U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x	Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2002

o	Transition report under Section 13 or 15 (d) of the Exchange Act

For the transition period from __________ to __________

Commission File No. 0-28604

TDK MEDIACTIVE, INC.
(Exact Name of Issuer as Specified in Its Charter)

Delaware		33-0557833

(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

4373 Park Terrace Drive, Westlake Village, California 91361

(Address of Principal Executive Offices)

(818) 707-7063

(Issuer’s Telephone Number, Including Area Code)



(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

Check whether the issuer: (1) filed all reports required to be file by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

The number of shares outstanding of the issuer’s common stock as of November 12, 2002 was 22,995,563.

TDK MEDIACTIVE, INC. AND SUBSIDIARY

Form 10-Q

INDEX

	Page

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets - September 30, 2002 and March 31, 2002	3

Condensed Consolidated Statements of Operations - Three month periods ended September 30, 2002 and 2001	4
Six month periods ended September 30, 2002 and 2001	5

Condensed Consolidated Statements of Cash Flows - Six month periods ended September 30, 2002 and 2001	6

Notes to Condensed Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	9

Item 3. Quantitative and Qualitative Disclosure About Market Risks	14

Item 4. Controls and Procedures	14

PART II - OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K	15

Signatures	15

Certifications	16-17

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

TDK MEDIACTIVE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS

			September 30, 2002			March 31, 2002

			(unaudited)
ASSETS
Current Assets:
	Cash and cash equivalents		$	784,891		$	1,063,024
	Accounts receivable - net			13,573,017			5,581,101
	Inventory - net			3,437,154			1,241,094
	Prepaid royalties			8,175,914			2,047,953
	Software development costs			9,652,983			8,693,083
	Prepaid expenses and other			409,473			782,705

		Total current assets		36,033,432			19,408,960

Property and equipment - net				1,354,558			465,352
Software development costs – long term				905,000			625,000
Other Assets				86,298			24,037

TOTAL			$	38,379,288		$	20,523,349

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
	Note payable to TDK USA		$	20,473,474		$	14,199,117
	Accounts payable and accrued expenses			6,507,175			1,697,790
	Accrued royalties			6,472,397			2,974,821
	Capital lease obligations			6,759			6,867
	Deferred revenue			2,007,500			2,007,499

		Total current liabilities		35,467,305			20,886,094

Capital lease obligations – long term				18,373			21,594
Deferred revenue – long term				5,074,999			350,000
Stockholders’ Deficit:
	Common stock - $.001 par value, 50,000,000 shares authorized, 22,894,582 and 22,884,582 shares issued and outstanding			22,894			22,885
	Additional paid-in capital			19,953,958			19,950,590
	Accumulated deficit			(22,158,241	)		(20,707,814	)

Total stockholders’ deficit				(2,181,389	)		(734,339	)

TOTAL			$	38,379,288		$	20,523,349

See notes to condensed consolidated financial statements.

TDK MEDIACTIVE, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2002 and 2001
(unaudited)

			2002			2001

Net Revenues			$	16,960,956		$	4,595,891
Costs and expenses:
	Cost of sales			11,721,407			3,176,117
	Product development			198,004			150,834
	Sales and marketing			1,938,370			615,386
	General and administrative			1,333,339			635,157

		Total costs and expenses		15,191,120			4,577,494

Operating income				1,769,836			18,397
Interest expense, net				(285,765	)		(113,315	)

Income (loss) before provision for income taxes				1,484,071			(94,918	)
Provision for income taxes				0			0

Net income (loss)			$	1,484,071		$	(94,918	)

Basic and diluted net income (loss) per share			$	0.06		$	(0.00	)

See notes to condensed consolidated financial statements.

TDK MEDIACTIVE, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended September 30, 2002 and 2001
(unaudited)

		2002			2001

Net Revenues		$	20,555,883		$	8,443,428
Costs and expenses:
	Cost of sales		15,454,174			6,015,657
	Product development		485,918			287,897
	Sales and marketing		3,229,098			1,287,167
	General and administrative		2,302,484			1,140,050

	Total costs and expenses		21,471,674			8,730,771

Operating loss			(915,791	)		(287,343	)
	Interest expense, net		(533,036	)		(181,811	)

Loss before provision for income taxes			(1,448,827	)		(469,154	)
Provision for income taxes			1,600			1,600

Net loss		$	(1,450,427	)	$	(470,754	)

Basic and diluted net loss per share		$	(0.06	)	$	(0.02	)

See notes to condensed consolidated financial statements.

TDK MEDIACTIVE, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended September 30, 2002 and 2001
(unaudited)

			2002			2001

Cash flows from operating activities:
Net loss			$	(1,450,427	)	$	(470,754	)
Adjustments to reconcile net loss to net cash used by operating activities:
	Depreciation and amortization			164,838			104,125
	Provision for doubtful accounts, discounts and returns			254,541			419,022
Changes in operating assets and liabilities:
	Accounts receivable			(8,246,457	)		(2,427,707	)
	Inventories			(2,196,060	)		(2,711,814	)
	Prepaid royalties			(6,127,961	)		(863,514	)
	Software development costs			(1,239,900	)		(3,597,482	)
	Prepaid expenses and other			373,233			(132,788	)
	Accounts payable and accrued expenses			4,844,695			2,357,346
	Accrued royalties			3,497,576			905,537
	Deferred revenue			4,724,999			(1,392,500	)

Net cash used by operating activities				(5,400,923	)		(7,810,529	)

Cash flows from investing activities:
Purchases of property and equipment				(1,054,044	)		(262,898	)
Other				(62,261	)		64,713

Net cash used by investing activities				(1,116,305	)		(198,185	)

Cash flows from financing activities:
	Proceeds from issuance of common stock			3,377			—
	Proceeds from notes payable			7,539,047			8,647,490
	Repayment on notes payable			(1,300,000	)		(750,000	)
	Payments on capital lease obligations			(3,329	)		(2,531	)

Net cash provided by financing activities				6,239,095			7,894,959

Net change in cash and cash equivalents				(278,133	)		(113,755	)
Cash and cash equivalents, beginning of period				1,063,024			438,555

Cash and cash equivalents, end of period			$	784,891		$	324,800

Supplemental disclosure of cash flow information
	Cash paid during the period for:
		Interest	$	502,745		$	141,746

See notes to condensed consolidated financial statements.

TDK MEDIACTIVE, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

The accompanying financial statements have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. While we believe that the disclosures made are adequate to make the information presented not misleading, we recommend that these condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended March 31, 2002.

In our opinion, such unaudited financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to fairly present the information provided. The results for the three months and six months ended September 30, 2002 are not necessarily indicative of the results to be expected for the full year or for any other interim period. The consolidated financial statements include the accounts of TDK Mediactive, Inc. and our wholly owned subsidiary. All material intercompany balances and transactions have been eliminated in consolidation.

Note 2 – Earnings Per Share Computation

The computations of the weighted-average common shares used in the computation of basic and diluted net income (loss) per share is based on 23,620,748 and 22,889,942 shares for the three months and six months ended September 30, 2002. The computations of the weighted-average common shares used in the computation of basic and diluted net loss per share is based on 22,876,832 shares for the three months and six months ended September 30, 2001. Stock options and warrants to purchase 974,342 and 13,724,165 shares of common stock outstanding at September 30, 2002 and 2001, but not included in the computation as their effect would be anti-dilutive.

Note 3 – Activision Agreement

On May 23, 2002, we announced a strategic agreement with Activision Publishing, Inc. to co-develop and co-publish video games. The companies have agreed that their initial collaboration will be based on TDK Mediactive’s existing license to the sequel to DreamWorks Pictures’ blockbuster Academy Award® winning feature film “Shrek.” Additionally, TDK Mediactive and Activision have agreed to co-develop and co-publish a title originating from Activision’s portfolio of video game brands. Throughout the co-publishing relationship TDK Mediactive and Activision will maintain control over development and marketing of their respective properties and licenses, while pooling their substantial collective industry expertise, resources and global brands. Under the agreement, Activision will start to co-develop and co-publish games with TDK Mediactive based on the upcoming “Shrek” theatrical sequel. The first “Shrek” title to be released under this agreement is expected to launch on multiple platforms simultaneously with the theatrical debut of the “Shrek” sequel.

In connection with this agreement, we will receive minimum guaranteed royalty payments plus additional royalties once the minimum guaranteed royalty has been earned. Deferred revenue in the accompanying balance sheet includes $5.0 million representing cash advanced from Activision in connection with this agreement. The deferred revenue that will be recognized as income beginning at the time the sequel to the film “Shrek” is released, which is currently scheduled for June 2004.

Note 4 – Loan from Related Entity

On March 29, 2001 we entered into an $8.0 million Loan and Security Agreement with TDK USA a related company. On August 24, 2001, the agreement was amended to increase the maximum aggregate borrowings to $20.0 million. On April 30, 2002, we reached an agreement with TDK USA to extend and expand the agreement. It now matures on March 31, 2003, provides for a combination of cash advances and letters of credit relating to the purchase of product, not to exceed aggregate borrowings of up to $30.0 million, $10.0 million of which is at the discretion of TDK USA. TDK USA holds a security interest in substantially all our assets. The agreement as amended provides for interest to be paid monthly at the annual rate of the higher of (i) LIBOR plus two and one-half percent (2.50%) or (ii) the Prime Rate plus one and one-half percent (1.50%). As to any borrowings on the uncommitted portion of the facility (that is, amounts exceeding $20.0 million), the respective interest rate margins are increased, from 2.50% to 2.75% for LIBOR borrowings and from 1.50% to 1.75% for prime rate borrowings.

The agreement, as amended, requires us to maintain: (i) a current ratio of 0.85 to 1.00 at the end of each calendar quarter; (ii) an interest coverage ratio of 1.50 to 1.00 as of December 31, 2002 and (iii) maintain a net sales to net assets (as defined) ratio of not less than 1.20 to 1.00 at the end of each calendar quarter. At September 30, 2002, we have an outstanding balance of approximately $20.5 million under the agreement at an interest rate of 6.50% and we were in compliance with such loan requirements.

Note 5 – Related Party Transactions

Republishing fees were recognized in connection with a republishing and distribution agreement with TDK Europe, a related company. Through July 31, 2002, republishing fees were recognized when certain milestones were met and passage of time had occurred. Pursuant to an agreement that we expect to consummate in the near future, the distribution agreement with TDK Europe will be terminated and replaced with an agreement whereby commencing August 1, 2002 republishing fees will be recognized on a per unit basis as product is sold by TDK Europe. The new agreement will extend through July 31, 2004. At September 30, 2002 we have deferred (unearned) revenue amounting to $2.2 million relating to this agreement.

ITEM 2 –

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements contained in this quarterly report that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include, without limitation, statements regarding future actions, prospective performance or results of current and anticipated products, sales, efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results.

All of the forward-looking statements contained in this Quarterly Report on Form 10-Q or in our other publications may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining actual or future results. Consequently, no forward-looking statement can be guaranteed. Our actual results may vary materially and there are no guarantees about the performance of our publicly traded securities. We undertake no obligation to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise. Future disclosures on related subjects in our reports to the Securities and Exchange Commission may update some of our disclosures (including Forms 10-K, 10-Q and 8-K filed in the future) contained herein.

Some of the facts that could cause uncertainties are:

	•	New competitors and intensification of price competition from other manufacturers of consumer software products and/or toy companies and the studio licensors themselves;

	•	New products that make our products and services obsolete;

	•	Inability to obtain additional capital as needed;

	•	Loss of customers;

	•	Technical problems with our products and services;

	•	Departure of key employees, and inability to attract new employees;

	•	Litigation and administrative proceedings;

	•	Departure or retirement of key executives; and

	•	Contracts tied to key executives and/or change in control.

Overview of the Company’s Operations

We are engaged primarily in developing, publishing, distributing and marketing interactive entertainment software primarily based on well-recognized intellectual content. This includes the development, distribution, marketing and publishing of video games for console and handheld electronic entertainment platforms. We also publish titles for Personal Computers on a case by case basis. We currently publish – or intend to publish – titles for Sony PlayStation, Sony PlayStation 2, Microsoft Xbox, Nintendo GameCube, Nintendo Game Boy Advance and Nintendo Game Boy Color. We intend to support most interactive software categories, including children’s, action, adventure, driving, fighting, puzzle, role-playing, simulation, sports and strategy. Our major retail customers include Toys “R” Us, Wal-Mart, Electronics Boutique, Target, Kmart Stores, GameStop, Best Buy, Kay Bee Toys, other national and regional retailers, discount store chains, specialty retailers and distributors.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us 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, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, allowance for obsolete inventory, impairment of long-lived assets and contingencies and litigation. We base our 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. We apply the following critical accounting policies in the preparation of our consolidated financial statements:

Revenue Recognition – Direct-to-the-customer sales are recognized when title and risk of loss passes to the customers and are recorded net of discounts, allowances and estimated merchandise returns. Although we generally sell our products on a no-return basis, in certain circumstances we may allow returns, price concessions or allowances on a negotiated basis. We have no obligation to perform future services subsequent to shipment, but we provide telephone customer support as an accommodation to purchasers of products for a limited time. Costs associated with this effort are charged to cost of sales as incurred in the consolidated statements of operations. Revenue from third-party distributors is recognized as reported by such distributors, net of estimated returns.

Reserves for returns are based on management’s evaluation of historical experience and current industry trends. Our revenue recognition policy complies with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.”

Discounts, Allowances and Returns; Inventory Management – At the time of product shipment, we establish allowances based on estimates of future returns, customer accommodations and doubtful accounts with respect to such products. We base this amount on our historical experience, retail inventories, the nature of the titles and other factors. The identification by us of slow-moving or obsolete inventory, whether as a result of requests from customers for accommodations or otherwise, would require us to establish reserves against such inventory or to write-down the value of such inventory to its estimated net realizable value.

Licenses – We have entered into various license agreements that require payment of up-front minimum guarantees against future royalties. Such license agreements generally require that we pay a percentage of sales of the products but no less than a specified minimum guaranteed royalty. We record the minimum guaranteed royalty as a liability and along with a related prepaid asset at the time the agreement is consummated. The liability is extinguished as payments are made to the license holders and the asset is expensed at the contractual royalty rate based on actual sales of the related product. Additional royalty liabilities, in excess of minimum guaranteed amounts, are recorded when such amounts are earned by the licensor. Prepaid royalties are expensed at the contractual royalty rate based on actual net product sales or on the ratio of current units sold to total projected units whichever amount is greater.

Software Development Costs – We account for software development in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for the Cost of Capitalized Software to Be Sold, Leased or Otherwise Marketed.” We capitalize software development costs once technological feasibility is established and such costs are determined to be recoverable against future revenues. Software development costs are expensed based on the ratio of current units sold to total projected units. When, in management’s estimate, future revenues will not be sufficient to recover previously capitalized advances or software development costs, we expense these items as project abandonment losses in the period the impairment is identified. Such abandonment losses are solely attributable to changes in market conditions or product quality considerations.

Three Months Ended September 30, 2002 Compared to the Three Months Ended September 30, 2001

Net Revenues – Net revenues increased to $16,960,956 for the three months ended September 30, 2002 as compared to $4,595,891 for the three months ended September 30, 2001. The increase includes: an increase in product sales of $12,801,146 and an increase in co-publishing fees of $523,489 net of reduced lower foreign republishing fees received of $959,570. The increase in product sales results primarily from the release of four titles (Robotech for Sony’s PlayStation2 and Microsoft’s Xbox, Casper for Nintendo’s GameCube and Shrek Treasure Hunt for Sony’s PlayStationOne) during the quarter as compared to the release of three titles (Wendy for Nintendo’s Game Boy Color, Lady Sia for Nintendo’s Advance GameBoy and Casper for Sony’s PlayStation2) during the same quarter of the prior year. The new releases for the quarter ended September 30, 2002 accounted for 96% of net revenues, whereas the new releases for the quarter ended September 30, 2001 accounted for 54% of net revenues.

Republishing fees were recognized in connection with a republishing and distribution agreement with TDK Europe, a related company. We recognized $69,030 of such fees from TDK Europe during the three months ended September 30, 2002 as compared to $1,028,600 during the three months ended September 30, 2001.

Co-publishing fees were recognized in connection with co-publishing and licensing agreements that were not in place in the prior year’s quarter. We recognized co-publishing fees of $523,489 during the three months ended September 30, 2002.

Cost of Sales – Cost of sales increased to $11,721,407 or 72% of product sales for the three months ended September 30, 2002 as compared to $3,176,117 or 89% of product sales for the three months ended September 30, 2001. The improvement is principally attributable to increased sales of new platform releases which typically carry higher margins offset by additional amortization of development costs taken in the current quarter on titles that were not performing up to expectations. There was also an increase in license costs reflecting costs associated with higher profile licenses.

Product Development – Product development costs increased to $198,004 for the three months ended September 30, 2002 or 1% of product sales as compared to $150,834 during the three months ended September 30, 2001 or 4% of product sales. The increase is due to increased salaries and benefits costs related to an increase in personnel required to manage our growing base of titles.

Sales and Marketing – Sales and marketing expenses increased to $1,938,370 or 12% of product sales for the three months ended September 30, 2002 as compared to $615,386 or 17% of product sales for the three months ended September 30, 2001. The increase relates primarily to advertising and marketing ($840,000) for the launch of four new titles during the current quarter compared to three new titles during the prior quarter. There was also an increase in sales commissions ($261,000) due to the increase in sales during the current quarter. There was also an increase in personnel ($203,000) due to the increase in anticipated titles slated for this year’s holiday season and beyond.

General and Administrative – General and administrative expenses increased to $1,333,339 for the three months ended September 30, 2002 as compared to $635,157 for the three months ended September 30, 2001. The $698,000 increase is primarily attributable to the following items: increase bad debt expense related to increased sales ($266,000), increased compensation and personnel ($130,000), increased professional fees ($71,000), moving costs ($58,000), increase depreciation ($54,000), increased rent and utilities ($65,000), increased insurance costs ($24,000), increased business taxes (21,000) and increased travel costs ($7,000).

Interest Expense – Interest expense increased by approximately $172,000 to $285,000 during the three months ended September 30, 2002. The increase relates to higher average borrowings during the current year quarter as compared to the prior year quarter and increased average interest rates. The average borrowings for the current quarter was approximately $18,000,000 whereas the average borrowings for the previous year’s quarter was approximately $6,000,000. The average interest rate for the current quarter was 6.25% whereas the average interest rate for the previous year’s quarter was 7.85%.

Six Months Ended September 30, 2002 Compared to the Six Months Ended September 30, 2001

Net Revenues – Net revenues increased to $20,555,883 for the six months ended September 30, 2002 as compared to $8,443,428 for the six months ended September 30, 2001. The increase includes: increased in product sales of 12,263,694, an increase in co-publishing fees of $1,130,767 and lower foreign republishing fees received of $1,282,006. The increase in product sales results primarily from the release of seven titles (Dinotopia for Nintendo’s Advance GameBoy, Tonka for Nintendo’s Game Boy Color, Pryzm and Robotech for Sony’s PlayStation2, Robotech for Microsoft’s Xbox, Casper for Nintendo’s GameCube and Shrek Adventure for Sony’s PlayStationOne) during the current period as compared to the release of four titles (Shrek and Wendy for Nintendo’s Game Boy Color, Lady Sia for Nintendo’s Advance GameBoy, and Casper for Sony’s PlayStation2) during the same period of the prior year. The new releases for the six months ended September 30, 2002 accounted for 93% of net revenues, whereas the new releases for the six months ended September 30, 2001 accounted for 71% of net revenues.

Republishing fees were recognized in connection with a republishing and distribution agreement with TDK Europe, a related company. We recognized $155,844 of such fees from TDK Europe during the six months ended September 30, 2002 as compared to $1,437,850 during the six months ended September 30, 2001. We currently have approximately $2.2 million in unearned revenue at September 30, 2002 related to this agreement.

Co-publishing fees were recognized in connection with co-publishing and licensing agreements that were not in place in the prior year’s quarter. We recognized co-publishing fees of $1,130,767 during the six months ended September 30, 2002.

Cost of Sales – Cost of sales increased to $15,454,174 or 80% of product sales for the six months ended September 30, 2002, as compared to $6,015,657 or 86% of product sales for the six months ended September 30, 2001. The improvement is principally attributable to increased sales of new platform releases, which typically carry higher margins offset by additional amortization of development costs taken in the current quarter on titles that were not performing up to expectations. There was also an increase in license costs reflecting costs associated with higher profile licenses.

Product Development – Product development costs increased to $485,918 for the six months ended September 30, 2002 or 3% of product sales, as compared to $287,897 during the six months ended September 30, 2001 or 4% of product sales. The increase is due to increased salaries and benefits costs related to an increase in personnel required to manage our growing base of titles.

Sales and Marketing – Sales and marketing expenses increased to $3,229,098 or 17% of product sales for the six months ended September 30, 2002, as compared to $1,287,167 or 18% of product sales for the six months ended September 30, 2001. The increase relates primarily to advertising and marketing ($1,350,000) for the launch of seven new titles during the current period, compared to four new titles during the prior year’s period. There was also an increase in sales commissions ($256,000) related to the increase in sales during the current period. There was also an increase in personnel ($294,000) due to the increase in anticipated titles slated for this year’s holiday season and beyond.

General and Administrative – General and administrative expenses increased to $2,302,484 for the six months ended September 30, 2002, as compared to $1,140,050 for the six months ended September 30, 2001. The $1,162,000 increase is primarily attributable to the following items: increased compensation and personnel ($483,000), increased bad debt expense related to increase in sales ($155,000), increased professional fees ($174,000), increased rent and utilities ($87,000), moving costs ($80,000), increased depreciation ($61,000), increased travel costs ($54,000), increased business taxes (36,000) and increased insurance costs ($34,000).

Interest Expense – Interest expense increased by approximately $351,000 to $533,000 during the six months ended September 30, 2002. The increase relates to higher average borrowings and higher average interest rates during the current year period as compared to the prior year period. The average borrowings for the current period was approximately $16,000,000 whereas the average borrowings for the previous year’s period was approximately $4,000,000. The average interest rate for the current period was 6.25% whereas the average interest rate for the previous year’s period was 8.29%.

Quarterly Results of Operations

We have experienced and may continue to experience, fluctuations in operating results due to a variety of factors, including the size and rate of growth of the consumer software market, market acceptance of our products and the licenses upon which they are based and those of our competitors, development and promotional expenses relating to the introduction of new products or new versions of existing products, product returns, changes in pricing policies by us and our competitors, the accuracy of retailers’ forecasts of consumer demand, the timing of the receipt of orders from major customers, and account cancellations or delays in shipment. Our expense levels are based, in part, on our expectations as to future sales and, as a result, operating results could be disproportionately affected by a reduction in sales or a failure to meet our sales expectations.

Seasonality

The consumer software business traditionally has been seasonal. Typically, net sales are the highest during the fourth calendar quarter and decline sequentially in the first and second calendar quarters. The seasonal pattern is due primarily to the increased demand for consumer software during the year-end holiday buying season. We expect net sales and operating results to continue to reflect seasonality.

Liquidity and capital resources

Our principal uses of cash are product purchases, payments to licensors, payments to developers and operating costs. In order to purchase products from manufacturers, we either open a letter of credit in their favor, obtain a line of credit from the manufacturer or prepay the cost of the product.

Our cash and cash equivalents amounted to $784,891 at September 30, 2002. Cash utilized in operating activities for the six months ended September 30, 2002 amounted to $5,400,923, compared to $7,810,529 during the six months ended September 30, 2001. The significant difference between the two

quarters represents payment received by Activision related to the Activision agreement ($5.0 million), increase in accounts payable and accrued expenses ($2.5 million), and software development costs, net of amortization ($2.4 million), offset by the increase in receivables ($5.8 million) and a net increase of prepaid royalties ($2.6 million). Historically, we have not generated sufficient cash flow to fund our operations, and have had to rely on debt and equity financings to fund our operations. At September 30, 2002, our working capital amounted to $566,127.

On April 30, 2002, we reached an agreement with TDK USA, a related party, to extend and expand our existing loan and security agreement. The agreement now matures on March 31, 2003 and provides for a combination of cash advances and letters of credit relating to the purchase of product, not to exceed aggregate borrowings of up to $30 million, $10 million of which is at the discretion of TDK USA. As of September 30, 2002, the balance outstanding under this facility amounted to $20.5 million and as of October 31, 2002, the outstanding balance amounted to $27.2 million.

Our business plan indicates that we will continue to expand our operations during the next 12 to 24 months, and involves the production of many titles that are scheduled for launch during fiscal 2003 and 2004. Our business plan indicates that funding this planned expansion will require amounts in excess of the $20.0 million that TDK USA has committed to provide to us pursuant to the existing credit agreement. We are currently investigating various sources for the additional financing. There is no assurance that we will be successful in obtaining the required financing on a timely basis and on terms acceptable to us, or that we will be able to extend the current TDK USA agreement when it matures on March 31, 2003. At this time, we are dependent on TDK USA for our liquidity needs, and TDK USA has no obligation either to extend credit to us other than as provided in the agreement or to extend the agreement beyond the current maturity date of March 31, 2003. If we are unable to obtain additional financing or extend the agreement, we may have to curtail or revise our planned operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks arising from transactions in the normal course of business, principally risks associated with variable interest rates on borrowings. We estimate that a 10% increase in interest rates would impact our results of operations by approximately $29,000 and $53,000for the three months and six months ended September 30, 2002 and by approximately $11,000 and $18,000 for the three months and six months ended September 30, 2001. We have no fixed rate debt. We do not have exposure to foreign currency or commodity price risks.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of a date within 90 days of the filing date of this quarterly report on Form 10-Q (the “Evaluation Date”)), have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and effective to ensure that material information relating to TDK Mediactive, Inc. and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this quarterly report on Form 10-Q was being prepared.

(b) Changes in Internal Controls. There were no significant changes in our internal controls or in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no corrective actions were taken.

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

	Exhibit Number		Title

	99.1		Certification of Vincent J. Bitetti, Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	99.2		Certification Martin G. Paravato, Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

None

SIGNATURES

In accordance with the requirements of the Securities Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

TDK MEDIACTIVE, INC.


By:	/s/ VINCENT J. BITETTI	Date November 13, 2002

	Vincent J. Bitetti Chief Executive Officer (Principal Executive Officer)


By:	/s/ MARTIN G. PARAVATO	Date: November 13, 2002

	Martin G. Paravato Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

CERTIFICATION

I, Vincent Bitetti, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of TDK Mediactive, Inc.

2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;

4.	I and the other certifying officers,

	•	are responsible for establishing and maintaining “disclosure controls and procedures” for the Company, and

	•	have designed such disclosure controls and procedures to ensure that material information relating to the Company and its consolidated subsidiaries is made known to them by others within those entities, particularly during the period in which this quarterly report is being prepared,

	•	have evaluated the effectiveness of the Company’s “disclosure controls and procedures” as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”),

	•	have presented in this quarterly report our conclusions about the effectiveness of the “disclosure controls and procedures” based on the required evaluation as of the Evaluation Date;

	•	have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee

		all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and

		any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and

	•	have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002		/s/ VINCENT BETETTI

		Vincent Bitetti, Chief Executive Officer

CERTIFICATION

I, Martin Paravato, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of TDK Mediactive, Inc.

2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report;

4.	I and the other certifying officers,

	•	are responsible for establishing and maintaining “disclosure controls and procedures” for the Company, and

	•	have designed such disclosure controls and procedures to ensure that material information relating to the Company and its consolidated subsidiaries is made known to them by others within those entities, particularly during the period in which this quarterly report is being prepared,

	•	have evaluated the effectiveness of the Company’s “disclosure controls and procedures” as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”),

	•	have presented in this quarterly report our conclusions about the effectiveness of the “disclosure controls and procedures” based on the required evaluation as of the Evaluation Date;

	•	have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee

		all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and

		any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls; and

	•	have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002		/s/ MARTIN PARAVATO

		Martin Paravato, Chief Financial Officer

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TDK MEDIACTIVE INC 10-Q