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Mad Catz Interactive Inc – ‘20-F’ for 3/31/03

On:  Friday, 7/25/03, at 4:38pm ET   ·   For:  3/31/03   ·   Accession #:  1193125-3-24099   ·   File #:  1-14944

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 7/25/03  Mad Catz Interactive Inc          20-F        3/31/03   10:2.5M                                   RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F        Annual Report of a Foreign Private Issuer           HTML    905K 
 2: EX-4.16     Agreement Dated Jan. 17, 2003                       HTML     23K 
 3: EX-4.17     Letter Agreement                                    HTML    153K 
 4: EX-4.18     Second Amending Agreement                           HTML     37K 
 5: EX-4.19     Web Service Agreement                               HTML     77K 
 6: EX-4.20     First Amending Agreement                            HTML     12K 
 7: EX-4.21     Marketing Agreement                                 HTML     47K 
 8: EX-4.22     First Amendment to Web Services                     HTML     15K 
 9: EX-99.1     Certification of CEO                                HTML      9K 
10: EX-99.2     Certification of CFO                                HTML      9K 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

OR

For the Fiscal Year Ended March 31, 2003

OR

For the transition period from                          to                         .

Commission file number 1-14944

MAD CATZ INTERACTIVE, INC.

(Exact name of Registrant as specified in its charter)

MAD CATZ INTERACTIVE, INC.

(Translation of Registrant’s name into English)

Canada

(Jurisdiction of incorporation or organization)

141 Adelaide St. West

Suite 400

Toronto, Ontario M5H 3L5

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common shares as of the close of the period covered by the annual report.

53,206,719

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  x    No  ¨

Indicate by check mark which financial statement item the Registrant has elected to follow.

Item 17  x.    Item 18  ¨.

PART I

Item 1.    Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2.    Offer Statistics and Expected Timetable

Not applicable.

Item 3.    Key Information

A.    Selected Financial Data

The summary of financial information set forth below is derived from and should be read in conjunction with the more detailed financial statements and notes thereto appearing elsewhere in this Annual Report on Form 20-F (the “Form 20-F”). See “Independent Auditors Report” and “Financial Statements.” The Company’s fiscal year is from April 1 to March 31.

Mad Catz Interactive, Inc., (the “Company”), maintains its books and records in US dollars, and has prepared its financial statements contained in this Form 20-F in accordance with generally accepted accounting principles (“GAAP”) in Canada, which vary in certain significant respects from GAAP in the United States. See Note 13 to the consolidated financial statements included in “Item 17. Financial Statements” elsewhere in this Form 20-F for a reconciliation of the fiscal year 2003 net income determined in accordance with GAAP in Canada to the net income determined in accordance with GAAP in the United States.

Beginning in fiscal year 2002, the Company changed its reporting currency from Canadian dollars to US dollars. In fiscal 2003, the Company adopted the Canadian Institute of Chartered Accountants’ (the “CICA”) new standards for the translation of foreign currencies. These bring Canadian practice into alignment with most other industrialized nations. This change has been applied retroactively as noted in Note 2 of the consolidated financial statements.

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SELECTED CONSOLIDATED

BALANCE SHEET INFORMATION

AUDITED

In addition to historical information, this Form 20-F contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. In some cases, you can identify forward-looking statements by terminology such as “could,” “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “intend,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. The Company’s actual results could differ significantly from those anticipated in these forward-looking statements as a result of these risks and uncertainties and certain other factors, including those discussed in “Risk Factors” below. Historical results of operations, percentage relationships and any trends that may be inferred therefrom are not necessarily indicative of the operating results of any future period.

EBITDA RECONCILIATION (Unaudited)

EBITDA represents net income plus interest, taxes, depreciation and amortization.

The Company believes that EBITDA is a useful supplement to net income as an indication of operating performance. EBITDA is a key financial measure but is not intended to represent cash flows for the period, nor has it been 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 accounting principles generally accepted in Canada. As defined, EBITDA is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation.

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B.    Capitalization and indebtedness

Not applicable.

C.    Reasons for the offer and use of proceeds

Not applicable.

D.    Risk Factors

The Company’s future financial results depend upon numerous factors and are subject to many risks and uncertainties. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties not presently known to the Company or that may be immaterial at this time may impair the Company’s business operations and future financial condition, results of operations or liquidity.

A significant portion of the Company’s revenue is derived from a few large customers.

The Company is dependent on a small number of large customers. The Company’s top two customers accounted for approximately 34% of the Company’s gross sales for fiscal year 2003, 48% in fiscal 2002 and 43% in fiscal 2001. In fiscal 2003, the Company’s two largest customers were Target and Wal-Mart. The Company’s top 10 customers accounted for approximately 76% of gross sales in fiscal 2003, 81% in fiscal 2002 and 81% in fiscal 2001. The Company does not have long-term agreements with these or other significant customers. As a result, agreements with respect to pricing, shelf space, cooperative advertising or special promotions, among other things, are subject to periodic negotiation with each customer. No assurance can be given that these or other customers will continue to do business with the Company or that they will maintain their historical levels of business. The loss of either of these customers or any of the Company’s other significant customers could have a material adverse effect on the Company’s business, results of operations, financial condition and liquidity.

Some of the Company’s license agreements with video game console developers have expired or may expire within the next fiscal year, which could limit the Company’s product offerings and significantly reduce its revenues.

Historically, a majority of the Company’s revenues has come from the sale of video game accessories for use with video game consoles sold by Sony Corporation (“Sony”), Nintendo Company, Ltd. (“Nintendo”), Microsoft Corporation (“Microsoft”) and Sega Corporation (“Sega”). Some, but not all, of the Company’s products compatible with these video game consoles have been produced under license agreements pursuant to which the Company received proprietary and other useful information, including use of first party logos. Products produced under first party license agreements accounted for approximately 26% of gross sales in fiscal 2003, 44% in fiscal 2002, and 36% in fiscal 2001. These licenses can be further categorized as products that are dependent on the license to generate on-going sales (“License Dependent Products”) and products that receive a marketing advantage due to the use of first party logos and trademarks (“Marketing Licenses”). License Dependent Products accounted for approximately 16% of gross sales in fiscal 2003, 30% in fiscal 2002, and 20%

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in fiscal 2001. Products manufactured under Marketing Licenses accounted for approximately 10% of gross sales in fiscal 2003, 14% in fiscal 2002 and 16% in fiscal 2001. Some of these license agreements have expired and others may expire, which could limit the Company’s product offerings and significantly reduce its revenues.

In particular, the Company’s North American license for the Sony PlayStation 2 Memory Card expired on December 31, 2001, and its international license for the Sony PlayStation 2 Memory Card expired on November 27, 2002. The Sony PlayStation 2 Memory Card accounted for approximately 16% of gross sales in fiscal 2003, 30% in fiscal 2002, and 20% in fiscal 2001, under these combined licenses. The reduction from fiscal 2002 to 2003 is due to the loss of the North American license in fiscal 2002. The Company does not expect to renew or replace these licenses. Without these licenses, the Company is unable to produce or sell the Sony PlayStation 2 Memory Card. As a result, the Company has discontinued sales of the Sony PlayStation 2 Memory Card. If the Company is unable to generate sufficient revenue from sales of other products to replace this revenue, its financial condition and results of operations could be materially and adversely affected.

Historically, sales generated by products subject to Marketing Licenses were predominantly from Microsoft, Sony and Sega licenses. The decline is due to the expiration of licenses on Sony products, declining sales of Sega licensed products and subsequent expiration of the Sega licenses, more than offsetting increasing sales of Microsoft licensed products. The expiration of the Sony and Sega marketing licenses does not prevent the Company from continuing to market the products; it only prevents the Company from using the first party logos in its marketing efforts.

The Company has a peripheral and compatibility license from Microsoft covering products relating to Microsoft’s Xbox video game console. This license will expire on February 28, 2004. Unless either Microsoft or the Company provides notice of its desire to terminate the license at least ninety (90) days prior to that date, the agreement will automatically renew for an additional one year period. While the Company has no intention to terminate the agreement and has not received any indication from Microsoft that it desires to terminate the agreement, no assurance can be given that the agreement will not expire in accordance with its terms. The Company is uncertain whether it will be able to renew or replace the Microsoft license. Nonetheless, this license only relates to the use of Microsoft’s logo on the Company’s products, so even without the license, the Company would be able to continue producing and selling similar products which do not contain the logo. There can be no assurance, however, that sales of unlicensed products will be equivalent to sales of the licensed products. Any decline in the sale of such products could significantly reduce the Company’s revenues and have a material adverse effect on its financial condition and results of operations.

The Company does not have any license agreements with Sony or Nintendo. The absence of license agreements with Sony or Nintendo (or the loss of the Microsoft license) could result in the Company being unable to efficiently and cost effectively design future generations of compatible accessories. In the event Nintendo, Sony or Microsoft enters into license agreements with the Company’s competitors and not with the Company, the Company would be placed at a substantial competitive disadvantage, which could materially and adversely affect its business, results of operations, financial condition and liquidity.

The Company must stay at the forefront of technology and any inability to do so would have a material adverse effect on the Company’s results of operations, financial condition and liquidity.

The high-tech industry is characterized by rapid technological advances, evolving industry standards, frequent new product introductions and enhancements and changing customer requirements. Much of the development of the Company’s new product offerings is dependent upon the Company’s ability to reverse engineer first party products as they are introduced by the manufacturers, and the introduction of products that effectively prevent or delay the Company’s ability to effectively develop products through reverse engineering could prevent the Company from developing new products, which would harm the Company’s business operations, financial condition, results of operations and liquidity. The introduction of products embodying or based upon new technologies and the emergence of new industry standards could render the Company’s existing

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inventory of products obsolete, incompatible with new consoles and unmarketable. The Company’s future success will depend upon its ability to introduce new products that keep pace with technological developments, respond to evolving end-user requirements and achieve market acceptance. If the Company fails to develop and introduce these enhancements or new products, or if these products are not accepted by its intended customers, the Company’s business could be materially harmed.

The Company’s financial results are dependent on timely introduction of new products, and any failure to introduce new products to the marketplace may adversely affect the Company’s business, results of operations, financial condition and liquidity.

New products introduced within the fiscal year accounted for approximately 30% of gross sales in fiscal 2003, 26% in fiscal 2002, and 38% in fiscal 2001. In addition, new bundles, consisting of a number of new and/or existing products sold in the same package, introduced within the fiscal year accounted for approximately 6% of sales in fiscal 2003, 9% in 2002 and 3% in 2001. There are numerous steps to develop a product from its conception to its commercial introduction and to ensure timely shipment to retail customers, including designing, sourcing and testing of the electronic components, receiving approval of hardware and other third party licensors, factory availability and manufacturing and designing the graphics and packaging. Any difficulties or delays in the process will likely result in delays in the contemplated product introduction schedule. It is common in new product introductions or product updates to encounter technical and other difficulties affecting manufacturing efficiency and, at times, the ability to manufacture the product at all. Although these difficulties can be corrected or improved over time with continued manufacturing experience and engineering efforts, if one or more aspects necessary for introduction of products are not completed as scheduled, or if technical difficulties take longer than anticipated to overcome, the product introductions will be delayed, or in some cases may be terminated. No assurances can be given that products will be introduced in a timely fashion, and if new products are delayed, the Company’s sales and revenue growth may be limited.

The typical life cycle of successful video game accessories is similar to the life of video game consoles which generally ranges from 2 to 5 years. Factors such as competition for access to retail shelf space, consumer preferences and seasonality could result in the shortening of the life cycle for older products and increase the importance of the Company’s ability to release new products on a timely basis. The Company must introduce new products in order to generate new revenues and/or to replace declining revenues from older products. The complexity of new video game systems has resulted in higher development expenses, longer development cycles, and the need to carefully monitor and plan the product development process.

Some of the Company’s products have been only recently introduced and although they may experience strong initial market acceptance, no assurance can be given that any initial acceptance will result in future sales. As a general matter, the Company expects that sales of these products will decline over the product’s life cycle, and the Company cannot predict the length of the life cycle for any particular product. In order to control costs, and take advantage of the limited shelf space provided to the Company, the Company must periodically discontinue some of its product offerings. The Company’s long-term operating results will therefore depend largely upon its continued ability to conceive, develop and introduce new appealing products at competitive prices.

At the end of fiscal 2003, the Company had approximately 116 active products. The Company defines “active products” as products that have maintained gross sales in excess of $5,000 per quarter. Each product may be configured and sold in a number of different stock keeping units. In fiscal 2003 the Company introduced approximately 71 new products and discontinued approximately 38 products for a net increase of approximately 33 active products. At the end of fiscal 2002, the Company had approximately 83 active products. In fiscal 2002, the Company introduced approximately 71 new products and discontinued approximately 48 products for a net increase of approximately 23 active products.

If the Company does not introduce new products in a timely and efficient manner and in accordance with its operating plans, its results of operations, financial condition and liquidity could be negatively affected.

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A significant portion of the Company’s revenue is derived from a few products.

The Company is dependent on a small number of products to generate a significant proportion of its revenues. The Company’s Top 10 products accounted for approximately 51% of gross sales in fiscal 2003, 65% in fiscal 2002, and 62% in fiscal 2001. No assurance can be given that these or other products will continue to gain consumer acceptance or that they will maintain their historical levels of sales. The loss of one or more of these products could have a material adverse effect on the Company’s business, results of operations, financial condition and liquidity.

New video game platforms and development for multiple consoles create additional technical and business model uncertainties.

The Company’s revenues are derived primarily from the sale of video game accessories for use with proprietary video game platforms, such as the Sony PlayStation and PlayStation 2, the Microsoft Xbox and the Nintendo GameCube, Game Boy Advance and Game Boy Advance SP. The success of the Company’s products is significantly affected by commercial acceptance of new video game platforms and the life cycle of older platforms. In addition, the Company anticipates that its profitability may be impacted by the research and development expenses incurred to develop compatible accessories for new and updated video game platforms.

If first party manufacturers choose to design video game systems that do not operate with third party accessories and are successful in implementing technological barriers, the Company’s ability to continue its current business plan would be limited and its business, financial condition, results of operations and liquidity would be harmed.

Changes to current video game platforms or introductions of new video game platforms may result in the Company’s products becoming inoperable on some video game platforms, which would reduce sales of the products and adversely affect the Company’s business, results of operations, financial condition and liquidity.

A significant proportion of the Company’s revenues are derived from products that are reverse engineered. First party video game manufacturers, such as Sony, Microsoft and Nintendo, continually update their video game platforms to correct problems in the operating systems and reduce costs. These manufacturers also expend significant resources to create next generation video game platforms. For example, during the development of such product updates and new video game platforms, manufacturers may implement changes to the design of the new video game platforms that render the Company’s products inoperable. If the Company’s products become inoperable on one or more video game platforms, the Company’s sales may be significantly reduced. Moreover, the Company may have excess inventory of products that does not operate properly with new gaming platforms, which would limit the growth of the Company and harm its business, results of operations, financial condition and liquidity. In fiscal 2003, the Company acquired the GameShark brand for approximately $5.1 million which is carried as an intangible asset. If this product was adversely impacted, sales may be reduced, having a material adverse effect on the Company’s business, results of operations, financial condition, and the value of the intangible asset may have to be written down.

Errors or defects contained in the Company’s products, or its failure to comply with applicable safety standards, could result in delayed shipments or rejection of the Company’s products, damage to its reputation and exposure to regulatory or other legal action.

Any defects or errors in the operation of the Company’s products may result in delays in their introduction. In addition, errors or defects may be uncovered after commercial shipments have begun, which could result in the rejection of the Company’s products by its retailers, damage to the Company’s reputation, lost sales, diverted development resources and increased customer service and support costs and warranty claims, any of which could harm the Company’s business. Adults and children could sustain injuries from the Company’s products, and the Company may be subject to claims or lawsuits resulting from such injuries. There is a risk that these claims or liabilities may exceed, or fall outside the scope of, the Company’s insurance coverage. The Company may also be unable to obtain adequate liability insurance in the future.

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The manufacture and supply of the Company’s products is dependant upon a limited number of third parties.

The Company relies on a limited number of manufacturers and suppliers for its products. There can be no assurance that these manufacturers and suppliers will be able to manufacture/supply the Company with sufficient quantities of its products to ensure consumer availability. Moreover, there can be no assurance that such manufacturers and suppliers will not refuse to supply the Company with product, and independently market their own competing products in the future or will not otherwise discontinue their relationships with or support of the Company. The failure of the Company to maintain its existing manufacturing and supplier relationships, or to establish new relationships in the future, could have a material adverse effect on the Company’s business, its results of operations, financial condition and liquidity. In addition, the Company obtains its GameShark products only from third party suppliers. If they are unable or unwilling for any reason to supply the Company with a sufficient quantity of GameShark products, the Company’s revenues would be materially adversely affected.

Natural disasters or other events outside of the Company’s control may damage the Company’s facilities or the facilities of third parties on which the Company depends for the manufacture and distribution of its products.

The Company’s North American distribution center and its operational headquarters are located in California near major earthquake faults that have experienced earthquakes in the past. An earthquake or other natural disaster could disrupt the Company’s operations at these facilities. Any of these disruptions or other events outside of the Company’s control could impair the manufacture or distribution of products, damage inventory, interrupt critical functions or otherwise affect the Company’s business negatively, harming the Company’s business operations and future financial condition, results of operations or liquidity. In addition, if the facilities of the Company’s third party product manufacturers are affected by earthquakes, power shortages, floods, monsoons, terrorism or other events outside of the Company’s control, the Company’s ability to obtain sufficient manufactured products could suffer.

Any disruption of shipping operations globally could harm the Company’s business.

The Company relies on contract ocean carriers to ship virtually all of its products to its primary distribution centers in California and the United Kingdom. Retailers that take delivery of the Company’s products in China rely on a variety of carriers to import those products. Any disruption or slowdown of service on importation of products caused by labor strikes, other labor disputes, terrorism, international incidents, lack of available shipping containers or otherwise could significantly harm the Company’s business and reputation. In 2002, a key collective bargaining agreement between the Pacific Maritime Association and the International Longshore and Warehouse Union affecting shipping of products to the Western United States, including the Company’s products, expired on September 1, 2002 and, after a temporary extension, resulted in an eleven-day cessation of work at West Coast docks. Although the Pacific Maritime Association and International Longshore and Warehouse Union have entered into a new collective bargaining agreement, any further disruption or slowdown of service on importation of products caused by labor disputes, terrorism, international incidents, lack of available shipping containers or otherwise could significantly harm the Company’s business, results of operations, financial condition and liquidity.

The Company’s pricing and product return policies and other promotional activities, may negatively impact the Company’s sales and profitability and harm its business, results of operations, financial condition and liquidity.

Many of the Companies products are value-priced or feature enhanced versions of products offered by first party companies. Sales of products that compete with a similar first party product accounted for approximately 65% of gross sales in fiscal 2003, 73% in fiscal 2002 and 62% in fiscal 2001. In the event a first party, or other competitor, reduces its prices, the Company could be forced to respond by lowering its prices to remain competitive. If the Company is forced to lower prices, the Company will be required to “price protect” the products that remain unsold in its customers’ inventories at the time of the price reduction. Price protection results in the Company issuing a credit to its customers in the amount of the price reduction for each unsold unit

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in the customer’s inventory. The Company’s price protection policies, which are customary in the video game industry, can have a major impact on the sales and profitability of the Company if the Company is forced to reduce the price of products for which a large inventory exists. It is also likely that the Company will experience additional price competition, which may lead to price protection, as it continues to introduce new and enhanced products.

To the extent the Company introduces new versions of products or changes its product sales mix, the rate of product returns may also increase above historical levels. Although the Company establishes allowances for anticipated product returns and believes its existing policies have resulted in allowances that are adequate, there can be no assurance that such product return obligations will not exceed the Company’s allowances in the future, which would have a material adverse effect on future operating results.

The Company’s business is seasonal and its financial results vary from period to period.

The video game and video game accessory industry is highly seasonal and the Company’s operating results vary substantially from period to period. The Company generates a substantial portion of its sales during the Christmas season. The high level of seasonality causes the Company to take large risks in the purchase of inventory for the holiday season. There can be no guarantee that the Company or its customers will sell all their inventories. Excess inventory at year-end may result in financial losses from obsolescence, reserves, returns and markdowns.

Moreover, if expenses remain relatively fixed, but the Company’s revenues are less than anticipated in any quarter, the Company’s operating results would be adversely affected for that quarter. In addition, incurring unexpected expenses could adversely affect operating results for the period in which such expenses are incurred. Failure to achieve periodic revenue, earnings and other operating and financial results as anticipated by brokerage firms or industry analysts could result in an immediate and adverse effect on the market price of the Company’s shares of its Common Stock (“Shares”). The Company may not discover, or be able to confirm, revenue or earnings shortfalls until the end of a quarter, which could result in a greater immediate and adverse effect on the Share price.

Continued poor economic conditions, could harm the Company’s business, results of operations, financial condition and liquidity.

Recent weak economic conditions in the United States and elsewhere have adversely affected consumer confidence and consumer sales generally. Further weakening of the economies of North America, Europe, Asia or other areas where the Company’s products are sold could damage the Company’s sales in these regions. Other changes in general economic conditions, such as greater demand or higher prices for plastic, electronic components, liquid crystal displays and fuel, may delay manufacture of the Company’s products, increase its costs or otherwise harm the Company’s margins and operating results.

The Company could be adversely affected by the bankruptcy of any of its customers.

On January 22, 2002, Kmart Corporation filed for bankruptcy protection. During the Company’s fiscal year 2003, the Company extended credit to Kmart on specific payment terms. On April 23, 2003, Kmart’s plan of reorganization was approved, and on May 6, 2003, Kmart emerged from bankruptcy. The Company continues to do business with Kmart. There can be no assurance that Kmart will not experience further financial difficulties in the future. If Kmart or any of the Company’s other customers were to experience difficulties in the future, the Company’s business, results of operations, financial condition and liquidity could be harmed.

No Assurance of Growth

The Company’s current business strategy emphasizes the continued expansion of retail account penetration, while focusing on maximizing the profitability of each sale. Sales to customers that did not have recorded sales

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in the prior 12 months accounted for approximately 21% in fiscal 2003, 15% in fiscal 2002, and 11% in fiscal 2001. The Company now sells products to nine of the ten largest retail companies in North America. North American sales represented approximately 79% of the total gross sales of the Company in fiscal 2003, 88% in fiscal 2002, and 82% in fiscal 2001. The decline in North American sales from fiscal 2002 to fiscal 2003 was largely due to the increase in sales from new customers and new products being more than offset by the loss of the North American PS2 memory card license. In fiscal 2002 the North American PS2 memory card license accounted for approximately 22% of gross sales. In fiscal 2002, the Company’s growth strategy expanded to include direct sales to retail accounts in certain European territories. In fiscal 2003, European sales accounted for approximately 18% of gross sales compared to 9% in fiscal 2002, and 13% in fiscal 2001. There can be no assurance that the Company will achieve future growth in net sales or that it will be able to maintain its present levels of net sales or profitability.

Any loss of China’s Normal Trade Relations “NTR” with the United States, or any changes in tariffs or trade policies, could increase the Company’s manufacturing expenses and make it more difficult for the Company to manufacture its products in China, if at all.

The majority of the Company’s products are manufactured in China and exported from Hong Kong and China to the United States and worldwide. Its products sold in the United States are currently not subject to United States import duties. However, as a result of opposition to policies of the Chinese government and China’s growing trade surpluses with the United States, there has been, and in the future may be, opposition to the extension of NTR status for China. The loss of NTR status for China, changes in current tariff structures or adoption in the United States of other trade policies adverse to China could increase the Company’s manufacturing expenses and make it more difficult for the Company to manufacture its products in China, if at all.

The Company’s manufacturing relationships in China may be adversely affected by changes in the political, economic and legal environment in China.

The Company maintains offices in Hong Kong and in China. The success of the Company’s current and future operations in Hong Kong and China is highly dependent on the Chinese government’s continued support of economic reform programs that encourage private investment, and particularly foreign private investment. There is no assurance that the Chinese government’s current policy of allowing companies to export goods manufactured in China will continue. A change in these policies by the Chinese government could adversely affect the Company by, among other things, imposing confiscatory taxation, restricting currency conversion, imports and sources of supplies, prohibiting the Company from manufacturing its products in China or disallowing it to ship its manufactured products from China into Hong Kong or to ship finished products out of Hong Kong or otherwise shutting down the Company’s offices in Hong Kong and China. Although the Chinese government has chosen economic reform policies to date, no assurance can be given that it will continue to pursue such policies or that such policies will not be significantly altered, especially in the event of a change in leadership or other social or political disruption.

The Company’s sources of manufacturing and distribution capabilities could be adversely affected by ongoing tensions between the Chinese and Taiwanese governments. In the event that Taiwan does not adopt a plan for unifying with China, the Chinese government has threatened military action against Taiwan. As of yet, Taiwan has not indicated that it intends to propose or adopt a reunification plan. If an invasion were to occur, the supply of components from Taiwanese suppliers that are used in the Company’s products could be interrupted, potentially limiting the production of the Company’s products. Invasion could also lead to sanctions or military action by the United States and/or European countries, which could materially effect the Company’s sales to those countries.

China does not have a comprehensive system of laws. Enforcement of existing laws may be sporadic and implementation and interpretation thereof inconsistent. The Chinese judiciary is relatively inexperienced in

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enforcing the laws that exist, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. Even where adequate law exists in China, it may be impossible to obtain swift and equitable enforcement of such law, or to obtain enforcement of a judgment by a court in a different jurisdiction. The Chinese tax system is subject to substantial uncertainties and has been subject to recently enacted changes, the interpretation and enforcement of which are also uncertain. There can be no assurance that changes in Chinese tax laws or their interpretation or their application will not subject the Company to substantial Chinese taxes in the future.

The Company depends upon the availability of capital under its credit facility to finance its operations. Any additional financing that the Company may need may not be available on favorable terms, or at all.

In addition to revenue generated from sales of its products, the Company finances its operations with a $35.0 million Credit Facility (the “Credit Facility”) provided by Congress Financial Corporation and affiliates (“Congress”), an unrelated party. The Credit Facility is scheduled to expire on September 25, 2003. The Credit Facility will automatically renew for an additional one year period unless either party gives written notice to the other party seeking to terminate the Credit Facility at least 60 days prior to the expiration date. On July 23, 2003, the Company received notice from Congress, that it has agreed to extend the renewal date of the Credit Facility to September 25, 2004. In addition, if the Company violates any of the financial or other covenants contained in the Credit Facility, the Company will be in default under the Credit Facility. If a default occurs and is not timely cured or waived by Congress, Congress could seek remedies against the Company, including: (1) penalty rates of interest, (2) immediate repayment of the debt or (3) foreclosure on assets securing the Credit Facility. The Company was not in compliance with the Adjusted Tangible Net Worth Covenant contained in the Credit Facility as of the end of fiscal year 2003 due to the acquisition of the GameShark intellectual property. On May 20, 2003, Congress waived the Company’s breach of this covenant through September 25, 2003. No assurance can be given that the Company will continue to maintain compliance with these covenants or that Congress will waive compliance with any of these covenants in the future. The credit facility is asset based and can only be drawn down in an amount to which eligible collateral exists and can be negatively impacted by extended collection of accounts receivable, unexpectedly high returns and slow moving inventory, among other factors.

If the Company needs to obtain additional funds for any reason, including the termination of the Credit Facility, increased working capital requirements, possible acquisitions or otherwise, there can be no assurance that alternative financing can be obtained on substantially similar or acceptable terms, or at all. The failure of the Company to promptly obtain alternate financing could limit the Company’s ability to implement its business plan and have an immediate, severe and adverse impact on the Company’s business, results of operations, financial condition and liquidity. In the event that no alternative financing is available, the Company would be forced to drastically curtail operations, or dispose of assets, or cease operations altogether.

The Company may be faced with legal challenges related to its products, including that its products infringe the third parties’ intellectual property rights, that could cause the Company to incur significant litigation or licensing expenses or could prohibit the Company from producing or marketing some or all of the products entirely.

Although the Company does not believe that its products infringe the proprietary rights of any third parties, there can be no assurance that infringement or other legal claims will not be asserted against the Company or that any such claims will not materially adversely affect the business, financial condition, or results of operations. Regardless of their validity or success, such claims may result in costly litigation, cause diversion of the Company’s management’s time and attention, cause product shipment delays or require the Company to enter into royalty or licensing agreements, which may not be available on terms acceptable to the Company, or at all. If licensing arrangements are required but unavailable, the Company may be prohibited from marketing and distributing these products. In addition, the Company could also incur substantial costs to redesign its products to comply with legal orders or contractual arrangements. Any of these costs or outcomes could adversely affect the Company’s business, results of operations, financial condition and liquidity.

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On February 10, 2003, Electro Source, LLC (“Electro Source”) filed a complaint against Mad Catz, Inc., a wholly-owned subsidiary of the Company (“MCI”), and Fire International Ltd. (“Fire International”), as well as other individual defendants, in the Superior Court in Los Angeles County, California entitled, Electro Source, LLC v. Fire International, Ltd., et al., Case No. BC 290076. In its complaint, Electro Source asserted claims against MCI for misappropriation of trade secrets, conspiracy to defraud, interference with contractual relationship and interference with prospective economic advantage in connection with Fire International’s agreement to supply Mad Catz with product to be marketed under the Company’s GameShark brand and the termination of Fire International’s 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. Trial has been set for April 14, 2004. The case is currently in the early stages of discovery. While the Company intends to vigorously defend this matter, there can be no guarantee that it will ultimately prevail or that damages will not be assessed against MCI. An adverse determination by the Court or jury could seriously impact the Company’s revenues and its ability to continue to distribute the GameShark products.

The Company’s intellectual property rights may not prevent its competitors from using its technologies or similar technologies to develop competing products, which could weaken the Company’s competitive position and harm its financial results.

The Company’s success depends in part on the use of proprietary technologies. The Company relies, and plans to continue to rely, on a combination of patents, copyrights, trademarks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect its proprietary rights. The Company has entered into confidentiality and invention assignment agreements with its employees and contractors, and nondisclosure agreements with selected parties with whom the Company conducts business to limit access to and disclosure of its proprietary information. These contractual arrangements and the other steps the Company has taken to protect its intellectual property may not prevent misappropriation of that intellectual property or deter independent third-party development of similar technologies. Monitoring the unauthorized use of proprietary technology and trademarks is costly, and any dispute or other litigation, regardless of outcome, may be costly and time-consuming and may divert the Company’s management and key personnel from its business operations. The steps taken by the Company may not prevent unauthorized use of its proprietary technology or trademarks. Many features of the Company’s products are not protected by patents, and, as a consequence, the Company may not have the legal right to prevent others from reverse engineering or otherwise copying and using these features in competitive products. If the Company fails to protect or to enforce its intellectual property rights successfully, its competitive position could suffer, which could adversely affect its financial results.

The Company may pursue acquisitions, which would subject its business to additional risks.

The Company may expand its operations or product offerings through the acquisition of additional businesses, products or technologies. A recent example is the acquisition of GameShark intellectual property. There can be no assurance that the Company will be able to identify, acquire or profitably manage additional businesses or successfully integrate any acquired businesses, products or technologies into the Company without substantial expenses, delays or other operational or financial problems. Acquisitions involve a number of risks, including:

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Some or all of these risks could have a material adverse effect on the Company’s acquired businesses, products or technologies. Furthermore, there can be no assurance that any acquired business, product, or technology will be profitable or achieve anticipated revenues and income. The failure of the Company to manage its acquisition strategy successfully could have a material adverse effect on the Company’s business, results of operations and financial condition.

There are numerous risks associated with the Company’s international operations, any number of which could harm the Company’s business.

The Company’s head office is in Canada, with operational headquarters located at offices in San Diego, California. Approximately 79% of its sales in fiscal year 2003 were generated in North America, and a substantial majority of its products are manufactured by third parties in Hong Kong and China. The Company also has an office in the United Kingdom. The geographical distances between the Company’s operations create a number of logistical and communications challenges. These challenges include managing operations across multiple time zones, directing the manufacture and delivery of products across long distances, coordinating procurement of components and raw materials and their delivery to multiple locations, and coordinating the activities and decisions of the core management team, which is based in a number of different countries.

In addition, there are other risks inherent in international operations, which could result in disruption or termination of supply of the Company’s products available for sale. These risks include, but are not limited to:

These factors could materially and adversely affect the Company’s business, operating results, and financial condition.

The recent outbreak of severe acute respiratory syndrome, or SARS, in China, Hong Kong, Singapore and Toronto may have a negative impact on the Company’s business operations and future financial condition, results of operations or liquidity. The Company’s operations may be impacted by a number of SARS-related factors, including, but not limited to, disruptions at manufacturing operations located in China that the Company uses, reduced demand for the Company’s products and increased supply chain costs.

Since the Company’s financial results are reported in United States dollars, fluctuations in the value of the United States dollar relative to the Canadian dollar, British pound, Euro and other currencies could materially affect the Company’s results. Historically, the Company has not engaged in hedging transactions to reduce the risk of currency fluctuation. However, upon opening a sales office in the United Kingdom in early 2002, the Company now denominates some sales invoices in British pounds and Euros. Accordingly, the Company engages in hedging transactions in an attempt to partially mitigate the effect of foreign currency variations on the financial results, but there is no guarantee that such attempts will be successful.

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Failure to attract, retain and motivate skilled personnel would have a material adverse effect on the Company’s results of operations, financial condition or liquidity.

The Company’s ability to achieve its revenue and operating performance objectives will depend in large part on its ability to attract and retain qualified and highly skilled sales, marketing, operations, logistics, management, engineering and finance personnel. The Company competes for its personnel with other companies, and competition for such personnel is intense and is expected to remain so for the foreseeable future, particularly for those with relevant technical expertise. Failure to retain and expand its key employee population could adversely affect the Company’s business and operating results.

The Company is heavily dependent upon its senior management team. The continued availability of this team will be a major contributing factor to the Company’s future growth. In the event that any member of senior management becomes unavailable for any reason, the Company could be materially and adversely affected. The Company does not maintain key-man life insurance on any of its senior management.

Competition for market acceptance and retail shelf space and pricing competition affect the Company’s revenue and profitability.

The video game accessory market is highly competitive and the barriers to entry are low. Only a small percentage of products introduced in the market achieve any degree of sustained market acceptance. If the Company’s products are not successful, its operations and profitability will be negatively impacted. Competition in the video game accessory industry is based primarily upon:

Some of the Company’s competitors, particularly the first party manufacturers, enjoy competitive advantages, such as longer operating histories, larger technical staffs, more established and larger sales and marketing organizations, significantly greater financial and other resources, ability to respond more quickly to new or emerging technologies and changes in customer requirements or ability to establish or strengthen cooperative relationships with retailers, distributors and other marketers.

Increased competition from these and other sources could require the Company to respond to competitive pressures by establishing pricing, marketing and other programs or seeking out additional acquisitions that may be less favorable than what the Company could otherwise establish or obtain, and thus could have a material adverse effect on the Company’s business, financial condition and results of operations. No assurance can be given that the Company will be able to compete effectively in its markets.

The Company has implemented a rights plan that could prevent or delay an acquisition of the Company that may be beneficial to its stockholders and could result in additional dilution to the stockholders.

The Company has adopted a shareholder rights plan in an attempt to ensure that shareholders receive a fair price in the event that a person seeks to acquire the Company. Under the rights plan, shareholders hold certain rights, which entitle them to purchase additional Shares in response to a take-over bid or tender offer, at a substantial discount from the prevailing market price of the Shares, and vote the additional Shares. The existence

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of the rights plan could result in a decrease in investor interest, and an accompanying downward pressure on the market price of the Shares, or could discourage, delay or prevent an acquisition of the Company under certain circumstances because of the increased difficulty faced by persons making a take-over bid for the Company. In addition, there could be substantial dilution of the Shares in the event that the permitted shareholders purchase additional Shares pursuant to the rights plan.

Any future terrorist attacks and other acts of violence or war may affect the demand for video game accessories, which may negatively affect the company’s operations and financial results.

There can be no assurance that there will not be further action by the United States military or additional terrorist attacks against the United States or United States businesses. These attacks or armed conflicts may directly impact the Company’s physical facilities, those of its customers or potential customers or those of its manufacturers or suppliers. Also, these attacks may cause a reduction in the demand for video game accessories. Any additional actions by the United States against the people and organizations the United States believes to coordinate and facilitate terrorist activities could have a further impact on demand for consumer products in general and video game accessories in particular. Political and economic instability in some regions of the world may also result and could negatively impact the Company’s international operations. The consequences of any of these armed conflicts are unpredictable, and the Company may not be able to foresee events that could have an adverse effect on its business. The continued threat of terrorism within the United States, Europe and the Middle East and the military action and heightened security measures in response to such threat may cause significant disruption to commerce throughout the world. To the extent that such disruptions result in delays or cancellations of customer orders, a general decrease in the demand for video game accessories, or the Company’s inability to effectively market its products, the Company business and results of operations could be materially and adversely affected. The Company is unable to predict whether the threat of terrorism or the responses thereto will result in any long term commercial disruptions or if such activities or responses will have a long term material adverse effect on the Company’s business, results of operations, financial condition and liquidity.

Control by existing shareholders; anti-takeover effects.

The Company’s officers and directors, in the aggregate, beneficially own approximately 17.5% of the Company’s outstanding Shares as of March 31, 2003. As a result, if these shareholders acted together, they could exert substantial influence over the Company and many matters requiring shareholder approval, including, without limitation, the election of directors, modification of the Company’s capital structure, adoption of stock option plans and award of grants thereunder, terms and conditions of a merger or consolidation of the Company with another company, and negotiation of the terms and conditions of a tender offer or take-over bid for the Shares made by another company. These shareholders could exercise this ability in a manner that advances their best interests and not necessarily those of the Company’s other stockholders. This ownership concentration could also have the effect of delaying or preventing any acquisition of the Company, which could adversely affect the market price of the Shares and, in certain circumstances, prevent shareholders from receiving a premium over the then current market value for their Shares.

Penny stock rules may negatively impact the liquidity of the Shares.

The Shares are subject to rules promulgated by the United States Securities and Exchange Commission (the “SEC”) relating to “penny stocks” which apply to certain companies whose shares trade at less than $5.00 per share and which do not meet certain other financial requirements specified by the SEC. These rules require brokers who sell “penny stocks” to persons other than established customers and “accredited investors” to complete certain documentation, make suitability inquiries of investors, and provide investors with certain information concerning the risks of trading in such penny stocks. These rules may discourage or restrict the ability of brokers to sell the Shares and may affect the secondary market for the Shares. These rules could also have a detrimental effect upon the Company’s ability to raise funds in the primary market for Shares.

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Volatility of Share price and absence of dividends.

The market price of the Shares has been and is likely to be highly volatile. Many factors could have a significant adverse impact on the market price of the Shares, including:

The Company has never paid cash dividends on its Shares and does not anticipate paying any cash dividends in the foreseeable future.

Item 4.    Information on the Company.

A.     History and Development of the Company

The name of the Company is Mad Catz Interactive, Inc. The Shares trade on the Toronto Stock Exchange (“TSX”) and the American Stock Exchange (“AMEX”) under the symbol “MCZ.” The Company’s corporate headquarters are located at 141 Adelaide Street West, Suite 400, Toronto, Ontario, M5H 3L5, Telephone (416) 368-4449. The Company’s registered office is located at BCE Place, 181 Bay Street, Suite 2500, Toronto, Ontario, M5J 2T7. The Company’s primary subsidiary—Mad Catz, Inc.—(“MCI”), is located at 7480 Mission Valley Road, Suite 101, San Diego, California, 92108. The Company is in the business of designing, manufacturing and distributing video game accessories, which are compatible with Sony, Nintendo, and Microsoft video game platforms. The Company’s video game accessories are marketed under the Mad Catz and GameShark brands.

The Company was incorporated under the Canada Business Corporations Act on August 25, 1993 under the name Patch Ventures Inc. (“Patch”). In 1994, Patch acquired all of the issued and outstanding shares of Legacy Manufacturing Corporation and changed its name to Legacy Storage Systems International Inc. In 1996, the Company changed its name to Tecmar Technologies International Inc. At that time, the Company conducted its principal business of designing and developing data storage systems for networks and workstations and marketing such systems to computer original equipment manufacturers and distributors through several operating subsidiaries.

In 1998, the Company sold the last of its operating businesses, Tecmar Technologies, Inc. and changed its name to Xencet Investments Inc. (“Xencet”). To meet the original listing requirements of the TSX, the Company then acquired all of the outstanding securities of Games Trader Inc., a private corporation incorporated pursuant to the laws of the Province of Ontario (“Games Trader”) that sold previously played video games. Following the acquisition, the Company changed its name to Games Trader Inc. The Company later changed its name to GTR Group Inc. in 1999.

Effective August 31, 1999, the Company completed the acquisition of MCI, a private company incorporated under the laws of Utah that designs, manufactures and distributes video game accessories. In September 2001, the Company changed its name to Mad Catz Interactive, Inc.

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General Organization of the Company

The Company is a corporation incorporated under the Canada Business Corporations Act. The Company has several operating subsidiaries: (i) MCI, (ii) 1328158 Ontario Inc., which distributes the Company’s Mad Catz and GameShark lines of video game accessories in Canada under the name Mad Catz Canada (“MCC”), (iii) Mad Catz Europe, Limited, a corporation incorporated under the laws of England and Wales (“MCE”) that sells the Company’s Mad Catz and GameShark lines of video game accessories in Europe. In connection with a general corporate reorganization, the Company also beneficially owns all the issued and outstanding shares of Mad Catz Interactive Asia, Limited, a corporation incorporated under the laws of Hong Kong (“MCIA”) that provides procurement services related to the manufacture of Mad Catz products. MCI owns all of the issued and outstanding shares of FX Unlimited, Inc., a corporation incorporated under the laws of Delaware (“FX”), which is currently inactive, but holds certain intangible assets related to the MCI business. MCI and FX each own 50% of the issued and outstanding shares of Mad Catz (Asia) Limited, a corporation incorporated under the laws Hong Kong (“MCA”), which is currently inactive.

B.    Business Overview

Video Game Controllers and Accessories

The Company’s products include video game controllers and accessories of all types, such as control pads, game enhancement software, steering wheels, joysticks, memory cards, video cables, light guns, dance pads, and microphones. The sale of control pads accounted for approximately 43% of gross sales in fiscal 2003, 29% in fiscal 2002, and 23% in fiscal 2001. Memory card sales accounted for approximately 22% of gross sales in fiscal 2003, 37% in fiscal 2002, and 32% in fiscal 2001. Steering wheel sales accounted for approximately 8% of gross sales in fiscal 2003, 7% in fiscal 2002, and 13% in fiscal 2001. Software sales, including the sale of GameShark products, accounted for approximately 0% of gross sales in each of fiscal 2003, 2002, and 2001.

The Company manufactures (through third parties) the majority of its products in Asia. The Company products have been designed, developed, manufactured (through third parties) and marketed for all major console based video game platforms (such as Microsoft Xbox; Nintendo GameCube, Game Boy Advance, Game Boy Advance SP and Nintendo 64; Sony PlayStation and PlayStation 2; across all 16-, 32-, 64-, and 128-bit technology platforms). The sale of products designed for Sony’s PlayStation 2 platform accounted for approximately 40% of gross sales in fiscal 2003, 45% in fiscal 2002, and 32% in fiscal 2001. Products for Microsoft’s Xbox platform accounted for approximately 23% of gross sales in fiscal 2003, 11% in fiscal 2002, and 0% in fiscal 2001. Products for Nintendo’s Game Boy, Game Boy Color, Game Boy Advance, and Game Boy Advance SP accounted for approximately 10% of gross sales in fiscal 2003, 15% in fiscal 2002, and 19% in fiscal 2001. Products for Nintendo’s GameCube platform accounted for approximately 9% of gross sales in fiscal 2003, 4% in fiscal 2002 and 0% in fiscal 2001. Products for Sony’s PlayStation platform accounted for approximately 7% of gross sales in fiscal 2003, 12% in fiscal 2002, and 29% in fiscal 2001.

Product Lifecycle

The typical life cycle of successful video game accessories is similar to the life of video game consoles which generally ranges from 2 to 5 years. Factors such as competition for access to retail shelf space, consumer preferences and seasonality could result in the shortening of the life cycle for older products and increase the importance of the Company’s ability to release new products on a timely basis. The Company must introduce new products in order to generate new revenues and/or to replace declining revenues from older products. The complexity of new video game systems has resulted in higher development expenses, longer development cycles, and the need to carefully monitor and plan the product development process.

The installed base of video game platforms, the Company’s relationships with major retailers, and the expansion of product offerings, which have increased more than 35% each of the past two years, along with the compatibility of the majority of the Company products, have contributed to the Company’s product sales success across the major platforms.

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Sales Analysis

The Company’s products are sold by 9 of the largest 10 retailers in North America. The Company also sells its products internationally within Europe (direct in the United Kingdom through MCE), South America, Australia, New Zealand and Japan.

Sales outside of North America represented approximately 21% of the Company’s gross sales in fiscal year 2003, 12% for fiscal year 2002, and 18% in fiscal 2001.

Sales by Customer

The Company’s top two customers accounted for approximately 34% of the Company’s gross sales for fiscal year 2003, 48% in fiscal 2002 and 43% in fiscal 2001. In fiscal 2003, the Company’s two largest customers were Target and Wal-Mart. No other customer represented more than 10% of the Company’s gross sales in 2003. The Company’s top 10 customers accounted for 76% of gross sales in fiscal 2003, 81% in fiscal 2002 and 81% in fiscal 2001.

Seasonality and the Volatility of Quarterly Results

The Company generates a substantial percentage of its net sales in the last three months of every calendar year. During fiscal year 2003, approximately 14% of the Company’s net sales were generated in the first quarter, 19% in the second quarter, 44% in the third quarter and 23% in the fourth quarter. In fiscal 2002, approximately 17% of the Company’s net sales were generated in the first quarter, 19% in the second quarter, 45% in the third quarter, and 19% in the fourth quarter. In fiscal 2001, approximately 9% of the Company’s net sales were generated in the first quarter, 19% in the second quarter, 59% in the third quarter, and 13% in the fourth quarter. In fiscal 2003, fourth quarter share of sales was higher than fiscal 2002 because the slow consumer spending on video game accessories in the first 9 to 10 weeks of the quarter resulted in sales peaking more acutely in the last 2-3 weeks of the third quarter and replenishment occurring in the fourth quarter. In addition, the Company added significant product listings in the fourth quarter. In fiscal 2002, third quarter sales were boosted by the launch of Microsoft’s Xbox platform and Nintendo’s GameCube platform and fourth quarter sales were favorably impacted by the launch of Nintendo’s Game Boy Advance platform and negatively impacted by the loss of the North American Sony PlayStation 2 Memory Card license. In fiscal 2001, sales were more heavily skewed to the third and fourth quarters due to the launch of Sony’s PlayStation 2 platform. The Company’s quarterly results of operations can be expected to fluctuate significantly in the future, as a result of many factors, including: seasonal influences on its sales; unpredictable consumer preferences and spending trends; the introduction of new video game platforms; the need to increase inventories in advance of the Company’s primary selling season; and timing of introductions of new products. For a discussion of these and other factors affecting seasonality, see “Risk Factors—The Company’s business is seasonal and financial results vary from period to period” elsewhere in this Form 20-F.

Strategy

In fiscal year 2001, the Company’s management determined that the opportunity in the video game accessories business significantly outweighed the benefits of pursuing a diversification strategy. As such, a decision was made by the Company’s board of directors to sell or discontinue the Company’s non-video gaming accessory operations, and to focus on the Mad Catz business. By October 1, 2001, all assets of the Company’s non-video game accessory businesses had been disposed of leaving only the Mad Catz video game accessory business.

The Company’s key focus in fiscal year 2002 was developing new products to support the North American launch of the Microsoft Xbox and the Nintendo GameCube and Game Boy Advance video game platform, expanding its North American customer base, and expanding the number of products listed by each customer.

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The Company developed and launched a complete line of accessories for the Sony PlayStation 2, Nintendo GameCube and Microsoft Xbox video game platforms and Nintendo’s Game Boy Advance hand held platform. The Company released approximately 71 new products in fiscal year 2002. At the beginning of fiscal 2002, the Company had key control pad placements in only 4 of the top 10 retailers in North America. By the end of fiscal 2002 the Company had placement in 8 of the top 10 retailers. The Company also established an office in the United Kingdom in January 2003 to begin direct sales to key European customers.

In fiscal 2003, the Company focused on developing and launching new products, expanding its North American customer base, and growing its European business in time for the European launch of the Microsoft’s Xbox and Nintendo’s GameCube video game platforms in the spring of 2002. During fiscal 2003 the Company launched 71 new products, including its newly acquired GameShark product, and expanded its North American control pad placement from 8 to 9 of the top 10 retailers. The Company became the leading third party video game accessory company in terms of market share in the North American market and also the United Kingdom market, the largest video game accessory market in Europe. Overall, the key initiatives for growth in fiscal 2004 include:

Intellectual Property Needed to Produce the Company’s Products

Historically, a majority of the Company’s revenue has come from video game accessories that are reverse engineered to work with video game platforms sold by Sony, Nintendo, Sega and Microsoft. Some, but not all, of the Company’s products compatible with these video game consoles have been produced under license agreements pursuant to which the Company received proprietary and other useful information, including use of the first party logos. Some of these license agreements have expired and others are about to expire. See “Risk Factors.”

In particular, the Company’s North American license for the Sony PlayStation 2 Memory Card expired on December 31, 2001, and its international license for the Sony PlayStation 2 Memory Card expired on November 27, 2002. Approximately 16% and 30% of the Company’s revenues in fiscal year 2003 and 2002, respectively, were attributable to sales of the Sony PlayStation 2 Memory Card under these licenses. The Company does not expect to renew or replace these licenses. Without these licenses, the Company is unable to produce or sell the Sony PlayStation 2 Memory Card. As a result, the Company has discontinued sales of the Sony PlayStation 2 Memory Card, causing a significant decline in its revenue. If the Company is unable to generate sufficient revenues from sales of other products to replace this revenue, its financial condition and results of operations could be materially and adversely affected.

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The Company has a peripheral and compatibility license from Microsoft covering products relating to Microsoft’s Xbox video game console. This license will expire on February 28, 2004. Unless either Microsoft or the Company provides notice of its desire to terminate the license at least ninety (90) days prior to that date, the agreement will automatically renew for an additional one year period. While the Company has no intention to terminate the agreement and has not received any indication from Microsoft that it desires to terminate the agreement, no assurance can be given that the agreement will not expire in accordance with its terms. The Company is uncertain whether it will be able to renew or replace the Microsoft license. Nonetheless, this license only relates to the use of Microsoft’s logo on the Company’s products, so even without the license, the Company would be able to continue producing and selling similar products which do not contain the logo. There can be no assurance, however, that sales of unlicensed products will be equivalent to sales of the licensed products. Any decline in the sale of such products could significantly reduce the Company’s revenues and have a material adverse effect on its financial condition and results of operations.

The Company does not have any license agreements with, and does not pay royalties to Sony or Nintendo. The absence of license agreements with Nintendo, Sony or Microsoft, if the Company’s license from Microsoft expires or is not extended, could result in the Company being unable to efficiently and cost effectively design future generations of compatible accessories. In the event Nintendo, Sony or Microsoft enters into license agreements with other companies and not with the Company, the Company would be placed at a substantial competitive disadvantage, which could materially and adversely affect its business and financial condition.

The Company introduces new products every year to replace revenue lost by discontinued products or products for which licenses have expired. In this manner, the Company believes that it can replace revenues lost by discontinued products and continue to grow at a similar pace as the third party peripherals market.

Competitive Environment

The markets in which the Company competes are highly competitive, and the Company expects that it may face increased competition as additional companies enter these markets. Historically, price has been a significant competitive factor across the market for interactive video game accessories under the Mad Catz name brand as well as in the original equipment manufacturer line of business.

Management believes that the other principal competitive factors that historically have affected retailer and consumer choice include value, product features, ease of use and installation, realism in simulation, name brand recognition (including reputation and historical compatibility), style (including colors) and whether the product is licensed. Additional competitive factors from the perspective of the major retailers include margins, service, support, merchandising and promotional support, reliable and timely delivery, track record and electronic data interchange capability.

The Company’s principal competitors include, Sony, Nintendo, Microsoft and to a lesser extent, Nuby Interactive, LLC, Nyko Technologies, Inc., Pelican Accessories, Thrustmaster, Inc., Big Ben InterActive, Radica Games Ltd., Logitech International, Intec, Inc., Naki International, Inc. and Datel Design & Development Limited.

Management believes that the Company’s products cover each market demographic group, and are complementary with consumers of Sony and Microsoft video game consoles (somewhat older consumers) and consumers of Nintendo video game consoles (younger consumers). The Company’s management believes that the major factors that will provide for the continued viability and competitive edge of the Mad Catz branded products are quality, service, brands and increasing the Company’s market share through retail relationships.

C.    Organizational Structure

The Company is incorporated under the Canada Business Corporations Act. In fiscal year 2003, the Company had several operating subsidiaries: MCI, MCC, MCIA and MCE. MCI owns all of the issued and

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outstanding shares of FX, and MCI and FX each own 50% of the issued and outstanding shares of MCA. At June 30, 2003, the Company had 134 full-time employees. The Company has one class of capital stock outstanding, the Shares.

D.    Property, plants and equipment

The head office of MCI, is leased and located at 7480 Mission Valley Road, Ste. 101, San Diego, California, USA 92108. The lease covers approximately 14,000 square feet. The lease commenced on August 1, 2001 and expires on August 31, 2006.

The Company’s 95,000 square foot warehouse, which is also leased, is located 12160 Philadelphia Street, Mira Loma, California, USA 91752-1188. The lease commenced on May 1, 2000 and expires on April 30, 2006.

On April 17, 2003, MCI entered into a lease for business premises for MCC located at 2425 Matheson Blvd. E., 7^th Floor, Mississauga, Ontario L4W 5K4. The lease began on May 1, 2003 and will terminate on April 30, 2004, provided however, that if neither party gives notice of the intent to terminate, the agreement will renew automatically for an additional year.

On February 3, 2003, MCI entered into a lease for business premises for MCE for office space in the United Kingdom. The office is located at Exchange House, 494 Midsummer Boulevard, Central Milton Keynes MK9 2EA. The initial term of the lease is for one (1) year and thereafter requires ninety (90) days notice by either party to terminate the lease.

On September 15, 2001, the Company entered into a lease for business premises for its corporate headquarters, located at 141 Adelaide Street West, Toronto, Ontario M5H 3L5. The lease expires on September 15, 2004.

The office of MCIA is located at 138 Shatin Rural Committee Road, Unit 1717-19 and 1720-1721, 17^th Floor, Grand Central Plaza, Tower 2, Shatin, New Territories, Hong Kong. The lease expires September 30, 2004.

The Company also leases 23,000 square feet at 8 Kenview Blvd., Brampton, Ontario L6T 5E4 Canada. This space was previously used by the Company’s Games Trader business. The lease relating to this office space expires on March 30, 2006. Since March 2002, the facility has been sub-leased to an independent third party at approximately the same lease rate.

Management believes that its facilities currently leased are adequate for the foreseeable future. At present management is unaware of any environmental issues affecting any of the premises.

Item 5.    Operating and Financial Review and Prospects.

Overview

The following discussion of the financial condition, changes in financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements of the Company and related notes contained elsewhere in this Form 20-F. See “Item 17 Financial Statements”. The consolidated financial statements are expressed in US dollars and have been prepared in accordance with GAAP in Canada. Reference is made to Note 13 of the consolidated financial statements for a discussion of the material measurement differences between GAAP in Canada and the United States, and their effect on the Company’s consolidated financial statements.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada, which conform to accounting principles generally accepted in the United States,

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except as discussed in Note 13 to the consolidated financial statements. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to the allowance for doubtful accounts, the valuation of inventory, and allowances for sales returns and price protection. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management believes that there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amounts of revenue and other significant areas that involve contractual relationships, management judgments and estimates. These significant accounting policies are:

These policies, and the Company’s procedures related to these policies, are described in detail below and under specific areas within the discussion and analysis of the Company’s financial condition and results of operations.

Allowance for Sales Returns

The Company maintains an allowance for the return of defective products based on the historical, trends and management’s assessment of the return rate of products by customers and end consumers. If the actual defective product return rate exceeds the historical average, additional write-downs may be required.

Valuation of Inventory

The Company assesses its inventory for estimated obsolescence or unmarketable inventory and writes down the difference between the cost of inventory and the estimated market value based upon assumptions about future sales and supply on-hand. If actual market conditions are less favorable than those projected by management, additional inventory allowances may be required.

Allowance for Price Protection

The Company does business in a highly competitive industry. Pricing strategies by competitors could require the Company to reduce prices and issue credits to its customers to cover price protection on existing customer inventories. The Company does not maintain estimated allowances to take into account the pricing strategies of competitors. Should market conditions exist that would require the Company to provide for price protection of customer’s inventories, additional allowances would be required that would reduce net sales.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company determines the amount of the allowance by analyzing

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known uncollectible accounts, aged receivables, economic conditions, historical trends, and customer credit worthiness. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Allowance for Volume Rebates

The Company maintains allowances for volume-based incentive programs as negotiated with the individual customer.

Allowance for Co-operative Advertising

The Company maintains allowances for contractual marketing cooperative advertising, costs as negotiated with specific customers. These allowances are based on specific dollar-value programs or percentages of sales, depending on how the program is negotiated with the individual customer.

Inventory reserve

The Company assesses its inventory for estimated obsolescence or unmarketable inventory and writes down the difference between the cost of inventory and the estimated market value based upon assumptions about future sales and supply on-hand. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

New Accounting Standards, the Impact of recent Canadian accounting pronouncements

Foreign Currency and Hedging

In November 2001, the CICA issued Accounting Guideline 13, “Hedging Relationships” (“AcG 13”). AcG 13 establishes new criteria for hedge accounting and will apply to all hedging relationships in effect on or after July 1, 2003. Effective January 1, 2004, the Company will reassess all hedging relationships to determine whether the criteria are met or not and will apply the new guidance on a prospective basis. To qualify for hedge accounting, the hedging relationship must be appropriately documented at the inception of the hedge and there must be reasonable assurance, both at the inception and throughout the term of the hedge, that the hedging relationship will be effective. The Company is in the process of formally documenting all hedging relationships and has not yet determined whether any of their current hedging relationships will not meet the new hedging criteria.

Impairment of Long-Lived Assets

In December 2002, the CICA issued Handbook Section 3063, “Impairment of Long-Lived Assets” (“Section 3063”) and revised Section 3475, “Disposal of Long-Lived Assets and Discontinued Operations” (“Section 3475”). These sections supersede the write-down and disposal provisions of Section 3061, “Property, Plant and Equipment” and Section 3475, “Discontinued Operations.” The new standards are consistent with U.S. generally accepted accounting principles. Section 3063 establishes standards for recognizing, measuring and disclosing impairment of long-lived assets held for use. An impairment is recognized when the carrying amount of an asset to be held and used exceeds the projected future net cash flows expected from its use and disposal, and is measured as the amount by which the carrying amount of the asset exceeds its fair value. Section 3475 provides specific criteria for and requires separate classification for assets held for sale and for these assets to be measured at the lower of their carrying amounts and fair value, less costs to sell. Section 3475 also broadens the definition of discontinued operations to include all distinguishable components of an entity that will be eliminated from operations. Section 3063 is effective for the Company’s 2004 fiscal years; however, early application is permitted. Revised Section 3475 is applicable to disposal activities committed to by the Company after May 1, 2003, however, early application is permitted. The Company expects that the adoption of these standards will have no material impact on its financial position, results of operations or cash flow at this time.

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Disclosure of Guarantees

In February 2003, the CICA issued Accounting Guideline 14, “Disclosure of Guarantees” (“AcG 14”). AcG 14 requires certain disclosures to be made by a guarantor in its interim and annual financial statements for periods beginning after January 1, 2003. The adoption of this standard had no impact on the Company’s results of operations or disclosures in its financial statements.

Impact of Recent United States Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board (“FASB”) published interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”). FIN 45 expands on the accounting guidance of statements No. 5, 57 and 107 and incorporates without change the provisions of FASB interpretation No. 34, which is being superseded. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. FIN 45 also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002, regardless of the guarantor’s fiscal year-end. The disclosure requirements in FIN 45 are effective for financial statements with respect to interim or annual periods ending after December 15, 2002. The Company adopted the provisions of FIN 45 in fiscal 2003. Our adoption of FIN 45 had no impact on its results of operations or disclosures in its financial statements.

In January 2003, the FASB published interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”), to clarify the conditions under which assets, liabilities and activities of another entity should be consolidated into the financial statements of a company. FIN 46 requires the consolidation of a variable interest entity (including a special purpose entity such as that utilized in an accounts receivable securitization transaction) by a company that bears the majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the variable interest entity’s residual returns or both. The provisions of FIN 46 are required to be adopted in fiscal 2004. The Company do not believe the adoption of FIN 46 will have a material impact on its financial position or results of operations.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs would be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, a company will recognize a gain or loss on settlement. The provisions of SFAS No. 143 are effective for fiscal years beginning after June 15, 2002. The Company does not expect implementation of SFAS No. 143 to have a significant effect on its results of operation or consolidated financial condition.

In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (“SFAS 149”), which amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is generally effective for derivative instruments, including derivative instruments embedded in certain contracts, entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company does not expect the adoption of SFAS 149 to have a material impact on its financial position and results of operations.

In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”). SFAS 150 establishes standards for how to classify and measure certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective

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for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect the adoption of this statement to have a material impact on its financial position and results of operations

Significant Developments During Fiscal Year 2003 and Subsequent Events

The international Sony PlayStation 2 Memory Card license expired on November 27, 2002, and was not renewed. Under the terms of the license, the Company had the right to continue selling existing inventory of the product for 180 days from that date. The Company sold the remaining inventory during the first quarter of Fiscal 2004, and will record no further sales of this product. Gross sales in Europe of the Sony PlayStation 2 Memory Card, as a percentage of total gross sales, accounted for approximately 16% in fiscal 2003, 8% in fiscal 2002 and 6% in fiscal 2001. Previously, on December 31, 2001, the Company’s North American PlayStation 2 Memory Card license expired, and was not renewed. Gross sales in North America of the Sony PlayStation 2 Memory Card, accounted for approximately 0% in fiscal 2003, 22% in fiscal 2002, and 14% in fiscal 2001.

In fiscal fourth quarter 2002, MCI organized an entity and opened a business office in the United Kingdom (MCE) to support the European launch of Microsoft Xbox, Nintendo GameCube and other products. European sales, including the Sony PlayStation 2 Memory Card, were approximately 18% of total sales in fiscal 2003. The Sony PlayStation 2 Memory Card sales accounted for approximately 77% of the European entity’s gross sales in fiscal 2003. As noted above, the agreement provided for existing inventory to be sold for a specified time period, with the final sales of the product occurring in the first quarter of fiscal 2004.

In May 2002, Sony, Microsoft and Nintendo, in connection with a reduction in the North American suggested retail price of their respective game consoles, each also reduced the price of selected accessories that compete with the Company’s products. The Company recorded a $475,000 charge for price protection in the fourth fiscal quarter 2002 and an additional $675,000 for price protection in the first fiscal quarter 2003 to re-price customer inventories in response to the accessory price reductions by Sony, Microsoft and Nintendo.

In the fiscal fourth quarter of 2003, the Company acquired the intellectual property associated with the GameShark brand name, one of the most widely recognized brands in the video game industry, for approximately $5.1 million. The acquisition included the GameShark brand, GameShark.com website and related intellectual property. Through its software product and its website, GameShark provides regularly updated game content. The GameShark product enhances the video game experience for gamers by enabling them to access secret codes, short cuts, hints and cheats in thousands of video games on numerous platforms. With millions of active users, GameShark is the leading enhancement code product in North America.

On May 13, 2003, the Company announced its multi-year publishing partnership agreement with BradyGames. Under the agreement, the Company and BradyGames will produce pocket strategy guides for sale in the GameShark product line.

In addition, in May 2003, the Company announced a partnership with Microsoft to develop and manufacture the exclusive microphone and microphone adapter for Microsoft’s Xbox Music Mixer, due for release November 1, 2003.

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A.    Operating Results

Fiscal Year ended March 31, 2003 compared to March 31, 2002

The following table sets forth items from the Company’s Consolidated Statements of Operations as a percentage of revenues:

Sales

Net sales from continuing operations in fiscal 2003 increased to $91.7 million as compared with $83.3 million in the prior year, an increase of $8.3 million or 10.0%. This increase was primarily due to the Company’s international sales, which were $20.8 million for fiscal 2003 as compared to $10.1 million in fiscal 2002. The increase in international sales is due to new direct sales accounts in the United Kingdom sold through MCE. The increase in international sales was offset by a decrease in North American sales related to the Sony PlayStation 2 Memory Cards. The North American license for the Sony PlayStation 2 Memory Card expired on December 21, 2001. The international license for the Sony PlayStation 2 Memory Card expired in November 2002, however, pursuant to the license agreement, sales continued through the fourth quarter of fiscal 2003, with the final sales of this product occurring in April 2003. During fiscal 2003, 16% of total gross sales were derived from Sony Play Station 2 Memory Card sales worldwide, compared to 30% in fiscal 2002. The seasonality of the sales cycle was as expected with 44% of net sales occurring in the fiscal third quarter. The top selling product group for fiscal 2003 was PlayStation 2 representing approximately 40% of gross sales as compared to 45% in fiscal 2002.

Gross Profit

Gross profit is defined as net sales less factory product costs, cost of royalties, cost of freight-in and freight out and distribution center costs.

Gross profit from continuing operations in fiscal 2003 was $21.0 million as compared to $18.4 million last year, an increase of $2.6 million or 13.8%. Gross profit as a percentage of net sales was 22.9% for fiscal 2003 as compared to 22.1% in fiscal 2002. Gross profit has improved due to manufacturing efficiencies and supply chain management initiatives.

Operating Expenses

Operating expenses include selling, marketing, engineering and administrative expenses of the MCI, MCC and MCE businesses, as well as the corporate operating expense associated with the Company.

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Total operating expenses were $16.0 million in fiscal 2003 as compared to $12.2 million in fiscal 2002. Selling expenses increased to $8.7 million as compared to $7.3 million in fiscal 2002 an increase of $1.4 million or 19.3%. In fiscal 2003, the Company incurred higher selling expenses related to cooperative (co-op) advertising costs in some of the Company’s new accounts, particularly Europe, to establish Mad Catz’ brand at these outlets and in the markets they serve. The increase in selling expenses also reflects additional costs related to sales growth and expenses associated with the launch of GameShark. Total administrative expenses increased to $7.3 million in fiscal 2003 from $4.9 million in fiscal 2002, an increase of $2.4 million or 47.9%. Corporate operating expense for the Company was $1.6 million in fiscal 2003 compared with $0.8 million in fiscal 2002. The increase in administrative expenses is due to increased costs related to legal and tax consultant fees, international business initiatives, and increased infrastructure expenses.

Interest Expense

Interest expense from continuing operations was $1.8 million in fiscal 2003 as compared to $1.2 million for the previous year. In fiscal 2002, $0.2 million of interest was applicable to subordinated debt, which was converted to equity in July of fiscal 2002. The increase in interest expense is attributed to higher bank loan balances used to finance the working capital needs of the business and the purchase of the GameShark brand.

Depreciation and Amortization

Depreciation and amortization of capital assets and goodwill charges associated with the purchase of MCI was $1.2 million in fiscal 2003 as compared to $2.0 million in fiscal 2002. Goodwill is no longer amortized in accordance with Canadian or U.S. GAAP and accordingly no goodwill charges were incurred in fiscal 2003. Goodwill amortization for fiscal 2002 was $1.0 million. Molds used in production of accessories are the primary depreciable assets in the Company’s business. Intangible assets with defined useful lives acquired for GameShark will be amortized over the estimated useful life of the assets.

Income Tax Expense

Income tax expense was $0.8 million for the year as compared to $1.9 million for fiscal 2002. The change in effective tax rates from one period to the next reflects a change in jurisdiction of taxable income and the related tax rates for each foreign jurisdiction in which the Company is doing business.

Net Income and Net Income Per Share

Net income from continuing operations was $1.2 million in both fiscal 2003 and 2002. Basic and diluted net income per share in fiscal 2003 was $0.02 as compared to a net income per share of $0.03 in fiscal 2002. Net income per share is calculated on the basis of the weighted average number of basic shares outstanding during the year of 53,070,890 (53,689,972 diluted) compared to 51,188,889 (51,956,695 diluted) in the previous year.

Earnings Before Interest, Taxes, Depreciation and Amortization

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the Company’s operations was $4.9 million in fiscal 2003 compared to $6.6 million for the previous year. The Company believes that EBITDA is a useful supplement to net income as an indication of operating performance. EBITDA is a key financial measure but is not intended to represent cash flows for the period, nor has it been 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 accounting principles generally accepted in Canada. As defined, EBITDA is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. For a reconciliation of EBITDA to net income, see Part I, item 3, Selected Financial Data.

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Fiscal Year ended March 31, 2002 compared to March 31, 2001

Beginning in fiscal year 2002, the Company changed its reporting currency from Canadian dollars to US dollars. The comparative historical figures for the 2001, 2000, and 1999 fiscal years in this Form 20-F have been translated into US dollars, in accordance with US GAAP, which requires the use of an average exchange rate for each year in the translation from Canadian dollars to US dollars for the historical periods.

Sales

Net sales from continuing operations increased to $83.3 million in fiscal year 2002 as compared with $58.5 million for the same period in fiscal 2001. The Company’s North American sales in fiscal year 2002, which accounted for 88% of total sales in fiscal year 2002, increased 58%, as a result of increased market penetration of PlayStation 2 products and the launch of the Xbox, GameCube and Game Boy Advance product lines. International sales were $10.1 million for fiscal 2002 as compared to $9.5 million in fiscal 2001. The seasonality of the sales cycle was as expected with 45% of sales occurring in the fiscal third quarter. The top selling product group for fiscal 2002 was PlayStation 2 representing 43% of total sales as compared to 31% in fiscal 2001, benefiting from the significant increase in the embedded base of Sony PlayStation 2 consoles. The top selling product for fiscal 2002 was the PlayStation 2 Memory Card representing 30% of total sales as compared to 20% of sales in fiscal 2001.

Gross Profit

Gross profit is defined as net sales less factory product costs, cost of royalties, cost of freight-in and freight out and distribution center costs.

Gross profit from continuing operations was $18.4 million in fiscal year 2002 as compared to $13.0 million in fiscal year 2001. Gross profit as a percentage of net sales was 22.1% for fiscal 2002 as compared to 22.3% in fiscal 2001. Gross profit for fiscal 2002 was negatively affected by the Xbox product launch due to higher new product development costs and expediting costs. Gross profit derived from the PlayStation 2 and Game Boy products helped offset the lower Xbox profit margins.

Operating Expenses

Operating expenses include selling, marketing, engineering and administrative expenses of the MCI, MCC and MCE businesses, as well as the corporate operating expense associated with the Company.

Total operating expenses were $12.2 million in fiscal 2002 as compared to $11.4 million in fiscal 2001. The primary driver for the increased operating expenses were selling costs attributable to the 43% increase in sales. Selling expenses increased to $7.3 million in fiscal year 2002 as compared to $5.2 million in fiscal 2001. Variable selling expenses including marketing co-op and commissions to outside sales representatives increased in line with sales. Selling expenses as a percentage of sales decreased to 8.7% in fiscal 2002 from 8.9% in fiscal 2001. Total administrative expenses decreased to $4.9 million in fiscal 2002 from $6.2 million in fiscal 2001. The decrease in administrative expenses was due to reductions in corporate overhead.

Corporate operating expense for the Company was $0.8 million in fiscal 2002 compared with $2.3 million in fiscal 2001. A reduction in professional and legal fees, salaries, and severance costs was responsible for the favorable variance.

Interest Expense

Interest expense from continuing operations was $1.2 million in fiscal 2002 as compared to $1.3 million for the previous year. Interest applicable to the asset-based operating line of credit was $1.0 million for fiscal 2002 compared with $0.9 million in fiscal 2001. Interest applicable to the subordinated debt was $0.2 million in fiscal

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2002 compared with $0.4 million in fiscal 2001. Fiscal 2002 and 2001 included 6 months of interest attributed to the subordinated debt. During fiscal 2001, a portion of the subordinated debt was repaid resulting in lower monthly interest payments in fiscal 2002. The subordinated debt was converted to equity in July of fiscal 2002.

Amortization

Amortization of capital assets and goodwill charges associated with the purchase of MCI was $2.0 million in fiscal 2002 as compared to $1.7 million for fiscal 2001. Depreciation attributed to fixed assets was $1.0 million for fiscal 2002 compared to $0.8 million in fiscal 2001. Primary asset acquisitions in fiscal 2002 were primarily molds used in production of accessories associated with the Nintendo Game Boy Advance, Microsoft Xbox and the Nintendo GameCube product launches.

Income Tax Expense

Income tax expense was $1.9 million for the 2002 fiscal year as compared to $3.2 million for fiscal 2001. Fiscal year 2001 income tax expense included a $1.7 million one-time write-off of a future tax asset related to the parent company.

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

Net income from continuing operations was $1.2 million as compared to a net loss of $4.9 million in fiscal 2001. Net income per share in fiscal 2002 was $0.03 as compared to a net loss per share of $0.53 in fiscal 2001. Income (loss) per share is calculated on the basis of the weighted average number of basic shares outstanding during fiscal 2002 of 51,188,889 compared to 45,297,305 in the previous year.

Net Gain (Loss) From Discontinued Operations

As of October 2001, the Company disposed of all of the assets of the non-video game accessory businesses. Provisions for outstanding liabilities related to the discontinued operations were updated to provide for the expected future liabilities of the non-video game accessory businesses. The net result of the disposal of assets and revaluation of liabilities resulted in a gain on discontinued operations of $0.3 million for the fiscal 2002 year. The loss from discontinued operations for fiscal 2001 was $19.1 million. The 2001 loss from discontinued operations includes charges of $1.0 million for costs to exit the non-video game accessory businesses. The fiscal 2001 loss also included $13.0 million in write-downs of the following assets to their net realizable value as related to the disposition of the business units: inventories, $2.7 million write-down; capital assets $2.1 million write-down; goodwill and intangibles $2.2 million write-down; future tax asset $4.0 million write-down; and accounts receivable $2.0 million write-down. The balance of the $19.1 million fiscal year 2001 loss was attributed to operating losses associated with the non-video game accessory fiscal 2001 operations.

Income per share for discontinued operations in fiscal 2002 was $0.01 as compared to a loss of $0.42 in the prior year.

Earnings Before Interest, Taxes, Depreciation and Amortization

Earnings before interest, taxes, depreciation and amortization “EBITDA” for the Company’s operations was $6.6 million in fiscal 2002 compared to $(17.7) million for the previous year. The increase in EBITDA was attributed to the gross profit generated by the 43% increase in sales and the reduction in administrative expenses. For a reconciliation of EBITDA to net income, see Part I, item 3, Selected Financial Data.                                        .

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B.    Liquidity and Capital Resources

Congress Credit Facility

On September 25, 2000, the Company entered into the Credit Facility with Congress, pursuant to which Congress agreed to provide the Company with lines of credit totaling approximately $35.0 million for MCI. The Credit Facility was amended on June 18, 2002 and August 1, 2002 to allow MCE and MCIA to borrow under the facility. The Credit Facility replaced lines of credit from other lenders that were established prior to the Company’s acquisition of MCI. On January 22, 2003, the Credit Facility was further amended to allow for a temporary increase in the credit facility to accommodate the acquisition of the GameShark intellectual property. The Credit Facility requires the Company to adhere to financial operating guidelines. See Note 7 to the consolidated financial statements included in “Item 17. Financial Statements and Exhibits” elsewhere in this Form 20-F.

The Credit Facility is utilized to finance ongoing operations. The Company also established a separate credit line under the Credit Facility of $10.0 million, which may be utilized, at Congress’ discretion, for acquisitions. The Credit Facility is secured by the Company’s assets, including a pledge in favor of Congress of all of the stock of the Company’s subsidiaries. The interest rate payable on outstanding balances is the U.S. prime rate plus 0.75%. In addition, the Company is obligated to pay Congress (i) a monthly service fee of $2,000, (ii) an unused line fee equal to 0.25%, and (iii) an early termination fee which ranges from .50% and 1.5% of the Credit Facility. The term of the Credit Facility is three (3) years, with a one (1) year renewal at Congress’ option, and automatic one year renewals, unless either party gives notice of termination. On July 23, 2003, the Company received notice from Congress that it has agreed to extend the renewal date of the Credit Facility to September 25, 2004.

At June 30, 2003, the outstanding balance of the Credit Facility was $17,557,339.

At March 31, 2003 available cash was approximately $1.2 million compared to cash of approximately $1.9 million at March 31, 2002. As set forth in the Summary Consolidated Statements of Cash Flow, below, this cash total reflects a decrease of approximately $0.7 million from March 31, 2002, as a result of net cash invested in continuing operations of approximately $7.4 million, cash used in investing activities of $6.0 million which includes the GameShark intellectual property of $5.1 million and cash provided from financing activities of approximately $13.0 million from the Credit Facility.

Summary Consolidated Statements of Cash Flow In Millions of US Dollars

The Company’s continuing operations used $7.4 million in cash in fiscal 2003 compared to cash generated from continuing operating activities of $5.3 million in fiscal 2002 and $10.0 million in fiscal 2001. During fiscal 2003, accounts receivable increased $6.1 million and inventories increased $2.4 million.

During fiscal 2002, the Company invested in inventories for the new Game Boy Advance, Xbox and GameCube product lines. The offset to the inventory investment was an increase in accounts payable. In addition, accounts receivable increased in line with the approximate 43% increase in sales.

Cash provided by financing activities was $13.0 million in fiscal 2003, compared to $4.0 million of cash used in financing activities in fiscal 2002. The increase in cash was a result of an increase in credit facilities.

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Total cash used in fiscal 2003 investing activities of $6.0 million was primarily for the purchase of GameShark intellectual property. The balance of 2003 investing activities, and the 2002 and 2001 investments were primarily for purchases of capital assets to support the operations of the business.

The net cash used during fiscal 2003 was $0.7 million as compared to net cash generated of $0.4 million in fiscal 2002 and $1.5 million in fiscal 2001.

The Company’s working capital needs are provided by internally generated cash flow and an operating credit facility with an asset-based lender. The current operating credit facility has a maximum availability of $35.0 million, however access to this line of credit is based on eligible collateral (accounts receivable and inventory), which changes throughout the year. At March 31, 2003 the outstanding balance was $17.1 million with additional excess loan availability of $17.9 million subject to Credit Facility collateral requirements. In addition, the Company must meet an Adjusted Tangible Net Worth covenant to access the line of credit. The Company was not in compliance with the Adjusted Tangible Net Worth Covenant contained in the Credit Facility as of the end of fiscal year 2003 due to the acquisition of the GameShark intellectual property. On May 20, 2003, Congress waived the Company’s breach of this covenant through September 30, 2003.

The Company believes that its available cash balances, anticipated cash flows from operations and available line of credit will be sufficient to satisfy its operating needs for at least the next twelve months. However, the Company operates 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 the Company 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 the Company’s existing debt. The Company may from time to time consider the acquisition of businesses complementary to its business. The Company could require debt financing if it were to engage in a material acquisition in the future.

Balance Sheet

As of March 31, 2003, the Company’s consolidated balance sheet had assets of $65.6 million as compared with $50.2 million the previous year. Shareholder’s equity was $32.4 million in fiscal 2003 as compared with $29.6 million the previous year. The increase in assets in fiscal 2003 was due to the increased working capital needs to support the new Game Boy Advance, Xbox and GameCube product lines as well as the overall increase in sales. The fiscal year 2002 increase in shareholder’s equity is primarily due to the conversion of subordinated debt to equity, which did not provide additional cash to the Company.

C.    Research and Development, Patents and Licenses, etc.

The Company is party to various license agreements, including one with Microsoft relating to its Xbox video game console. See “Item 4 Information on the Company—B. Business Overview—Intellectual Property Needed to Produce the Company’s Products”.

D.    Trend Information

Trends in the Company’s financial performance are discussed above in Section A, “Operating Results.”

E.    Off Balance Sheet Arrangements

Reserved

F.    Tabular Disclosure of Contractual Obligations

Reserved

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Item 6.    Directors, Senior Management and Employees

A.    Directors and Senior Management

Directors

The directors of the Company are as follows:

Patrick S. Brigham, Chairman and Director

Mr. Brigham has been the Chairman of the Company since September 30, 1998. He is the President of Hartay Enterprises Inc. He was the founder and past Chairman of Sunquest Vacations Limited. In March 1997, he was appointed to the Board of Directors of Radium Energy Corporation. Mr. Brigham is also a director and Chairman of the Board of Clublink Corporation and Enegenius, Inc.

J. Brendan Ryan, Director

Mr. Brendan Ryan is CEO of Foote, Cone & Belding Worldwide, Inc., a leading Advertising firm based in New York City. Mr. Ryan has held this position for the past five years. Mr. Ryan is also a Director of NYC Citymeals on Wheels.

Donald Lenz, Director

Mr. Lenz is the Managing Director of Newport Partners Inc., formerly Brompton Securities Ltd., (Investment banking—Toronto, Ontario). Mr. Lenz was previously the President of SELDM Limited, a private investment company based in Toronto, Canada. Prior to starting Seldm Limited in 1999, Mr. Lenz spent over 30 years in the investment banking industry. Joining Dominion Securities Inc. in 1986, Mr. Lenz most recently served as a senior partner with its Investment Banking Division, and prior to this fulfilled the role of Vice-President of Corporate Finance for Goldman Sachs & Co. in New York. Mr. Lenz began his investment banking career with A.E. Ames & Co. Incorporated where he served as Vice-President before leaving in 1976. Mr. Lenz has experience in all facets of investment, restructuring and general advisory services. He led the first initial public offering for a technology based company at RBC Dominion Securities Inc. Mr. Lenz serves on the Board of Directors of DataMirror Corporation, a public company, Trizec Canada Inc., a public company and SELDM Limited, Newport Partners, Newport Securities Inc. and Newport Investment Counsel Inc., all private.

Cary L. McWhinnie, Director

Mr. McWhinnie is the Secretary of Hartay Enterprises Inc. with responsibility for developing new investment opportunities. Previously, he was a Director and Executive Vice-President, Strategic Planning of Sunquest Vacations Limited. Mr. McWhinnie serves on the Board of Energenius, Inc., Autoshield International Inc. and iTravel 2000 Inc., all private companies.

Morris Perlis, Director, President and Chief Executive Officer

Mr. Perlis is currently the President and Chief Executive Officer of the Company. Previously, he was President of Counsel Corporation, a public investment company. Prior to his involvement with Counsel Corporation, from 1979 to 1992, Mr. Perlis was with American Express in Canada and at its U.S. headquarters in New York. Mr. Perlis served American Express in a variety of capacities over 13 years, including as President

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and Chief Executive Officer of Amex Bank of Canada, President and General Manager of American Express Canada, and Executive Vice President and General Manager of American Express’ Personal Card Division. Mr Perlis also serves on the Boards of Directors of Assante Corporation Inc. and Associated Brands Inc., both public companies.

Committees of the Board

The Board the Board of Directors currently has two standing committees; the Audit Committee, comprised of Donald Lenz, Cary McWhinnie and Patrick Brigham, and the Compensation Committee, comprised of Cary McWhinnie, Patrick Brigham and J. Brendan Ryan.

Senior Management

The Company’s executive officers are as follows:

Darren Richardson

Mr. Richardson was appointed President and COO of MCI following GTR’s acquisition of MCI on August 31, 1999, and has been an Executive Vice President of the Company since October of 1997. Prior to joining MCI, Mr. Richardson served in several senior management capacities with Games Trader, including Chief Operating Officer, and Vice-President of Business Development, responsible for sales and marketing with a focus on new account development. He has a Master of Business Administration degree from Trinity College Dublin (1993) and a Bachelor of Commerce degree from the University of Wollongong, Australia (1984).

Tom Roberts

Mr. Roberts joined MCI in 1993 and has served as Senior Vice President of MCI and is principally responsible for Product Development and Manufacturing. Mr. Roberts has lived and traveled throughout Asia where the company’s manufacturing operations are performed. Mr. Roberts has held executive positions in Engineering and Design with General Dynamics Corporation and Hughes Aircraft. Mr. Roberts holds an Undergraduate Degree in Engineering from Brigham Young University and attended MBA studies at the University of Laverne.

Warren Cook

Mr. Cook has been Senior Vice-President for MCI since February 1997. His emphasis is on servicing and developing MCI’s existing customers as well as the development of new accounts. With the acquisition of MCI, Mr. Cook was charged with the integration of both sales organizations and the execution of a customer-focused strategy that will leverage the strengths of both product lines. Previously, during the period between August 1991 and February 1997, Mr. Cook fulfilled the role of Manager, Accounts Sales at Mark’s Work Warehouse, with a focus on the development of corporate business. Prior to this, Mr. Cook worked for Grants between 1998 and 1991, a small privately held textile company, as National Sales Manager. Mr. Cook graduated from Ryerson Polytechnic University with a Bachelor of Business Administration in 1986.

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Whitney Peterson

Mr. Peterson has been Vice President Corporate Development and General Counsel for MCI since July 1998. Prior to joining MCI, Mr. Peterson spent seven years working at the International law firm of Latham & Watkins, where he represented and consulted with numerous Fortune 500 companies. Mr. Peterson received his law degree from the J. Rueben Clark School of Law at Brigham Young University, where he graduated Magna Cum Laude. Mr. Peterson also served as an Articles Editor on the BYU Law Review in which he was published. Following law school, Mr. Peterson clerked for the Honorable Bruce S. Jenkins, Chief Judge of the Federal District Court in Utah.

Cyril Talbot III

Mr. Talbot was appointed Chief Financial Officer of the Company and MCI on March 17, 2003. Prior to joining the Company, Mr. Talbot served as Senior Vice President-Finance, Chief Financial Officer and Secretary at DJ Orthopedics, Inc. a publicly traded orthopedic sports medicine company. During his 11 years as DJ Orthopedics’ principal financial officer, he oversaw the company’s initial public offering and listing on the New York Stock Exchange and was responsible for merger and acquisition analysis and strategic planning. From 1981 to 1991, he held several management positions at American Hospital Supply Corporation and McGaw, Inc. Prior to that time, he was an Audit Manager and a Certified Public Accountant at Miller, Cooper & Co. Ltd. Mr. Talbot earned his B.S. in Accounting/Finance at Miami University in Oxford, Ohio.

Family Relationships

There are no family relationships between any director or executive officer of the Company and any other director or executive officer of the Company.

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B.    Compensation

The following table provides a summary of all compensation earned for the three most recently completed financial years by those persons who served as the Company’s Chief Executive Officer at any time during the most recently completed fiscal year and the other most highly compensated executive officers of the Company for the fiscal year ended March 31, 2003 (collectively, the “Named Executive Officers”).

Summary Compensation Table

Information provided in the table below is in United States dollars unless noted otherwise.

Notes:

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Stock Options

The Company has an incentive stock option plan (the “Option Plan”) the terms of which, together with particulars of options granted to and exercised by Named Executive Officers during the financial year ended March 31, 2003, are described below.

Options to purchase common shares may be granted under the Option Plan to directors, officers, employees or other personnel of the Company or any of its subsidiaries, as determined by the Board of Directors, at a price to be fixed by the Board of Directors, subject to limitations imposed by any stock exchange on which the common shares are listed for trading and any other regulatory authority having jurisdiction in such matters. The common shares subject to each option shall become purchasable at such time or times as may be determined by the Board of Directors. An option not exercised prior to the date that is five years from the date of grant of such option shall automatically expire and may expire on such earlier date or dates as may be determined by the Board of Directors (the “Option Expiry Date”). Any common shares not purchased by the Option Expiry Date may thereafter be reallocated in accordance with the provisions of the Option Plan. Options are non-assignable and non-transferable by the optionholder and are exercisable during the optionholder’s lifetime only by the optionholder. The Board of Directors may make such arrangements as it deems advisable for the exercise of an option by an optionholder who has ceased to be a director, officer or employee of the Company or any of its subsidiaries, or by the estate or heirs of the optionholder, subject to any limitations imposed by any stock exchange on which the common shares of the Company are listed for trading or any regulatory authority having jurisdiction in such matters. The aggregate number of the Company’s common shares reserved for issuance to any one individual under the Option Plan and under any other share compensation arrangement of the Company may not exceed 5% of the number of common shares issued and outstanding. The Company does not provide any financial assistance with respect to purchases of shares under the Option Plan. The number of common shares subject to options granted to Insiders (as defined in the Securities Act (Ontario)) are restricted in accordance with the requirements of the Toronto Stock Exchange.

Details of options granted to and exercised by Named Executive Officers during the financial year ended March 31, 2003 are shown in the two tables set out below.

Options Grants During the Most Recently Completed Financial Year

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Aggregated Option Exercises During the Most Recently Completed Financial Year

and Financial Year-End Option Values

(in Canadian dollars)

Notes:

Employment Contracts with Named Executive Officers

The services of Morris Perlis are provided to the Company pursuant to the terms of a consulting agreement dated February 26, 2001 between the Company and Morris Perlis & Associates Inc. Under the terms of this agreement, which may be terminated by the Company on three months prior notice, the Company pays a monthly fee of Cdn.$50,000 (plus GST).

Mad Catz, Inc., a wholly-owned subsidiary of the Company and Darren Richardson entered into an agreement dated May 18, 2000, pursuant to which Mr. Richardson agreed to serve as Mad Catz, Inc.’s President and Chief Operating Officer. The agreement provided for a three-year term and thereafter automatically renews for successive one year periods unless prior notice of termination is given by either party. On May 14, 2003 the agreement was renewed for a one year period. If, during the term of the agreement, there is a termination of employment either without cause or in certain other specified circumstances, Mr. Richardson will be entitled to receive one year’s salary. These specified circumstances include where there has occurred a change of control in Mad Catz, Inc. or the Company.

Mad Catz, Inc. and Cyril Talbot III entered into an agreement dated July 23, 2003, pursuant to which Mr. Talbot agreed to serve as Mad Catz, Inc.’s Chief Financial Officer. The agreement provides for a three-year term and thereafter automatically renews for successive one year periods unless prior notice of termination is given by either party. If, during the term of the agreement, there is a termination of employment either without cause or in certain other specified circumstances, Mr. Talbot will be entitled to receive one year’s salary. These specified circumstances include where there has occurred a change of control in Mad Catz, Inc. or the Company.

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Effective December 31, 2002, Andrew Schmidt’s employment as Mad Catz, Inc.’s Chief Financial Officer was terminated.

C.    Board Practices

Directors were elected at the Annual Meeting of Shareholders held on August 7, 2002, and each will serve until the next Annual Meeting of Shareholders which is scheduled to occur on August 20, 2003, or until his or her successor is duly elected unless prior thereto he resigns or his office becomes vacant by reason of death or other cause.

Report of the Compensation Committee

The Compensation Committee is responsible for determining the total compensation paid to the President and Chief Executive Officer of the Company and to the other executive officers of the Company. In making such determinations, the Compensation Committee is mindful of the need to attract, motivate and retain qualified personnel. In establishing and implementing policies covering base salaries, cash bonuses and stock options, the Compensation Committee considers the recommendations of the Chief Executive Officer (as such relate to those executive officers other than the Chief Executive Officer) and also makes reference from time to time to other comparable corporate situations, primarily within but also outside of the Company’s industry and to the advice of independent consultants.

The Company’s compensation program has two primary components, being base salary and long term incentives in the form of grants of stock options. In addition, executive officers, other than the Chief Executive Officer whose compensation is governed by the terms of a consulting agreement, are eligible to receive a cash bonus based upon the attainment of corporate and personal objectives.

The services of the Company’s President and Chief Executive Officer are provided to the Company pursuant to the terms of a consulting agreement dated February 26, 2001 entered into between the Company and Morris Perlis & Associates Inc. The terms of the consulting agreement were negotiated and entered into by the Company prior to Mr. Perlis assuming the position of President and Chief Executive Officer. Under the terms of the consulting agreement, the cash consideration payable by the Company is fixed at Cdn.$50,000 per month. Mr. Perlis is not eligible to receive a cash bonus but is eligible to participate in the Company’s stock option plan.

Executive officers, other than the President and Chief Executive Officer, in addition to receiving compensation in the form of salary and stock options, are eligible to receive cash bonuses. The Company has not paid cash bonuses during the past three fiscal years primarily in recognition of the stage of the Company’s development and the level of net income achieved to date.

In determining the number of options granted under the stock option plan, the number and terms of outstanding options are taken into account in determining whether and how many new option grants will be made, as well as the proposed optionee’s level within the Company and the optionee’s level of contribution to the Company. Stock options granted are exercisable at a price at or above the market price of the Company’s common shares at the time of grant.

Submitted by the Committee

Cary L. McWhinnie, Chairman

Patrick S. Brigham

J. Brendan Ryan

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Audit Committee

Charter of the Audit Committee of the Board of Directors

A.    Purpose

The Audit Committee (the “Committee”) is appointed by the Board of Directors (the “Board”) for the purpose of assisting the Board in fulfilling its oversight responsibilities and, to this end, with review of:

The Committee has the authority granted by the shareholders to set the compensation of the external auditor and is responsible for overseeing the external auditor’s independence and performance. The Committee also has the authority to fill a vacancy in the office of the external auditor by recommending a new auditor for approval by the Board and the shareholders. The external auditor reports directly to the Committee, which is also responsible for resolving any disagreements between Management and the external auditor regarding financial reporting.

The Committee must approve all non-audit services to be provided by the external auditor and consider whether these services are compatible with the auditor’s independence. Between Committee meetings, the Chair may pre-approve proposed non-audit services that arise, provided the pre-approval decision is presented at the next scheduled Committee meeting for ratification.

The Committee encourages continuous improvement of, and fosters adherence to, the Company’s policies, procedures, and practices at all levels.

B.    Composition

The Committee will consist of three or more directors as determined by the Board, each of whom shall be independent and free from any relationship that, in the opinion of the Board, would interfere with the exercise of his or her independent judgment as a member of the Committee. In evaluating a member’s independence, applicable laws and regulations shall be followed. The Chair shall be appointed by the full Board.

All members of the Committee will be financially literate. Financial literacy is the ability to read and understand basic financial statements. At least one member of the Committee will have accounting or related financial management expertise, that is the ability to analyze and interpret a full set of financial statements, including the notes thereto, in accordance with applicable laws and regulations. This member must have past employment experience in finance or accounting, professional certification in accounting, or any other comparable experience or background that results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer, or other senior officer with financial oversight responsibilities.

Each Committee member serves until the earlier of the date on which he or she is replaced by the Board, resigns from the Committee, or resigns from the Board.

Except as the Committee may otherwise direct, the Chair of the Committee may represent the entire Committee for any purpose. Any decisions made by the Chair of the Committee that require communication with the other members will be communicated at the next scheduled meeting.

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C.    Responsibilities

The Committee’s specific responsibilities in carrying out its oversight role will be as set out in a procedures checklist as from time to time developed by the Committee and updated periodically (at least annually) to reflect changes in regulatory requirements, authoritative guidance, and evolving oversight practices. The procedures checklist covers the Committee’s review and monitoring procedures pertaining to:

Although the Committee has the powers and responsibilities set forth in this charter, it is not the Committee’s responsibility to determine whether the Company’s financial statements present fairly the financial position, the results of operations, and the cash flows of the Company, in accordance with generally accepted accounting principles, or to plan or conduct financial statement audits. These are the responsibilities of Management and the external auditor, respectively. In carrying out their oversight responsibilities, the Committee is not providing any expert or special assurance as to the Company’s financial statements or any professional certification as to the external auditor’s work.

D.    Meetings

The Committee will meet at least quarterly or more frequently if circumstances dictate. The Committee Chair shall prepare and/or approve an agenda in advance of each meeting. A quorum shall consist of a majority of the members of the Committee. The Committee will keep minutes or other records of its meetings and activities. In addition, the Committee or its Chair shall communicate with Management and the external auditor quarterly to review the Company’s interim financial statements and any significant findings based upon the auditor’s interim review.

E.    Communications/Reporting

The external auditor is accountable to the Board and to the Committee as representatives of the shareholders and shall report directly to the Committee, which is expected to maintain free and open communication with the external auditor and the Company’s Management. The Committee should meet privately in executive session at least annually with each of Management and the external auditor, and as a committee to discuss any matters that the Committee or each of these groups believe should be discussed. The Committee Chair shall report on Audit Committee activities to the full Board at each Board meeting. Employees may submit anonymous complaints or concerns respecting accounting or audit matters.

F.    Education

The Company is responsible for providing the Committee with educational resources related to accounting principles and procedures, current accounting topics pertinent to the Company, and other material as requested by the Committee. Committee members are encouraged to enhance their familiarity with finance and accounting by participating, at the Company’s expense, in seminars, conferences, roundtables, and other educational programs conducted by the Company or outside organizations. The Company will assist the Committee in maintaining appropriate financial literacy.

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G.    Authority

The Committee has the authority to conduct any investigation appropriate to fulfilling its responsibilities, and therefore has direct access to the external auditor, as well as Company personnel. The Committee has the ability to retain, at the Company’s expense, independent legal, accounting, or other advisors it deems necessary to carry out its duties. The Company does not have an internal audit department nor does it feel that one is currently required. The Audit Committee consists of Donald Lenz (Chairman), Cary McWhinnie and Patrick Brigham.

D.    Employees