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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the Quarterly Period Ended September 30, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------------

For the Transition Period from 
to

Commission File No. 001-14944

MAD CATZ INTERACTIVE, INC.

(Exact
name of Registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Canada                                                         |  | Not Applicable                      
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|7480 Mission Valley Road, Suite 101 San Diego, California      |  | 92108                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(619) 683-9830

(Registrants telephone number, including area code)

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    YES  þ     NO ̈

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filers in Rule 12b-2 of the Exchange Act.

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer   þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  þ

There were 54,244,383 shares of the
registrants common stock issued and outstanding as of November 8, 2006.



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MAD CATZ INTERACTIVE, INC.

FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 30, 2006

TABLE OF CONTENTS



|                               |  |                                                                                                                  |  |   
|------------------------------ |  | ---------------------------------------------------------------------------------------------------------------- |  | --
|PART I  FINANCIAL INFORMATION |  | 3                                                                                                               
|                               |  |                                                                                                                 
|Item 1.                        |  | Financial Statements                                                                                             |  | 3 
|                               |  |                                                                                                                 
|                               |  | Consolidated Balance Sheets as of September 30, 2006 and March 31, 2006 (unaudited)                              |  | 3 
|                               |  |                                                                                                                 
|                               |  | Consolidated Statements of Operations for the three and six months ended September 30, 2006 and 2005 (unaudited) |  | 4 
|                               |  |                                                                                                                 
|                               |  | Consolidated Statements of Cash Flows for the three and six months ended September 30, 2006 and 2005 (unaudited) |  | 5 
|                               |  |                                                                                                                 
|                               |  | Notes to Consolidated Financial Statements (unaudited)                                                           |  | 6 
|                               |  |                                                                                                                 
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |  | 14
|                               |  |                                                                                                                 
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                                                       |  | 24
|                               |  |                                                                                                                 
|Item 4.                        |  | Controls and Procedures                                                                                          |  | 25
|                               | 
|PART II  OTHER INFORMATION    |  | 26                                                                                                              
|                               |  |                                                                                                                 
|Item 1.                        |  | Legal Proceedings                                                                                                |  | 26
|                               |  |                                                                                                                 
|Item 1A.                       |  | Risk Factors                                                                                                     |  | 26
|                               |  |                                                                                                                 
|Item 6.                        |  | Exhibits                                                                                                         |  | 26
|                               | 
|SIGNATURES                     |  | 27                                                                                                              



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PART I  FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

MAD CATZ INTERACTIVE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands of U.S. dollars)



|                                                                                                                                           |  |                    |         |   |                |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | ------- | - | -------------- | - | ------- | -
|                                                                                                                                           |  | September 30, 2006 |         |   | March 31, 2006 |  
|                                                                                                                                           |  | (unaudited)        |         |   |                |  
|Assets                                                                                                                                     |  |                    |         |   |                |   |         |  
|Current assets:                                                                                                                            |  |                    |         |   |                |   |         |  
|Cash                                                                                                                                       |  | $                  | 1,628   |   |                | $ | 1,607   |  
|Accounts receivable, net of allowances of $5,714 and $5,198 at September 30, 2006 and March 31, 2006, respectively                         |  |                    | 20,253  |   |                |   | 12,024  |  
|Other receivables                                                                                                                          |  |                    | 60      |   |                |   | 429     |  
|Inventories                                                                                                                                |  |                    | 15,770  |   |                |   | 18,390  |  
|Income taxes receivable                                                                                                                    |  |                    | 1,172   |   |                |   | 1,275   |  
|Deferred tax assets                                                                                                                        |  |                    | 2,586   |   |                |   | 2,586   |  
|Other current assets                                                                                                                       |  |                    | 927     |   |                |   | 1,661   |  
|                                                                                                                                           |  |                    |         |   |                |   |         |  
|Total current assets                                                                                                                       |  |                    | 42,396  |   |                |   | 37,972  |  
|Deferred tax assets                                                                                                                        |  |                    | 3,700   |   |                |   | 3,339   |  
|Property and equipment, net                                                                                                                |  |                    | 1,970   |   |                |   | 2,427   |  
|Intangible assets, net                                                                                                                     |  |                    | 2,232   |   |                |   | 2,634   |  
|Goodwill                                                                                                                                   |  |                    | 23,437  |   |                |   | 22,363  |  
|                                                                                                                                           |  |                    |         |   |                |   |         |  
|Total assets                                                                                                                               |  | $                  | 73,735  |   |                | $ | 68,735  |  
|                                                                                                                                           |  |                    |         |   |                |   |         |  
|Liabilities and Shareholders Equity                                                                                                       |  |                    |         |   |                |   |         |  
|Current liabilities:                                                                                                                       |  |                    |         |   |                |   |         |  
|Bank loan                                                                                                                                  |  | $                  | 14,822  |   |                | $ | 8,581   |  
|Accounts payable                                                                                                                           |  |                    | 16,436  |   |                |   | 19,502  |  
|Accrued liabilities                                                                                                                        |  |                    | 4,600   |   |                |   | 3,800   |  
|                                                                                                                                           |  |                    |         |   |                |   |         |  
|Total current liabilities                                                                                                                  |  |                    | 35,858  |   |                |   | 31,883  |  
|Shareholders equity:                                                                                                                      |  |                    |         |   |                |   |         |  
|Common stock, no par value, unlimited shares authorized; 54,244,383 shares issued and outstanding at September 30, 2006 and
March 31, 2006 |  |                    | 47,055  |   |                |   | 46,746  |  
|Accumulated other comprehensive income                                                                                                     |  |                    | 8,512   |   |                |   | 7,116   |  
|Accumulated deficit                                                                                                                        |  |                    | (17,690 | ) |                |   | (17,010 | )
|                                                                                                                                           |  |                    |         |   |                |   |         |  
|Total shareholders equity                                                                                                                 |  |                    | 37,877  |   |                |   | 36,852  |  
|                                                                                                                                           |  |                    |         |   |                |   |         |  
|Total liabilities and shareholders equity                                                                                                 |  | $                  | 73,735  |   |                | $ | 68,735  |  
|                                                                                                                                           |  |                    |         |   |                |   |         |  

See accompanying notes to consolidated financial statements.



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MAD CATZ INTERACTIVE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands of U.S. dollars,
except per share data)



|                                               |  |                                  |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|---------------------------------------------- |  | -------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                               |  | Three Months Ended September 30, |            |   | Six Months Ended September 30, |  
|                                               |  | 2006                             |            |   | 2005                           |   |            | 2006 |  |   | 2005       |  
|Net sales                                      |  | $                                | 25,788     |   |                                | $ | 23,744     |      |  | $ | 43,929     |   |  | $ | 38,536     |  
|Cost of sales                                  |  |                                  | 20,017     |   |                                |   | 19,686     |      |  |   | 34,410     |   |  |   | 32,160     |  
|                                               |  |                                  |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Gross profit                                   |  |                                  | 5,771      |   |                                |   | 4,058      |      |  |   | 9,519      |   |  |   | 6,376      |  
|Operating expenses:                            |  |                                  |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Sales and marketing                            |  |                                  | 2,049      |   |                                |   | 2,904      |      |  |   | 4,593      |   |  |   | 5,373      |  
|General and administrative                     |  |                                  | 2,397      |   |                                |   | 1,985      |      |  |   | 4,337      |   |  |   | 3,651      |  
|Research and development                       |  |                                  | 485        |   |                                |   | 481        |      |  |   | 704        |   |  |   | 959        |  
|Amortization of intangible assets              |  |                                  | 201        |   |                                |   | 201        |      |  |   | 402        |   |  |   | 402        |  
|                                               |  |                                  |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                       |  |                                  | 5,132      |   |                                |   | 5,571      |      |  |   | 10,036     |   |  |   | 10,385     |  
|                                               |  |                                  |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Operating income (loss)                        |  |                                  | 639        |   |                                |   | (1,513     | )    |  |   | (517       | ) |  |   | (4,009     | )
|Interest expense, net                          |  |                                  | (291       | ) |                                |   | (293       | )    |  |   | (564       | ) |  |   | (619       | )
|Foreign exchange gain (loss), net              |  |                                  | 1          |   |                                |   | 329        |      |  |   | 163        |   |  |   | (31        | )
|Other income                                   |  |                                  | 72         |   |                                |   | 101        |      |  |   | 129        |   |  |   | 215        |  
|                                               |  |                                  |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) before income taxes              |  |                                  | 421        |   |                                |   | (1,376     | )    |  |   | (789       | ) |  |   | (4,444     | )
|Income tax expense (benefit)                   |  |                                  | 225        |   |                                |   | (155       | )    |  |   | (109       | ) |  |   | (1,111     | )
|                                               |  |                                  |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                              |  | $                                | 196        |   |                                | $ | (1,221     | )    |  | $ | (680       | ) |  | $ | (3,333     | )
|                                               |  |                                  |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) per share, basic and diluted |  | $                                | 0.00       |   |                                | $ | (0.02      | )    |  | $ | (0.01      | ) |  | $ | (0.06      | )
|                                               |  |                                  |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Number of shares used in computation           |  |                                  | 54,244,383 |   |                                |   | 54,244,383 |      |  |   | 54,244,383 |   |  |   | 54,244,383 |  
|                                               |  |                                  |            |   |                                |   |            |      |  |   |            |   |  |   |            |  

See accompanying notes to consolidated financial statements.



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MAD CATZ INTERACTIVE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands of U.S. dollars)



|                                                                            |  |                                |        |   |      |   |        |  
|--------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------ | -
|                                                                            |  | Six Months Ended September 30, |       
|                                                                            |  | 2006                           |        |   | 2005 |  
|Cash flows from operating activities:                                       |  |                                |        |   |      |   |        |  
|Net loss                                                                    |  | $                              | (680   | ) |      | $ | (3,333 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                |        |   |      |   |        |  
|Depreciation and amortization                                               |  |                                | 1,015  |   |      |   | 927    |  
|(Gain) loss on disposals of assets                                          |  |                                | 2      |   |      |   | (1     | )
|Foreign exchange (gain) loss                                                |  |                                | (163   | ) |      |   | 31     |  
|Provision for deferred income taxes                                         |  |                                | (361   | ) |      |   |       |  
|Stock-based compensation                                                    |  |                                | 309    |   |      |   |       |  
|Changes in operating assets and liabilities:                                |  |                                |        |   |      |   |        |  
|Accounts receivable                                                         |  |                                | (7,919 | ) |      |   | (1,432 | )
|Other receivables                                                           |  |                                | 369    |   |      |   | 1,673  |  
|Inventories                                                                 |  |                                | 2,850  |   |      |   | 33     |  
|Income taxes receivable/payable                                             |  |                                | 97     |   |      |   | (1,182 | )
|Other current assets                                                        |  |                                | 745    |   |      |   | (698   | )
|Accounts payable                                                            |  |                                | (3,099 | ) |      |   | (2,277 | )
|Accrued liabilities                                                         |  |                                | 689    |   |      |   | (1,030 | )
|                                                                            |  |                                |        |   |      |   |        |  
|Net cash used in operating activities                                       |  |                                | (6,146 | ) |      |   | (7,289 | )
|                                                                            |  |                                |        |   |      |   |        |  
|Cash flows from investing activities:                                       |  |                                |        |   |      |   |        |  
|Purchases of property and equipment                                         |  |                                | (156   | ) |      |   | (986   | )
|                                                                            |  |                                |        |   |      |   |        |  
|Net cash used in investing activities                                       |  |                                | (156   | ) |      |   | (986   | )
|                                                                            |  |                                |        |   |      |   |        |  
|Cash flows from financing activities:                                       |  |                                |        |   |      |   |        |  
|Increase in bank loan                                                       |  |                                | 6,241  |   |      |   | 8,453  |  
|                                                                            |  |                                |        |   |      |   |        |  
|Net cash provided by financing activities                                   |  |                                | 6,241  |   |      |   | 8,453  |  
|                                                                            |  |                                |        |   |      |   |        |  
|Effects of foreign exchange on cash                                         |  |                                | 82     |   |      |   | 215    |  
|                                                                            |  |                                |        |   |      |   |        |  
|Net increase in cash                                                        |  |                                | 21     |   |      |   | 393    |  
|Cash, beginning of period                                                   |  |                                | 1,607  |   |      |   | 1,085  |  
|                                                                            |  |                                |        |   |      |   |        |  
|Cash, end of period                                                         |  | $                              | 1,628  |   |      | $ | 1,478  |  
|                                                                            |  |                                |        |   |      |   |        |  
|Supplemental cash flow information:                                         |  |                                |        |   |      |   |        |  
|Income taxes paid                                                           |  | $                              | 179    |   |      | $ | 67     |  
|                                                                            |  |                                |        |   |      |   |        |  
|Interest paid                                                               |  | $                              | 584    |   |      | $ | 625    |  
|                                                                            |  |                                |        |   |      |   |        |  

See accompanying notes to consolidated financial statements.



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MAD CATZ INTERACTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Description of Business and
Summary of Significant Accounting Policies

Mad Catz Interactive, Inc. (the Company) is a corporation incorporated under the
Canada Business Corporations Act. The Companys products are designed, manufactured (primarily through third parties), marketed and distributed for all major console based video game systems. The Companys products include video game
accessories of all types, such as control pads, steering wheels, joysticks, memory cards, video cables, light guns, dance pads, microphones, car adapters and carry cases. The Company also markets game enhancement software, distributes video game
software and related accessories and publishes video game titles.

The accompanying consolidated financial statements include the accounts
of Mad Catz Interactive, Inc. and its subsidiaries. The information furnished is unaudited and consists of only normal recurring adjustments that, in the opinion of management, are necessary to provide a fair statement of the results for the interim
periods presented. Interim operating results are not necessarily indicative of operating results expected in subsequent periods or for the year as a whole. These unaudited consolidated financial statements should be read in conjunction with the
consolidated financial statements and the related notes included in the Companys Annual Report on Form 10-K for the year ended March 31, 2006 as filed with the United States Securities and Exchange Commission (SEC).

Use of Estimates

The
preparation of financial statements in conformity with accounting principals generally accepted in the United States (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes
revenue based on the applicable provisions of Staff Accounting Bulletin No. 104, Revenue Recognition and on the criteria set forth in Statement of Position 97-2, Software Revenue Recognition. Accordingly,
the Company recognizes revenue when (1) there is persuasive evidence that an arrangement with the customer exists, which is generally a customer purchase order, (2) the products are delivered, which occurs when the products are shipped and
risk of loss has been transferred to the customer, (3) the selling price is fixed or determinable and (4) collection of the customer receivable is deemed probable. The Companys payment arrangements with customers typically provide
net 30 and 60-day terms.

Revenues from sales to authorized resellers are subject to terms allowing price protection, certain rights of
return and allowances for volume rebates and cooperative advertising. Allowances for price protection are recorded when the price protection program is approved. Allowances for estimated future returns, cooperative advertising and volume rebates are
provided upon recognition of revenue. Such amounts are estimated and periodically adjusted based on historical and anticipated rates of returns, inventory levels and other factors and are recorded as operating expenses or as a reduction of sales in
accordance with EITF 01-9.

Software Development Costs

Software development costs primarily consist of payments made to independent software developers under development agreements. The Company accounts for software development costs in accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, which provides for the capitalization of certain software development costs incurred after technological feasibility of the software is
established or for development costs that have alternative future use. Under the Companys current practice of developing new products, the technological feasibility of the underlying software is not established until substantially all product
development is complete and the first playable version is delivered. During the three months ended September 30, 2006 the Company expensed capitalized software development costs totaling approximately $220,000, which related to a product that
the Company decided not to market or distribute. There are no capitalized software development costs as of September 30, 2006.

Royalties and
Intellectual Property Licenses

Royalty and license expenses consist of royalties and license fees paid to intellectual property
rights holders for use of their trademarks, copyrights, software, technology or other intellectual property or proprietary rights in the development or sale of the Companys products. Royalty-based payments that are paid in advance are
generally capitalized and expensed to cost of sales at the greater of the contractual or effective royalty rate based on net product sales.



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Royalty payments to independent software developers and co-publishing affiliates are payments for the
development of intellectual property related to the Companys video game titles. Payments made prior to the establishment of technological feasibility are expensed as research and development. Once technological feasibility has been
established, payments made are capitalized and amortized upon release of the product. Additional royalty payments due after the general release of the product are typically expensed as cost of sales at the higher of the contractual or effective
royalty rate based on net product sales.

Advertising

Advertising costs are expensed as incurred and amounted to $913,000 and $2,149,000 for the three and six month periods ended September 30, 2006, respectively. Advertising expense was $1,281,000 and $2,178,000 for
the three and six months ended September 30, 2005, respectively. Cooperative advertising with distributors and retailers is recorded when revenue is recognized and such amounts are included in sales and marketing expense if there is a separate
identifiable benefit with an estimable fair value. Otherwise, such costs are recognized as a reduction of sales.

Recent Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments  An Amendment of FASB Statements No. 133 and 140 (SFAS No. 155). SFAS No. 155 (1) permits fair value measurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation, (2) clarifies that interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, (3) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, (4) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (5) amends SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities  A Replacement of FASB Statement No. 125 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued for fiscal years beginning after September 15, 2006. The Company does not expect the adoption of SFAS
No. 155 to have a material impact on its consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. FIN 48 prescribes a recognition
threshold and measurement process for recording in the financial statements uncertain tax provisions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on the de-recognition, classification, accounting in interim
periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN 48 will be effective for the Company beginning April 1, 2008. The Company is in evaluating the impact, if any, the adoption of FIN 48 will have on
its consolidated financial statements.

In September 2006, the Securities and Exchange Commission issued SAB No. 108,
Financial Statements  Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB No. 108). SAB No. 108 provides guidance on how prior
year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current years financial statements are materially misstated. The impact of
correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, must be quantified on the current year financial statements. When a current year misstatement has been quantified, SAB No. 99,
Financial Statements - Materiality should be applied to determine whether the misstatement is material and should result in an adjustment to the financial statements. SAB No. 108 also discusses the implications of
misstatements uncovered upon the application of SAB No. 108 in situations when a registrant has historically been using either the iron curtain approach or the rollover approach as described in SAB No. 108. Registrants electing not to
restate prior periods should reflect the effects of initially applying the guidance in Topic 1N in their annual financial statements covering the first fiscal year ending after November 15, 2006. The Company is evaluating what impact, if any,
the adoption of SAB No. 108 will have on its consolidated financial statements.



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(2) Inventories

Inventories consist of the following (in thousands):



|                                    |  |                    |        |                |   |       
|----------------------------------- |  | ------------------ | ------ | -------------- | - | ------
|                                    |  | September 30, 2006 |        | March 31, 2006
|Raw materials                       |  | $                  | 1,570  |                | $ | 1,078 
|Finished goods                      |  |                    | 14,199 |                |   | 17,311
|Packaging materials and accessories |  |                    | 1      |                |   | 1     
|                                    |  |                    |        |                |   |       
|Inventories                         |  | $                  | 15,770 |                | $ | 18,390
|                                    |  |                    |        |                |   |       

(3) Property and Equipment

Property and equipment consist of the following (in thousands):



|                                                |  |                   |        |   |               |   |        |  
|----------------------------------------------- |  | ----------------- | ------ | - | ------------- | - | ------ | -
|                                                |  | September 30,2006 |        |   | March 31,2006 |  
|Molds                                           |  | $                 | 3,599  |   |               | $ | 3,513  |  
|Computer equipment and software                 |  |                   | 2,435  |   |               |   | 2,236  |  
|Manufacturing and office equipment              |  |                   | 601    |   |               |   | 580    |  
|Furniture and fixtures                          |  |                   | 318    |   |               |   | 318    |  
|Assets not yet in service                       |  |                   |       |   |               |   | 163    |  
|Leasehold improvements                          |  |                   | 429    |   |               |   | 418    |  
|                                                |  |                   |        |   |               |   |        |  
|                                                |  |                   | 7,382  |   |               |   | 7,228  |  
|Less: Accumulated depreciation and amortization |  |                   | (5,412 | ) |               |   | (4,801 | )
|                                                |  |                   |        |   |               |   |        |  
|Property and equipment, net                     |  | $                 | 1,970  |   |               | $ | 2,427  |  
|                                                |  |                   |        |   |               |   |        |  

Depreciation and amortization expense associated with property and equipment amounted to $303,000
and $613,000 for the three and six month periods ended September 30, 2006, respectively, and $273,000 and $525,000 for the three and six month periods ended September 30, 2005, respectively.

(4) Intangible Assets and Goodwill

In January 2003,
the Company acquired the rights to the GameShark brand, intellectual property, and the www.gameshark.com web site from InterAct, a subsidiary of Recoton Corporation, for total cash consideration of $5,083,000. GameShark is the industry leader in
video game enhancement software, which enables players to take full advantage of the secret codes, short cuts, hints and cheats incorporated by video game publishers into their game offerings. In connection with the GameShark acquisition, the
Company entered into a five-year technology agreement with Fire International, Ltd. (Fire) to implement Fires technology in the GameShark brand of video game enhancements. The amounts of the intangible assets and their respective
useful lives were determined based upon the allocation of the actual purchase price to the various categories of intellectual property as determined by an independent external valuation analysis completed in May 2003. In addition, the Company
considered the eight year history of the GameShark brand prior to its acquisition and the lifecycle and installed base of the console systems on which GameShark products can be used. The acquired intangible assets are summarized as follows (in
thousands):



|                  |  |      |       |                                             |   |                                    |  |                                |       |                    |   |       |  |  
|----------------- |  | ---- | ----- | ------------------------------------------- | - | ---------------------------------- |  | ------------------------------ | ----- | ------------------ | - | ----- |  | -
|                  |  | Cost |       | AccumulatedAmortization atSeptember 30,2006 |   | Net BookValue at September 30,2006 |  | Net BookValue at March 31,2006 |       | Useful life(years)
|Trademarks        |  | $    | 4,112 |                                             | $ | 2,056                              |  | $                              | 2,056 |                    | $ | 2,350 |  | 7
|Copyrights        |  |      | 514   |                                             |   | 378                                |  |                                | 136   |                    |   | 188   |  | 5
|Website           |  |      | 457   |                                             |   | 417                                |  |                                | 40    |                    |   | 96    |  | 4
|                  |  |      |       |                                             |   |                                    |  |                                |       |                    |   |       |  |  
|Intangible assets |  | $    | 5,083 |                                             | $ | 2,851                              |  | $                              | 2,232 |                    | $ | 2,634 |  |  
|                  |  |      |       |                                             |   |                                    |  |                                |       |                    |   |       |  |  

The Company has recorded goodwill in connection with the acquisitions it has completed in prior
periods. The goodwill is recorded in Canadian dollars and is translated into U.S. dollars at the prevailing exchange rate at the end of each reporting period. Fluctuations in the exchange rate between these two currencies at the time of translation
result in changes to the amount of goodwill reported in the consolidated financial statements.

The changes in the U.S. dollar carrying
amount of goodwill from March 31, 2006 to September 30, 2006 are as follows (in thousands):



|                                    |  |                   |         |                |       |          |  |        |      
|----------------------------------- |  | ----------------- | ------- | -------------- | ----- | -------- |  | ------ | -----
|                                    |  | September 30,2006 |         | March 31, 2006 |       | $ Change
|Balance in Canadian dollars         |  | Cdn.$             | 26,103  |                | Cdn.$ | 26,103   |  | Cdn. $ |     
|Exchange rate at balance sheet date |  |                   | 0.89788 |                |       | 0.85677  |  |        |      
|                                    |  |                   |         |                |       |          |  |        |      
|Balance in U.S. dollars             |  | $                 | 23,437  |                | $     | 22,364   |  | $      | 1,073
|                                    |  |                   |         |                |       |          |  |        |      



8



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##### Table of Contents

(5) Bank Loan

The Company has a Credit Facility with Wachovia Capital Finance Corporation (Central) (Wachovia), formerly Congress Financial Corporation (Central) to borrow up to $35 million under a revolving line of credit subject to the
availability of eligible collateral (accounts receivable and inventories), which changes throughout the year. The line of credit accrues interest on the daily outstanding balance at the U.S. prime rate plus 0.25% per annum, and must be repaid
in United States dollars. At September 30, 2006 the interest rate was 8.5%. The Company is also required to pay a monthly service fee and an unused line fee equal to 0.25%. The Credit Facility is secured by a first priority interest in the
inventories, equipment, accounts receivable and investment properties of Mad Catz, Inc. (MCI) and by a pledge of all of the capital stock of the Companys subsidiaries and is guaranteed by the Company. In addition, as of
September 30, 2006, the Company was required, monthly, to meet a consolidated tangible net worth covenant. On October 30, 2006, the Company and Wachovia entered into a Second Amended and Restated Credit Agreement that extended the term
until October 30, 2009, reduced the monthly service fee from $2,000 to $1,000, and replaced the prior consolidated tangible net worth covenant with a covenant based on the Companys net income before interest, taxes, depreciation and
amortization (EBITDA).

(6) Stock-Based Compensation

Adoption of SFAS No. 123R

On April 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123(R) (SFAS No. 123R) related to accounting for share-based payments and, accordingly, compensation expense is now recorded for share-based awards based upon an assessment of the grant date fair value
of the awards. The Company is using the modified prospective transition method of adoption, which requires that compensation expense be recorded for all unvested stock options and restricted stock beginning in fiscal 2007 as the requisite service is
rendered. The provisions of SFAS No. 123R apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. Accordingly, prior periods are not restated for the effect of SFAS No. 123R.

Prior to April 1, 2006, the Company accounted for stock-based awards to employees using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25. The Company adopted the disclosure-only provisions of SFAS No. 123, as amended, and provided pro forma net income (loss) and net income (loss) per share disclosures for stock-based awards as if
the fair-value method defined in SFAS No. 123 had been applied.

Stock options entitle the holder to purchase, at the end of a vesting
period, a specified number of shares of the Companys common stock at a price per share set at the grant date. Stock-based compensation cost related to stock options is measured based on several criteria including, but not limited to, the
valuation model used and associated input factors such as expected term of the award, stock price volatility, dividend rate, risk-free interest rate, and award forfeiture rate. The input factors to be used in the valuation model are based on
subjective future expectations combined with management judgment. The Company estimates the fair value of awards granted using the Black-Scholes option pricing model, which was the same model previously used for the pro forma information required
under SFAS No. 123.

Stock-based compensation expense for the six months ended September 30, 2006 was calculated at the date of
grant using the Black-Scholes option-pricing model based on the following weighted average assumptions (annualized percentages):



|                            |  |              
|--------------------------- |  | -------------
|Dividend yield              |  | 0.0%         
|Expected volatility (1)     |  | 72% - 75%    
|Risk-free interest rate (2) |  | 4.73% - 4.81%
|Expected term (3)           |  | 2 -3 years   



|(1) | After consideration of both its implied volatility and historical volatility, the Company determined its historical volatility to be the most accurate estimate of future volatility
and therefore utilizes this measure. The expected volatility is estimated based on the historical volatility (using daily pricing) of the Companys stock.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(2) | The risk-free interest rate is determined based on a constant U.S. Treasury security rate with a contractual life that approximates the expected term of the stock options.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The expected term of options granted is estimated based on a number of factors, including historical exercise experience, the vesting term of the award, the expected volatility of
the Companys stock and an employees average length of service.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The weighted average grant date fair value of
stock options granted during the three and six months ended September 30, 2006 was $0.21. Due to the immediate vesting of the stock options granted, as of September 30, 2006, there was no unrecognized compensation cost. There were no
options exercised during the six months ended September 30, 2006 and 2005. The aggregate intrinsic value of the Companys fully vested options was approximately $180,000 at September 30, 2006.

Summary of Plan and Plan Activity

The Companys stock option plan (the Plan) allows the Company to grant options to purchase common stock to employees, officers and directors. A maximum of six million shares of common stock may be issued pursuant to options
granted under the Plan. Options granted under the Plan generally expire five years from the date of grant and generally vest over a period of two years with one-third vesting immediately. During the three months ended September 30, 2006,
1,497,500 options were granted to employees, officers and directors. These options vest immediately and subject to shareholder approval, expire ten years from the date of grant. Without shareholder approval, these options will expire five years from
the date of grant. The Company recorded stock-based compensation expense of $309,000 in connection with these options.

The Companys
options are denominated in Canadian dollars. For convenience, per share amounts stated below have been translated to U.S. dollars at the rate of exchange in effect at the balance sheet date. A summary of option activity from April 1, 2006
through September 30, 2006 is presented as follows:



|                                  |  |           |   |  |                                  |      |                                                  |    
|--------------------------------- |  | --------- | - |  | -------------------------------- | ---- | ------------------------------------------------ | ---
|Stock options outstanding:        |  | Options   |   |  | Weighted- Average Exercise Price |      | WeightedAverageRemainingContractualLife in Years
|Outstanding at April 1, 2006      |  | 2,099,333 |   |  | $                                | 0.99 |                                                  |    
|Options granted                   |  |          |   |  |                                  |      |                                                  |    
|Options exercised                 |  |          |   |  |                                  |      |                                                  |    
|Options cancelled                 |  | (521,000  | ) |  |                                  | 1.22 |                                                  |    
|                                  |  |           |   |  |                                  |      |                                                  |    
|Outstanding at June 30, 2006      |  | 1,578,333 |   |  |                                  | 0.97 |                                                  | 1.7
|Options granted                   |  | 1,497,500 |   |  |                                  | 0.41 |                                                  |    
|Options exercised                 |  |          |   |  |                                  |      |                                                  |    
|Options cancelled                 |  | (358,666  | ) |  |                                  | 0.85 |                                                  |    
|                                  |  |           |   |  |                                  |      |                                                  |    
|Outstanding at September 30, 2006 |  | 2,717,167 |   |  | $                                | 0.68 |                                                  | 6.3
|Exercisable at September 30, 2006 |  | 2,717,167 |   |  | $                                | 0.68 |                                                  | 6.3
|                                  |  |           |   |  |                                  |      |                                                  |    

Pre- SFAS No. 123R Pro Forma Accounting Disclosure

During the three and six months ended September 30, 2005, the Company did not grant any options. For disclosure purposes under SFAS 123, the Company
estimated the fair value of awards granted in prior periods, consistent with the current methodology utilizing the Black-Scholes option pricing model. The Company estimated the option term, dividend yield, volatility and risk-free interest rate
assumptions consistent with the current methodology. The following table reflects pro forma net earnings and earnings per share for the three months and six months ended September 30, 2005 under the disclosure only provisions of SFAS 123, as if
the fair value method had been applied to all outstanding and unvested options (in thousands except per share data):



|                                                     |  |                                      |        |   |                                    |   |        |  
|---------------------------------------------------- |  | ------------------------------------ | ------ | - | ---------------------------------- | - | ------ | -
|                                                     |  | Three Months EndedSeptember 30, 2005 |        |   | Six Months EndedSeptember 30, 2005 |  
|Net loss as reported                                 |  | $                                    | (1,221 | ) |                                    | $ | (3,333 | )
|Stock based compensation using the fair value method |  |                                      | (35    | ) |                                    |   | (73    | )
|                                                     |  |                                      |        |   |                                    |   |        |  
|Pro forma net loss                                   |  | $                                    | (1,256 | ) |                                    | $ | (3,406 | )
|                                                     |  |                                      |        |   |                                    |   |        |  
|Net loss per common share:                           |  |                                      |        |   |                                    |   |        |  
|Basic and diluted net loss per shareas reported     |  | $                                    | (0.02  | ) |                                    | $ | (0.06  | )
|                                                     |  |                                      |        |   |                                    |   |        |  
|Basic and diluted net loss per sharepro forma       |  | $                                    | (0.02  | ) |                                    | $ | (0.06  | )
|                                                     |  |                                      |        |   |                                    |   |        |  



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(7) Commitments and Contingencies

Leases

The Company is obligated under certain non-cancelable operating leases, primarily for
warehouses and office space. Total future minimum lease commitments under operating leases as of September 30, 2006 are as follows (in thousands):



|                             |  |   |      
|---------------------------- |  | - | -----
|Fiscal Year Ending March 31: |  |   |      
|2007 (remaining 6 months)    |  | $ | 560  
|2008                         |  |   | 999  
|2009                         |  |   | 683  
|2010                         |  |   | 111  
|                             |  |   |      
|                             |  | $ | 2,353
|                             |  |   |      

Royalty and License Agreements

The Company has license agreements to utilize existing design and utility technology with its products. The Company also has royalty agreements for use of
licensed trademarks and celebrity endorsements. These agreements have royalty and license fees based on different percentages of certain types of sales or a predetermined amount per unit. Royalty and license expenses were $781,000 and $471,000 for
the three months ended September 30, 2006 and 2005, respectively and $1,909,000 and $920,000 for the six months ended September 30, 2006 and 2005, respectively. The minimum amount due under royalty and license agreements for the remainder of
fiscal year 2007 is approximately $520,000, which includes several new agreements for distribution of licensed product.

Legal Proceedings

On February 10, 2003, Electro Source, LLC (Electro Source) filed a complaint against MCI, and Fire International,
Ltd. (Fire), as well as other defendants, in the Superior Court in Los Angeles County, California entitled, Electro Source, LLC v. Fire International, Ltd., et al., Case No. BC 290076. On or about November 18, 2003, Electro
Source amended its complaint to add the Company as a defendant. In its amended complaint, Electro Source asserted claims against the Company and MCI alleging misappropriation of trade secrets, conspiracy to defraud, interference with contractual
relationship and interference with prospective economic advantage in connection with Fires agreement to supply MCI with product to be marketed under the GameShark brand and for the termination of Fires alleged prior business relationship
with Electro Source.

Electro Source moved for a temporary restraining order to prevent MCI from marketing or otherwise distributing the
GameShark products. After a hearing on the matter, the Court denied Electro Sources motion and refused to enter the temporary restraining order. The parties have engaged in written and oral discovery, including depositions. On
February 17, 2005, MCI filed a cross-complaint against Electro Source alleging false advertising, state and federal unfair competition, libel per se, and trade libel arising out of certain advertisements and internet statements. Discovery is
proceeding on the cross-complaint. On July 29, 2005, the Court denied the Companys motions for summary judgment, and on August 26, 2005, the Court denied the Companys motion for summary adjudication as to the plaintiffs
claim for intentional interference with contract. Trial in this matter commenced on May 15, 2006 and closing arguments were completed on June 9, 2006. On June 19, 2006, the jury rendered a verdict on MCIs cross-complaint finding
that the advertisement and other statements in question did not satisfy the legal elements of defamation. On June 21, 2006, the jury rendered a verdict finding that MCI was not liable for any alleged misappropriation of trade secrets. On
June 23, 2006 the jury rendered a verdict finding that MCI was not liable for conspiracy to defraud or intentional interference with prospective economic advantage. The only remaining claim against MCI is a claim for interference with contract,
which claim could not be decided because the jury deadlocked on the issue of whether a contract existed between Fire and Electro Source. The judge declared a mistrial with respect to this issue. A status conference was held on July 25, 2006 to
set a date for a new trial on the issue of whether a contract existed between Electro Source and Fire, whether such contract was breached and whether MCI interfered with any such contract. Trial as those issues has been set for March 1,
2007. While the Company intends to vigorously defend this matter, there can be no guarantee that the Company will ultimately prevail or that damages will not be assessed against it. An adverse determination by the Court or jury could require
payment of damages and seriously impact the Companys revenues and its ability to continue to distribute the GameShark products.



11



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##### Table of Contents

On or about May 2, 2005, MCI was served with a lawsuit filed by Freedom Wave LLC in the United
States District Court for the Central District of California entitled, Freedom Wave LLC. v. Mad Catz, Inc. et al., Case No CV5 2954NM (PLAx). The complaint alleges that certain MCI products infringe U.S. patent numbers 6,878,066 (
066 Patent) and 6,280,327 ( 327 Patent). MCI answered, denying the allegation in the complaint. The 6,280,327 patent is under reexamination by the patent and trademark office. The parties have agreed that until the
327 Patent comes out of reexamination, the case should be dismissed, without prejudice to Freedom Wave refilling its claims at a later date. On November 14, 2006 Freedom Wave LLC refiled the lawsuit against the Company. The Company believes
its products do not infringe any valid claim of the 327 or 066 patents and intends to vigorously defend against these claims. While the Company intends to vigorously defend this matter, there can be no guarantee that the Company will
ultimately prevail or that damages will not be assessed against it. An adverse determination by the Court or jury could require payment of damages and seriously impact the Companys revenues and its ability to continue to distribute some
product.

On July 14, 2005, the Company was served with a lawsuit filed in the United States District Court for the District of Texas,
Marshall Division entitled Konami Corporation v. Roxor Games, Inc.,Case No. 02-05cv-173. The complaint alleges that the Companys MC Groovz Dance Craze product violates U.S. patent number 6,410,835. On January 10,
2006, the Company received a letter from Konami Corporation asserting that Pump It Up:Exceed, which the Company distributes on behalf of Mastiff, LLC, also infringes the claims of the 6,410,835 patent and demanded that the Company cease all sales
and offers to sell Pump It Up:Exceed. On October 26, 2006, the Company and Konami executed a settlement agreement under which the parties agreed that the lawsuit would be dismissed with prejudice in exchange for payments to Konami totaling
$300,000. This amount was accrued in the consolidated financial statements at September 30, 2006.

(8) Comprehensive Income (Loss)

SFAS No. 130, Reporting Comprehensive Income,requires classification of other comprehensive income in a financial statement
and display of other comprehensive income separately from retained earnings and additional paid-in capital. Other comprehensive income includes primarily foreign currency translation adjustments and unrealized gains (losses) on investments.

Comprehensive income (loss) for the three and six months ended September 30, 2006 and 2005 consists of the following components (in
thousands):



|                                        |  |                                 |     |      |                               |        |      |  |   |       |   |  |   |        |  
|--------------------------------------- |  | ------------------------------- | --- | ---- | ----------------------------- | ------ | ---- |  | - | ----- | - |  | - | ------ | -
|                                        |  | Three Months EndedSeptember 30, |     |      | Six Months EndedSeptember 30, |       
|                                        |  | 2006                            |     | 2005 |                               |        | 2006 |  |   | 2005  |  
|Net income (loss)                       |  | $                               | 196 |      | $                             | (1,221 | )    |  | $ | (680  | ) |  | $ | (3,333 | )
|Foreign currency translation adjustment |  |                                 | 174 |      |                               | 1,288  |      |  |   | 1,396 |   |  |   | 1,033  |  
|                                        |  |                                 |     |      |                               |        |      |  |   |       |   |  |   |        |  
|Comprehensive income (loss)             |  | $                               | 370 |      | $                             | 67     |      |  | $ | 716   |   |  | $ | (2,300 | )
|                                        |  |                                 |     |      |                               |        |      |  |   |       |   |  |   |        |  

The foreign currency translation adjustments are not adjusted for income taxes as they relate to indefinite
investments in non-U.S. subsidiaries.

(9) Basic and Diluted Net Income (Loss) per Share

Basic earnings per share exclude any dilutive effects of options, shares subject to repurchase or warrants. Diluted earnings per share include the impact
of potentially dilutive securities. During the three months ended September 30, 2006 there were no potentially dilutive securities due to the exercise price of the options being greater than the average market price of the Companys common
stock during the quarter. During the six months ended September 30, 2006, outstanding options to purchase an aggregate 7,146 shares of the Companys common stock were excluded from diluted net loss per share calculation because inclusion
of such options would have an anti-dilutive effect. During the three and six months ended September 30, 2005, options to purchase an aggregate 188,153 and 488,662 shares, respectively, of the Companys common stock were excluded from the net
loss per share calculations.



12



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##### Table of Contents

(10) Geographic Data

The Companys sales are attributed to the following geographic regions (in thousands):



|                |  |                                  |        |                                |   |        |  |      |        |  |   |       
|--------------- |  | -------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                |  | Three months ended September 30, |        | Six months ended September 30,
|                |  | 2006                             |        | 2005                           |   | 2006   |  | 2005
|Net sales:      |  |                                  |        |                                |   |        |  |      |        |  |   |       
|United States   |  | $                                | 17,432 |                                | $ | 16,398 |  | $    | 31,121 |  | $ | 27,044
|Europe          |  |                                  | 6,840  |                                |   | 5,135  |  |      | 9,302  |  |   | 8,254 
|Canada          |  |                                  | 1,516  |                                |   | 2,147  |  |      | 3,397  |  |   | 3,143 
|Other countries |  |                                  |       |                                |   | 64     |  |      | 109    |  |   | 95    
|                |  |                                  |        |                                |   |        |  |      |        |  |   |       
|                |  | $                                | 25,788 |                                | $ | 23,744 |  | $    | 43,929 |  | $ | 38,536
|                |  |                                  |        |                                |   |        |  |      |        |  |   |       

Revenue is attributed to geographic regions based on the location of the customer. During the
three months ended September 30, 2006, two customers individually accounted for at least 10% of the Companys gross sales, one accounted for 32% and the second for 17% of the Companys gross sales for a combined total of 49% of gross
sales. During the three months ended September 30, 2005, four customers individually accounted for at least 10% of the Companys gross sales, one accounted for 15%, one accounted for 14% and the remaining two each accounted for 11% of the
Companys gross sales for a combined total of 51% of gross sales.

The Companys property and equipment, goodwill and intangible
assets are attributed to the following geographic regions (in thousands):



|                                |  |                    |        |               |   |       
|------------------------------- |  | ------------------ | ------ | ------------- | - | ------
|                                |  | September 30, 2006 |        | March 31,2006
|Property and equipment:         |  |                    |        |               |   |       
|United States                   |  | $                  | 1,803  |               | $ | 2,224 
|Other Countries                 |  |                    | 163    |               |   | 198   
|Canada                          |  |                    | 4      |               |   | 5     
|                                |  |                    |        |               |   |       
|                                |  |                    | 1,970  |               |   | 2,427 
|                                |  |                    |        |               |   |       
|Goodwill and intangible assets: |  |                    |        |               |   |       
|United States                   |  |                    | 2,232  |               |   | 2,634 
|Canada                          |  |                    | 23,437 |               |   | 22,363
|                                |  |                    |        |               |   |       
|                                |  |                    | 25,669 |               |   | 24,997
|                                |  |                    |        |               |   |       
|                                |  | $                  | 27,639 |               | $ | 27,424
|                                |  |                    |        |               |   |       

(11) Differences Between Accounting Principles Generally Accepted in the United States and in Canada

The consolidated financial statements to which these notes relate have been prepared in accordance with U.S. GAAP. In certain respects,
U.S. GAAP differs from accounting principal generally accepted in Canada (Canadian GAAP). Reconciliation of net income determined in accordance with U.S. GAAP to net income determined under Canadian GAAP follows (in thousands, except per
share data):



|                                                                                |  |                                  |      |      |                                |        |      |  |   |       |   |  |   |        |  
|------------------------------------------------------------------------------- |  | -------------------------------- | ---- | ---- | ------------------------------ | ------ | ---- |  | - | ----- | - |  | - | ------ | -
|                                                                                |  | Three months ended September 30, |      |      | Six months ended September 30, |       
|                                                                                |  | 2006                             |      | 2005 |                                |        | 2006 |  |   | 2005  |  
|Net income (loss), as reported                                                  |  | $                                | 196  |      | $                              | (1,221 | )    |  | $ | (680  | ) |  | $ | (3,333 | )
|Stock-based compensationoptions grants                                         |  |                                  |     |      |                                | (35    | )    |  |   |      |   |  |   | (73    | )
|                                                                                |  |                                  |      |      |                                |        |      |  |   |       |   |  |   |        |  
|Net income (loss) in accordance with Canadian GAAP                              |  | $                                | 196  |      | $                              | (1,256 | )    |  | $ | (680  | ) |  | $ | (3,406 | )
|                                                                                |  |                                  |      |      |                                |        |      |  |   |       |   |  |   |        |  
|Net income (loss) per share in accordance with Canadian GAAP, basic and diluted |  | $                                | 0.00 |      | $                              | (0.02  | )    |  | $ | (0.01 | ) |  | $ | (0.06  | )

The area of material difference between United States and Canadian GAAP and their impact on the
consolidated financial statements of the Company is described below:

Stock-Based CompensationOption Grants

Under U.S. GAAP, during the three and six months ended September 30, 2005 the Company accounted for its stock-based employee compensation plan using
the intrinsic value method under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees,and related Interpretations. For purposes of Canadian GAAP, under the transitional
provisions of the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3870



13



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##### Table of Contents

(Section 3870), Stock-based Compensation and Other Stock-based Payments,the Company would have adopted the fair value method of
accounting for stock options on a retroactive basis, with prior periods restated. As of April 1, 2006, the Company adopted SFAS 123R and as a result there is no difference in accounting for stock options between U.S. GAAP and Canadian GAAP
during the three and six months ended September 30, 2006.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

This section contains forward-looking statements involving risks and uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors including those set out under Forward-looking Statements herein and in Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended March 31,
2006 and in Part II Other Information  Item 1A. Risk Factors in this Quarterly Report on Form 10-Q. The following discussion should be read in conjunction with our consolidated financial statements and related notes included in this Form
10-Q and in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006.

Overview

Our Business

We are a leading provider of video game
accessories and software marketed under the Mad Catz and GameShark brands. We design, manufacture (primarily through third parties in Asia), market and distribute accessories for all major video game platforms, including the Microsoft Xbox and Xbox
360; Nintendo GameCube, Game Boy Advance, Game Boy Advance SP, DS, DS Lite, N64 and Micro; and Sony PlayStation, PlayStation 2 and PSP. In addition, we design, manufacture (primarily through third parties in Asia), market and distribute accessories
for the Apple iPod. Our products include video game accessories of all types, such as control pads, steering wheels, joysticks, memory cards, video cables, light guns, dance pads, microphones, car adapters and carry cases. We also market game
enhancement software, distribute video game software and related accessories and publish video game titles.

Seasonality

We generate a substantial percentage of our net sales in the last three months of every calendar year, our fiscal third quarter. Our quarterly results of
operations can be expected to fluctuate significantly in the future, as a result of many factors, including: seasonal influences on our sales; unpredictable consumer preferences and spending trends; the introduction of new video game platforms; the
need to increase inventories in advance of our primary selling season; and timing of introductions of new products. See further discussion under Results of Operations  Net Sales below.

Transition to Next-Generation Consoles

Our industry
is cyclical and we believe it is now in a transition stage entering into the next cycle. The transition began with the release of Microsofts Xbox 360 in November 2005 and we expect it to continue with releases by Sony and Nintendo by the end
of 2006, with a total of three new video game consoles being introduced into the market. Upon release of the Xbox 360 we were a licensee with rights to officially market a full range of accessories compatible with the Xbox 360. Continuing through
this transition, we also intend to develop and market a range of accessories that are compatible with the new console systems to be introduced by Sony and Nintendo, as well as continue to provide accessories to the significant installed base of
current consoles in the marketplace. The transition of consoles provides an opportunity for us to market products to the value-oriented consumer. Until we have had an opportunity to fully evaluate the technology used by the first party
manufacturers, we will be unable to determine the extent to which we will be able to design and manufacture accessories that are compatible with all of the new video game consoles.



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Foreign Currency

During the second quarter of fiscal 2007, approximately 32% of total net sales were transacted outside of the United States. The majority of our international business is presently conducted in currencies other than
the U.S. dollar. As such we are exposed to translation adjustments when converting under the current rate method our foreign subsidiaries functional currency financial statements to U.S. dollar, which is our reporting currency. Translation
adjustments are reported as accumulated other comprehensive income in the shareholders equity section of the balance sheet; whereas, foreign currency transaction gains and losses both unrealized and realized, arising from normal business
operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which business is conducted relative to the U.S. dollar or the subsidiaries respective functional currencies
will cause currency transaction gains and losses, which we have experienced in the past and continue to experience. Due to the substantial volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate
fluctuations upon future operating results. There can be no assurances that we will not experience currency losses in the future. During the six months of fiscal 2007 and in fiscal 2006, we did not hedge against foreign currency exposure and we
cannot predict the effect foreign currency fluctuations will have on us during the remainder of fiscal 2007.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, and revenue and expenses during
the reporting periods. The policies discussed below are considered by management to be critical because they are not only important to the portrayal of our financial condition and results of operations but also because application and interpretation
of these policies requires both judgment and estimates of matters that are inherently uncertain and unknown. As a result, actual results may differ materially from our estimates.

Revenue Recognition

We generate revenue from the sale of our products, including interactive
software licensed from third party developers. We recognize revenue based on the applicable provisions of Staff Accounting Bulletin No. 104, Revenue Recognition and on the criteria set forth in Statement of Position 97-2,
Software Revenue Recognition. Accordingly, we recognize revenue when each of the following have occurred (1) there is persuasive evidence that an arrangement with our customer exists, which is generally a customer purchase
order, (2) the products are delivered, which occurs when the products are shipped and risk of loss has been transferred to the customer, (3) the selling price is fixed or determinable and (4) collection of the customer receivable is
deemed probable. Our payment arrangements with customers typically provide net 30 and 60-day terms.

Revenues from sales to authorized
resellers are subject to terms allowing price protection, certain rights of return and allowances for customer marketing programs. Reserves for price protection are recorded when the price protection program is approved. Allowances for estimated
future returns and customer marketing programs are provided upon revenue recognition. Such amounts are estimated and periodically adjusted based on historical and anticipated rates of returns, inventory levels and other factors and are recorded as a
reduction of revenue or operating expense in accordance with EITF 01-9.

Customer Marketing Programs

We record allowances for customer marketing programs, including certain rights of return, price protection, volume-based cash incentives and cooperative
advertising. The estimated cost of these programs is accrued as a reduction to revenue or as an operating expense in the period we sell the product or commit to the program. Significant management judgments and estimates must be used to determine
the cost of these programs in any accounting period.

We grant limited rights of return for certain products. Estimates of expected future
product returns are based on analyses of historical returns and information regarding inventory levels and the demand and acceptance of our products by the end consumer.

Consistent with industry standards and practices, on a product-by-product basis by customer, we allow price protection credits to be issued to retailers in the event of a subsequent price reduction. In general, price
protection refers to the circumstances when we elect to decrease the price of a product as a result of reduction in competitive prices and issue credits to our customers to protect the customers from lower profit margins on their then current
inventory of the product. The decision to effect price reductions is influenced by retailer inventory levels, product lifecycle stage, market acceptance, competitive environment and new product introductions. Credits are issued based upon the number
of units that customers have on hand at the date of the price reduction. Upon approval of a price protection program, reserves for the estimated amounts to be reimbursed to qualifying customers are established. Reserves are estimated based on
analyses of qualified inventories on hand with retailers and distributors.



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We enter into cooperative advertising arrangements with many of our customers allowing customers to
receive a credit for various advertising programs. The amounts of the credits are based on specific dollar-value programs or a percentage of sales, depending on the terms of the program negotiated with the individual customer. The objective of these
programs is to encourage advertising and promotional events to increase sales of our products. Accruals for the estimated costs of these advertising programs are recorded based on the specific negotiations with individual customers in the period in
which the revenue is recognized. We regularly evaluate the adequacy of these cooperative advertising program accruals.

We also offer
volume rebates to several of our customers and record reserves for such rebates as a reduction of revenue at the time revenue is recognized. Estimates of required reserves are determined based on programs negotiated with the specific customers.

Future market conditions and product transitions may require us to take action to increase customer programs and incentive offerings that
could result in incremental reductions to revenue or increased operating expenses at the time the incentive is offered.

Allowance for Doubtful Accounts

We sell our products in the United States and internationally primarily through retailers. We generally do not require any collateral
from our customers. However, we seek to control our credit risk through ongoing credit evaluations of our customers financial condition and by purchasing credit insurance on European accounts receivable balances.

We regularly evaluate the collectibility of our accounts receivable and we maintain an allowance for doubtful accounts which we believe is adequate. The
allowance is based on managements assessment of the collectibility of specific customer accounts, including their credit worthiness and financial condition, as well as historical experience with bad debts, receivables aging and current
economic trends.

Inventories

We value
inventories at the lower of cost or market value.

Inventory Reserves

If the estimated market value is determined to be less than the recorded cost of the inventory, a provision is made to reduce the carrying amount of the inventory item. Determination of the market value may be
complex, and therefore, requires management to make assumptions and to apply a high degree of judgment. In order for management to make the appropriate determination of market value, the following items are commonly considered: inventory turnover
statistics, inventory quantities on hand in our facilities and customer inventories, unfilled customer order quantities, forecasted consumer demand, current retail prices, competitive pricing, seasonality factors, consumer trends, and performance of
similar products or accessories. Subsequent changes in facts or circumstances do not result in the reversal of previously recorded reserves.

We have not made any significant changes in the methodology or assumptions used to establish our inventory reserves as reported during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a
significant change in the future methodology or assumptions we use to calculate our inventory reserves. However, if our estimates regarding market value are inaccurate, or changes in customer or consumer demand affect specific products in an
unforeseen manner, we may be exposed to additional increases in our inventory reserves that could be material. A 10% change in our actual inventory reserves at September 30, 2006, would have affected net earnings by approximately $0.1 million and
$0.2 million, respectively, for the three and six months ended September 30, 2006.

Software Development Costs

Software development costs primarily consist of payments made to independent software developers under development agreements. We account for software
development costs in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, which provides for the capitalization of certain software development costs incurred
after technological feasibility of the software is established or for development costs that have alternative future uses. Under our current practice of developing new products, the technological feasibility of the underlying software is not
established until substantially all product development is complete and the first playable version is delivered. There are no capitalized software development costs as of September 30, 2006.

Royalties and Intellectual Property Licenses

Royalty
and license expenses consist of royalties and license fees paid to intellectual property rights holders for use of their trademarks, copyrights, software, technology or other intellectual property or proprietary rights in the development or sale of
our products. Royalty payments to independent software developers are payments for the development of intellectual property related to our video game titles.



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##### Table of Contents

Royalty-based payments that are paid in advance are generally capitalized and expensed to cost of sales
at the greater of the contractual or effective royalty rate based on net product sales. With regard to payments made to independent software developers and co-publishing affiliates, the Company is generally subject to development risk prior to the
general release of the product. Accordingly, payments that are due prior to completion of the product are generally expensed as research and development as the services are incurred. Payments due after the general release of the product (primarily
royalty-based in nature) are generally expensed as cost of sales at the higher of the contractual or effective royalty rate based on net product sales.

Valuation of Goodwill

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS
No. 142), we perform an annual impairment review at the reporting unit level during the fourth quarter of each fiscal year or more frequently if we believe indicators of impairment are present. SFAS No. 142 requires that goodwill and
certain intangible assets be assessed for impairment using fair value measurement techniques. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential
impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step
of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill
impairment test compares the implied fair value of the reporting units goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting units goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess. We performed step one of the annual goodwill impairment test in the fourth quarter of fiscal years 2006, 2005 and 2004 and determined that the fair value of the reporting unit exceeded
its net book value. Therefore, step two was not required.

RESULTS OF OPERATIONS

Net Sales

From a geographical perspective, our net sales for the three and six months ended
September 30, 2006 and 2005 were as follows (in thousands):



|                       |  |                                  |        |            |     |   |      |   |            |  |     |          |  |   |          |   |  |        |   
|---------------------- |  | -------------------------------- | ------ | ---------- | --- | - | ---- | - | ---------- |  | --- | -------- |  | - | -------- | - |  | ------ | --
|                       |  | Three months ended September 30, |        |            |     |   |      |   |           
|                       |  | 2006                             |        | % of total |     |   | 2005 |   | % of total |  |     | $ Change |  |   | % Change |  
|United States          |  | $                                | 17,432 |            | 68  | % |      | $ | 16,398     |  | 69  | %        |  | $ | 1,034    |   |  | 6.3    | % 
|Europe                 |  |                                  | 6,840  |            | 26  | % |      |   | 5,135      |  | 22  | %        |  |   | 1,705    |   |  | 33.2   | % 
|Canada                 |  |                                  | 1,516  |            | 6   | % |      |   | 2,147      |  | 9   | %        |  |   | (631     | ) |  | (29.4  | )%
|Other countries        |  |                                  |       |            | 0   | % |      |   | 64         |  | 0   | %        |  |   | (64      | ) |  | (100.0 | )%
|                       |  |                                  |        |            |     |   |      |   |            |  |     |          |  |   |          |   |  |        |   
|Consolidated net sales |  | $                                | 25,788 |            | 100 | % |      | $ | 23,744     |  | 100 | %        |  | $ | 2,044    |   |  | 8.6    | % 
|                       |  |                                  |        |            |     |   |      |   |            |  |     |          |  |   |          |   |  |        |   



|                       |  |                                |        |            |     |   |      |   |            |  |     |          |  |          |       |  |      |  
|---------------------- |  | ------------------------------ | ------ | ---------- | --- | - | ---- | - | ---------- |  | --- | -------- |  | -------- | ----- |  | ---- | -
|                       |  | Six months ended September 30, |        |            |     |   |      |  
|                       |  | 2006                           |        | % of total |     |   | 2005 |   | % of total |  |     | $ Change |  | % Change |      
|United States          |  | $                              | 31,121 |            | 71  | % |      | $ | 27,044     |  | 70  | %        |  | $        | 4,077 |  | 15.1 | %
|Europe                 |  |                                | 9,302  |            | 21  | % |      |   | 8,254      |  | 22  | %        |  |          | 1,048 |  | 12.7 | %
|Canada                 |  |                                | 3,397  |            | 8   | % |      |   | 3,143      |  | 8   | %        |  |          | 254   |  | 8.1  | %
|Other countries        |  |                                | 109    |            | 0   | % |      |   | 95         |  | 0   | %        |  |          | 14    |  | 14.7 | %
|                       |  |                                |        |            |     |   |      |   |            |  |     |          |  |          |       |  |      |  
|Consolidated net sales |  | $                              | 43,929 |            | 100 | % |      | $ | 38,536     |  | 100 | %        |  | $        | 5,393 |  | 14.0 | %
|                       |  |                                |        |            |     |   |      |   |            |  |     |          |  |          |       |  |      |  

For the three months ended September 30, 2006, consolidated net sales increased 8.6% as
compared to the three month period ended September 30, 2005. Net sales increased in the U.S. due primarily to sales of NFL licensed accessories. Net sales in Europe increased primarily due to the addition of new customers and the launch of a
new software product. The decrease in Canadian net sales is due to the overall softness in the gaming market in anticipation of the next-generation platforms, as well as additional customer allowances.



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##### Table of Contents

For the six months ended September 30, 2006, consolidated net sales increased 14.0% as compared to
the six months ended September 30, 2005. The increase in net sales is primarily due to increased sales of video game software products and NFL licensed accessories, and the addition of new customers in Europe.

Our sales by product group for the three and six months ended September 30, 2006 and 2005 were as follows:



|                     |  |                                  |   |  |      |  
|-------------------- |  | -------------------------------- | - |  | ---- | -
|                     |  | Three months ended September 30, |  
|                     |  | 2006                             |   |  | 2005 |  
|PlayStation 2        |  | 33                               | % |  | 34   | %
|Xbox                 |  | 10                               | % |  | 26   | %
|Xbox 360             |  | 17                               | % |  | 0    | %
|GameCube             |  | 11                               | % |  | 10   | %
|Handheld Consoles(a) |  | 17                               | % |  | 15   | %
|PlayStation          |  | 0                                | % |  | 2    | %
|All others           |  | 12                               | % |  | 13   | %
|                     |  |                                  |   |  |      |  
|Total                |  | 100                              | % |  | 100  | %
|                     |  |                                  |   |  |      |  



|                     |  |                                |   |  |      |  
|-------------------- |  | ------------------------------ | - |  | ---- | -
|                     |  | Six months ended September 30, |  
|                     |  | 2006                           |   |  | 2005 |  
|PlayStation 2        |  | 33                             | % |  | 33   | %
|Xbox                 |  | 13                             | % |  | 27   | %
|Xbox 360             |  | 14                             | % |  | 0    | %
|GameCube             |  | 11                             | % |  | 11   | %
|Handheld Consoles(a) |  | 16                             | % |  | 14   | %
|PlayStation          |  | 0                              | % |  | 2    | %
|All others           |  | 13                             | % |  | 13   | %
|                     |  |                                |   |  |      |  
|Total                |  | 100                            | % |  | 100  | %
|                     |  |                                |   |  |      |  

---

|(a) | Handheld consoles include Sony PSP and Nintendo Game Boy Advance, Game Boy Advance SP, DS, DS Lite and Micro.
|--- | -------------------------------------------------------------------------------------------------------------

Our sales by product category for the three and six months ended September 30, 2006 and 2005 were as follows:



|                |  |                                  |   |  |      |  
|--------------- |  | -------------------------------- | - |  | ---- | -
|                |  | Three months ended September 30, |  
|                |  | 2006                             |   |  | 2005 |  
|Control pads    |  | 44                               | % |  | 48   | %
|Bundles         |  | 12                               | % |  | 11   | %
|Software(b)     |  | 12                               | % |  | 16   | %
|Accessories     |  | 13                               | % |  | 6    | %
|Steering wheels |  | 5                                | % |  | 4    | %
|Memory          |  | 4                                | % |  | 4    | %
|All others      |  | 10                               | % |  | 11   | %
|                |  |                                  |   |  |      |  
|Total           |  | 100                              | % |  | 100  | %
|                |  |                                  |   |  |      |  



|                |  |                                |   |  |      |  
|--------------- |  | ------------------------------ | - |  | ---- | -
|                |  | Six months ended September 30, |  
|                |  | 2006                           |   |  | 2005 |  
|Control pads    |  | 42                             | % |  | 48   | %
|Bundles         |  | 10                             | % |  | 15   | %
|Software(b)     |  | 19                             | % |  | 13   | %
|Accessories     |  | 10                             | % |  | 5    | %
|Steering wheels |  | 6                              | % |  | 5    | %
|Memory          |  | 3                              | % |  | 4    | %
|All others      |  | 10                             | % |  | 10   | %
|                |  |                                |   |  |      |  
|Total           |  | 100                            | % |  | 100  | %
|                |  |                                |   |  |      |  

---

|(b) | Software includes game enhancement software in addition to published and distributed video game software with related accessories.
|--- | ----------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Gross Profit

Gross profit is defined as net sales less cost of sales. Cost of sales consists of product costs, cost of licenses and royalties, cost of freight-in and freight-out and distribution center costs, including
depreciation and other overhead.

The following table presents net sales, cost of sales and gross profit for the three and six months ended
September 30, 2006 and 2005 (in thousands):



|              |  |                                  |        |               |       |   |      |   |               |  |       |          |  |          |       |  |      |  
|------------- |  | -------------------------------- | ------ | ------------- | ----- | - | ---- | - | ------------- |  | ----- | -------- |  | -------- | ----- |  | ---- | -
|              |  | Three months ended September 30, |        |               |       |   |      |  
|              |  | 2006                             |        | % of NetSales |       |   | 2005 |   | % of NetSales |  |       | $ Change |  | % Change |      
|Net sales     |  | $                                | 25,788 |               | 100.0 | % |      | $ | 23,744        |  | 100.0 | %        |  | $        | 2,044 |  | 8.6  | %
|Cost of sales |  |                                  | 20,017 |               | 77.6  | % |      |   | 19,686        |  | 82.9  | %        |  |          | 331   |  | 1.7  | %
|              |  |                                  |        |               |       |   |      |   |               |  |       |          |  |          |       |  |      |  
|Gross profit  |  | $                                | 5,771  |               | 22.4  | % |      | $ | 4,058         |  | 17.1  | %        |  | $        | 1,713 |  | 42.2 | %
|              |  |                                  |        |               |       |   |      |   |               |  |       |          |  |          |       |  |      |  



|              |  |                                |        |               |       |   |      |   |               |  |       |          |  |          |       |  |      |  
|------------- |  | ------------------------------ | ------ | ------------- | ----- | - | ---- | - | ------------- |  | ----- | -------- |  | -------- | ----- |  | ---- | -
|              |  | Six months ended September 30, |        |               |       |   |      |  
|              |  | 2006                           |        | % of NetSales |       |   | 2005 |   | % of NetSales |  |       | $ Change |  | % Change |      
|Net sales     |  | $                              | 43,929 |               | 100.0 | % |      | $ | 38,536        |  | 100.0 | %        |  | $        | 5,393 |  | 14.0 | %
|Cost of sales |  |                                | 34,410 |               | 78.3  | % |      |   | 32,160        |  | 83.5  | %        |  |          | 2,250 |  | 7.0  | %
|              |  |                                |        |               |       |   |      |   |               |  |       |          |  |          |       |  |      |  
|Gross profit  |  | $                              | 9,519  |               | 21.7  | % |      | $ | 6,376         |  | 16.5  | %        |  | $        | 3,143 |  | 49.3 | %
|              |  |                                |        |               |       |   |      |   |               |  |       |          |  |          |       |  |      |  

Gross profit for the three months ended September 30, 2006 increased 42.2%, while gross
profit as a percentage of net sales, or gross profit margin, increased from 17.1% to 22.4%. The increase in gross profit margin was partly due to an increase in sales of higher margin licensed products and video game software, which increased profit
margin by approximately 3 percentage points. Reductions in customer returns, discounts and other allowances during the three months ended September 30, 2006 resulted in an increase in profit margin of approximately 2 percentage points. A
reduction in freight expense due to a higher mix of direct imports to customers and renegotiated shipping rates increased profit margin by approximately 1 percentage point. These increases in profit margin were offset by additional royalty and
license expenses, which decreased profit margin by approximately 1 percentage point.

Gross profit for the six months ended
September 30, 2006 increased 49.3%, while gross profit as a percentage of net sales, or gross profit margin, increased from 16.5% to 21.7%. The increase in gross profit margin was due to sales of higher margin licensed products and video game
software, which increased profit margin by approximately 3 percentage points, reductions in customer returns, discounts and other allowances which resulted in an increase in profit margin of approximately 1 percentage point, a reduction in freight
expense due to a higher mix of direct imports to customers and renegotiated shipping rates which increased profit margin by approximately 2 percentage points and a reduction in distribution costs which increased profit margin by approximately 1
percentage point. These increases in margin were offset by additional royalty and license expenses, which decreased profit margin by approximately 2 percentage points.

Operating Expenses

Operating expenses for the three and six months ended September 30,
2006 and 2005 were as follows (in thousands):



|                                  |  |                                  |       |               |      |   |      |   |               |  |      |         |  |   |          |   |  |       |   
|--------------------------------- |  | -------------------------------- | ----- | ------------- | ---- | - | ---- | - | ------------- |  | ---- | ------- |  | - | -------- | - |  | ----- | --
|                                  |  | Three months ended September 30, |       |               |      |   |      |   |              
|                                  |  | 2006                             |       | % of NetSales |      |   | 2005 |   | % of NetSales |  |      | $Change |  |   | % Change |  
|Sales and marketing               |  | $                                | 2,049 |               | 7.9  | % |      | $ | 2,904         |  | 12.2 | %       |  | $ | (855     | ) |  | (29.4 | )%
|General and administrative        |  |                                  | 2,397 |               | 9.3  | % |      |   | 1,985         |  | 8.4  | %       |  |   | 412      |   |  | 20.8  | % 
|Research and development          |  |                                  | 485   |               | 1.9  | % |      |   | 481           |  | 2.0  | %       |  |   | 4        |   |  | 0.8   | % 
|Amortization of intangible assets |  |                                  | 201   |               | 0.8  | % |      |   | 201           |  | 0.9  | %       |  |   | 0        |   |  | 0     | % 
|                                  |  |                                  |       |               |      |   |      |   |               |  |      |         |  |   |          |   |  |       |   
|Total operating expenses          |  | $                                | 5,132 |               | 19.9 | % |      | $ | 5,571         |  | 23.5 | %       |  | $ | (439     | ) |  | (7.9  | )%
|                                  |  |                                  |       |               |      |   |      |   |               |  |      |         |  |   |          |   |  |       |   



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|                                  |  |                                |        |               |      |   |      |   |               |  |      |         |  |   |          |   |  |       |   
|--------------------------------- |  | ------------------------------ | ------ | ------------- | ---- | - | ---- | - | ------------- |  | ---- | ------- |  | - | -------- | - |  | ----- | --
|                                  |  | Six months ended September 30, |        |               |      |   |      |   |              
|                                  |  | 2006                           |        | % of NetSales |      |   | 2005 |   | % of NetSales |  |      | $Change |  |   | % Change |  
|Sales and marketing               |  | $                              | 4,593  |               | 10.4 | % |      | $ | 5,373         |  | 13.9 | %       |  | $ | (780     | ) |  | (14.5 | )%
|General and administrative        |  |                                | 4,337  |               | 9.9  | % |      |   | 3,651         |  | 9.5  | %       |  |   | 686      |   |  | 18.8  | % 
|Research and development          |  |                                | 704    |               | 1.6  | % |      |   | 959           |  | 2.5  | %       |  |   | (255     | ) |  | (26.6 | )%
|Amortization of intangible assets |  |                                | 402    |               | 0.9  | % |      |   | 402           |  | 1.0  | %       |  |   | 0        |   |  | 0     | % 
|                                  |  |                                |        |               |      |   |      |   |               |  |      |         |  |   |          |   |  |       |   
|Total operating expenses          |  | $                              | 10,036 |               | 22.8 | % |      | $ | 10,385        |  | 26.9 | %       |  | $ | (349     | ) |  | (3.4  | )%
|                                  |  |                                |        |               |      |   |      |   |               |  |      |         |  |   |          |   |  |       |   

Sales and Marketing Expenses. Sales and marketing expenses consist primarily of
payroll, commissions, participation at trade shows and travel costs for our worldwide sales and marketing staff, advertising expense and costs of operating our GameShark.com website. The decrease in sales and marketing expense of 29.4% for the three
months ended September 30, 2006 is primarily due to lower salaries and travel due to reduced headcount, and lower advertising expense and trade show costs. The decrease in sales and marketing expense of 14.5% for the six months ended
September 30, 2006 is primarily due to lower salaries and travel due to reduced headcount, and lower and trade show costs, offset by an increase in advertising expense in connection with the launch of a new software product.

General and Administrative. General and administrative expenses include salaries and benefits for our executive and administrative
personnel, facilities costs and professional services, such as legal and accounting. The increase in general and administrative expense of 20.8% for the three months ended September 30, 2006 is primarily due to additional legal expenses related
to the progression and settlement of existing cases, increased audit fees and stock-based compensation related to stock options. The increase in general and administrative expense of 18.8% for the six months ended September 30, 2006 is
primarily due to additional legal expenses, increased audit fees and stock-based compensation related to stock options, offset in part by decreased salaries due to reduced headcount.

Research and Development. Research and development expenses include the costs of developing and enhancing new and existing products in
addition to the costs of developing software products. The increase in research and development expenses for the three months ended September 30, 2006 relates to the write-off of certain software development costs for a product which is not
being marketed, offset by a decrease in new game development. For the six months ended September 30, 2006 research and development expenses decreased 26.6% due primarily to decreased software development.

Amortization of Intangible Assets. Amortization of intangible assets results from our acquisition of GameShark in January 2003.
Intangible assets with defined useful lives are being amortized over the estimated useful life of the assets ranging from 3 to 7 years.

Interest
Expense, Foreign Exchange Gain (Loss) and Other Income

Interest expense, foreign exchange loss and other income for the three and
six months ended September 30, 2006 and 2005 were as follows (in thousands):



|                      |  |                                  |      |   |               |     |   |      |   |      |               |  |     |         |  |   |          |   |  |       |   
|--------------------- |  | -------------------------------- | ---- | - | ------------- | --- | - | ---- | - | ---- | ------------- |  | --- | ------- |  | - | -------- | - |  | ----- | --
|                      |  | Three months ended September 30, |      |   |               |     |   |      |  
|                      |  | 2006                             |      |   | % of NetSales |     |   | 2005 |   |      | % of NetSales |  |     | $Change |  |   | % Change |  
|Interest expense      |  | $                                | (291 | ) |               | 1.1 | % |      | $ | (293 | )             |  | 1.2 | %       |  | $ | (2       | ) |  | (0.7  | )%
|Foreign exchange gain |  | $                                | 1    |   |               | 0.0 | % |      | $ | 329  |               |  | 1.4 | %       |  | $ | (328     | ) |  | (99.7 | )%
|Other income          |  | $                                | 72   |   |               | 0.3 | % |      | $ | 101  |               |  | 0.4 | %       |  | $ | (29      | ) |  | (28.7 | )%



|                             |  |                                |      |   |               |     |   |      |   |      |               |  |     |         |  |   |          |   |  |       |   
|---------------------------- |  | ------------------------------ | ---- | - | ------------- | --- | - | ---- | - | ---- | ------------- |  | --- | ------- |  | - | -------- | - |  | ----- | --
|                             |  | Six months ended September 30, |      |   |               |     |   |      |  
|                             |  | 2006                           |      |   | % of NetSales |     |   | 2005 |   |      | % of NetSales |  |     | $Change |  |   | % Change |  
|Interest expense             |  | $                              | (564 | ) |               | 1.3 | % |      | $ | (619 | )             |  | 1.6 | %       |  | $ | (55      | ) |  | (8.9  | )%
|Foreign exchange gain (loss) |  | $                              | 163  |   |               | 0.4 | % |      | $ | (31  | )             |  | 0.1 | %       |  | $ | 194      |   |  | 625.8 | % 
|Other income                 |  | $                              | 129  |   |               | 0.3 | % |      | $ | 215  |               |  | 0.6 | %       |  | $ | (86      | ) |  | (40.0 | )%

The decrease in interest expense during the three and six months ended September 30, 2006 is
attributable to lower bank loan balances during the periods, offset by increases in the interest rate. The foreign exchange gains in the three and six months ended September 30, 2006 results from the change of the U.S. dollar and relate to the
revaluation of intercompany payables arising from product purchases at the Companys foreign subsidiaries.



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Other income primarily consists of advertising income from our GameShark.com website and royalties paid
by an unrelated third party to distribute our products in Australia. The decrease in other income is primarily due to decreased purchases from the unrelated third party distributor in Australia.

Income Tax Expense (Benefit)

Income tax
expense (benefit) for the three and six months ended September 30, 2006 and 2005 was as follows (in thousands):



|                                 |  |                   |   |  |      |      |   |                   |      |   |         |   |          |  |       |  
|-------------------------------- |  | ----------------- | - |  | ---- | ---- | - | ----------------- | ---- | - | ------- | - | -------- |  | ----- | -
|Three months ended
September 30, |  |                   |   |  |      |     
|2006                             |  | EffectiveTax Rate |   |  | 2005 |      |   | EffectiveTax Rate |      |   | $Change |   | % Change | 
|$ 225                            |  | 53.4              | % |  | $    | (155 | ) |                   | 11.3 | % |         | $ | 380      |  | 245.2 | %



|                               |  |                   |   |  |      |        |   |                   |      |   |         |   |        |          |  |       |   
|------------------------------ |  | ----------------- | - |  | ---- | ------ | - | ----------------- | ---- | - | ------- | - | ------ | -------- |  | ----- | --
|Six months ended
September 30, |  |                   |   |  |      |        |  
|2006                           |  | EffectiveTax Rate |   |  | 2005 |        |   | EffectiveTax Rate |      |   | $Change |   |        | % Change | 
|$(109)                         |  | 13.8              | % |  | $    | (1,111 | ) |                   | 25.0 | % |         | $ | (1,002 | )        |  | (90.2 | )%

Income tax expense increased due to the income earned for the second quarter of fiscal 2007, as
compared to the losses incurred for the first and second quarters of fiscal 2006. The effective tax rate is a blended rate for different jurisdictions in which the Company operates.

Net Income (Loss) and Net Income (Loss) Per Share

Net income (loss) for the three and six
months ended September 30, 2006 and 2005 was as follows (in thousands):



|                                 |  |               |   |  |      |        |   |               |      |    |         |   |          |  |       |  
|-------------------------------- |  | ------------- | - |  | ---- | ------ | - | ------------- | ---- | -- | ------- | - | -------- |  | ----- | -
|Three months ended
September 30, |  |               |   |  |      |       
|2006                             |  | % of NetSales |   |  | 2005 |        |   | % of NetSales |      |    | $Change |   | % Change | 
|$ 196                            |  | 0.8           | % |  | $    | (1,221 | ) |               | (5.1 | )% |         | $ | 1,417    |  | 116.1 | %



|                               |  |               |    |  |      |        |   |               |      |    |         |   |          |  |      |  
|------------------------------ |  | ------------- | -- |  | ---- | ------ | - | ------------- | ---- | -- | ------- | - | -------- |  | ---- | -
|Six months ended
September 30, |  |               |    |  |      |       
|2006                           |  | % of NetSales |    |  | 2005 |        |   | % of NetSales |      |    | $Change |   | % Change | 
|$(680)                         |  | (1.5          | )% |  | $    | (3,333 | ) |               | (8.6 | )% |         | $ | 2,653    |  | 79.6 | %

Basic and diluted net income per share for the three months ended September 30, 2006 was
$0.00 compared to basic and diluted net loss per share of $(0.02) for the three months ended September 30, 2005. Basic and diluted net loss per share for the six months ended September 30, 2006 was $(0.01) compared to $(0.06) for the six
months ended September 30, 2005. Net income (loss) per share is calculated using the weighted average number of basic and diluted shares outstanding during the three and six month periods ended September 30, 2006 and 2005, which were
54,244,383 shares in each of the periods.

Liquidity and Capital Resources

Sources of Liquidity



|                                      |  |                                                 |        |   |        |   |        |   |  |   |        |  
|------------------------------------- |  | ----------------------------------------------- | ------ | - | ------ | - | ------ | - |  | - | ------ | -
|                                      |  | As of and for thesix months ended September 30, |        |   | Change |  
|(in thousands)                        |  | 2006                                            |        |   | 2005   |   |       
|Cash                                  |  | $                                               | 1,628  |   |        | $ | 1,478  |   |  | $ | 150    |  
|                                      |  |                                                 |        |   |        |   |        |   |  |   |        |  
|Percentage of total assets            |  |                                                 | 2.2    | % |        |   | 1.8    | % |  |   |        |  
|Cash used in operating activities     |  | $                                               | (6,146 | ) |        | $ | (7,289 | ) |  | $ | 1,143  |  
|Cash used in investing activities     |  |                                                 | (156   | ) |        |   | (986   | ) |  |   | 830    |  
|Cash provided by financing activities |  |                                                 | 6,241  |   |        |   | 8,453  |   |  |   | (2,212 | )
|Effects of foreign exchange on cash   |  |                                                 | 82     |   |        |   | 215    |   |  |   | (133   | )
|                                      |  |                                                 |        |   |        |   |        |   |  |   |        |  
|Net increase in cash                  |  | $                                               | 21     |   |        | $ | 393    |   |  |   |        |  
|                                      |  |                                                 |        |   |        |   |        |   |  |   |        |  



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At September 30, 2006, available cash was approximately $1.6 million compared to cash of
approximately $1.6 million at March 31, 2006 and $1.5 million at September 30, 2005. Our primary sources of liquidity include a revolving line of credit (as discussed below under Cash Flows from Financing Activities), cash on hand at the
beginning of the year and cash flows generated from operations.

Cash Flows from Operating Activities

Our cash flows from operating activities have typically included the collection of customer receivables generated by the sale of our products, offset by
payments to vendors for materials and manufacture of our products. For the six months ended September 30, 2006, cash used in operating activities was $6.1 million compared to cash used of $7.3 million for the six months ended September 30,
2005. Cash was primarily used for the payment of accounts payable, offset by smaller inventory purchases resulting in a reduction in inventories. The largest use of cash for the six months ended September 30, 2006 resulted from the increase in
accounts receivable which is attributable to the increase in sales during the period.

Cash Flows from Investing Activities

Cash used in investing activities was $0.2 million during the six months ended September 30, 2006 and $1.0 million during the six months ended
September 30, 2005. Investing activities consist of capital expenditures to support our operations.

Cash Flows from Financing Activities

Cash provided by financing activities during the six months ended September 30, 2006 was a result of increased borrowings under
our line of credit. For the six months ended September 30, 2006, cash provided by financing activities was $6.2 million compared to cash provided of $8.5 million in the six months ended September 30, 2005. We are focused on effectively
managing our overall liquidity position by continuously monitoring expenses and managing our accounts receivable collection efforts.

We
maintain a Credit Facility (the Credit Facility) with Wachovia Capital Finance Corporation (Central) (Wachovia), formerly Congress Financial Corporation (Central), which allows us to borrow up to $35 million under a revolving
line of credit, subject to the availability of eligible collateral (accounts receivable and inventories), which changes throughout the year. On October 30, 2006, the Company and Wachovia entered into a Second Amended and Restated Credit
Agreement that extended the term until October 30, 2009. The line of credit accrues interest on the daily outstanding balance at the U.S. prime rate plus 0.25% per annum, and must be repaid in United States dollars. In addition, the
Company is required to pay a monthly service fee of $1,000 as of October 30, 2006 ($2,000 prior to the renewal on October 30, 2006) and an unused line fee equal to 0.25%. The Credit Facility is secured by a first priority security interest in
the inventories, equipment, accounts receivable and investment properties of Mad Catz, Inc., our primary operating subsidiary (MCI), and a pledge in favor of Wachovia of all of the shares of capital stock of our subsidiaries. The Credit
Facility is guaranteed by the Company and requires us to adhere to specified financial operating guidelines. See Note 5 to the consolidated financial statements included in Item 1. Financial Statements, elsewhere in this Form 10-Q.

At September 30, 2006 the outstanding balance on our line of credit was $14.8 million and our weighted average annualized interest rate during
the six-month period ended September 30, 2006 was 8.2%. Prior to the renewal on October 30, 2006, we were required to meet an adjusted tangible net worth covenant to access the line of credit. At September 30, 2006 and March 31,
2006, we were in compliance with this loan covenant. As of October 30, 2006, the adjusted tangible net worth covenant is replaced with a covenant based on our net income before interest, taxes, depreciation and amortization (EBITDA) to access
the line of credit.

We believe that our available cash balances, anticipated cash flows from operations and available line of credit will
be sufficient to satisfy our operating needs for at least the next twelve months. However, we operate in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and
expenditures. Accordingly, there can be no assurance that we may not be required to raise additional funds through the sale of equity or debt securities or from additional credit facilities. Additional capital, if needed, may not be available on
satisfactory terms, if at all. Furthermore, additional debt financing may contain more restrictive covenants than our existing debt.



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Contractual Obligations and Commitments

The following summarizes our minimum contractual obligations as of September 30, 2006 (in thousands):



|                                         |  |              |        |                 |   |          |  |          |       |  |   |  
|---------------------------------------- |  | ------------ | ------ | --------------- | - | -------- |  | -------- | ----- |  | - | -
|                                         |  | Payments Due
|                                         |  | Total        |        | Less Than1 Year |   | 1-3Years |  | 3-5Years
|Bank loan (excludes interest)            |  | $            | 14,822 |                 | $ | 14,822   |  | $        |      |  | $ | 
|Operating leases                         |  |              | 2,353  |                 |   | 560      |  |          | 1,793 |  |   | 
|Royalty & license guaranteed commitments |  |              | 545    |                 |   | 520      |  |          | 25    |  |   |  
|                                         |  |              |        |                 |   |          |  |          |       |  |   |  
|Total                                    |  | $            | 17,720 |                 | $ | 15,902   |  | $        | 1,818 |  | $ | 
|                                         |  |              |        |                 |   |          |  |          |       |  |   |  

As of September 30, 2006 and March 31, 2006, we did not have any relationships with
unconsolidated entities or financial parties, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships.

EBITDA

EBITDA, a non-GAAP financial measure, represents net income before interest, taxes,
depreciation and amortization. EBITDA is not intended to represent cash flows for the period, nor is it being presented as an alternative to operating income or net income as an indicator of operating performance and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. As defined, EBITDA is not necessarily comparable to other similarly titled captions of other companies due to potential
inconsistencies in the method of calculation. We believe, however, that in addition to the performance measures found in our financial statements, EBITDA is a useful financial performance measurement for assessing our Companys operating
performance. Our management uses EBITDA as a measurement of operating performance in comparing our performance on a consistent basis over prior periods, as it removes from operating results the impact of our capital structure, including the interest
expense resulting from our outstanding debt, and our asset base, including depreciation and amortization of our capital and intangible assets.



|                              |  |                                  |       |      |                                |        |      |  |   |       |   |  |   |        |  
|----------------------------- |  | -------------------------------- | ----- | ---- | ------------------------------ | ------ | ---- |  | - | ----- | - |  | - | ------ | -
|                              |  | Three months ended September 30, |       |      | Six months ended September 30, |       
|(in thousands)                |  | 2006                             |       | 2005 |                                |        | 2006 |  |   | 2005  |  
|Net income (loss)             |  | $                                | 196   |      | $                              | (1,221 | )    |  | $ | (680  | ) |  | $ | (3,333 | )
|Adjustments:                  |  |                                  |       |      |                                |        |      |  |   |       |   |  |   |        |  
|Interest expense              |  |                                  | 291   |      |                                | 293    |      |  |   | 564   |   |  |   | 619    |  
|Income tax expense (benefit)  |  |                                  | 225   |      |                                | (155   | )    |  |   | (109  | ) |  |   | (1,111 | )
|Depreciation and amortization |  |                                  | 504   |      |                                | 474    |      |  |   | 1,015 |   |  |   | 927    |  
|                              |  |                                  |       |      |                                |        |      |  |   |       |   |  |   |        |  
|EBITDA                        |  | $                                | 1,216 |      | $                              | (609   | )    |  | $ | 790   |   |  | $ | (2,898 | )
|                              |  |                                  |       |      |                                |        |      |  |   |       |   |  |   |        |  

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q are not historical fact and constitute forward-looking statements within the meaning of Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements may address, among other things, our strategy for growth, business development,
market and competitive position, financial results, expected revenue, expense levels in the future and the sufficiency of our existing assets to fund future operations and capital spending needs. These statements relate to our expectations, hopes,
beliefs, anticipations, commitments, intentions and strategies regarding the future, and may be identified by the use of words or phrases such as believe, expect, anticipate, should, plan,
estimate, and potential, among others.

Forward-looking statements are not guarantees of performance and are
subject to important factors and events that could cause our actual business, prospects and results of operations to differ materially from the historical information contained in this Form 10-Q, and from those that may be expressed or implied by
the forward-looking statements. Readers are cautioned that actual results could differ materially from the anticipated results or other expectations expressed in these forward-looking statements for the reasons detailed in Part I 
Item 1A.  Risk Factors of our most recent Annual Report on



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Form 10-K, and in Part II Other Information  Item 1A. Risk Factors of this Quarterly Report on Form 10-Q. The fact that some risk factors may be
the same or similar to our past reports filed with the Securities and Exchange Commission means only that the risks are present in multiple periods. We believe that many of the risks listed here and detailed in our other SEC filings are part of
doing business in the industry in which we operate, and will likely be present in all periods reported. The fact that certain risks are endemic to the industry does not lessen their significance. The forward-looking statements contained in this
report are made as of the date of this report and we assume no obligation to update them or to update the reasons why actual results could differ from those projected in such forward-looking statements. Among others, risks and uncertainties that may
affect our business, financial condition, performance, development and results of operations include:



| |  |  | Our dependence upon a few large customers, and their continued viability and financial stability, and a few core products to generate a significant portion of our revenues,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our need to constantly change our product mix by introducing new products in response to changing competitive and market conditions, and our need to obtain sufficient retail shelf
space at our retailers to display and market our products,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Risks associated with the introduction of new video game consoles, including technological compatibility of our products and obsolescence of our older products,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our dependence upon third parties to manufacture, ship and sell our products,
| | - |  | -----------------------------------------------------------------------------



| |  |  | Our dependence upon third parties to develop new and enhanced video game consoles and software that promote demand for our products and the commercial acceptance of the new consoles
and software,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The seasonality of our business, with the bulk of our sales coming in our fiscal third quarter,
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | Regulatory requirements of new laws related to environmental practices in connection with developing, manufacturing and distributing electronics products,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Potential political events, particularly in China, that may negatively affect economic conditions generally and our ability to obtain sufficient quantities of our products in a
timely and efficient manner,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Product liability claims, product defects, recalls and other manufacturing activity risks,
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Risks related to our pricing, product return, promotion and production practices,
| | - |  | ---------------------------------------------------------------------------------



| |  |  | Our ability to negotiate and comply with licensing arrangements with first party manufacturers and other parties that are necessary to manufacture our products,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provisions in some of our supply agreements that could require us to make substantial minimum annual purchases,
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | The impact on our sales of disruptions of shipping and product delivery operations worldwide,
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | Costs associated with defending our intellectual property rights and with defending assertions by other parties that we infringe their intellectual property rights,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Risks associated with our international operations,
| | - |  | ---------------------------------------------------



| |  |  | The fact that accounts receivable represent a large portion of our assets and are owed by a few large customers,
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | Our dependence upon the availability of capital under our credit facility to finance our operations,
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | Potential inability to sustain or manage growth, including the failure to continue to develop new products and markets,
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Our reliance on the use of information technology,
| | - |  | --------------------------------------------------



| |  |  | Our need to attract, train and retain skilled personnel to manage our business, develop new products and market our products to retailers,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The loss of product market share to competitors,
| | - |  | ------------------------------------------------



| |  |  | Potential adverse effects of domestic and international taxation and transfer pricing regulations, and
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Fluctuations in the value of foreign currencies against the U.S. dollar.
| | - |  | ------------------------------------------------------------------------



|Item  3. | Quantitative and Qualitative Disclosures About Market Risk
|-------- | ----------------------------------------------------------

Market Risk

Market risk is the potential loss arising from changes in market rates and market prices. Our market risk
exposure results primarily from fluctuations in foreign exchange rates and interest rates. Our views on market risk are not necessarily indicative of actual results that may occur and do not represent the maximum possible gains and losses that may
occur, since actual gains and losses will differ from those estimated, based upon actual fluctuations in foreign currency exchange rates and interest rates and the timing of transactions.



24



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##### Table of Contents

Foreign Currency Exchange Rate Risk

A majority of our international business is presently conducted in currencies other than the U.S. dollar and may be exposed to financial market risk
resulting from fluctuations in foreign currency exchange rates, particularly the Chinese Yuan, the British pound sterling, the Euro and the Canadian dollar. Foreign currency transaction gains and losses arising from normal business operations
are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which we conduct our business relative to the U.S. dollar will cause currency transaction gains and losses, which we have
experienced in the past and continue to experience. Due to the difficulty in determining and obtaining predictable cash flow forecasts in our foreign operations based on the overall challenging economic environment and associated contract
structures, we do not currently utilize any derivative financial instruments to hedge foreign currency risks. The volatility of the Chinese Yuan, the British pound sterling, the Euro and the Canadian dollar (and any other applicable currencies)
is monitored frequently. If appropriate, we may enter into hedging transactions in order to mitigate our risk from foreign currency fluctuations. Due to the substantial volatility of currency exchange rates, among other factors, we cannot predict
the effect of exchange rate fluctuations upon future operating results. There can be no assurances that we will not experience currency losses in the future.

We estimate that an immediate 10% adverse change in foreign exchange rates would decrease/increase our reported net income (loss) by approximately $1.1 million for the six months ended September 30, 2006. This
was estimated using a 10% deterioration factor to the average monthly exchange rates applied to net income or loss for each of the related subsidiaries in the respective period.

Interest Rate Risk.

We are exposed to interest rate risk on borrowings under the Credit
Facility. Funds advanced to us pursuant to the Credit Facility bear interest at the U.S. prime rate plus 0.25%. We do not hedge our exposures to interest rate risk. We estimate that an increase of 100 basis points in the interest rate under our
Credit Facility would not materially impact reported net income (loss) for the three and six months ended September 30, 2006.



|Item 4. | Controls and Procedures
|------- | -----------------------

We maintain disclosure
controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

Evaluation
of Disclosure Controls and Procedures

As required by Securities and Exchange Commission Rules 13a-15(a) and 13a-15(e), we carried out
an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures as of the end of the
period covered by this report. Based on the foregoing, our Chief Executive Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Controls over Financial Reporting

There has been no change in our internal
controls over financial reporting during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect our internal controls over financial reporting.



25



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##### Table of Contents

PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

Discussion of legal matters is
incorporated by reference from Part I, Item 1, Note 6, Commitments and Contingencies, of this document, and should be considered an integral part of Part II, Item 1, Legal Proceedings.



|Item 1A. | Risk Factors
|-------- | ------------

There have been no material changes
to the risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006.

Item 6.



|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Second Amended and Restated Loan Agreement dated as of October 30, 2006 by and between Wachovia Capital Finance Corporation (Central), formerly known as Congress Financial Corporation
(Central), an Illinois corporation and Mad Catz, Inc. (filed as an exhibit to the Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on November 3, 2006 and incorporated herein by
reference)                                              
|     | 
|31.1 |  | Certifications of Registrants Chief Executive Officer and Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                          
|     | 
|32.1 |  | Certifications of Registrants Chief Executive Officer and Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.
These certifications are being furnished solely to accompany this Quarterly Report on Form 10-Q and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into
any filing of the Company.



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                  |  |  |  |                                                                                         
|----------------- |  |  |  | ----------------------------------------------------------------------------------------
|                  |  |  |  | MAD CATZ INTERACTIVE, INC.                                                              
|                  |  | 
|November 14, 2006 |  |  |  | /s/ DARREN RICHARDSON                                                                   
|                  |  |  |  | Darren Richardson President and Chief Executive
Officer and Principal Accounting Officer



27