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 December 31, 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		(I.R.S. Employer
Incorporation or Organization)		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 February 12, 2003 was 23,005,885.

TDK MEDIACTIVE, INC. AND SUBSIDIARY

Form 10-Q

INDEX

		Page

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets -
	December 31, 2002 and March 31, 2002	3

Condensed Consolidated Statements of Operations -
	Three month periods ended December 31, 2002 and 2001	4
	Nine month periods ended December 31, 2002 and 2001	5

Condensed Consolidated Statements of Cash Flows -
	Nine month periods ended December 31, 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		15

Item 4. Controls and Procedures		15

PART II - OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K		16

Signatures		16

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

TDK MEDIACTIVE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS

			December 31, 2002			March 31, 2002

				(unaudited)
ASSETS
Current Assets:
	Cash and cash equivalents		$	1,491,285		$	1,063,024
	Accounts receivable - net			10,997,717			5,581,101
	Inventory - net			3,211,579			1,241,094
	Prepaid royalties			8,220,368			2,047,953
	Software development costs			9,545,253			8,693,083
	Prepaid expenses and other			1,949,461			782,705

		Total current assets		35,415,663			19,408,960
Property and equipment - net				1,317,333			465,352
Software development costs – long term				—			625,000
Other Assets				89,298			24,037

TOTAL			$	36,822,294		$	20,523,349

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
	Note payable to TDK USA		$	21,786,503		$	14,199,117
	Accounts payable and accrued expenses			4,529,192			1,697,790
	Accrued royalties			6,742,406			2,974,821
	Capital lease obligations			6,445			6,867
	Deferred revenue			1,457,583			2,007,499

		Total current liabilities		34,522,129			20,886,094

Capital lease obligations – long term				16,693			21,594
Deferred revenue – long term				5,025,000			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			22,895			22,885
	Additional paid-in capital			19,953,957			19,950,590
	Accumulated deficit			(22,718,380	)		(20,707,814	)

Total stockholders’ deficit				(2,741,528	)		(734,339	)

TOTAL			$	36,822,294		$	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 December 31, 2002 and 2001
(unaudited)

			2002			2001

Net Revenues			$	18,500,991		$	16,457,076
Costs and expenses:
	Cost of sales			14,526,349			12,218,674
	Product development			229,671			160,552
	Sales and marketing			2,554,114			2,176,627
	General and administrative			1,358,904			844,416

		Total costs and expenses		18,669,038			15,400,269

Operating income (loss)				(168,047	)		1,056,807
Interest expense, net				(392,093	)		(228,982	)

Income (loss) before provision for income taxes				(560,140	)		827,825
Provision for income taxes				0			0

Net income (loss)			$	(560,140	)	$	827,825

Basic and diluted net income (loss) per share			$	(0.02	)	$	0.04

See notes to condensed consolidated financial statements.

TDK MEDIACTIVE, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine months Ended December 31, 2002 and 2001
(unaudited)

		2002			2001

Net Revenues		$	39,056,874		$	24,900,504
Costs and expenses:
	Cost of sales		29,980,523			18,234,331
	Product development		715,589			448,449
	Sales and marketing		5,783,212			3,463,794
	General and administrative		3,661,388			1,984,466

	Total costs and expenses		40,140,712			24,131,040

Operating income (loss)			(1,083,838	)		769,464
	Interest expense, net		(925,129	)		(410,793	)

Income (loss) before provision for income taxes			(2,008,967	)		358,671
Provision for income taxes			1,600			1,600

Net income (loss)		$	(2,010,567	)	$	357,071

Basic and diluted net income (loss) per share		$	(0.09	)	$	0.02

See notes to condensed consolidated financial statements.

TDK MEDIACTIVE, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine months Ended December 31, 2002 and 2001
(unaudited)

				2002			2001

Cash flows from operating activities:
Net income (loss)				$	(2,010,567	)	$	357,071
Adjustments to reconcile net income (loss) to net cash used by operating activities:
			Depreciation and amortization		284,185			165,399
			Provision for doubtful accounts, discounts and returns		650,547			526,179
Changes in operating assets and liabilities:
			Accounts receivable		(6,067,163	)		(11,436,374	)
			Inventories		(1,970,485	)		(477,584	)
			Prepaid royalties		(6,172,415	)		(832,245	)
			Software development costs		(227,170	)		(3,230,071	)
			Prepaid expenses and other		(1,166,756	)		(404,601	)
			Accounts payable and accrued expenses		2,876,377			1,912,325
			Accrued royalties		3,767,585			2,088,615
			Deferred revenue		4,125,084			(2,042,500	)

Net cash used by operating activities					(5,910,778	)		(13,373,786	)

Cash flows from investing activities:
	Purchases of property and equipment				(1,136,165	)		(406,023	)
	Other				(65,261	)		64,713

Net cash used by investing activities					(1,201,426	)		(341,310	)

Cash flows from financing activities:
		Proceeds from issuance of common stock			3,377			—
		Proceeds from notes payable			16,842,411			16,107,230
		Repayment on notes payable			(9,300,000	)		(750,000	)
		Payments on capital lease obligations			(5,323	)		(4,914	)

Net cash provided by financing activities					7,540,465			15,352,316

Net change in cash and cash equivalents					428,261			1,637,220
Cash and cash equivalents, beginning of period					1,063,024			438,555

Cash and cash equivalents, end of period				$	1,491,285		$	2,075,775

Supplemental disclosure of cash flow information
	Cash paid during the period for interest			$	884,852		$	339,633

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 accounting principles generally accepted in the United States of America 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 nine months ended December 31, 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 22,894,582 and 22,891,500 shares for the three months and nine months ended December 31, 2002. The computations of the weighted-average common shares used in the computation of basic and diluted net income per share is based on 22,876,832 shares for the three months and nine months ended December 31, 2001. Stock options and warrants to purchase 1,675,758 and 13,865,915 shares of common stock outstanding at December 31, 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 Ò 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 a Loan and Security Agreement with TDK USA, a related company. On April 30, 2002, the Loan and Security Agreement as amended 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 $30.0 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 December 31, 2002, we have an outstanding balance of approximately $21.7 million under the agreement at an interest rate of 5.87%. As of December 31, 2002 we were not in compliance with the interest coverage ratio. On January 30, 2003 TDK USA issued a waiver for this requirement.

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. During the current quarter, we entered into a new distribution agreement with TDK Europe that relates to certain titles. Republishing fees, under this agreement, will be recognized on a per unit basis as product is sold by TDK Europe. The new agreement extends through July 31, 2004. At December 31, 2002 we have deferred (unearned) revenue amounting to $1.7 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. 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 net revenues 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 December 31, 2002 Compared to the Three Months Ended December 31, 2001

Net Revenues – Net revenues increased to $18,500,991 for the three months ended December 31, 2002 as compared to $16,457,076 for the three months ended December 31, 2001. The increase includes an increase in product sales of $2,177,341 net of a decrease in co-publishing and republishing fees of $133,427. The increase in product sales resulted primarily from the release of seven titles (Shrek Super Party for Sony’s PlayStation 2 and Microsoft’s Xbox, Shrek Extra Large for Nintendo’s GameCube, Robotech Battlecry for Nintendo’s GameCube, Robotech: The Macross Saga for Nintendo’s Game Boy Advance, Shrek: Hassle in the Castle for Nintendo’s Game Boy Advance, and Masters of the Universe for Nintendo’s Game Boy Advance) during the quarter as compared to the release of two titles during the same quarter of the prior year. The new releases for the quarter ended December 31, 2002 accounted for 95% of net revenues, whereas the new releases for the quarter ended December 31, 2001 accounted for 44% of net revenues.

Republishing fees were recognized in connection with a republishing and distribution agreement with TDK Europe, a related company. We recognized $581,621 of such fees from TDK Europe during the three months ended December 31, 2002 as compared to $660,000 during the three months ended December 31, 2001. In the current quarter, we recognize republishing fees on a per unit basis, whereas in the prior year’s quarter we recognized republishing fees upon the deliverance of the gold master to TDK Europe.

Co-publishing fees were recognized in connection with co-publishing and licensing agreements. We recognized co-publishing fees of $491,340 during the three months ended December 31, 2002 as compared to $546,388 during the three months ended December 31, 2001. The overall decrease is due primarily to lower sales of PC titles

Cost of Sales – Cost of sales increased to $14,526,349 or 79% of net revenues for the three months ended December 31, 2002 as compared to $12,218,674 or 74% of net revenues for the three months ended December 31, 2001. The increase is principally attributable to higher amortization including $575,000 of additional development costs written off in the current quarter on titles that were not performing up to expectations. The higher costs were also impacted by lower sales prices due to lower than expected demand of certain titles. There was also an increase in costs reflecting costs associated with higher profile licenses.

Internal Product Development – Product development costs increased to $229,671 for the three months ended December 31, 2002 or 1% of net revenues as compared to $160,552 during the three months ended December 31, 2001 or 1% of net revenues. The increase is due to increased salaries and benefits costs related to an increase in personnel required to manage our growing base of titles and turnover costs.

Sales and Marketing – Sales and marketing expenses increased to $2,554,114 or 14% of net revenues for the three months ended December 31, 2002 as compared to $2,176,627 or 13% of net revenues for the three months ended December 31, 2001. The increase relates primarily to advertising and marketing ($274,000) for the launch of seven new titles during the current quarter compared to two new titles during the prior quarter. There was also a decrease in sales commissions ($115,000) due to the reduction in the commission rate and an increase in sales not subject to commissions. There was also an increase in personnel ($183,000) due to the increase in anticipated titles slated for the upcoming year.

General and Administrative – General and administrative expenses increased to $1,358,904 for the three months ended December 31, 2002 as compared to $844,416 for the three months ended December 31, 2001. The $514,000 increase is primarily attributable to the following items: increase bad debt expense related to increased sales ($207,000), increased compensation and personnel ($140,000), increased professional fees ($42,000), increased depreciation ($58,000), increased rent ($28,000), increased insurance costs ($21,000) and increased business taxes ($28,000)

Interest Expense – Interest expense increased by approximately $163,000 to $392,000 during the three months ended December 31, 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 interest rate for the current quarter was 6.41% whereas the average interest rate for the previous year’s quarter was 7.25%.

Nine months Ended December 31, 2002 Compared to the Nine months Ended December 31, 2001

Net Revenues – Net revenues increased to $39,056,874 for the nine months ended December 31, 2002 as compared to $24,900,504 for the nine months ended December 31, 2001. The increase includes: increase in product sales of 14,441,036, an increase in co-publishing fees of $1,075,719 and lower foreign republishing fees received of $1,360,385. The increase in product sales resulted primarily from the release of fourteen titles during the current period as compared to the release of six titles during the same period of the prior year. The new releases for the nine months ended December 31, 2002 accounted for 86% of net revenues, whereas the new releases for the nine months ended December 31, 2001 accounted for 89% of net revenues.

Republishing fees were recognized in connection with a republishing and distribution agreement with TDK Europe, a related company. We recognized $737,465 of such fees from TDK Europe during the nine months ended December 31, 2002 as compared to $2,097,850 during the nine months ended December 31, 2001. In the current period, we recognize republishing fees on a per unit basis, whereas in the prior year we recognized republishing fees upon the delivery of the gold master to TDK Europe. We currently have approximately $1.7 million in unearned revenue at December 31, 2002 related to this agreement.

Co-publishing fees were recognized in connection with co-publishing and licensing agreements. We recognized co-publishing fees of $1,622,107 during the nine months ended December 31, 2002 as compared to $546,388 during the nine months ended December 31, 2001.

Cost of Sales – Cost of sales increased to $29,980,523 or 77% of net revenues for the nine months ended December 31, 2002, as compared to $18,234,331 or 73% of net revenues for the nine months ended December 31, 2001. The increase is principally attributable to higher amortization including development costs written off in the current period on titles that were not performing up to expectations offset by the new releases which have a lower cost to sales ratio.

Internal Product Development – Product development costs increased to $715,589 for the nine months ended December 31, 2002 or 2% of net revenues, as compared to $448,449 during the nine months ended December 31, 2001 or 2% of net revenues. 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 $5,783,212 or 15% of net revenues for the nine months ended December 31, 2002, as compared to $3,463,794 or 14% of net revenues for the nine months ended December 31, 2001. The increase relates primarily to advertising and marketing ($1,623,000) for the launch of new titles during the period, compared to six new titles launched during the prior year’s period. There was also an increase in sales commissions ($141,000) related to the increase in sales during the current period offset by lower commission rate during the last quarter. There was also an increase in personnel ($477,000) due to the increase in anticipated titles slated for the upcoming year.

General and Administrative – General and administrative expenses increased to $3,661,388 for the nine months ended December 31, 2002, as compared to $1,984,466 for the nine months ended December 31, 2001. The $1,677,000 increase is primarily attributable to the following items: increased compensation and personnel ($624,000), increased bad debt expense related to increase in sales ($362,000), increased professional fees ($216,000), increased rent and utilities ($154,000), moving costs ($18,000), increased depreciation ($119,000), increased travel costs ($65,000), increased business taxes (64,000) and increased insurance costs ($55,000).

Interest Expense – Interest expense increased by approximately $514,000 to $925,000 during the nine months ended December 31, 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 interest rate for the current period was 6.35% whereas the average interest rate for the previous year’s period was 7.91%.

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 $1,491,285 at December 31, 2002. Cash utilized in operating activities for the nine months ended December 31, 2002 amounted to $5,910,778, compared to $13,373,786 during the nine months ended December 31, 2001. The significant difference between the two periods represents a deferred revenue payment received of $5.0 million received in May 2002, increases in accounts payable and accrued expenses ($1 million), and software development costs, net of amortization ($3.0 million), and a decrease in receivables ($4.0 million), offset by a net increase of prepaid royalties ($3.7 million), an increase of prepaid expenses and inventory ($2.2 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 December 31, 2002, our working capital amounted to $893,534.

On April 30, 2002, we signed an agreement with TDK USA, a related party, to extend and expand our existing loan and security agreement. The agreement 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 January 31, 2003, the balance outstanding under this facility amounted to $21.7 million at an interest rate of 5.87 %.

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. As of December 31, 2002 we were not in compliance with the interest coverage ratio. On January 30, 2003 TDK USA issued a waiver for this requirement.

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 $39,000 and $93,000for the three months and nine months ended December 31, 2002 and by approximately $23,000 and $41,000 for the three months and nine months ended December 31, 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 subsidiary 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 February 12, 2003

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

By:	/s/ MARTIN G. PARAVATO	Date: February 12, 2003

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

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TDK MEDIACTIVE INC 10-Q