Mad Catz Interactive (MCZAF) 10-Q 2010 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended December 31, 2009

OR

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso     Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero Accelerated filero Non-accelerated filero(Do not check if a smaller reporting company) Smaller reporting companyþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso     Noþ

There were 55,098,549 shares of the registrant’s common stock issued and outstanding as of January 31, 2010.

MAD CATZ INTERACTIVE, INC.
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2009

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of December 31, 2009 and March 31, 2009	3
Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2009 and 2008	4
Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2009 and 2008	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 4. Controls and Procedures	16
PART II — OTHER INFORMATION	17
Item 1. Legal Proceedings	17
Item 1a. Risk Factors	17
Item 6. Exhibits	17
SIGNATURES	18
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

MAD CATZ INTERACTIVE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars, except share data)
(unaudited)

	December 31,			March 31,
	2009			2009
Assets
Current assets:
Cash	$	5,825		$	2,890
Accounts receivable, net of allowances of $7,222 and $5,926 at December 31, 2009 and March 31, 2009, respectively		28,374			15,524
Other receivables		176			471
Income tax receivable		760			759
Inventories		24,978			17,774
Deferred tax assets		19			19
Prepaid expenses and other current assets		1,273			1,491
Total current assets		61,405			38,928
Deferred tax assets		367			484
Other assets		704			362
Property and equipment, net		3,568			2,242
Intangible assets, net		3,231			5,118
Goodwill		8,453			8,467
Total assets	$	77,728		$	55,601
Liabilities and Shareholders’ Equity
Current liabilities:
Bank loan	$	23,256		$	13,272
Accounts payable		15,983			13,528
Accrued liabilities		8,294			5,929
Note payable		847			847
Income taxes payable		2,040			655
Total current liabilities		50,420			34,231
Convertible notes payable		14,500			14,500
Other long-term liabilities		1,484			453
Total liabilities		66,404			49,184
Shareholders’ equity:
Common stock, no par value, unlimited shares authorized; 55,098,549 shares issued and outstanding at December 31, 2009 and March 31, 2009		48,715			48,255
Accumulated other comprehensive income		923			101
Accumulated deficit		(38,314	)		(41,939	)
Total shareholders’ equity		11,324			6,417
Total liabilities and shareholders’ equity	$	77,728		$	55,601

See accompanying notes to unaudited condensed consolidated financial statements.

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MAD CATZ INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands of U.S. dollars, except share data)

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2009			2008			2009			2008
Net sales	$	48,763		$	40,817		$	92,745		$	89,872
Cost of sales		32,822			30,269			63,424			63,307
Gross profit		15,941			10,548			29,321			26,565
Operating expenses:
Sales and marketing		3,696			3,851			8,747			10,816
General and administrative		3,465			3,783			9,533			12,307
Research and development		741			223			2,033			1,161
Goodwill impairment		—			28,513			—			28,513
Amortization of intangible assets		395			597			1,567			1,811
Total operating expenses		8,297			36,967			21,880			54,608
Operating income (loss)		7,644			(26,419	)		7,441			(28,043	)
Interest expense, net		(645	)		(521	)		(1,637	)		(1,512	)
Foreign exchange gain (loss), net		109			1,032			(310	)		859
Other income		42			112			138			251
Income (loss) before income taxes		7,150			(25,796	)		5,632			(28,445	)
Income tax expense		1,558			1,113			2,007			480
Net income (loss)	$	5,592		$	(26,909	)	$	3,625		$	(28,925	)
Basic net income (loss) per share	$	0.10		$	(0.49	)	$	0.07		$	(0.53	)
Diluted net income (loss) per share	$	0.09		$	(0.49	)	$	0.07		$	(0.53	)
Weighted average shares — basic		55,098,549			55,098,549			55,098,549			55,085,822
Weighted average shares — diluted		65,316,293			55,098,549			55,098,549			55,085,822

See accompanying notes to unaudited condensed consolidated financial statements.

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MAD CATZ INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands of U.S. dollars)

	Nine Months Ended
	December 31,
	2009			2008
Cash flows from operating activities:
Net income (loss)	$	3,625		$	(28,925	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		3,003			3,138
Amortization of deferred financing fees		114			56
Goodwill impairment		—			28,513
Increase in sales reserves		6,589			7,663
Provision (benefit) for deferred income taxes		118			(298	)
Loss on disposal or sale of assets		81			—
Stock-based compensation		458			339
Changes in operating assets and liabilities:
Accounts receivable		(19,182	)		(26,687	)
Other receivables		296			(386	)
Inventories		(7,133	)		(1,024	)
Prepaid expenses and other current assets		220			184
Other assets		2			(36	)
Accounts payable		2,479			4,469
Accrued liabilities		3,429			1,334
Income taxes receivable/payable		1,398			(35	)
Net cash used in operating activities		(4,503	)		(11,695	)
Cash flows from investing activities:
Purchases of property and equipment		(2,412	)		(1,127	)
Net cash used in investing activities		(2,412	)		(1,127	)
Cash flows from financing activities:
Proceeds from stock option exercises		—			56
Payment of financing fees		(458	)		—
Repayments on bank loan		(68,291	)		(61,900	)
Borrowings on bank loan		78,275			72,930
Net cash provided by financing activities		9,526			11,086
Effects of foreign exchange on cash		324			(533	)
Net increase (decrease) in cash		2,935			(2,269	)
Cash, beginning of period		2,890			5,230
Cash, end of period	$	5,825		$	2,961
Supplemental cash flow information:
Income taxes paid	$	655		$	569
Interest paid	$	1,248		$	589
Supplemental disclosure of non-cash investing and financing activities:
Lease incentives recorded as deferred rent	$	—		$	109
Note payable issued for final Saitek acquisition working capital purchase price adjustment	$	—		$	847

See accompanying notes to unaudited condensed consolidated financial statements.

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MAD CATZ INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) Basis of Presentation

     The condensed consolidated balance sheets and related condensed consolidated statements of operations and cash flows contained in this Quarterly Report on Form 10-Q, which are unaudited, include the accounts of Mad Catz Interactive, Inc. (the “Company”) and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all entries necessary for a fair presentation of such condensed consolidated financial statements have been included. These entries consisted only of normal recurring items. The results of operations for the interim period are not necessarily indicative of the results to be expected for any other interim period or for the entire fiscal year. The Company generates a substantial percentage of net sales in the last three months of every calendar year.

     The condensed consolidated financial statements do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with United States generally accepted accounting principles. Please refer to the Company’s audited consolidated financial statements and related notes for the fiscal year ended March 31, 2009 contained in the Company’s Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission (the “SEC”).

     The preparation of financial statements in conformity with United States generally accepted accounting principles 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 revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to asset impairments, reserves for accounts receivable and inventories, contingencies and litigation, valuation and recognition of share-based payments and income taxes. Illiquid credit markets, volatile equity markets, foreign currency fluctuations, and declines in customer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. Actual results could differ from those estimates.

     The Company has evaluated subsequent events through the time of filing this Form 10-Q with the SEC on February 09, 2010.

          Recently Adopted Accounting Pronouncements

     In May 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance for subsequent events that establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. This guidance is effective for interim or annual periods ending after June 15, 2009. This guidance requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether the date represents the date the financial statements were issued or were available to be issued. The Company adopted the provisions of the guidance for subsequent events during the quarter ended June 30, 2009, and the adoption did not have a material impact on its unaudited condensed consolidated financial statements.

     In April 2009, the FASB issued authoritative guidance for interim disclosures about fair value of financial instruments, which requires disclosures of the fair value of financial instruments whenever a public company issues summarized financial information for interim reporting periods. This guidance is effective for interim reporting periods ending after June 15, 2009. The Company adopted the provisions of the guidance during the quarter ended June 30, 2009, and the adoption did not have a material impact on its unaudited condensed consolidated financial statements.

     In September 2006, the FASB issued authoritative guidance for fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value in the financial statements. In February 2008, the FASB issued authoritative guidance, which allowed for the delay of the effective date of the authoritative guidance for fair value measurements for one year for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company adopted the provisions of the guidance for financial assets and liabilities as of April 1, 2008 with the exception of the application of the statement to nonrecurring nonfinancial assets and nonfinancial liabilities, which the Company adopted on April 1, 2009. These adoptions did not have an impact on the Company’s unaudited condensed consolidated financial statements.

     In April 2009, the FASB issued authoritative guidance on fair value determination, which provides guidance on how to determine the fair value of assets and liabilities when the volume and level of activity for the asset or liability has significantly decreased when compared with normal market activity for the asset or liability as well as guidance on identifying circumstances that indicate a transaction is not orderly. This guidance is effective for interim and annual periods ending after June 15, 2009. The Company adopted the provisions of this guidance on April 1, 2009 and the adoption did not have an impact on its unaudited condensed consolidated financial statements.

     In December 2007, the FASB revised the authoritative guidance for business combinations, which establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (iii) determines what information to disclose to enable

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users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will be effective for the Company’s fiscal 2010. The impact of the adoption on the Company’s results of operations and financial position will depend on the nature and extent of business combinations that it completes, if any, in or after fiscal 2010.

     In May 2008, the FASB issued authoritative guidance for accounting for convertible debt instruments that may be settled in cash upon conversion, which applies to all convertible debt instruments that have a “net settlement feature,” which means that such convertible debt instruments, by their terms, may be settled either wholly or partially in cash upon conversion. This guidance requires issuers of convertible debt instruments that may be settled wholly or partially in cash upon conversion to separately account for the liability and equity components in a manner reflective of the issuers’ nonconvertible debt borrowing rate. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The Company adopted the provisions of this guidance on April 1, 2009, but it did not have an impact on its unaudited condensed consolidated financial statements as the Company’s convertible debt instrument does not contain a net settlement feature.

     In April 2008, the FASB issued authoritative guidance for determining the useful life of intangible assets, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset to include an entity’s historical experience in renewing or extending similar arrangements, adjusted for entity-specific factors, even when there is likely to be “substantial cost or material modifications.” This guidance states that in the absence of historical experience an entity should use assumptions that market participants would make regarding renewals or extensions, adjusted for entity-specific factors. The guidance for determining the useful life of intangible assets will be applied prospectively to intangible assets acquired after the effective date of April 1, 2009. The Company adopted the provisions of this guidance beginning April 1, 2009, and the adoption did not have an impact on its unaudited condensed consolidated financial statements.

     In November 2008, the FASB issued authoritative guidance for accounting for defensive intangible assets, which applies to defensive intangible assets, which are acquired intangible assets that the acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. As these assets are separately identifiable, the guidance requires an acquiring entity to account for defensive intangible assets as a separate unit of accounting which should be amortized to expense over the period the intangible asset will directly or indirectly affect the entity’s cash flows. Defensive intangible assets must be recognized at fair value in accordance with authoritative guidance. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company adopted the provisions of this guidance beginning April 1, 2009, and the adoption did not have an impact on its unaudited condensed consolidated financial statements.

     In June 2008, the FASB issued authoritative guidance for determining whether instruments granted in share-based payment transactions are participating securities, which addresses whether instruments granted in share-based payment transactions may be participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing basic earnings per share (“EPS”) pursuant to the two-class method. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company adopted the provisions of this guidance on April 1, 2009, but it did not have an impact on its unaudited consolidated financial statements as the Company’s unvested equity awards are not participating securities.

     In June 2008, the FASB issued authoritative guidance (formerly Emerging Issues Task Force Issue No. 07-05) for determining whether an instrument is indexed to an entity’s own stock, which addresses the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock. This guidance is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. The Company adopted the provisions of this guidance beginning April 1, 2009, and the adoption did not have a material impact on its unaudited condensed consolidated financial statements.

     In June 2009, the FASB issued guidance establishing the FASB Accounting Standards Codification (“Codification”) as the single source of authoritative U.S. generally accepted accounting principles “U.S. GAAP” recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The provisions of this guidance are effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification supersedes all existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification has become nonauthoritative. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to: (a) update the Codification; (b) provide background information about the guidance; and (c) provide the basis for conclusions on the change(s) in the Codification. The Company adopted this guidance beginning July 1, 2009 and accordingly, has removed references to legacy U.S. GAAP herein.

(2) Stock-Based Compensation

     The Company records compensation expense associated with share-based awards made to employees and directors based upon their grant date fair value. The Company records compensation expense on a straight-line basis over the requisite service period of the award, which ranges from zero to four years. During the nine month period ended December 31, 2009, the Company issued 725,000 stock option grants, totaling less than 10% of the previously outstanding balance.

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(3) Inventories

     Inventories consist of the following (in thousands):

	December 31,		March 31,
	2009		2009
Raw materials	$	1,977	$	949
Finished goods		23,001		16,825
Inventories	$	24,978	$	17,774

(4) Bank Loan

     The Company has a Credit Facility with Wachovia Capital Finance Corporation (Central) (“Wachovia”) to borrow funds under a revolving line of credit subject to the availability of eligible collateral (accounts receivable and inventories), which changes throughout the year. On June 23, 2009, the Company extended the term of the Credit Facility through October 31, 2012. As part of extending the term, the Company chose to reduce the amount of the Credit Facility from $35.0 million to $30.0 million. The line of credit accrued interest on the daily outstanding balance at the U.S. prime rate plus 0.75% per annum through June 30, 2009, after which interest accrues at the U.S. prime rate plus 2.00% or, at the Company’s option, LIBOR plus 3.50% with a LIBOR floor of 1.50%. At December 31, 2009, the interest rate was 5.25%. The Company is also required to pay a monthly service fee of $1,000, which increased to $2,000 as of July 1, 2009, and an unused line fee equal to 0.25% of the unused portion of the loan, which increased to 0.50% on July 1, 2009. Borrowings under the Credit Facility are 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. The Company is required to meet a quarterly financial covenant based on the Company’s trailing four quarter’s coverage of fixed charges. The Company was in compliance with the current fixed charge coverage ratio covenant as of December 31, 2009.

(5) Convertible Notes Payable

     On November 20, 2007, the Company issued to the seller of Saitek $14,500,000 of convertible notes (“Saitek Notes”) as part of the consideration relating to that acquisition. On June 24, 2009, the terms of the Saitek Notes were amended as follows. The maturity of the Saitek Notes was extended to March 31, 2019 with annual principal and interest payments of $2,400,000 due beginning March 31, 2011 until the Saitek Notes are retired. The Saitek Notes will bear interest at 7.5% through March 31, 2014 and 9.0% thereafter. Quarterly cash payments for partial interest in the amount of approximately $45,000 became due beginning June 30, 2009, in addition to an interest payment of $500,000 which was due and paid on October 31, 2009, and an interest payment of $596,035 due on March 31, 2010. All payments due have been made in accordance with the agreement. The Saitek Notes are convertible into common stock of the Company at a conversion price of $1.419 per share.

(6) Completion Note

     Pursuant to the Saitek purchase agreement, a working capital adjustment in the amount of $847,000 was made to the purchase price based on the completion of the final balance sheet, and the Company financed this amount with a note payable to The Winkler Atlantic Trust. The note is unsecured, was originally due August 1, 2011 including all accrued interest, and bears interest at 7.0% per annum compounded annually. As part of restructuring the Saitek Notes described above, the Company is required to repay this note in full, plus accrued interest, on March 31, 2010.

(7) Comprehensive Income (Loss)

     Comprehensive income (loss) for the three and nine months ended December 31, 2009 and 2008 consists of the following components (in thousands):

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2009			2008			2009		2008
Net income (loss)	$	5,592		$	(26,909	)	$	3,625	$	(28,925	)
Foreign currency translation adjustment		(590	)		(2,700	)		822		(4,190	)
Comprehensive income (loss)	$	5,002		$	(29,609	)	$	4,447	$	(33,115	)

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

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

Basic income (loss) per share is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding during the reporting period. Diluted income (loss) per share includes the impact of potentially dilutive common stock-based equity instruments.

The following table sets forth the computation of basic and diluted income (loss) per share:

	Three months ended					Nine months ended
	December 31,					December 31,
	2009		2008			2009		2008
Numerator:
Net income (loss) for basic income (loss) per share	$	5,592	$	(26,909	)	$	3,625	$	(28,925	)
Effect of dilutive securities:
Convertible notes payable — interest expense, net of tax		304		—			—		—
Numerator for diluted income (loss) per share		5,896		(26,909	)		3,625		(28,925	)
Denominator:
Denominator for basic income (loss) per share — weighted average shares		55,098,549		55,098,549			55,098,549		55,085,822
Effect of dilutive securities:
Convertible notes payable		10,217,744		—			—		—
Denominator for diluted income (loss) per share		65,316,293		55,098,549			55,098,549		55,085,822
Income (loss) per share basic and diluted:
Basic income (loss) per common share	$	0.10	$	(0.49	)	$	0.07	$	(0.53	)
Diluted income (loss) per common share	$	0.09	$	(0.49	)	$	0.07	$	(0.53	)

     Outstanding options to purchase an aggregate of 7,590,900 and 7,190,091 shares of the Company’s common stock for the three and nine months ended December 31, 2009, respectively, and 7,500,359 and 5,005,053 shares for the three and nine months ended December 31, 2008, respectively, were excluded from diluted net income (loss) per share calculations because inclusion of such options would have an anti-dilutive effect on income (loss) in these periods. Weighted average shares of 10,217,744 related to the convertible notes payable were excluded from the calculation for the nine months ended December 31, 2009 and the three and nine month periods ended December 31, 2008 because of their anti-dilutive effect during those periods.

(9) Geographic Data

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

	Three months ended				Nine months ended
	December 31,				December 31,
	2009		2008		2009		2008
Net sales:
United States	$	23,375	$	23,956	$	48,520	$	51,069
Europe		22,982		14,548		38,811		34,050
Canada		1,201		787		2,555		1,349
Other countries		1,205		1,526		2,859		3,404
	$	48,763	$	40,817	$	92,745	$	89,872

     Revenue is attributed to geographic regions based on the location of the customer. During each of the three and nine months ended December 31, 2009, one customer individually accounted for approximately 25% of the Company’s gross sales. During the three and nine months ended December 31, 2008, one customer individually accounted for approximately 31% and 29% of the Company’s gross sales, respectively.

(10) Subsequent Events

     In accordance with authoritative guidance, management has evaluated any events or transactions occurring after December 31, 2009, the balance sheet date, through February 9, 2010, the date that the Company’s unaudited condensed consolidated financial statements were issued, and identified no events or transactions which would impact its unaudited condensed consolidated financial statements for the three month period ended December 31, 2009 or require disclosure.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Unless the context otherwise requires, all references in this section to the “Company”, “we”, “us” or “our” refer, collectively, to Mad Catz Interactive Inc. and all of its subsidiaries, and all references in this section to “Mad Catz” refer to Mad Catz Interactive Inc.

     This section contains forward-looking statements and forward looking information (collectively “forward-looking statements”) as defined in applicable securities legislation 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 onForm 10-K for the fiscal year ended March 31, 2009 and in Part II Other Information — Item 1A. Risk Factors in this Quarterly Report onForm 10-Q. The following discussion should be read in conjunction with our condensed consolidated financial statements and related notes included in this Form 10-Q and in our Annual Report onForm 10-K for the fiscal year ended March 31, 2009.

Overview

Our Business

     We design, manufacture (primarily through third parties in Asia), market and distribute accessories for all major videogame platforms, the PC and, to a far lesser extent, the iPod and other audio devices. Our accessories are marketed primarily under the Mad Catz, Saitek, Joytech, GameShark and AirDrives brands; we also produce for selected customers a limited range of products which are marketed on a “private label” basis. Our products include videogame, PC and audio accessories, such as control pads, steering wheels, joysticks, memory cards, video cables, flight sticks, dance pads, microphones, car adapters, carry cases, mice, keyboards and headsets. We also market videogame enhancement products and publish videogames.

Seasonality and Fluctuation of Sales

     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 videogame platforms; the need to increase inventories in advance of our primary selling season; and timing of introductions of new products.

Potential Fluctuations in Foreign Currency

     During the three and nine month periods ended December 31, 2009, approximately 52% and 48% of total net sales was transacted outside of the United States, respectively. The majority of our international business is presently conducted in currencies other than the U.S. 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 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. To date we have not hedged against foreign currency exposure.

Critical Accounting Policies

     Our critical accounting principles and estimates remain consistent with those reported in our Annual Report on Form 10-K for the year ended March 31, 2009, as filed with the SEC.

RESULTS OF OPERATIONS

Net Sales

     From a geographical perspective, our net sales for the three and nine months ended December 31, 2009 and 2008 were as follows (in thousands):

	Three months ended December 31,										$			%
	2009		%of total			2008		%of total			Change			Change
United States	$	23,375		48	%	$	23,956		59	%	$	(581	)		(2	)%
Europe		22,982		48	%		14,548		35	%		8,434			58	%
Canada		1,201		2	%		787		2	%		414			53	%
Other countries		1,205		2	%		1,526		4	%		(321	)		(21	)%
Consolidated net sales	$	48,763		100	%	$	40,817		100	%	$	7,946			19	%

	Nine months ended December 31,										$			%
	2009		%of total			2008		%of total			Change			Change
United States	$	48,520		52	%	$	51,069		57	%	$	(2,549	)		(5	)%
Europe		38,811		42	%		34,050		38	%		4,761			14	%
Canada		2,555		3	%		1,349		1	%		1,206			89	%
Other countries		2,859		3	%		3,404		4	%		(545	)		(16	)%
Consolidated net sales	$	92,745		100	%	$	89,872		100	%	$	2,873			3	%

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     For the three months ended December 31, 2009, consolidated net sales increased 19% as compared to the three month period ended December 31, 2008. In the United States, the decrease in net sales is primarily attributable to a decline in sales on the Wii platform, as the prior-year period benefitted from strong sales of Wii Fit accessories, with no significant new product placements for the Wii platform in the current period and an overall softness in the videogame market, which led to the price cuts in videogame console hardware which occurred late in the quarter ended September 30, 2009. The decline in Wii product sales was partly offset by increases in sales of products on the Xbox 360 and PlayStation 3 platforms. In Europe the increase is largely attributable to the success of new products launched for Xbox 360 during this fiscal year.

     For the nine months ended December 31, 2009, consolidated net sales increased 3% as compared to the nine months ended December 31, 2008. In the United States, the preponderance of the decline in net sales occurred during the six month period ended December 31, 2009 for the reasons described above. In Europe the increase is largely attributable to the success of new products launched for Xbox 360 during this fiscal year. The increase in sales in Canada is largely attributable to new placements at existing customers as well as the addition of new customers.

     Our sales by product group as a percentage of gross sales for the three and nine months ended December 31, 2009 and 2008 were as follows:

	Three months ended						Nine months ended
	December 31,						December 31,
	2009			2008			2009			2008
PC		23	%		27	%		25	%		30	%
Xbox 360		31	%		21	%		30	%		17	%
PlayStation 3		17	%		5	%		16	%		7	%
Wii		14	%		17	%		12	%		17	%
Handheld Consoles(a)		3	%		9	%		4	%		10	%
PlayStation 2		1	%		3	%		2	%		4	%
GameCube		2	%		2	%		2	%		3	%
Xbox		0	%		1	%		0	%		0	%
All others		9	%		15	%		9	%		12	%
Total		100	%		100	%		100	%		100	%

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

Our sales by product category as a percentage of gross sales for the three and nine months ended December 31, 2009 and 2008 were as follows:

	Three months ended						Nine months ended
	December 31,						December 31,
	2009			2008			2009			2008
Specialty controllers		21	%		11	%		28	%		15	%
Accessories		30	%		45	%		26	%		44	%
Controllers		26	%		26	%		24	%		22	%
Personal computer input devices		8	%		11	%		8	%		10	%
Audio		10	%		5	%		10	%		6	%
Games(a)		2	%		2	%		2	%		3	%
All others		3	%		0	%		2	%		0	%
Total		100	%		100	%		100	%		100	%

(a)     Games include GameShark videogame enhancement products in addition to videogames with related accessories.

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.

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The following table presents net sales, cost of sales and gross profit for the three and nine months ended December 31, 2009 and 2008 (in thousands):

	Three months ended December 31,
			% of Net					% of Net			$		%
	2009		Sales			2008		Sales			Change		Change
Net sales	$	48,763		100.0	%	$	40,817		100.0	%	$	7,946		19.5	%
Cost of sales		32,822		67.3	%		30,269		74.2	%		2,553		8.4	%
Gross profit	$	15,941		32.7	%	$	10,548		25.8	%	$	5,393		51.1	%

	Nine months ended December 31,
			% of Net					% of Net			$		%
	2009		Sales			2008		Sales			Change		Change
Net sales	$	92,745		100.0	%	$	89,872		100.0	%	$	2,873		3.2	%
Cost of sales		63,424		68.4	%		63,307		70.4	%		117		0.2	%
Gross profit	$	29,321		31.6	%	$	26,565		29.6	%	$	2,756		10.4	%

Gross profit for the three months ended December 31, 2009 increased 51.1%, while gross profit as a percentage of net sales, or gross profit margin, increased from 25.8% to 32.7%. Gross profit for the nine months ended December 31, 2009 increased 10.4%, while gross profit margin increased from 29.6% to 31.6%. The changes in gross profit margin for the three and nine months ended December 31, 2009 were primarily due to product placement mix and reduced provision for inventory reserves as a percentage of sales in the current year, due to the fact that there was less economic uncertainty in the current year than the comparable period last year. Partially offsetting the same increases during the nine months ended December 31, 2009 was the negative impact of foreign exchange rate fluctuations during the period. We expect the gross profit margins to remain in the current range, although the gross profit margins may fluctuate due to factors such as changes in product mix and exchange rate fluctuations.

Operating Expenses

     Operating expenses for the three and nine months ended December 31, 2009 and 2008 were as follows (in thousands):

	Three months ended December 31,
			% of Net					% of Net			$			%
	2009		Sales			2008		Sales			Change			Change
Sales and marketing	$	3,696		7.6	%	$	3,851		9.4	%	$	(155	)		(4.0	)%
General and administrative		3,465		7.1	%		3,783		9.3	%		(318	)		(8.4	)%
Research and development		741		1.5	%		223		0.5	%		518			232.3	%
Goodwill impairment		—		—			28,513		69.9	%		(28,513	)		(100	)%
Amortization		395		0.8	%		597		1.5	%		(202	)		(33.8	)%
Total operating expenses	$	8,297		17.0	%	$	36,967		90.6	%	$	(28,670	)		(77.6	)%
			Nine months ended December 30,
			% of Net					% of Net			$			%
	2009		Sales			2008		Sales			Change			Change
Sales and marketing	$	8,747		9.4	%	$	10,816		12.0	%	$	(2,069	)		(19.1	)%
General and administrative		9,533		10.3	%		12,307		13.7	%		(2,774	)		(22.5	)%
Research and development		2,033		2.2	%		1,161		1.3	%		872			75.1	%
Goodwill impairment		—		—			28,513		31.7	%		(28,513	)		(100	)%
Amortization		1,567		1.7	%		1,811		2.0	%		(244	)		(13.5	)%
Total operating expenses	$	21,880		23.6	%	$	54,608		60.7	%	$	(32,728	)		(60.0	)%

     Sales and Marketing.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 websites. The decrease in sales and marketing expenses as a percentage of sales for the three and nine months ended December 31, 2009 is primarily due to cost reductions being made throughout the organization combined with leverage gained from the fixed nature of certain costs. Going forward, we expect fixed costs to grow approximately at the rate of inflation, with some increase in discretionary marketing spending in connection with the launch of new products.

     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 decrease in general and administration expenses for the three months ended December 31, 2009 is primarily related to cost reductions being made throughout the organization, partially offset by increased bonus expense related to the Company’s financial performance. The decrease in general and administration expenses for the nine months ended December 31, 2009 is primarily related to cost reductions being made throughout the organization, non-recurring professional fees related to the acquisition and integration of Saitek which were included in

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the 2008 period, as well as reduction in use of other outside consultants. Going forward, we expect these expenses to increase approximately at the rate of inflation and as a percentage of our sales to decline as we plan to increase our sales.

     Research and Development.Research and development expenses include the costs of developing and enhancing new and existing products. The increase in research and development expenses relates to a greater focus on research and development activities. Going forward, we expect research and development expenses to grow at an annual rate several percentage points higher than the rate of inflation as we continue to invest in new product development.

     Amortization.Amortization expenses consist of the amortization of the acquired intangible assets from Saitek and Joytech. These acquisitions occurred in the third and second quarters of fiscal 2008, respectively. The decrease in amortization expense during the three and nine months ended December 31, 2009 is primarily due to a portion of the intangible assets becoming fully amortized during November 2009.

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

     Interest expense, foreign exchange gain (loss) and other income for the three and nine months ended December 31, 2009 and 2008 were as follows (in thousands):

	Three months ended December 31,
				% of Net						% of Net			$			%
	2009			Sales			2008			Sales			Change			Change
Interest expense, net	$	(645	)		1.3	%	$	(521	)		1.3	%	$	(124	)		23.8	%
Foreign exchange gain, net	$	109			0.2	%	$	1,032			2.5	%	$	(923	)		(89.4	)%
Other income	$	42			0.1	%	$	112			0.3	%	$	(70	)		(62.5	)%

	Nine months ended December 31,
				% of Net						% of Net			$			%
	2009			Sales			2008			Sales			Change			Change
Interest expense, net	$	(1,637	)		1.8	%	$	(1,512	)		1.7	%	$	(125	)		8.3	%
Foreign exchange (loss), gain net	$	(310	)		0.3	%	$	859			1.0	%	$	(1,169	)		(136.1	)%
Other income	$	138			0.1	%	$	251			0.3	%	$	(113	)		(45.0	)%

     The increase in interest expense for the three and nine month periods ended December 31, 2009 is due to increases in total debt outstanding.

     The foreign exchange gains in the three months ended December 31, 2009 and 2008 are due primarily to the decline in value of the U.S. dollar versus the Great British Pound and the Euro during those periods versus these currencies in the comparable periods in the prior year. The foreign exchange loss during the nine months ended December 31, 2009 compared to the foreign exchange gain during the nine months ended December 31, 2008 resulted primarily from changes in the relative value between the British pound and the Euro against the U.S. dollar during such periods.

     Other income primarily consists of advertising income from our GameShark.com website. The decrease in other income is due primarily to lower advertising income.

Income Tax Expense

     Income tax expense for the three and nine months ended December 31, 2009 and 2008 was as follows (in thousands):

	Three months ended December 31,
			Effective					Effective			$		%
	2009		Tax Rate			2008		Tax Rate			Change		Change
Income tax expense	$	1,558		21.8	%	$	1,113		(4.3	)%	$	445		40.0	%

	Nine months ended December 31,
			Effective					Effective			$		%
	2009		Tax Rate			2008		Tax Rate			Change		Change
Income tax expense	$	2,007		35.6	%	$	480		(1.7	)%	$	1,527		318.1	%

     The Company’s effective tax rate is a blended rate for different jurisdictions in which the Company operates. The effective tax rate fluctuates depending on the taxable income in each jurisdiction and the statutory income tax rates in those jurisdictions. Our U.S., Canadian and French operations are excluded from the effective tax rate calculation due to the full valuation allowances against their deferred tax assets. The increase in the effective tax rate in the three and nine months ended December 31, 2009 versus the prior year periods is primarily due to the goodwill impairment in the third quarter of fiscal 2009, for which there was no tax benefit. The effective tax rate is lower during the three months ended December 31, 2009 versus the nine months ended December 31, 2009 due to a shift in jurisdictional income.

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Liquidity and Capital Resources

Sources of Liquidity

	As of and for the
	nine months ended
	December 31,
(in thousands)	2009			2008			Change
Cash	$	5,825		$	2,961		$	2,864
Percentage of total assets		7.5	%		3.8	%
Cash used in operating activities	$	(4,503	)	$	(11,695	)	$	7,192
Cash used in investing activities		(2,412	)		(1,127	)		(1,285	)
Cash provided by financing activities		9,526			11,086			(1,560	)
Effects of foreign exchange on cash		324			(533	)		857
Net increase (decrease) in cash	$	2,935		$	(2,269	)		5,204

     At December 31, 2009, available cash was approximately $5.8 million compared to cash of approximately $2.9 million at March 31, 2009 and $3.0 million at December 31, 2008. 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 during the year.

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 nine months ended December 31, 2009 and 2008, cash used in operating activities was $4.5 million and $11.7 million, respectively. For both periods cash used in operations primarily resulted from an increase in accounts receivable due to higher sales generated during the peak annual selling season, partially offset by higher sales reserves. Also contributing to the cash usage are increased inventories relating to maintaining levels significant enough to avoid stock-outs through the Chinese New Year period when our factories are closed, which are partially offset by the correlating increase in accounts payable for the inventory build-up.

     Due to the seasonality of our business, we typically experience a large build-up in inventories beginning during our second fiscal quarter ending September 30, with corresponding increases in accounts payable and our bank loan balance. These increases are in anticipation of the holiday selling season, which occurs during our third fiscal quarter ending December 31. During the third quarter our inventories tend to begin to decrease and accounts receivable increases as a result of the annual holiday selling. A large percentage of our annual revenue is generated during our third quarter. During our fourth quarter ending March 31, the sales cycle completes with decreases in accounts receivable, inventory, accounts payable and bank loan balance and net increase in cash. We forecast the expected demand for the holiday selling season months in advance to ensure adequate quantities of inventory. Our sales personnel forecast holiday sales based on information that we receive from our major customers as to expected product purchases for the holiday season, and we also utilize mathematical modeling techniques to forecast demand based on recent point-of-sale activity. If demand does not meet expectations, the result will be excess inventories, reduced sales and the overall effect could result in a reduction to cash flows from operating activities following payment of accounts payable.

Cash Flows from Investing Activities

     Cash used in investing activities was $2.4 million during the nine months ended December 31, 2009 and $1.1 million during the nine months ended December 31, 2008. Investing activities typically consist of capital expenditures to support our operations and were made up primarily of production molds, leasehold improvements, computers and machinery and equipment.

Cash Flows from Financing Activities

     Cash provided by financing activities was $9.5 million for the nine months ended December 31, 2009 and $11.1 million for the nine months ended December 31, 2008. Cash provided by financing activities during both periods was primarily driven by increased borrowings under our line of credit.

     We maintain a Credit Facility with Wachovia to borrow up to $30 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 2.0% per annum. This facility expires on October 31, 2012. At December 31, 2009, the interest rate was 5.25%. We are also required to pay a monthly service fee of $2,000 and an unused line fee equal to 0.50% of the unused portion of the loan. Borrowings under the Credit Facility are secured by a first priority interest in the inventories, equipment, accounts receivable and investment properties of MCI and by a pledge of all of the capital stock of Mad Catz’ subsidiaries and is guaranteed by Mad Catz. We are required to meet a quarterly covenant based on the fixed charge coverage ratio. We were in compliance with this covenant as of December 31, 2009.

     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

14

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.

Contractual Obligations and Commitments

     There have been no material changes to our contractual obligations from the information provided in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

     As of December 31, 2009 and March 31, 2009, 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, and Adjusted EBITDA

     EBITDA, a non-GAAP financial measure, represents net income before interest, taxes, depreciation and amortization. Prior to the third quarter of fiscal 2009, we had not recorded any goodwill impairment charges. To address the goodwill impairment charge recorded in fiscal 2009, we modified the calculation to exclude this non-operating, non-cash charge and defined the result as “Adjusted EBITDA”. We believe this to be a more meaningful measurement of performance than the previously calculated EBITDA. Adjusted EBITDA is not intended to represent cash flows for the period, nor is it being presented as an alternative to operating 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, Adjusted 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, Adjusted EBITDA is a useful financial performance measurement for assessing our Company’s operating performance. Our management uses Adjusted 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. In addition, Adjusted EBITDA is an important measure for our lender. We calculate Adjusted EBITDA as follows (in thousands):

	Three months ended					Nine months ended
	December 31,					December 31,
	2009		2008			2009		2008
Net income (loss)	$	5,592	$	(26,909	)	$	3,625	$	(28,925	)
Adjustments:
Interest expense		645		521			1,637		1,512
Income tax expense		1,558		1,113			2,007		480
Depreciation and amortization		920		973			3,003		3,138
EBITDA	$	8,715	$	(24,302	)	$	10,272	$	(23,795	)
Goodwill impairment		—		28,513			—		28,513
Adjusted EBITDA	$	8,715	$	4,211		$	10,272	$	4,718

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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 and constitute “forward-looking information” as defined in applicable Canadian securities legislation (collectively “forward-looking statements”). 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. Specifically this document contains forward-looking statements regarding, among other things, the continuance of seasonal fluctuations in the Company’s sales, inventories, receivables, payables and cash; the effect of currency exchange rate fluctuations; the sufficiency of funds available to meet operational needs; and our expectations for fiscal 2010 in respect of our gross profit margin and operating expenses.

     The forward-looking statements contained herein reflect management’s current beliefs and expectations and are based on information currently available to management, as well as its analysis made in light of its experience, perception of trends, current conditions, expected developments and other factors and assumptions believed to be reasonable and relevant in the circumstances. These assumptions include, but are not limited to: continuing demand by consumers for videogames and accessories, continued financial viability of our largest customers, continued access to capital to finance our working capital requirements and the continuance of open trade with China, where the majority of our products are manufactured.

     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 Form 10-K, and in “Part II Other Information — Item 1A— Risk Factors” in this Form 10-Q. We believe that many of the risks 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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     For the third quarter of fiscal 2010, our management with the participation of our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2009. 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 is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Accordingly, our disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of such date, our disclosure controls and procedures were effective at the reasonable assurance level in ensuring that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and Exchange Commission.

     Although we believe we have remediated the material weakness identified in 2008, in 2009 we identified significant deficiencies in our internal control over financial reporting related to (1) our reviews over sales reserve estimates and (2) information technology general controls. These deficiencies, and our remediation plans, are described in our Annual Report on Form 10-K for the year ended March 31, 2009. We will continue to implement further measures to remediate these previously identified deficiencies in fiscal 2010 and further improve our internal controls.

Changes in Internal Control over Financial Reporting

     There has been no change in our internal control over financial reporting during the quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting other than the steps we have taken to remediate the significant deficiencies described in our Annual Report on Form 10-K for the year ended March 31, 2009, relating to our sales reserve estimation process and our information technology general controls.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

     On or about January 23, 2009, Michele Graham, a former employee of MCI, filed an action in the Superior Court of California in the County of San Diego, styled, Michele Graham v. Mad Catz, Inc., Case No. 37-2009-00081888 CU-WT-CTL. In her complaint, Ms. Graham claims she was improperly terminated based on her age and Ms. Graham requested $73,500 in special damages and $5.56 million in punitive damages. This matter was settled favorably to the Company in November 2009 for an immaterial amount. All amounts related to this settlement were paid out at December 31, 2009.

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, 2009.

Item 6. Exhibits

31.1	Certification of Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Registrant’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Registrant’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.
32.2	Certification of Registrant’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company.

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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.
February 9, 2010	/s/ Darren Richardson
	Darren Richardson
	President and Chief Executive Officer
February 9, 2010	/s/ Stewart A. Halpern
	Stewart A. Halpern
	Chief Financial Officer

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