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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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



| |  | For the year ended March 31, 2003
| |  | ---------------------------------



OR



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



Commission File No. 0-28604



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TDK MEDIACTIVE, INC.

(Exact name of registrant 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)             |  | (Zip Code)



(818) 707-7063

(Issuers telephone number including area code)



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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:



NONE



SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:



Common
Stock, par value $.001



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Check whether the Issuer (1) 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 Issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No ̈



Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained herein, and such
disclosure will not be contained, to the best of the Issuers knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act ̈



The aggregate market value of the common stock of
the Issuer (the Common Stock) held by nonaffiliates, based on the market price at September 30, 2002, was approximately $7,873,282. As of June 26, 2003, there were 23,005,885 shares of the Common Stock outstanding.



DOCUMENTS INCORPORATED BY REFERENCE:



Portions of the Issuers definitive proxy statement, to be delivered to
its stockholders in connection with the Issuers 2003 Annual Meeting of Stockholders, are incorporated by reference to Part III herein.



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TDK Mediactive, Inc.

INDEX TO ANNUAL REPORT ON FORM 10-K

FILED WITH THE SECURITIES AND EXCHANGE COMMISSION

Year Ended March 31, 2003



ITEMS IN FORM 10-K

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Facing page



|Part I         |  |                                                                                        |  |   
|-------------- |  | -------------------------------------------------------------------------------------- |  | --
|Item 1.        |  | Business.                                                                              |  | 3 
|Item 2.        |  | Properties.                                                                            |  | 10
|Item 3.        |  | Legal Proceedings.                                                                     |  | 10
|Item 4.        |  | Submission of Matters to a Vote of Security Holders.                                   |  | 10
|               |  |                                                                                       
|Part II        |  |                                                                                        |  |   
|Item 5.        |  | Market for the Registrants Common Equity and Related Stockholder Matters.             |  | 12
|Item 6.        |  | Selected Financial Data.                                                               |  | 14
|Item 7.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations. |  | 15
|Item 7A.       |  | Quantitative and Qualitative Disclosures About Market Risk.                            |  | 26
|Item 8         |  | Financial Statements and Supplementary Data                                            |  | 26
|Item 9         |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.  |  | 26
|               |  |                                                                                       
|Part III       |  |                                                                                        |  |   
|Item 10.       |  | Directors and Executive Officers of the Registrant.                                    |  | 27
|Item 11.       |  | Executive Compensation.                                                                |  | 27
|Item 12.       |  | Security Ownership of Certain Beneficial Owners and Management.                        |  | 27
|Item 13.       |  | Certain Relationships and Related Transactions.                                        |  | 27
|Item 14.       |  | Disclosure Controls and Procedures                                                     |  | 27
|               |  |                                                                                       
|Part IV        |  |                                                                                        |  |   
|Item 15.       |  | Exhibits, Financial Statement Schedule and Reports on Form 8-K.                        |  | 28
|Signatures     |  |                                                                                        |  |   
|Certifications |  |                                                                                        |  |   



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This Annual Report on Form 10-K contains, or incorporates by reference, certain statements that may be deemed
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to TDK Mediactive, Inc. (the Company). Forward-looking statements give our expectations of forecast of future events.
These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as estimate, expect, project, plan, believe,
anticipate intend, and other words and terms of similar meanings in connection with disclosures of future operating or financial performance. In particular, these statements relate to 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 Annual Report on Form 10-K or in other TDK Mediactive 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 and 8-K filed in the future) contained herein. Some of the facts that could cause uncertainties
are described under the caption Factors That May Affect Future Performance.



PART I



|Item 1. |  | BUSINESS
|------- |  | --------



Introduction



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. Our first wireless cell-phone game will launch in the fall of 2003. We intend to support most interactive software categories, including childrens, action, adventure, driving,
fighting, puzzles, 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. During the year ended March 31, 2003, sales to two of our customers, Toys R Us and Wal-Mart each exceeded 10% of consolidated revenues.



We were initially incorporated in California in 1990 under the name Sound Source
Interactive, Inc. On May 16, 1994, Sound Source Interactive, Inc. merged with Basic Science Associates, Inc., a publicly held Delaware corporation. The merger was accounted for as a reverse acquisition because stockholders of Sound Source
maintained control of the surviving entity, Basic Science. Concurrent with the merger, Basic Science changed its name to Sound Source Interactive, Inc. (a Delaware corporation). During September and November 2000, we sold 16,667,000 shares of our
common stock to TDK U.S.A. Corporation, which thereby acquired an approximately 74% controlling interest in our Company. TDK USA is a wholly owned subsidiary of TDK Corporation, a publicly traded Japanese corporation. We then changed our name to
TDK Mediactive, Inc. Our principal executive offices are located at 4373 Park Terrace Drive, Westlake Village, California 91361, and our telephone number is (818) 707-7063. Our web site is at www.tdkm.com.



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Our objective is to harness the substantial growth predicted for the interactive gaming industry and become a leading
publisher of high quality entertainment software for all the primary game consoles and handheld systems. To achieve this objective, we intend to:



| |  |  | Leverage the substantial experience and expertise across our team of approximately 52 full-time employees, representing all facets of the interactive gaming industry, including
professionals from most of the leading interactive game publishers;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Focus on developing products based on strong licensed intellectual content and brands from a variety of entertainment industry and other sources, each offering either high
visibility and/or targeted consumer recognition and affinity;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Focus our development efforts principally on the T for Teen and E for Everyone game ratings that reach very broad audiences;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | Target a diverse base of demographics, properties, and game platforms to provide a truly diversified base of titles and revenues;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expand our base of licensor, development, and distribution partnerships, leveraging each partners respective strengths while managing the process with our in-house teams;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Leverage our brand and product recognition worldwide; and
| | - |  | ---------------------------------------------------------



| |  |  | Pursue strategic alliances, joint ventures, and acquisitions where prudent.
| | - |  | ---------------------------------------------------------------------------



Most of our products are based on the licensed content of major motion picture studios and other intellectual property holders including DreamWorks SKG, Vivendi-Universal
Studios, Mattel, Inc., Classic Media, DC Comics, Hallmark Entertainment Distribution LLC, BDSP Inc., The Jim Henson Company, General Motors Corporation, Disney Interactive, Atari, and others. Our license agreements for existing products and new
products under development include Pirates of the Carribean, Haunted Mansion, Shrek, Robotech, Star Trek,
Tonka, Corvette, Aquaman Dinotopia, and Scaler, a license that we recently acquired a 50% interest.



The licensing contracts with the licensors/studios are generally of three to five years in duration. The licenses are usually exclusive, worldwide, and typically allow
for multiple titles to be produced in all applicable localized languages to suit market needs by territory. We typically seek licenses that have strong brand awareness worldwide and/or franchises that receive or are expected to receive, licensor
support.



In addition to the CD-ROM media format, many of the licenses allow
for DVD and dedicated game console formats such as the Sony PlayStation, PlayStation2, Microsoft Xbox, and proprietary disc formats such as Nintendo GameCube. In addition, handheld systems such as Nintendo Game Boy (Color and Advance), PDA (personal
digital assistant), pocket personal computers, and cellular phone rights are included in some license agreements.



Arrangements with Major Platform Manufacturers



We have entered into license agreements with Sony, Microsoft, and Nintendo to develop and publish software in for the PlayStation, PlayStation 2, Xbox, Game Boy
Advance, Game Boy Color, and Nintendo GameCube. We are not required to obtain any licenses to develop titles for the PC (CDROM).



On June 2, 2002 we signed a license agreement with Sony Entertainment Corporation of America to develop and publish Sony PlayStation titles. On June 8, 2000 we signed a
license agreement to develop and publish titles for the Sony PlayStation2 Computer Entertainment System. We are also an authorized developer and publisher for the Microsoft Xbox and Nintendo gaming systems and are anticipating adding other
interactive formats such as new wireless technologies such as cellular phone and broadband delivered consumer-based entertainment.



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The following sets forth information with respect to our platform licenses:



MICROSOFT XBOX



| | Signed: 10/17/00
|- | ----------------

| | Effective Date: 9/28/00
|- | -----------------------

| | Term: November 2004
|- | -------------------



NINTENDO GAME BOY ADVANCE



| | Signed: 6/14/01
|- | ---------------

| | Effective Date: 6/14/01
|- | -----------------------

| | Term: June 2004
|- | ---------------



NINTENDO GAMECUBE



| | Signed: 11/9/01
|- | ---------------

| | Effective Date: 11/9/01
|- | -----------------------

| | Term: November 2004
|- | -------------------



SONY PlayStation



| | Signed: 6/11/02
|- | ---------------

| | Effective Date: 9/11/02
|- | -----------------------

| | Term: Ends September 2006
|- | -------------------------



SONY PlayStation 2



| | Signed: 6/8/00
|- | --------------

| | Effective Date: 6/7/00
|- | ----------------------

| | Term: Ends on 3/31/04 and automatically extends for additional one-year terms
|- | -----------------------------------------------------------------------------



On May 23, 2002, we announced a strategic agreement with Activision. 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. 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 scheduled for June 2004. Additionally, TDK Mediactive and Activision have agreed to co-develop and co-publish Star Trek  Shattered Universe to be launched on Xbox and PlayStation 2 platforms in the fall of 2003.
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.



The Industry



A large and growing installed base of video game consoles and advanced PCs
combined with expanding game player demographics have driven demand for interactive entertainment software in recent years. According to US Bancorp Piper Jaffray, US sales of console games, and games for the PC will increase to $7.4 Billion up
approximately 12% over 2002. In addition US sales of consoles are expected to approximate 21 million units during 2003, the same number during 2002.



Demand for interactive entertainment software is expected to increase due to increasing penetration of PC and next-generation console platforms. The
International Data Corporation (IDC) estimates that approximately 53% of all households in the United States own a PC. According to IDC, the household penetration rate for video game consoles is approximately 46%, and is expected to increase.



The interactive entertainment software industry has
transitioned to next-generation platforms that began with the release of Sonys PlayStation 2 in 2000 and continued with the release of Microsofts Xbox and Nintendos



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GameCube in 2001. Demand for these new platforms is significant due to their ability to offer one or more of the following features:



| |  |  | More powerful and realistic graphics and game play through 128-bit technology;
| | - |  | ------------------------------------------------------------------------------



| |  |  | Backwards compatibility (the ability to play the platforms previous generation of games); and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | Broad entertainment capabilities, including Internet access and the ability to watch DVD movies and play compact discs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------



Interactive entertainment software has also increasingly become a mainstream
entertainment choice for a maturing, technologically sophisticated audience. According to IDSA, the average age of Americans who play video games is 28, of which 43% are female. Additional catalysts for growth include mass market penetration of
budget titles, the emergence of non-traditional retail channels such as drug stores and supermarkets and price reductions for hardware platforms.



Scheduled Product Releases



The following tables set forth, for each platform, the titles we expect to release during our fiscal year ending March 31, 2004. We cannot assure you that
each of the titles anticipated for release will be released when scheduled, if ever.



|
|

|Property / Title                                   |  | Xbox  |  | PS2   |  | G-Cube |  | GBA   |  | PC CDROM
|-------------------------------------------------- |  | ----- |  | ----- |  | ------ |  | ----- |  | --------
|Aquaman / tba                                      |  | Q204 |  |       |  | Q204  |  |       |  |         
|Corvette                                           |  | Q204 |  | Q204 |  |        |  | Q204 |  | tba     
|Dinotopia/ The Sunstone Odyssey                    |  | Q204 |  |       |  | Q204  |  |       |  |         
|Haunted Mansion                                    |  | Q304 |  | Q304 |  | Q304  |  | Q304 |  | tba     
|Masters of Universe He-Man / Defender of Greyskull |  | Q304 |  | Q304 |  | Q304  |  |       |  | tba     
|Muppets /Party Cruise                              |  |       |  | Q304 |  | Q304  |  | Q304 |  | tba     
|Pirates of the Caribbean / tba                     |  |       |  |       |  |        |  | Q204 |  |         
|Shrek Party                                        |  |       |  |       |  | Q104  |  |       |  |         
|ShrekReekin Havoc                                  |  |       |  |       |  |        |  | Q204 |  |         
|Spy vs Spy / tba                                   |  | Q404 |  | Q404 |  |        |  |       |  |         
|Star Trek /Scattered Universe                      |  | Q204 |  | Q204 |  |        |  |       |  |         
|Tonka /Rescue Patrol                               |  |       |  |       |  | Q204  |  |       |  |         
|UFC /Sudden Impact                                 |  |       |  | Q404 |  |        |  |       |  |         

tba = title to be announced



Marketing, Sales and Distribution



North American Sales Our North American Sales structure consists of a national Executive Vice President, regional company representatives and
internal support personnel for distribution and Canadian accounts and sales and retail marketing tracking and sell through administration in house. In addition, we also utilize independent manufacturers representatives and select independent
distributors to reach new or alternative sales channels that are managed by our internal team.



International Sales The majority of our international business is conducted via a republishing and distribution agreement dated February 28, 2000 with TDK Recording Media Europe, SA (TDK
Europe), a wholly owned subsidiary of TDK Corporation, an affiliated company pursuant to which TDK Europe distributes our software titles throughout Europe and other territories. Under the terms of the TDK Europe agreement, we are paid a
republishing fee on each product sold. All costs of localization of the product, product boxes, and collateral



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materials, as well as all costs of replication, marketing, warehousing, and fulfillment, are borne by TDK Europe. The
success of the localization is dependent upon the international appeal of certain of our products, growth of the interactive software market internationally, the ability to successfully localize and market the products and the ability to continue to
obtain licenses with worldwide appeal. Effective November 1, 2002 we signed a new agreement with TDK Europe whereby TDK Europe will have an non-exclusive right to distribute selected software titles offered by us and accepted by TDK Europe. The new
agreement with TDK Europe, that supersedes the previous agreement, extends through July 31, 2004.



Sales and Marketing By offering a portfolio of products, we believe that we can provide retailers with an assortment of titles in categories of interest to consumers. We also support our
retailers, where applicable, by setting up special displays, end caps, and kiosks, executing targeted promotions and analyzing sales trends to help build incremental sales. We are currently developing a variety of cross-marketing promotional
programs with the movie studio licensors and other licensees of movie, television, literary works, and direct to video titles. These promotional programs may include discount coupons for products in videocassettes, movie trailers in our software
products, and promotional contests with various motion picture studios. We are actively seeking additional cross-promotion opportunities. We believe that we can generate additional revenues through our involvement in cross-promotional efforts with
studio partners, other licensees and direct sale programs, although there can be no assurance that this will occur.



Drawing upon established consumer marketing techniques, our marketing department creates and executes high-impact merchandising programs with the goal of maximizing each
products retail exposure. We believe that consumer-driven marketing, high perceived value, competitive price points, and easily identifiable packaging that emphasizes high-impact design and concise non-technical product information, lead to
higher visibility and impulse purchases of our products in retail stores.



We
provide product and technical support to our customers by telephone and on-line via our web site at at www.tdkm.com. Customer feedback is shared among other support representatives and made available to product managers and producers for
development of future products.



Revenue Fluctuations and Seasonality We have experienced, and will likely continue to experience, significant quarterly fluctuations in net sales and operating results due to a variety of factors. The software market is highly seasonal with sales typically significantly higher
during the quarter ending December 31st(due primarily to the increased demand for interactive games during the
year-end holiday buying season). Other factors that cause fluctuations include the timing of our release of new titles, the popularity of both new titles and titles released in prior periods, changes in the mix of titles with varying gross margins,
the timing of customer orders, the timing of shipments by the manufacturers, fluctuations in the size and rate of growth of consumer demand for software for various platforms, the timing of the introduction of new platforms and the accuracy of
retailers forecasts of consumer demand. Our expenses are partially based on our expectations of future sales and, as a result, operating results would be disproportionately and adversely affected by a decrease in sales or a failure by us to
meet our sales expectations. There can be no assurance that we can maintain consistent profitability on a quarterly or annual basis.



Profit margins may vary over time as a result of a variety of factors. Profit margins for cartridge products for the Game Boy platforms can vary based on the cost of the
memory chip used for a particular title. The other platforms support disc-based products that have significantly lower per unit manufacturing costs than cartridge-based products; however, they have higher development costs than cartridge-based
products.



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Development



We seek to develop a broad line of products in sustainable market categories in which a reasonable market share can be obtained. We believe that our development model is
consistent with industry standards, including high product quality, reliable delivery schedules, cost containment and controlled capital investment risk.



Our in-house producers oversee the development of various products from conception through completion, and control the content, design, scope, and development schedule.
New product ideas are evaluated with each licensor based upon upcoming theatrical and/or video and book releases, television programming, market research on the subject matter, the type and demographics of the target consumer, and the existence and
characteristics of competitive products. We seek to design new products that incorporate all of the important functions and features of the leading competitive products. Once a product is approved for development, a detailed design specification is
created that includes the products features and a user interface that is consistent with our other products. Whenever practical, the software is designed to incorporate technology used in existing products in an effort to shorten the
development cycle and improve quality and consistency. The overall product, including documentation, is designed to achieve a manufacturing specification that will enable us to meet margin requirements at consumer price points.



Our producers then commence the development of the project through independent external
developers who utilize a team of programmers, sound engineers, artists, animators, designers, and writers. Internal development efforts are focused primarily on product design and features, consistent user interfaces and product quality consistency,
play balancing and testing. Development costs associated with externally licensed technology are sometimes partially paid by royalties based on net sales that lowers our investment risk. Our agreements with independent developers normally grant us
an exclusive worldwide license to use the developers source code. We expect to continue to outsource product development to qualified sources for the foreseeable future.



Products under development are extensively tested by our internal quality assurance department, and must be approved by the licensor(s)
before being released for production. The quality assurance department tests for fun factor, bugs, functionality and ease-of-use. Producers are also responsible for reviewing customer feedback, competitive products, product performance,
and market positioning in order to introduce features that keep abreast of consumer tastes and trends.



We currently are the licensee under technology licenses with Microsoft Corp., Sony Entertainment Corporation of America and Nintendo of America. We utilize technology provided by these licensors to develop and operate
several of our products.



Personal computer titles are currently being
developed under a co-publishing model. We co-develop and co-publish select titles on a case-by-case basis. We have co-published personal computer titles with Activision Value, a subsidiary of Activision, Inc.



Manufacturing



Other than games that we release on PCs, all of our home interactive entertainment products are manufactured for us by the manufacturers or
their authorized vendors. We contract with various PC replicators for the manufacturing of our PC products.



The platform game manufacturing process begins with our placing a purchase order with a manufacturer and prepaying the manufacturer, opening either a letter of credit in favor of the manufacturer or utilizing credit
granted by the manufacturer. We then send the software code and a prototype of the game to the manufacturer, together with related artwork, user instructions, warranty information, brochures, and packaging designs, for approval, defect testing, and
manufacture. Nintendo typically delivers products to us within 15 to 60 days of its receipt of an order and a payment or corresponding letter of credit and Sony typically delivers products to us within 10 to 24 days. Microsofts authorized
vendors typically deliver products to us within 10 to 15 days.



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We are required by the platform licenses to provide a standard defective product warranty on all of the products sold.
Generally, we are responsible for resolving, at our own expense, any warranty or repair claims. We have not experienced any material claims, but there is no guarantee that we will not experience claims in the future.



Operations



We control all purchasing, inventory, scheduling, order processing, and accounting functions related to our operations, with all production
and warehousing performed by independent contractors in accordance with our specifications. We intend to continue to invest in additional management information systems and other capital equipment that we believe to be necessary to achieve
operational efficiencies and support increasing sales volumes.



Our designated
outside developers prepare master software discs and user manuals. Packaging design, duplication, printing of documentation, and packaging, as well as the assembly of purchased components and/or the shipment of finished products, are performed by
third parties in accordance with our and/or technology licensor specifications. We have multiple sources for most components, with assembly and shipping currently performed by several independent fulfillment houses. To date, we have not experienced
any material difficulties or delays in the production and assembly of our products.



Competition



The market for consumer software products is
intensely and increasingly competitive. Our competitors range from companies with limited resources to companies with substantially greater financial, technical and marketing resources than those of ours. Existing consumer software companies have
broadened their product lines and compete with us. In addition, new competitors, including computer hardware and software manufacturers, diversified media companies, toy companies, and the platform licensors, have entered the consumer software
market, resulting in greater competition for us.



Only a small percentage of
products introduced in the consumer software market achieve any degree of, or have sustained, market acceptance. Principal competitive factors in marketing consumer software include product features, quality, reliability, trade name, and licensed
title recognition, ease-of-use, merchandising, access to distribution channels and retail shelf space, marketing, price, and the availability and quality of support services. We believe that we compete effectively in these areas, particularly in the
areas of quality, brand recognition, ease-of-use, merchandising, access to distribution channels, retail shelf space and price.



In addition to manufacturers, our competitors include Activision, Inc., Electronic Arts Inc., Take-Two Interactive Software, Inc., THQ, UBI Soft, Eidos,
Vivendi-Universal, Acclaim, Konomi, and Atari. Each of the manufacturers has a broader software line and greater financial, marketing, and other resources than us, as do some of our other competitors. Accordingly, some of our competitors may be able
to market their software more aggressively or make higher offers or guarantees in connection with the acquisition of licensed properties.



At various times, toy companies, large software companies, movie studios, and others have entered the video game market resulting in greater competition for us.
Additionally, many of our competitors are developing on-line interactive games and interactive networks that will be competitive with our interactive products.



Competition is intense among an increasing number of newly introduced entertainment software titles and hardware systems for adequate levels of limited retail shelf
space and promotional support and resources. Competition for retail shelf space is expected to increase and may require us to increase our marketing expenditures from time to time to maintain sales of our titles. Competitors with more extensive
lines and popular titles frequently have greater bargaining power with retailers. Accordingly, we may not be able to achieve the levels of support and shelf space that such competitors receive. Similarly, as competition for popular properties
increases, our cost of acquiring licenses for such properties is likely to increase, possibly resulting in reduced margins.





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In addition, the market for our products is characterized by significant price competition, and we may face increasing
pricing pressures from our current and future competitors. Accordingly, these competitive pressures have, from time to time, required us to reduce our prices on certain products. Any material reduction in the price of our products would adversely
affect operating income as a percentage of net revenue and would require us to increase unit sales in order to maintain net revenue. Prolonged price competition, increased marketing costs, increased licensing costs or reduced operating margins would
cause our profits to decrease significantly.



Proprietary Rights and
Licenses



We regard our software as proprietary and rely primarily on a
combination of trademark, copyright and trade secret laws, employee and third party nondisclosure agreements, and other methods to protect our proprietary rights.



Our products are based primarily upon the licensed content of major motion picture studios and other intellectual property rights holders.
All such license agreements to which we currently are a party are for fixed terms that expire over the next five to seven years. Provided that we are in compliance with all requirements of each license, including most significantly that we have
satisfied the applicable minimum royalty guarantees, the licensor cannot prematurely cancel a license.



Employees



As of June 26, 2003, we had
52 full-time employees, including 14 employees in sales, and marketing, 26 employees in product development and customer support, and 12 employees in administration and finance. None of our employees are represented by a labor union or are subject
to a collective bargaining agreement. We believe that our relations with our employees are good.



Recent Developments



We recently
entered into a financial advisory services agreement with Europlay Capital Advisors, a Los Angeles, California-based private advisory firm specializing in media and entertainment companies. Europlay, which specializes in the interactive
entertainment industry and cross-border media transactions, will assist us in developing, structuring, and securing alternative sources of capital and financing or other strategic alternatives. Such alternatives may include, but are not limited to
the sale, merger, consolidation, recapitalization or spin-off of the business, securities or assets of the Company.



|Item 2. |  | PROPERTIES
|------- |  | ----------



In May 2002 we signed a lease for
our corporate office in Westlake Village, Los Angeles County California. Our facility lease of approximately 14,600 square feet expires on February 28, 2006. We currently expect that this facility will be sufficient for our needs at least through
the term of the lease.



|Item 3. |  | LEGAL PROCEEDINGS
|------- |  | -----------------



Although we may be a party to
legal proceedings from time to time, such legal proceedings have been ordinary and incidental to our business and have not had a material adverse effect on us.



|Item 4. |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- |  | ---------------------------------------------------



Not Applicable



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EXECUTIVE OFFICERS



The names of our executive officers and their ages as of March 31, 2003 are shown below:



Vincent J. Bitetti (48), Chief Executive Officer. Mr. Bitetti has over 14 years of
executive experience in the interactive entertainment industry and possesses a very strong track record of identifying, securing and building powerful interactive entertainment brands including Ultimate Fighting Championship, Haunted Mansion, Star
Trek, Shrek, Robotech and others. Mr. Bitetti was the co-architect of TDK Mediactives move into the console gaming space and TDK USA Corp.s strategic majority investment in the Company in 2000. He has completed numerous global licensing,
republishing, co-publishing and distribution agreements while also building a very strong, proven senior management team. In 1988 he founded the predecessor to TDK Mediactive, Sound Source Interactive, Inc. and served as its President and CEO from
its formation. He has been a director and the CEO of TDK Mediactive since 1994. Mr. Bitetti serves as Executive Producer for all game projects.



Shin Tanabe (50), President and Chief Operating Officer. Mr. Tanabe brings over 25 years of operations, sales and marketing experience, including 20 years at
divisions within TDK, to his role as President and COO of TDK Mediactive. As Executive Director of TDK Recording Media Europe, SA from April 1999 through December 2000, he built a strong business based on localizing entertainment, edutainment and
music content for European markets. It was in this role that Messrs. Tanabe and Bitetti developed the plan to refocus Sound Source on the fast growing console video game market, fueled by TDKs strategic majority investment. In December 2000
Mr. Tanabe was appointed President and COO of TDK Mediactive. Previously, Mr. Tanabe served as TDK Europes Recording Media Marketing Director from June 1991 to May 1995, where he supported that businesss expansion, directing product
planning, advertising, and new business feasibility studies. He was then elevated to Sales Executive Director of TDK Europes Recording Media division, (June 1995 to March 1999) where he was responsible for sales and the P&L for over 30
European countries.



Martin G. Paravato(61), Chief Financial Officer,
Mr. Paravato has 29 years of experience in public accounting. From 1980 to 1996 he was a partner at BDO Seidman, LLP, an international accounting firm, where he specialized in servicing publicly held companies. From 1996 to 1998, Mr. Paravato served
as Senior Vice President-Finance and Special Projects of Koo Koo Roo, Inc., a publicly traded quick service food restaurant chain. Mr. Paravato also served as chief financial officer of an international courier package delivery company from June
1998 through November 1999. From November 1999 until joining TDK Mediactive in December 2000, he served as chief financial officer of a privately held telecommunications company. Mr. Paravato holds a Bachelor of Science degree in Accounting from
California State University, Northridge and is a Certified Public Accountant and a member of the American Institute and California Societies of CPAs.



Daniel Kletzky (56), Executive Vice President of Business Development, Mr. Kletzky joined TDK Mediactive in September 2002. Prior to joining the company, Mr.
Kletzky operated Entertainment Licensing Associates Ltd. (ELA) a privately held licensing firm for popular entertainment properties which he founded in 1991. In addition to his licensing activities, Mr. Kletzky produced several animated television
series. More recently, Kletzky served as executive producer of the RESIDENT EVIL live action motion picture and will be serving as executive producer of the upcoming HOUSE OF THE DEAD (Sega) and DEAD OR ALIVE (Tecmo) game-to-film adaptations. Prior
to forming ELA, Kletzky held various executive positions at Warner Bros consumer products divisions both in New York and Los Angeles. Before joining Warner Bros. Kletzky practiced law in New York City.



Michael Devine(44), Executive Vice President of Sales and Marketing, Mr. Devine
joined TDK Mediactive in January 2002. From 1995 to 2001, Mr. Devine served in various sales capacities including Director of National Accounts, Director of Sales and Vice President of Sales while at The 3DO Company, a publicly-traded video game
company from 1995 to 2001. Mr. Devine was co-founder and President of Game America, a privately held video game distribution company from 1992 to 1995. Mr. Devine also served as a Sales Manager and Video Game buyer for CSD Distribution, a
privately-held consumer electronics company from 1988 to 1992. Mr. Devine holds a Bachelor of Arts degree in American Studies from Pitzer College in Claremont, California.



11



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PART II



|Item 5. |  | MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- |  | --------------------------------------------------------



Our common stock is traded on the OTC Bulletin Board under the symbol TDKM.OB. The following table sets forth the range of the bid prices for our
common stock during the periods indicated and may not represent actual transactions.



|Common Stock |  | High                                            |  | Low
|------------ |  | ----------------------------------------------- |  | ---
|2001         |  | First Calendar Quarter                          |  | $  
|             |  | Second Calendar Quarter                         |  | $  
|             |  | Third Calendar Quarter                          |  | $  
|             |  | Fourth Calendar Quarter                         |  | $  
|2002         |  | First Calendar Quarter                          |  | $  
|             |  | Second Calendar Quarter                         |  | $  
|             |  | Third Calendar Quarter                          |  | $  
|             |  | Fourth Calendar Quarter                         |  | $  
|2003         |  | First Calendar Quarter                          |  | $  
|             |  | Second Calendar Quarter (through June 26, 2003) |  | $  



Holders



As of June 26, 2003, there were approximately 173 holders of record of our common stock.
Nominees who hold stock certificates for an unknown number of beneficial owners hold most such securities in street name.



Dividend Policy



We have never paid cash dividends on our common stock. We currently intend to retain future earnings, if any, to finance the growth and development of our business and, therefore, do not anticipate payment of cash
dividends in the foreseeable future.



Securities Authorized for Issuance
Under Equity Compensation Plans



Information for our equity compensation
plans in effect as of March 31, 2003 is as follows (amounts in thousands, except per share amounts):



|                                                           |  | (a)                                                                 |  | (b)                                                 |      | (c)                                                                                                                               
|---------------------------------------------------------- |  | ------------------------------------------------------------------- |  | --------------------------------------------------- | ---- | ----------------------------------------------------------------------------------------------------------------------------------
|                                                           |  | Number of securitiesto be issued uponexercise ofoutstanding options |  | Weighted-averageexercise price ofoutstandingoptions |      | Number of securitiesremaining availablefor future issuanceunder equitycompensation plan(excluding securitiesreflected in column(a)
|Plan Category                                              |  |                                                                     |  |                                                     |      |                                                                                                                                   
|Equity compensation plans approved by security holders     |  | 1,193                                                               |  | $                                                   | 0.82 |                                                                                                                                   
|Equity compensation plans not approved by security holders |  | 0                                                                   |  |                                                     | na   |                                                                                                                                   
|                                                           |  |                                                                     |  |                                                     |      |                                                                                                                                   
|Total                                                      |  | 1,193                                                               |  | $                                                   | 0.82 |                                                                                                                                   



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In March and April 2003, our Board of Directors approved a 3.0 million increase to the total number of shares available
for distribution under the Companys 1995 Stock Option Plan. Incentive stock options under the 1995 Plan are limited to persons who are employees of the Company and may not be granted at a price less than 100% of the fair value of the stock as
of the date of grant (110% as to any 10% stockholder at the time of grant). The term of each option may not exceed 10 years from the date of grant (five years for 10% stockholders). The committee on a case-by-case basis determines vesting of the
options, and the options are not exercisable unless the holder is currently employed with the Company. The increase will be submitted to the Companys shareholders for approval at the next meeting of stockholders.



See Note 11 of the Notes to Consolidated Financial Statements included in Item 8 for the
material features of each equity compensation plan.



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|Item 6. |  | SELECTED FINANCIAL DATA
|------- |  | -----------------------



This selected financial data should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and
the Consolidated Financial Statements and Notes thereto included elsewhere in this report.



STATEMENT OF OPERATIONS DATA

(In thousands except per share data)



|                                               |  | Year ended March 31, |        |   | Nine MonthsEndedMarch 31, |   |        | Year ended June 30, | 
|---------------------------------------------- |  | -------------------- | ------ | - | ------------------------- | - | ------ | ------------------- | 
|                                               |  | 2003                 |        |   | 2002                      |   |        | 2001                | 
|Net revenues                                   |  | $                    | 42,218 |   |                           | $ | 31,464 |                     | 
|Costs and expenses:                            |  |                      |        |   |                           |   |        |                     | 
|Cost of sales                                  |  |                      | 36,408 |   |                           |   | 22,945 |                     | 
|Sales and marketing                            |  |                      | 921    |   |                           |   | 4,551  |                     | 
|Product development                            |  |                      | 7,350  |   |                           |   | 641    |                     | 
|General and administrative                     |  |                      | 4,592  |   |                           |   | 2,546  |                     | 
|                                               |  |                      |        |   |                           |   |        |                     | 
|Total costs and expenses                       |  |                      | 49,271 |   |                           |   | 30,683 |                     | 
|                                               |  |                      |        |   |                           |   |        |                     | 
|Income (loss) from operations                  |  |                      | (7,053 | ) |                           |   | 781    |                     | 
|Interest income (expense)net                  |  |                      | (1,245 | ) |                           |   | (611   | )                   | 
|Other income (expense)                         |  |                      |       |   |                           |   |       |                     | 
|                                               |  |                      |        |   |                           |   |        |                     | 
|Income (loss) before taxes on income           |  |                      | (8,298 | ) |                           |   | 170    |                     | 
|Net income (loss)                              |  | $                    | (8,300 | ) |                           | $ | 168    |                     | 
|                                               |  |                      |        |   |                           |   |        |                     | 
|Basic net income (loss) per share              |  | $                    | (0.36  | ) |                           | $ | 0.01   |                     | 
|                                               |  |                      |        |   |                           |   |        |                     | 
|Diluted net income (loss) per share            |  | $                    | (0.36  | ) |                           | $ | 0.01   |                     | 
|                                               |  |                      |        |   |                           |   |        |                     | 
|Shares used in per share calculation  basic   |  |                      | 22,947 |   |                           |   | 22,877 |                     | 
|                                               |  |                      |        |   |                           |   |        |                     | 
|Shares used in per share calculation  diluted |  |                      | 22,947 |   |                           |   | 23,386 |                     | 
|                                               |  |                      |        |   |                           |   |        |                     | 



BALANCE SHEET DATA

(In Thousands)



|                               |  | March 31, |        |   | June 30, |  
|------------------------------ |  | --------- | ------ | - | -------- | -
|                               |  | 2003      |        |   | 2002     |  
|Working capital (deficiency)   |  | $         | (5,063 | ) |          | $
|Total assets                   |  |           | 30,214 |   |          |  
|Loan payable to related entity |  |           | 23,785 |   |          |  
|Shareholders deficit          |  |           | (9,031 | ) |          |  



Effective March 31, 2001, we changed
our fiscal year end from June 30thto March 31st.



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|Item 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------



Critical Accounting Policies and Estimates



Managements discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements and 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. The policies discussed below are considered by management to be critical because they are both important to the portrayal of our financial condition and results of operations
and their application places the most significant demands on managements judgment, with financial reporting results relying on estimates about the effect of matters that are inherently uncertain. Specific risks for these critical accounting
policies are described in the following paragraphs. For all of these policies, management cautions that actual results may differ materially from these estimates under different assumptions or conditions.



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 together 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. When, in managements estimate,
future revenues will not be sufficient to recover previously capitalized costs, we expense such costs to royalty expense that is included in cost of sales. If actual revenues or revised forecasted units fall below initial forecasted units, the
charge to royalty expense may be larger than anticipated in any given quarter. As of March 31, 2003, the net carrying value of our licenses was $ 9.5 million. If we were required to write off licenses, due to changes in market condition or product
quality, our results of operations could be materially adversely affected.



Software development costs Software development costs include payments made to independent software developers under agreements for the development of products for the company. We account for such software development
in accordance with Statement of Financial Accounting Standards (SFAS) 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. All other internal development costs are expensed as incurred.



Capitalized software development costs are expensed 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 additional software development amortization in the period the impairment is identified. Such losses
are solely attributable to changes in market conditions or product quality considerations. If actual or revised forecasted units fall below initial forecasted units, the charge to software development amortization may be larger than anticipated in
any given quarter. As of March 31, 2003, the net carrying value of our software development was $ 12.6 million. If we were required to write off software development costs, due to changes in market condition or product quality, our results of
operations could be materially adversely affected.



15



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Revenue recognition  Our revenue recognition policies are in compliance with American Institute of
Certified Public Accountants Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended. In December 1999, The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements (SAB 101) that outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to revenue recognition policies in
financial statements filed with the SEC.



Product Sales:
Direct-to-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 sell our products on a no-return basis, in certain
circumstances we may allow returns, price concessions, or allowances on a negotiated basis. While we have no obligation to perform future services subsequent to shipment, 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 our consolidated statements of operations.



Allowances for price protection, returns, and doubtful accounts.Product sales are recognized net of allowances for price protection and returns, and
various anticipated customer discounts. Although we sell our products on a no-return basis, in certain circumstances we may allow returns, price concessions or allowances on a negotiated basis. We may decide to provide price protection or allow
returns for our products after we analyze



| |  |  | Inventory remaining in the retail channel;
| | - |  | ------------------------------------------

| |  |  | The rate of inventory sell-through in the retail channel; and
| | - |  | -------------------------------------------------------------

| |  |  | Our remaining inventory on hand.
| | - |  | --------------------------------



We maintain a policy of giving credits for price protection and returns, but do not give cash refunds. We establish sales allowances based on estimates of future price
protection and returns with respect to current period product revenue. In addition, management monitors the volume of our sales to retailers and distributors and their inventories because substantial overstocking in the distribution channel can
result in the requirement for substantial price protection or high returns in subsequent periods. Price protection and returns in future periods are inherently uncertain as unsold products in the distribution channels are exposed to rapid changes in
consumer preferences, market conditions or technological obsolescence due to new platforms, product updates or competing products. While management believes it can make reliable estimates for these matters, if we changed our assumptions and
estimates, our price protection and returns reserves would change and impact the net revenue we report. In addition, if actual price protection and returns were significantly greater than the reserves we have established, the actual results would
decrease our reported revenue. Conversely, if actual price protection and returns were significantly less than our reserves, this would increase our reported revenue.



Similarly, management must use significant judgment and make estimates in connection with establishing allowances for doubtful accounts in
any accounting period. Management analyzes customer concentrations, customer credit-worthiness, and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. Material differences may result in the amount and timing
of our bad debt expense for any period if management made different judgments or utilized different estimates. If our customers experience financial difficulties and are not able to meet their ongoing financial obligations to us, our results of
operations could be adversely impacted.



Recently Issued Accounting
Pronouncements



In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be initially measured at fair value and recognized when the
liability is incurred. The provisions of SFAS No. 146 are required to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on our financial statements,
as we have not initiated any exit or disposal activities.



In November 2002,
FASB issued Interpretation (FIN) No. 45  Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 elaborates



16



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on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The provisions of FIN No. 45 did not have an impact on our financial statements.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure. This statement amends SFAS No. 123, to provide alternative methods of voluntary transition to change to the fair value based method of accounting for stock-based employee compensation.
Additionally, this statement amends disclosure requirements of accounting for stock-based employee compensation and the effect of the method used on reporting results. Currently, we do not expect to adopt SFAS No. 123 related to the expensing of the
fair value based method of accounting for stock-based employee compensation. The adoption of SFAS No. 148 did not a material effect on the Companys financial position or results of operations.



In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (FAS 150). This statement affects the classification, measurement and disclosure requirements of the following three types of freestanding
financial instruments: 1) manditorily redeemable shares, which the issuing company is obligated to buy back with cash or other assets; 2) instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other
assets, which includes put options and forward purchase contracts; and 3) obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with
the value of the issuers shares. In general, FAS 150 is effective for all 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 adoption of FAS 150 is not expected to have an impact on the Companys consolidated financial position or disclosures.



Results of Operations



Comparison of the Years Ended March 31, 2003 and 2002



Net Revenues. Net revenues increased 34% from $31.5 million for the year ended March 31, 2002 to $42.2 million for the year ended March 31, 2003. Product sales increased by 42% from $27.5 million in 2002 to
$39.0 million in 2003. The increase is entirely attributed to increased sales of interactive software for video game platforms as follows: PlayStation2 ($9.7 million), Xbox ($2.3 million), Game Boy Advance ($742,000); and Game Cube ($7.4 million),
partially offset by a decrease in PlayStation ($458,000); Game Boy Color ($7.4 million); and PC CD-ROM ($1.5 million). We have established reserves for price protection and returns and various anticipated customer discounts that we believe to be
adequate based upon historical return data and our analysis of current customer inventory levels and sell-through rates.



Republishing and distribution fees decreased from $4.0 million for the year ended March 31, 2002 to $3.2 million for the year ended March 31, 2003. This decrease is
mainly attributed a decline in revenue under our republishing and distribution agreement with TDK Europe, a related entity. We recognized $1.5 million of such revenue during the year ended March 31, 2003 as compared to $3.0 million during the year
ended March 31, 2002. At March 31, 2003 we have $931,000 in deferred revenue related to this agreement with TDK Europe that extends through July 31, 2004.



Cost of Sales. Cost of sales is composed of cost of purchased product, amortization of software development costs, royalty expense as well as freight and
fulfillment costs. Cost of sales increased from $22.9 million for the year ended March 31, 2002 to $36.4 million for the year ended March 31, 2003, and increased from 73% to 86% of net revenues. Cost of purchased product and platform royalties
decreased from 47% to 44% of net revenues as a result of certain console owners lowering their royalty rates. Amortization of software development cost increased from 13% to 29% of net revenues primarily due to the write-off of approximately $2.0
million in the current year of abandoned or cancelled titles.



17



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General and Administrative. General and administrative costs increased from $2.5 million during the year ended
March 31, 2002 to $4.6 million during the year ended March 31, 2003 and increased as a percentage of net revenues from 8% to 10%. The $1.9 million increase is primarily attributable to the following major components (i) increased payroll and related
costs ($830,000); (ii) increased bad debt expense ($500,000); (iii) higher depreciation ($178,000); (iv) higher professional fees ($210,000); (v) higher insurance costs ($80,000); and (vi) increased rent ($86,000).



Internal Product Development. Internal product development expenses increased from
$641,000 during the year ended March 31, 2002 to $921,000 during the year ended March 31, 2003. As a percentage of net revenues, product development expenses remained constant at 2% in the current period compared to the prior period.



Sales and Marketing. Sales and marketing expenses increased from $4.6 million during
the year ended March 31, 2002 to $7.4 million during the year ended March 31, 2003 and as a percentage of net revenues increased from 14% to 17%. The increase in expenses is primarily due to costs associated with higher volume and the expansion of
our business from CD-ROM for personal computers to video game platforms. We anticipate that for the foreseeable future, marketing and sales expenses will continue to increase in the aggregate as we continue to distribute products directly to
customers in North America. The $2.8 million increase is primarily attributable to the following major components: (i) increased advertising ($2.0 million); (ii) increased payroll and related costs ($733,000); and (iii) higher travel and
entertainment cost ($80,000).



Other Income/Expense. During the year
ended March 31, 2003 and 2002, other expense relates to interest expense. The interest was incurred in connection with borrowings under our loan agreement with TDK USA, a related entity. We expect that such borrowings and the associated interest
expense will continue to grow, within the limits of the borrowing agreement, as our business grows and we borrow additional funds to finance such growth. See Liquidity and Capital Resources below.



Comparison of the Years Ended March 31, 2002 and 2001



Net Revenues.Net revenues increased 372% from $6.7 million for the 12 months
March 31, 2001 to $31.5 million for the year ended March 31, 2002. Sales of our software products increased by 544% from $4.4 million in 2001 to $28.5 million in 2002. The increase is entirely attributed increased sales of interactive software for
video game platforms as follows: PlayStation ($39,000); PlayStation2 ($2.2 million); Xbox ($6.0 million), Game Boy Advance ($6.5 million); and Game Boy Color ($9.7 million); partially offset by a decrease in PC CD-ROM sales of approximately
$455,000. We have established reserves for product returns that we believe to be adequate based upon historical return data, analysis of current customer inventory levels, and sell-through rates.



We also recognized republishing fees in connection with a republishing and distribution
agreement with TDK Europe. Revenue is recognized when certain milestones and passage of time have occurred. We recognized $3.0 million of such revenue during the year ended March 31, 2002 as compared to $1.8 million during the 12 months ended March
31, 2001.



Cost of Sales. Cost of sales is composed of cost of purchased
product, amortization of development costs, royalty expense as well as freight and fulfillment costs. Cost of sales increased from $4.9 million during the 12 months ended March 31, 2001 to $22.9 million during the year ended March 31, 2002, but
remained constant at 73% of net revenues. Cost of sales associated with sales of video game software decreased as a percentage of video game software sales from 110% during the 12 months ended March 31, 2001 to 83% during the year ended March 31,
2002. The improvement results primarily from higher volume.



General and
Administrative. General and administrative costs increased from $2.1 million during the 12 months ended March 31, 2001 to $2.5 million during the year ended March 31, 2002 but decreased as a percentage of net revenues from 31% to 8%. The
reduction as a percentage of net revenues is due to the higher volume. The $467,000 increase is primarily attributable to the following major components (i) increased payroll and related costs ($190,000); (ii) higher depreciation ($68,000); (iii)
higher professional fees ($45,000); (iv) higher insurance costs ($40,000); and (v) increased travel costs ($36,000).



18



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Internal Product Development.Internal product development expenses increased from $498,000
during the 12 months ended March 31, 2001 to $641,000 during the year ended March 31, 2002. As a percentage of net revenues, product development expenses decreased from 7% in the prior period to 2% during the current period. The improvement resulted
from the significant increase in net revenues.



Sales and
Marketing. Sales and marketing expenses increased from $1.1 million during the 12 months ended March 31, 2001 to $4.6 million during the year ended March 31, 2002 and as a percentage of net revenues decreased from 17% to 14%. The
increase in expenses is primarily due to costs associated with higher volume and the expansion of our business from CD-ROM for personal computers to video game platforms.



Other Income/Expense. During the year ended March 31, 2002, other expense related to interest expense. The interest was incurred in
connection with our line of credit. Other income during the 12 months ended March 31, 2001 is primarily due to a settlement entered into during the prior period with a major distributor relating to outstanding claims for disputed sales returns.



Liquidity and Capital Resources



We have incurred net losses and historically generated insufficient cash flows to fund
operations and had to rely on debt and equity financings to fund operations. We have negative working capital of approximately $5.1 million at March 31, 2003 compared to negative working capital of approximately $1.5 million at March 31, 2002.



As of March 31, 2003, we had a loan and security agreement with TDK USA
(TDK USA), an affiliated entity, providing for a combination of cash advances and letters of credit relating to the purchase of product not to exceed an aggregate amount of $30.0 million. On April 30, 2003, we expanded and renewed our
loan and security agreement with TDK USA. The renewal provides for a combination of cash advances and letters of credit to fund inventories not to exceed $37 million, $12 million of which is at the discretion of TDK USA. Previously, the loan and
security agreement provided a total of $30 million in borrowings, $10 million of which was at the discretion of TDK USA. The loan will mature on March 31, 2004. As of June 1, 2003, the balance outstanding under this facility was $29.8 million, at a
floating rate of prime plus 1.5% on the first $25.0 million of borrowings and prime plus 1.75% on borrowings in excess of $25.0 million.



The loan agreement does not require TDK USA to advance more than $25 million to us in fiscal 2004 or to advance any amounts to us thereafter, and there can be no
assurance that TDK USA will do so. If TDK USA were to refuse to make such advances or to demand repayment of the loan upon its scheduled maturity date of March 31, 2004, we would need to obtain financing from other sources to satisfy our capital
requirements. There can be no assurance that such financing would be available on terms acceptable to the Company, if at all.



The loan agreement requires us to maintain: (i) a current ratio of 0.7 to 1.00 at June 30, 2003 and September 30, 2003, .6 to 1.00 at December 31, 2003 and .53 to 1.00 at
March 31, 2004,; (ii) maintain a net sales to net assets (as defined) ratio of not less than 1.40 to 1.00 at June 30, 2003, 1.20 to 1.00 at September 30, 2003, 2.10 to 1.00 at December 31, 2003, and 3.00 to 1.00 at March 31, 2004. At March 31, 2003,
we have an outstanding balance of approximately $23.8 million under the agreement at an interest rate of 5.87%



In addition to the credit available under the TDK USA agreement, our business plan indicates that we will need additional financing to fund any expansion of our business subsequent to March 31, 2004. 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 agreement
when it matures on March 31, 2004. 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, 2004. If we are unable to obtain additional financing or extend the agreement, we may have to curtail or revise our planned operations.



19



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We recently entered into a financial advisory services agreement with Europlay Capital Advisors, a Los Angeles,
California-based private advisory firm specializing in media and entertainment companies. Europlay, which specializes in the interactive entertainment industry and cross-border media transactions, will assist us in developing, structuring, and
securing alternative sources of capital and financing or other strategic alternatives. Such alternatives may include, but are not limited to the sale, merger, consolidation, recapitalization or spin-off of the business, securities or assets of TDK
Mediactive.



Guarantees and Commitments. We have entered into
contractual arrangements with third parties for the rights to intellectual property and for the development of products. Under these agreements, we commit to provide specified payments to an intellectual property holder or developer, based upon
contractual arrangements. Assuming all contractual provisions are met the total future minimum contract commitment for contracts in place as of March 31, 2003 is approximately $19.8 million. We also have various operating lease commitments of
$898,000 expiring at various times through 2006. We also have various employee agreements with four employees that expire on various dates through November 2004. An agreement with one corporate officer provides for, (i) annual adjustments based on
the Consumer Price Index; (ii) annual performance bonuses; (iii) options to purchase 500,000 shares of common stock that vest over a four year period and (iv) other normal employee benefits.



The following table summarizes our minimum contractual obligations and commercial commitments
as of March 31, 2003 (in thousands):



Contractual Obligations
and Commercial Commitments



|Years Ended March 31, |  | LicenseGuarantee |       | SoftwareDevelopment |   | EmployeeAgreements |  | Leases |       | Total
|--------------------- |  | ---------------- | ----- | ------------------- | - | ------------------ |  | ------ | ----- | -----
|2004                  |  | $                | 3,483 |                     | $ | 12,480             |  | $      | 796   |      
|2005                  |  |                  | 1,415 |                     |   | 2,170              |  |        | 342   |      
|2006                  |  |                  | 50    |                     |   | 0                  |  |        | 0     |      
|2007                  |  |                  | 200   |                     |   | 0                  |  |        | 0     |      
|                      |  |                  |       |                     |   |                    |  |        |       |      
|                      |  | $                | 5,148 |                     | $ | 14,650             |  | $      | 1,138 |      
|                      |  |                  |       |                     |   |                    |  |        |       |      



In addition we have advertising
commitments under some of our major license agreements. We currently have 27 active license agreements of which 9 require a minimum advertising commitment. Two agreements specify that we must spend an aggregate of $600,000 during the current year;
the other seven specify a minimum advertising commitment ranging from 8% to 10% of net sales with related to the respective license.



Factors That May Affect Future Performance



The statements that are not historical facts contained in this Annual Report on Form10-K are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements reflect the current belief, expectations or intent of our management and are subject to and involve certain risks and uncertainties. Many of these risks and uncertainties are outside of our control and
are difficult for us to forecast or mitigate. In addition to the risks described elsewhere in this Annual Report on Form 10-K and in certain of our other SEC fillings, the following important factors, among others, could cause our actual results to
differ materially from those expressed or implied by us in any forward-looking statements contained herein or made elsewhere by or on behalf of TDK Mediactive:



We have a limited operating history. We were initially incorporated in California in 1990 under the name Sound Source Interactive, Inc. On
May 16, 1994, Sound Source Interactive, Inc. merged with Basic Science Associates, Inc., a publicly held Delaware corporation. The merger was accounted for as a reverse acquisition because stockholders of Sound Source maintained control of the
surviving entity, Basic Science. Concurrent with the merger, Basic Science changed its name to Sound Source Interactive, Inc. (a Delaware corporation). During September and November 2000, we sold 16,667,000 shares of our common stock to TDK U.S.A.
Corporation,



20



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which thereby acquired an approximately 74% controlling interest in our Company. TDK USA is a wholly owned subsidiary of
TDK Corporation, a publicly traded Japanese corporation. We then changed our name to TDK Mediactive, Inc.



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 via a co-publishing
business model. It is difficult to evaluate our future prospects because we have a limited operating history and the market for our products is very competitive and rapidly evolving. Our prospects are uncertain and must be considered in light of the
risks, expenses, and difficulties frequently encountered by companies in the early stage of development.



Our future performance will depend upon a number of factors, including our ability to:



| |  |  | Expand our customer base;
| | - |  | -------------------------

| |  |  | Secure popular entertainment properties upon which to base future products;
| | - |  | ---------------------------------------------------------------------------

| |  |  | Develop and enhance products in response to new interactive entertainment hardware platform releases, customer demand and competitive market conditions;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Expand our interactive entertainment software development and sales and marketing capabilities;
| | - |  | -----------------------------------------------------------------------------------------------

| |  |  | Expand our international operations;
| | - |  | ------------------------------------

| |  |  | Attract, retain, and motivate qualified personnel; and
| | - |  | ------------------------------------------------------

| |  |  | Maintain adequate control of our expenses.
| | - |  | ------------------------------------------



We have a history of operating losses.During our recent year ended March 31, 2003 we realized a net loss of $8.3 million. Prior to fiscal 2003, we incurred
net losses and historically generated insufficient cash flows to fund operations and had to rely on debt and equity financings to fund operations. We have negative working capital of approximately $5.0 million at March 31, 2003 compared to negative
working capital of approximately $1.5 million at March 31, 2002. We have an accumulated deficit as of March 31, 2003 of $29 million. We will need to generate significant revenues to be profitable. There can be no assurance that our revenues will
grow in the future or that we will achieve sufficient revenues for profitability. If our revenues do not grow as quickly as we anticipate, or if our operating expenses exceed our expectations, our business would be severely harmed.



We must obtain additional capital to fund operations and finance growth.Our current loan and security agreement that matures in March 2004 limits the amounts that may be spent on new titles scheduled for launch during fiscal 2004 and 2005. In addition to the credit available under the TDK USA loan agreement; our
business plan indicates that we will need additional financing to fund additional expansion. 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 agreement when it matures on March 31, 2004. 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 loan agreement or to extend the loan agreement beyond its current maturity date of March 31, 2004. If we are unable to obtain additional financing or extend the TDK USA loan agreement, we
may have to curtail or revise our operations.



We are dependent on
key personnel. Our success depends to a significant extent on the performance and continued service of our senior management and certain key employees. In particular, the loss of the services of Vincent J. Bitetti, our Chief Executive
Officer, could have a material adverse effect on our operations. Mr. Bitetti has signed an employment agreement for the period ending November 27, 2004. Competition for highly skilled employees with technical, management, marketing, sales, creative
product development, and other specialized training is intense and there can be no assurance that we will be successful in attracting and retaining such personnel. In addition, there can be no assurance that employees will not leave TDK Mediactive
or compete against us. Our failure to attract additional qualified employees or to retain the services of key personnel could have a material adverse effect on our business, operating results and financial condition. We are the beneficiary of a $1.0
million life insurance policy on Mr. Bitetti, but do not currently maintain life insurance on any of our other key employees.



21



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Our revenues fluctuate due to seasonal demand.We have experienced and may continue to experience
significant quarterly fluctuations in net sales and operating results. The interactive entertainment industry is highly seasonal, with sales typically higher during the fourth and first calendar quarters, due primarily to the increased demand for
games during and immediately following the holiday buying season. Our failure or inability to introduce products on a timely basis to meet seasonal fluctuations in demand will harm our business and operating results. Although we attempt to reduce
the effect of seasonal patterns on our business by distributing our product release dates more evenly throughout the year, we cannot assure you that these efforts will be successful.



Other factors that cause fluctuations include the following items:



| |  |  | The timing of our release of new titles;
| | - |  | ----------------------------------------

| |  |  | The popularity of both new titles and titles released in prior periods;
| | - |  | -----------------------------------------------------------------------

| |  |  | Fluctuations in the size and rate of growth of consumer demand for titles for different hardware platforms;
| | - |  | -----------------------------------------------------------------------------------------------------------

| |  |  | The timing of the introduction of new hardware platforms and the accuracy of retailers forecasts of consumer demand;
| | - |  | ---------------------------------------------------------------------------------------------------------------------

| |  |  | The timing of shipments by hardware manufacturers or delays in those shipments;
| | - |  | -------------------------------------------------------------------------------

| |  |  | Changes in the mix of titles with varying profit margins;
| | - |  | ---------------------------------------------------------

| |  |  | The development and timing of releases of products by competitors;
| | - |  | ------------------------------------------------------------------

| |  |  | The timing of customer orders; and
| | - |  | ----------------------------------

| |  |  | Product returns.
| | - |  | ----------------



Our expense levels are based, in part, on our expectations regarding future sales and therefore, our operating results would be harmed by a decrease in sales or a failure to meet our sales expectations. The
uncertainties associated with interactive entertainment software development, lengthy manufacturing lead times, production delays and the approval process for products by hardware manufacturers and other licensors make it difficult to predict the
quarter in which our products will ship and therefore, may cause us to fail to meet financial expectations.



Our market is characterized by changing consumer preferences and short product life cycles.The interactive entertainment software market is characterized by short product life cycles, changing consumer
preferences, and frequent introduction of new products. We believe that our success will be dependent on the production of successful titles on a continuous basis. We cannot assure you that new products introduced by us will achieve significant
market acceptance or that such acceptance, if achieved, will be sufficient to permit us to recover development and other associated costs. Consumer preferences for interactive entertainment software products are continually changing and are
difficult to predict.



Historically, very few interactive entertainment
software products have achieved sustained market acceptance. Rather, a limited number of products have become popular and have accounted for a substantial portion of revenues in the industry. Even the most successful titles remain popular for only
limited periods of time, often less than six months. The life cycle of a game generally consists of a relatively high level of sales during the first few months after introduction, followed by a decline in sales. Accordingly, we expect that
substantially all of our net sales for a particular year will be generated by titles released in that year and in the latter part of the prior year.



In the past, we have experienced delays in the introduction of new titles and we anticipate that we will experience similar delays in the future in connection with the
introduction of additional new titles, including products currently under development. Because net revenues associated with the initial shipments of a new product generally constitute a high percentage of the total net revenues associated with the
life of a product, any delay in the introduction of, or the presence of a defect in, one or more new products could harm the ultimate success of the products or our business and operating results.



In addition, the development cycle for new titles is long, typically ranging from 12 to 24
months. After development of the product, it may take between six to nine additional months to develop the product for additional hardware platforms. In order to distribute a product, we must develop and test the necessary game



22



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software, obtain approval from the manufacturer and licensor if required, and have the initial order of cartridges or
disks manufactured. During the development cycle, the market appeal of a title may decline. If market acceptance is not achieved, we may grant markdown allowances to maintain our relationship with retailers and our access to distribution channels.
Because we introduce a relatively limited number of new products in a given period, the failure of one or more of our products to achieve market acceptance could harm our business.



The introduction of new hardware platforms creates risks relating to the development of new titles for these platforms.The
interactive entertainment industry is also characterized by rapid technological change. For example, the 128-bit hardware platform was released within five years of the release of the 64-bit hardware platform. As a result, we must continually
anticipate these changes and adapt our offerings to emerging hardware platforms and evolving consumer preferences. Generally, because of the length of the development cycle, our development efforts must begin well in advance of the release of new
hardware platforms in order to introduce titles on a timely basis with the release of such hardware platforms. Further, we have no control over the release dates of new hardware platforms or the number of units that will be shipped upon such
release. It is difficult to ensure that our schedule for releasing new titles will coincide with the release of the corresponding hardware platforms. Additionally, if fewer than expected units of a new hardware platform are produced or shipped,
developers of titles for those hardware platforms may experience lower than expected sales.



Our development efforts with respect to new hardware platforms may not lead to marketable titles or titles that generate sufficient revenues to recover their development and marketing costs, especially if a new
hardware platform does not reach an expected level of acceptance. This risk may increase in the future, as continuing increases in development costs require corresponding increases in net sales in order for us to maintain profitability.



The technological advancements of the new hardware platforms also allow more complex
software products. As software products become more complex, the risk of undetected errors in products when first introduced increases. We cannot assure you that, despite testing, errors will not be found in new products or releases after shipments
have been made, resulting in loss of or delay in timely market acceptance, product returns, loss of revenues, and damage to our reputation.



The introduction of new hardware platforms and technologies can also render existing titles obsolete and unmarketable. Generally, as more advanced hardware platforms are
introduced, consumer demand for titles for older hardware platforms diminishes. In addition, a broad range of competing and incompatible emerging technologies may lead consumers to postpone buying decisions until a particular hardware platform gains
widespread acceptance. As a result of such reduced consumer demand for titles on older hardware platforms, our titles for older hardware platforms may not generate sufficient sales to make our titles profitable.



The costs associated with the introduction of products for new hardware platforms, such as
Nintendo GameCube, Sonys PlayStation2, and Microsofts Xbox, could harm our business. We anticipate that it will be more costly to develop titles for new hardware platforms and believe the costs of developing and publishing titles for
these hardware platforms may require greater financial and technical resources than prior development and publishing efforts. Additionally, during periods of new technology introductions, forecasting our revenues and earnings is more difficult than
in more stable or rising product markets.



Lack of market acceptance of
new hardware platforms may harm our business.Our sales are dependent on, among other factors, the popularity and unit sales of the interactive entertainment hardware platforms of the various manufacturers. The interactive entertainment
industry has experienced periods of significant growth in consumer interest and popularity, followed by periods in which consumer demand for interactive entertainment products has slowed. Unexpected shortfalls in the market acceptance of a
particular hardware platform can significantly harm consumer demand for titles released or scheduled for release for that hardware platform. Therefore, we are dependent upon the successful marketing efforts of the manufacturers of the various
hardware platforms to meet financial expectations.



If product
returns and price concessions exceed allowances, we may incur losses.We are exposed to the risk of product returns and price concessions with respect to our customers. The decrease in demand for products based upon older hardware platforms
may lead to a high level of product returns and price allowances. If the consumers



23



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demand for a specific titles falls below expectations or significantly declines below previous rates of sale then, a
price concession or credit may be negotiated to spur further sales. Product returns and price concessions that exceed our expectations could harm our business. We believe that as of March 31, 2003 our allowances for future returns and price
concessions are adequate but we cannot guarantee the adequacy of current or future allowances.



A substantial portion of our revenues has been derived from a limited number of products. To date, a substantial portion of our revenues have been derived from a limited number of products. Sales of
Robotech: Battlecry for Playstation 2 and Xbox and Shrek: Hassle in the Castle for Game Boy Advance accounted for 39% of our net revenue for the year ended March 31, 2003. Sales of Shrek Fairy Tale FreakDown, Shrek for Xbox and
Shrek Kart accounted for 60% of our net revenues for the year ended March 31, 2002. If we fail to replace these titles with additional products generating significant revenues, our business will be harmed.



Over 41% of our net revenues are derived from sales to our four largest customers. We
could be adversely affected if any of them reduced or terminated their purchases from us or did not pay their obligations to us. Revenues from our four largest customers collectively accounted for 41% of our net revenues for the year ended
March 31, 2003 as compared to 46% from our four largest customers for the year ended March 31, 2002. Our largest customers for the year ended March 31, 2003 were Toys R Us and Wal-Mart, each of which accounted for over 10% of our net
revenues. We have no written agreements or other understandings with any of our customers that relate to future purchases, so purchases by these customers or any others could be reduced or terminated at any time. A substantial reduction or a
termination of purchases by any of our largest customers would harm us.



Our
sales are typically made on credit, with terms that vary depending upon the customer and other factors. While we attempt to carefully monitor the creditworthiness of our customers and distributors, we bear the risk of their inability to pay our
receivables and of any delay in payment. A business failure by any of our largest customers would harm us, as could a business failure by any of our distributors or other retailers.



We cannot publish our interactive entertainment software titles without the approval of hardware manufacturers. Our ability to
continue to develop and market our titles is dependent on the hardware manufacturers continuing to do business with us. We are wholly dependent on the manufacturers of interactive entertainment hardware platforms and our ability to obtain or
maintain nonexclusive licenses with them, both for the right to publish and manufacture titles for their hardware platforms. We are required to obtain a license to develop and publish titles for each hardware platform for which we develop and
publish titles. Each license specifies the territory to which it applies, and such licenses range from as broad as worldwide distribution to as narrow as approval on a title-by-title and country by country basis. As a result, the number of titles we
are able to publish for these hardware platforms, along with our ability to time the release of these titles and, accordingly, our revenues from titles for these hardware platforms, may be limited. Should any manufacturer choose not to renew or
extend our license agreement at the end of its current term, or if the manufacturer were to terminate our license for any reason, we would be unable to publish additional titles for that manufacturers hardware platform. License agreements
relating to these rights generally extend for a term of three to five years. The agreements are terminable upon the occurrence of a number of factors, including: (i) breach of the agreement by us; (ii) our bankruptcy or insolvency; or (iii) our
entry into a relationship with, or acquisition by, a competitor of the manufacturer. We cannot assure you that we will be able to obtain new or maintain existing licenses on acceptable terms, or at all.



Generally, when we develop interactive entertainment software titles for a hardware platform
offered by Sony or Nintendo, exclusively that hardware manufacturer manufactures the products. Our hardware platform licenses with Sony and Nintendo provide that the manufacturer may change prices for the manufacturing of products at any time and
includes other provisions that give the manufacturer substantial control over our costs and the release of new titles. Because each of the manufacturers is also a publisher of games for its own hardware platforms and manufactures products for all of
its other licensees, a manufacturer may give priority to its own products or those of our competitors in the event of insufficient manufacturing capacity. We would be materially harmed by unanticipated delays in the manufacturing and delivery of
products.



24



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We are dependent on third party interactive entertainment software developers for developing and completing many of
our titles. We rely on third party interactive entertainment software developers for the development of our interactive entertainment software titles. Quality third party developers are continually in high demand. For this reason, we cannot
assure you that the third party software developers who have developed titles for us in the past will continue to be available to develop software for us in the future. Due to the limited number of quality third party software developers and the
lack of control that we exercise over them, we cannot assure you that these developers will complete titles for us on a timely basis or within acceptable quality standards, if at all.



If we are required to write down prepaid royalties or capitalized software development costs below their current recorded value, our
results or operations could be adversely affected. The agreements we enter into with licensors of popular entertainment properties and third party developers of interactive entertainment software titles typically require advance payments of
royalties and/or guaranteed minimum royalty payments. We cannot assure you that the sales of products for which these royalties are paid or guaranteed payments are made will be sufficient to cover the amount of these required payments. We capitalize
our advances to developers on our balance sheet once technological feasibility is achieved. We analyze our capitalized costs quarterly and we reduce capitalized costs to their net realizable value when, based on our estimates, future individual
product contributions will not be sufficient to recover our investment.



Our success depends on our ability to effectively manage our growth. Our operations have rapidly expanded during the past 12 months and we plan to continue to expand our operations. Our rapid growth has placed, and will
continue to place, significant strain on our management and operational systems and resources. We anticipate that as our business grows, we will have to improve and enhance our financial and managerial controls, reporting systems and procedures, and
we will need to continue to expand, train and manage our workforce. We will also have to increase the capacity of our current systems to meet additional demands. An inability to manage our growth and meet these additional demands will impair the
success of our business.



Competition for limited shelf space and
promotional resources among interactive entertainment software publishers is intense and poses an ongoing threat to the success of our business. There is intense competition among developers and publishers of interactive entertainment
software products for high quality retail shelf space and promotional support from retailers. As the number of titles and hardware platforms increases, competition for shelf space will intensify and may require us to increase our marketing
expenditures. Due to increased competition for shelf space, retailers and distributors are in an increasingly better position to negotiate favorable terms of sale, including price discounts, price protection, marketing and display fees and product
return policies. Our products constitute a relatively small percentage of any retailers sales volume, and we cannot assure you that retailers will continue to purchase our products or to provide our products with adequate levels of shelf space
and promotional support.



Obtaining additional capital to fund our
operations and finance our growth could impair the value of your investment.If we expand more rapidly than currently anticipated or if our working capital needs exceed our current expectations, we may need to raise additional capital
through public or private equity offerings or debt financings. Our future capital requirements depend on many factors including our product development and sales and marketing activities. We do not know whether additional financing will be available
when and if needed, or whether it will be available on terms favorable to us. If we cannot raise needed funds on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution and the new equity securities may have greater rights, preferences or
privileges than our existing common stock. Manufacturers of interactive entertainment hardware platforms generally have better bargaining positions with respect to retail pricing, shelf space and retailer accommodations than do any of their
licensees, including us.



One stockholder owns a substantial
portion of our common stock and therefore has substantial influence over our operations and can significantly influence matters requiring stockholder approval. TDK USA, a wholly-owned subsidiary of TDK Corporation, a Japanese corporation,
beneficially currently owns approximately 72% of our common stock as of the date of this Annual Report on Form 10-K. As a result, they have the ability to control all matters requiring approval by our stockholders, including the election and removal
of directors, approval of



25



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significant corporate transactions and the decision of whether a change in control will occur.



Our stock price is volatile and stockholders may not be able to recoup their
investment.There is a history of significant volatility in the market prices of companies engaged in the video game software industry, including TDK Mediactive. Movements in the market price of our common stock from time to time have
negatively affected stockholders ability to recoup their investment in the stock. The price of our common stock is likely to be highly volatile, and stockholders may not be able to recoup their investment. If our revenues, profitability or
product releases do not meet expectations, the price of our common stock may be negatively affected. Our stock is currently listed on the OTC Bulletin Board that may inhibit stockholders ability to trade their shares at a reasonable price or on a
timely basis.



Other parties may assert claims against us that we
are infringing upon their intellectual property rights and we are required to indemnify hardware manufacturers from certain claims in exchange for the right to purchase titles and manufacture our software for their hardware platforms. We
cannot be certain that our products do not infringe upon the intellectual property rights of others. Authorship of intellectual property rights can be difficult to verify. We may be subject to legal proceedings and claims from time to time in the
ordinary course of our business, including claims of alleged infringement of the intellectual property rights of third parties. If our products violate third-party proprietary rights, we cannot assure you that we would be able to obtain licenses to
continue offering such products on commercially reasonable terms, or at all. In addition, we must indemnify the hardware manufacturers with respect to all loss, liability and expense resulting from any claim against them involving the development,
marketing, sale or use of our products, including any claims for copyright or trademark infringement brought against them. As a result, we bear the risk that the properties upon which our software titles are based, or that the information and
technology licensed from the hardware manufacturer and incorporated in our software, may infringe the rights of third parties. Any claims against us or the parties we indemnify relating to the infringement of third-party proprietary rights, even if
not meritorious, could result in the expenditure of significant financial and managerial resources and also result in injunctions preventing us from offering these products. Such claims could severely harm our financial condition and ability to
compete.



We may also be subject to legal proceedings and claims from time to
time in the ordinary course of business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties.



Our agreements with third party software developers and property licensors typically provide for us to be indemnified with respect to certain matters. However, if a claim
is brought against us by a hardware manufacturer for indemnification, software developers or property licensors may not have sufficient resources to, in turn, indemnify us and as a result our business could be harmed.



|Item 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- |  | ----------------------------------------------------------



We are exposed to certain market risks arising from transactions in the normal course of business, principally risk associated with interest rate fluctuations relating to
our credit line. The interest rate is tied to the LIBOR and Prime rates and as such interest rates increase, we may incur higher interest expense. We have no foreign currency or commodity risk.



|Item 8. |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- |  | -------------------------------------------



The Financial Statements together with the report of BDO Seidman, LLP, required by this Item are included in Item 14 of this Annual Report on Form 10-K and are
incorporated herein by reference.



|Item 9. |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- |  | ------------------------------------------------------------------------------------



None.



26



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PART III



|Item 10. |  | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
|-------- |  | ------------------------------------------------------------



Directors



Information with respect to directors required by this Item will be included under the heading Information Regarding Nominees in the definitive Proxy Statement relating to our 2003 Annual Meeting of
Stockholders, to be filed within 120 days after the close of our fiscal year that was March 31, 2003 and is incorporated herein by reference.



Executive Officers



Information with respect to executive officers required by this Item may be found in Item 1, Business, of this Annual Report on Form 10-K.



|Item 11. |  | EXECUTIVE COMPENSATION
|-------- |  | ----------------------



Information required by this Item will be included under the heading Compensation in the definitive Proxy Statement relating to our 2003 Annual Meeting of
Stockholders, to be filed within 120 days after the close of our fiscal year that was March 31, 2003 and is incorporated herein by reference.



|Item 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|-------- |  | --------------------------------------------------------------



Information required by this Item will be included under the heading Beneficial Ownership of Common Stock in the definitive Proxy Statement relating to our
2003 Annual Meeting of Stockholders, to be filed within 120 days after the close of our fiscal year that was March 31, 2003 and is incorporated herein by reference.



|Item 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- |  | ----------------------------------------------



Information required by this Item will be included under the heading Certain Transactions in the definitive Proxy Statement relating to our 2002 Annual
Meeting of Stockholders, to be filed within 120 days after the close of our fiscal year that was March 31, 2003 and is incorporated herein by reference.



|Item 14. |  | DISCLOSURE CONTROLS AND PROCEDURES
|-------- |  | ----------------------------------



Our Chief Executive Officer and Chief Financial Officer, as of a date within 90 days before the filing of this Form 10-K, have evaluated our disclosure controls and
procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) and have concluded that such controls and procedures are effective. There have been no significant changes in internal controls or in other factors that
could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



27



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PART IV



|Item 15. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
|-------- |  | ---------------------------------------------------------------



| | (a) |  | Financial Statements and Financial Statement Schedules
| | --- |  | ------------------------------------------------------



See Index to Financial Statements



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



None



| | (c) |  | Exhibits
| | --- |  | --------



|Exhibit Number |  | Title                                                                                                                                                                                                                  
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               | 
|3.1            |  | Second Restated Certificate of Incorporation. [Filed as Exhibit 3.1 to the Registrants Registration Statement on Form SB-2 No. 33-80827 (Registration Statement No.
33-80827) and incorporated herein by reference.]
|               | 
|3.2            |  | Certificate of Amendment of Certificate of Incorporation. [Filed as Exhibit 3.1 to the Registrants Quarterly Report on Form 10-Q for the quarter ended December 31, 2000 and
incorporated herein by reference.]       
|               | 
|3.3            |  | Second Amended and Restated Bylaws. [Filed as Exhibit 3.2 to the Registrants Quarterly Report on Form 10-Q for the quarter ended December 31, 2000 and incorporated herein by
reference.]                             
|               | 
|4.1            |  | Specimen Common Stock Certificate. [Filed as Exhibit 4.1 to Registration Statement No. 33-80827 and incorporated herein by reference.]                                                                                 
|               | 
|10.1           |  | TDK Mediactive, Inc. 1992 Stock Option Plan. Filed as Exhibit 10.4 to Registration Statement No. 33-80827 and incorporated herein by reference.]                                                                       
|               | 
|10.2           |  | TDK Mediactive, Inc. 1995 Stock Option Plan, as amended. [Filed as Exhibit A to the Registrants Proxy Statement on Schedule 14A dated June 8, 1998 and incorporated herein by
reference.]                             
|               | 
|10.3           |  | TDK Mediactive, Inc. 1999 Director Stock Plan, as amended. . [Filed as Exhibit 10.3 to the Registrants Annual Report on Form 10-K for the years ended March 31, 2002 and
incorporated herein by reference.]           
|               | 
|10.4           |  | TDK Mediactive, Inc. 1995 Stock Option Plan, as amended and restated as of April 1, 2003. [Filed herewith]                                                                                                             
|               | 
|10.5           |  | Indemnification Agreement, dated as of February 18, 2003, between the Registrant and Vincent J. Bitetti. [Filed herewith.]                                                                                             
|               | 
|10.6           |  | Indemnification Agreement, dated as of February 18, 2003, between the Registrant and John Wholihan. [Filed herewith.]                                                                                                  
|               | 
|10.7           |  | Indemnification Agreement, dated as of February 18, 2003, between the Registrant and Francis J. Sweeney. [Filed herewith.]                                                                                             
|               | 
|10.8           |  | Indemnification Agreement, dated as of February 18, 2003, between the Registrant and Martin G. Paravato. [Filed herewith.]                                                                                             
|               | 
|10.9           |  | Indemnification Agreement, dated as of February 18, 2003, between the Registrant and Kenichi Aoshima. [Filed herewith.]                                                                                                
|               | 
|10.10          |  | Indemnification Agreement, dated as of February 18, 2003, between the Registrant and Masatoshi Shikanai. [Filed herewith.]                                                                                             
|               | 
|10.11          |  | Indemnification Agreement, dated as of February 18, 2003, between the Registrant and Shin Tanabe. [Filed herewith.]                                                                                                    
|               | 
|10.12          |  | Indemnification Agreement, dated as of February 18, 2003, between the Registrant and Dennis J. Kenny. [Filed herewith.]                                                                                                



28



---

|Exhibit Number |  | Title                                                                                                                                                                                                                                                            
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               | 
|10.13          |  | Non-Exclusive Distribution Agreement, dated November 1, 2002, between TDK Recording Media Europe S.A. and the Registrant. [Filed herewith]                                                                                                                       
|               | 
|10.14          |  | Purchase Agreement, dated September 8, 2000, between TDK USA Corporation and the Registrant. [Filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K dated
September 8, 2000 (the September 2000 Form 8-K) and incorporated herein by reference.]
|               | 
|10.15          |  | Registration Rights Agreement, dated as of September 8, 2000, between TDK USA Corporation and the Registrant. [Filed as Exhibit 10.3 to the September 2000 Form 8-K dated September
8, 2000 and incorporated herein by reference.]                               
|               | 
|10.16          |  | Amended and Restated Employment Agreement of Vincent J. Bitetti dated as of November 27, 2000. [Filed herewith]                                                                                                                                                  
|               | 
|10.17          |  | Lock-Up Agreement, dated September 8, 2000, between Vincent J. Bitetti and the Registrant. [Filed as Exhibit 10.2 to the Registrants September 2000 Form 8-K and incorporated
herein by reference.]                                                             
|               | 
|10.18          |  | Amended and Restated Loan and Security Agreement, dated as of April 30, 2003, by and between the Registrant and TDK USA Corporation. [Filed herewith]                                                                                                            
|               | 
|10.19          |  | Employment Agreement of Martin G. Paravato dated as of December 1, 2001. [Filed as Exhibit 10.23 to the Registrants Annual Report on Form 10-K for the years ended March 31,
2002 and incorporated herein by reference.]                                        
|               | 
|10.20          |  | Sublease dated April 19, 2002 between the Registrant and Lucent Technologies, Inc. [Filed as Exhibit 10.24 to the Registrants Annual Report on Form 10-K for the years ended
March 31, 2002 and incorporated herein by reference.]                              
|               | 
|10.21          |  | Employment Agreement of Shin Tanabe dated as of October 1, 2002. [Filed herewith]                                                                                                                                                                                
|               | 
|21.1           |  | Subsidiaries of the Registrant. [Filed herewith]                                                                                                                                                                                                                 
|               | 
|23.1           |  | Consent of BDO Seidman, LLP. [Filed herewith]                                                                                                                                                                                                                    
|               | 
|99.1           |  | Certification of Vincent J. Bitetti, Chief Executive Officer, Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. [Filed herewith]                                                                                                     
|               | 
|99.2           |  | Certification of Martin G. Paravato, Chief Financial Officer, Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. [Filed herewith]                                                                                                     



29



---

SIGNATURES



In accordance with Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended (the Exchange Act), the issuer has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|Date: June 26, 2003 |  |  |  | TDK MEDIACTIVE, INC.
|------------------- |  |  |  | --------------------
|                    |  |  |  |                     
|                    |  |  |  |                     
|                    |  |  |  |                     



In accordance with the Exchange Act,
this report has been signed below by the following persons on behalf of the issuer in the capacities and on the dates indicated.



|Signature                                   |  | Title                                                                                                |  | Date          
|------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | --------------
|                                            |  |                                                                                                     
|/s/    SHIN TANABEShin Tanabe               |  | President and Director                                                                               |  | June 26, 2003 
|                                            |  |                                                                                                     
|/s/    VINCENT J. BITETTIVincent J. Bitetti |  | Chief Executive Officer and Director                                                                 |  | June 26 , 2003
|                                            |  |                                                                                                     
|/s/    MARTIN G. PARAVATOMartin G. Paravato |  | Chief Financial Officer and Secretary (Principal Financial Officer and Principal Accounting Officer) |  | June 26, 2003 
|                                            |  |                                                                                                     
|/s/    KENICHI AOSHIMAKenichi Aoshima       |  | Director                                                                                             |  | June 26, 2003 
|                                            |  |                                                                                                     
|/s/    FRANCIS J. SWEENEYFrancis J. Sweeney |  | Director                                                                                             |  | June 26, 2003 
|                                            |  |                                                                                                     
|/s/    DENNIS J. KENNYDennis J. Kenny       |  | Director                                                                                             |  | June 26, 2003 
|                                            |  |                                                                                                     
|/s/    MASATOSHI SHIKANAIMasatoshi Shikanai |  | Director                                                                                             |  | June 26, 2003 
|                                            |  |                                                                                                     
|/s/    JOHN T. WHOLIHANJohn T. Wholihan     |  | Director                                                                                             |  | June 26, 2003 



30



---

CERTIFICATION



I, Vincent J. Bitetti, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of TDK Mediactive, Inc., the registrant;
| | -- |  | ----------------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this annual 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 annual report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant, and have:
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant and its consolidated subsidiaries is made known to them by others
within those entities, particularly during the period in which this annual report is being prepared,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the
Evaluation Date),
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of the Evaluation
Date;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of the
registrants board of directors (or persons performing the equivalent functions):
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report
financial data and have identified for the registrant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 Registrants internal controls; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officers and I have indicated in this annual 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    June 26, 2003

| |  |  |  | /s/    VINCENT J. BITETTI              
| |  |  |  | ---------------------------------------
| |  |  | 
| |  |  |  | Vincent Bitetti Chief Executive Officer



31



---

CERTIFICATION



I, Martin G. Paravato, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of TDK Mediactive, Inc., the registrant;
| | -- |  | ----------------------------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this annual 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 annual report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant, and have:
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant and its consolidated subsidiaries is made known to them by others
within those entities, particularly during the period in which this annual report is being prepared,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the
Evaluation Date),
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on the required evaluation as of the Evaluation
Date;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of the
registrants board of directors (or persons performing the equivalent functions):
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report
financial data and have identified for the registrant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 Registrants internal controls; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officers and I have indicated in this annual 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    June 26, 2003



| |  |  |  | /s/    MARTIN G. PARAVATO              
| |  |  |  | ---------------------------------------
| |  |  | 
| |  |  |  | Martin Paravato Chief Financial Officer



32



---

INDEX TO FINANCIAL STATEMENTS



|Report of Independent Certified Public Accountants                                                                                                         |  | F-2
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|                                                                                                                                                           | 
|Consolidated Balance Sheets as of March 31, 2003 and 2002                                                                                                  |  | F-3
|                                                                                                                                                           | 
|Consolidated Statements of Operations for the year ended March 31, 2003, the year ended March 31, 2002 and the nine months ended March 31, 2001            |  | F-4
|                                                                                                                                                           | 
|Consolidated Statements of Stockholders Deficit for the year ended March 31, 2003, the year ended March 31, 2002 and the nine months ended March 31, 2001 |  | F-5
|                                                                                                                                                           | 
|Consolidated Statements of Cash Flows for the year ended March 31, 2003, the Year ended March 31, 2002 and the nine months ended March 31, 2001            |  | F-6
|                                                                                                                                                           | 
|Notes to Consolidated Financial Statements                                                                                                                 |  | F-7



F-1



---

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors and Stockholders of

TDK Mediactive, Inc.

Los Angeles, California



We have audited the accompanying consolidated balance sheets of TDK Mediactive, Inc. (a 72%
owned subsidiary of TDK USA Corporation) and Subsidiary as of March 31, 2003 and March 31, 2002, and the related consolidated statements of operations, stockholders deficit and cash flows for the years ended March 31, 2003 and March 31, 2002
and the nine months ended March 31, 2001. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.



In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of TDK Mediactive, Inc. and Subsidiary at March 31, 2003 and March 31, 2002, and the results of their operations and their cash flows for
the years ended March 31, 2003 and March 31, 2002 and the nine months ended March 31, 2001, in conformity with accounting principles generally accepted in the United States of America.



/s/    BDO SEIDMAN, LLP



Los Angeles, California

April 10, 2003



F-2



---

TDK MEDIACTIVE, INC. AND SUBSIDIARY



CONSOLIDATED BALANCE SHEETS

(In thousands)



---

|                                                                                                                     |  | March 31, 2003 |         |   | March 31, 2002 |  
|-------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | -------------- | -
|ASSETS                                                                                                               |  |                |         |   |                |  
|CURRENT ASSETS:                                                                                                      |  |                |         |   |                |  
|Cash and cash equivalents                                                                                            |  | $              | 421     |   |                | $
|Accounts receivable, less allowances for possible losses, returns and allowances of $3,687 and $926                  |  |                | 3,075   |   |                |  
|Inventories                                                                                                          |  |                | 2,548   |   |                |  
|Prepaid royalties                                                                                                    |  |                | 9,475   |   |                |  
|Prepaid expenses and other                                                                                           |  |                | 905     |   |                |  
|Software development costs                                                                                           |  |                | 12,592  |   |                |  
|                                                                                                                     |  |                |         |   |                |  
|Total current assets                                                                                                 |  |                | 29,016  |   |                |  
|PROPERTY AND EQUIPMENT                                                                                               |  |                | 954     |   |                |  
|SOFTWARE DEVELOPMENT COSTS, net of current portion                                                                   |  |                | 175     |   |                |  
|OTHER ASSETS                                                                                                         |  |                | 69      |   |                |  
|                                                                                                                     |  |                |         |   |                |  
|TOTAL                                                                                                                |  | $              | 30,214  |   |                | $
|                                                                                                                     |  |                |         |   |                |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                |  |                |         |   |                |  
|CURRENT LIABILITIES:                                                                                                 |  |                |         |   |                |  
|Accounts payable and accrued expenses                                                                                |  | $              | 3,042   |   |                | $
|Accrued royalties                                                                                                    |  |                | 6,465   |   |                |  
|Loan payable to related entity                                                                                       |  |                | 23,785  |   |                |  
|Capital lease obligation                                                                                             |  |                | 7       |   |                |  
|Deferred revenue from related entity                                                                                 |  |                | 781     |   |                |  
|                                                                                                                     |  |                |         |   |                |  
|Total current liabilities                                                                                            |  |                | 34,080  |   |                |  
|DEFERRED REVENUE from related entity, net of current portion                                                         |  |                | 150     |   |                |  
|DEFERRED REVENUE                                                                                                     |  |                | 5,000   |   |                |  
|CAPITAL LEASE OBLIGATIONS, net of current portion                                                                    |  |                | 15      |   |                |  
|                                                                                                                     |  |                |         |   |                |  
|Total liabilities                                                                                                    |  |                | 39,245  |   |                |  
|                                                                                                                     |  |                |         |   |                |  
|COMMITMENTS AND CONTINGENCIES (Note 9)                                                                               |  |                |         |   |                |  
|STOCKHOLDERS DEFICIT:                                                                                               |  |                |         |   |                |  
|Common stock, $.001 par value; 50,000,000 shares authorized; 23,005,885 and 22,884,582 shares issued and
outstanding |  |                | 23      |   |                |  
|Additional paid-in capital                                                                                           |  |                | 19,954  |   |                |  
|Accumulated deficit                                                                                                  |  |                | (29,008 | ) |                |  
|                                                                                                                     |  |                |         |   |                |  
|Total stockholders deficit                                                                                          |  |                | (9,031  | ) |                |  
|                                                                                                                     |  |                |         |   |                |  
|TOTAL                                                                                                                |  | $              | 30,214  |   |                | $
|                                                                                                                     |  |                |         |   |                |  



See accompanying notes
to consolidated financial statements.



F-3



---

TDK MEDIACTIVE, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)



---

|                                                |  | Year endedMarch 31,2003 |        |   | Year endedMarch 31, 2002 |   |        | Nine monthsended March 31,2001 | 
|----------------------------------------------- |  | ----------------------- | ------ | - | ------------------------ | - | ------ | ------------------------------ | 
|Revenues:                                       |  |                         |        |   |                          |   |        |                                | 
|Net sales                                       |  | $                       | 40,752 |   |                          | $ | 28,477 |                                | 
|Revenues from related entity                    |  |                         | 1,466  |   |                          |   | 2,987  |                                | 
|                                                |  |                         |        |   |                          |   |        |                                | 
|Total revenues                                  |  |                         | 42,218 |   |                          |   | 31,464 |                                | 
|                                                |  |                         |        |   |                          |   |        |                                | 
|Costs and expenses:                             |  |                         |        |   |                          |   |        |                                | 
|Cost of sales                                   |  |                         | 36,408 |   |                          |   | 22,945 |                                | 
|Product development                             |  |                         | 921    |   |                          |   | 641    |                                | 
|Sales and marketing                             |  |                         | 7,350  |   |                          |   | 4,551  |                                | 
|General and administrative                      |  |                         | 4,592  |   |                          |   | 2,546  |                                | 
|                                                |  |                         |        |   |                          |   |        |                                | 
|Total costs and expenses                        |  |                         | 49,271 |   |                          |   | 30,683 |                                | 
|                                                |  |                         |        |   |                          |   |        |                                | 
|Operating income (loss)                         |  |                         | (7,053 | ) |                          |   | 781    |                                | 
|                                                |  |                         |        |   |                          |   |        |                                | 
|Other income (expense):                         |  |                         |        |   |                          |   |        |                                | 
|Interest income                                 |  |                         | 6      |   |                          |   | 7      |                                | 
|Interest expense                                |  |                         | (1,251 | ) |                          |   | (618   | )                              | 
|Other income, net                               |  |                         |       |   |                          |   |       |                                | 
|                                                |  |                         |        |   |                          |   |        |                                | 
|Total other income (expense)                    |  |                         | (1,245 | ) |                          |   | (611   | )                              | 
|                                                |  |                         |        |   |                          |   |        |                                | 
|Income (loss) before provision for income taxes |  |                         | (8,298 | ) |                          |   | 170    |                                | 
|Provision for income taxes                      |  |                         | 2      |   |                          |   | 2      |                                | 
|                                                |  |                         |        |   |                          |   |        |                                | 
|Net income (loss)                               |  | $                       | (8,300 | ) |                          | $ | 168    |                                | 
|                                                |  |                         |        |   |                          |   |        |                                | 
|Basic and diluted net income (loss) per share   |  | $                       | (0.36  | ) |                          | $ | 0.01   |                                | 
|                                                |  |                         |        |   |                          |   |        |                                | 



See accompanying notes
to consolidated financial statements.



F-4



---

TDK MEDIACTIVE, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT

(In thousands)



---



|                                   |  | Common Stock |  | Additional Paid-in |    | Accumulated |   |         |  |  
|---------------------------------- |  | ------------ |  | ------------------ | -- | ----------- | - | ------- |  | -
|                                   |  | Shares       |  | Amount             |    | Capital     |   | Deficit |  |  
|Balance, June 30, 2000             |  | 5,912        |  | $                  | 6  |             | $ | 14,876  |  | $
|Common stock options exercised     |  | 18           |  |                    |   |             |   | 1       |  |  
|Private placement   sale of stock |  | 16,667       |  |                    | 17 |             |   | 4,888   |  |  
|Common stock issued for services   |  | 280          |  |                    |   |             |   | 100     |  |  
|Net loss for the period            |  |             |  |                    |   |             |   |        |  |  
|                                   |  |              |  |                    |    |             |   |         |  |  
|Balance, March 31, 2001            |  | 22,877       |  |                    | 23 |             |   | 19,865  |  |  
|Common stock options exercised     |  | 8            |  |                    |   |             |   | 2       |  |  
|Stock warrant issued for services  |  |             |  |                    |   |             |   | 84      |  |  
|Net income for the year            |  |             |  |                    |   |             |   |        |  |  
|                                   |  |              |  |                    |    |             |   |         |  |  
|Balance, March 31, 2002            |  | 22,885       |  |                    | 23 |             |   | 19,951  |  |  
|Common stock options exercised     |  | 121          |  |                    |   |             |   | 3       |  |  
|Net loss for the year              |  |             |  |                    |   |             |   |        |  |  
|                                   |  |              |  |                    |    |             |   |         |  |  
|Balance, March 31, 2003            |  | 23,006       |  | $                  | 23 |             | $ | 19,954  |  | $
|                                   |  |              |  |                    |    |             |   |         |  |  



See accompanying notes
to consolidated financial statements.



F-5



---

TDK MEDIACTIVE, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



---

|                                                                                     |  | Year endedMarch 31,2003 |         |   | Year endedMarch 31,2002 |   |         | Nine monthsended March 31,2001 | 
|------------------------------------------------------------------------------------ |  | ----------------------- | ------- | - | ----------------------- | - | ------- | ------------------------------ | 
|Cash flows from operating activities:                                                |  |                         |         |   |                         |   |         |                                | 
|Net income (loss)                                                                    |  | $                       | (8,300  | ) |                         | $ | 168     |                                | 
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |                         |         |   |                         |   |         |                                | 
|Depreciation and amortization                                                        |  |                         | 375     |   |                         |   | 197     |                                | 
|Amortization of software development costs                                           |  |                         | 12,300  |   |                         |   | 4,105   |                                | 
|Provision for doubtful accounts, discounts and returns                               |  |                         | 650     |   |                         |   | 764     |                                | 
|Stock issued for services                                                            |  |                         |        |   |                         |   | 84      |                                | 
|Changes in operating assets and liabilities:                                         |  |                         |         |   |                         |   |         |                                | 
|Accounts receivable                                                                  |  |                         | 1,856   |   |                         |   | (5,059  | )                              | 
|Inventories                                                                          |  |                         | (1,307  | ) |                         |   | (774    | )                              | 
|Prepaid royalties                                                                    |  |                         | (7,427  | ) |                         |   | (1,096  | )                              | 
|Software development costs                                                           |  |                         | (16,200 | ) |                         |   | (9,572  | )                              | 
|Prepaid expenses and other                                                           |  |                         | (123    | ) |                         |   | (744    | )                              | 
|Accounts payable and accrued expenses                                                |  |                         | 1,387   |   |                         |   | 540     |                                | 
|Accrued royalties                                                                    |  |                         | 3,491   |   |                         |   | 1,306   |                                | 
|Deferred revenue                                                                     |  |                         | 3,399   |   |                         |   | (2,745  | )                              | 
|                                                                                     |  |                         |         |   |                         |   |         |                                | 
|Net cash used in operating activities                                                |  |                         | (9,273  | ) |                         |   | (12,826 | )                              | 
|                                                                                     |  |                         |         |   |                         |   |         |                                | 
|Cash flows from investing activities:                                                |  |                         |         |   |                         |   |         |                                | 
|Purchase of property and equipment                                                   |  |                         | (863    | ) |                         |   | (336    | )                              | 
|Other assets                                                                         |  |                         | (45     | ) |                         |   | 64      |                                | 
|                                                                                     |  |                         |         |   |                         |   |         |                                | 
|Net cash used in investing activities                                                |  |                         | (908    | ) |                         |   | (272    | )                              | 
|                                                                                     |  |                         |         |   |                         |   |         |                                | 
|Cash flows from financing activities:                                                |  |                         |         |   |                         |   |         |                                | 
|Net proceeds from issuances of common stock                                          |  |                         |        |   |                         |   |        |                                | 
|Proceeds from exercises of stock options                                             |  |                         | 3       |   |                         |   | 3       |                                | 
|Payments on capital lease obligations                                                |  |                         | (7      | ) |                         |   | (8      | )                              | 
|Repayment of short-term borrowing                                                    |  |                         | (9,300  | ) |                         |   | (4,750  | )                              | 
|Proceeds from short-term borrowing                                                   |  |                         | 18,843  |   |                         |   | 18,478  |                                | 
|                                                                                     |  |                         |         |   |                         |   |         |                                | 
|Net cash provided by financing activities                                            |  |                         | 9,539   |   |                         |   | 13,723  |                                | 
|                                                                                     |  |                         |         |   |                         |   |         |                                | 
|Net change in cash and cash equivalents                                              |  |                         | (642    | ) |                         |   | 625     |                                | 
|Cash and cash equivalents at beginning of period                                     |  |                         | 1,063   |   |                         |   | 438     |                                | 
|                                                                                     |  |                         |         |   |                         |   |         |                                | 
|Cash and cash equivalents at end of period                                           |  | $                       | 421     |   |                         | $ | 1,063   |                                | 
|                                                                                     |  |                         |         |   |                         |   |         |                                | 
|Supplemental Disclosure of Cash Flow Information:                                    |  |                         |         |   |                         |   |         |                                | 
|Cash paid for interest                                                               |  | $                       | 1,207   |   |                         | $ | 547     |                                | 
|                                                                                     |  |                         |         |   |                         |   |         |                                | 
|Cash paid for income taxes                                                           |  | $                       | 2       |   |                         | $ | 2       |                                | 
|                                                                                     |  |                         |         |   |                         |   |         |                                | 
|Supplemental disclosure of noncash investing and financing activities:               |  |                         |         |   |                         |   |         |                                | 
|Capital lease obligation for purchase of equipment                                   |  | $                       |        |   |                         | $ |        |                                | 
|                                                                                     |  |                         |         |   |                         |   |         |                                | 



See accompanying notes
to consolidated financial statements.



F-6



---

TDK MEDIACTIVE, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | DESCRIPTION OF BUSINESS
|-- |  | -----------------------



Business  TDK Mediactive, Inc., a Delaware corporation (the Company), is 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, puzzles, 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.



License Agreements  We have a license agreement with Sony
pursuant to which we have the non-exclusive right to utilize the Sony name and its proprietary information and technology in order to develop and market software for use with the 32-bit Sony PlayStation in the United States, Latin America and
Canada, the rights to which expires in June 2006. We also have a license agreement with Sony for use with the 128-bit Sony PlayStation 2 in the United States and Canada that expires in March 2004.



We have a license agreement with Nintendo pursuant to which we have the
non-exclusive right to utilize the Nintendo name and its proprietary information and technology in order to develop and market software for use with the Game Boy, Game Boy Advance portable game systems and GameCube console system in North America
and Latin America, the rights to which expire in December 2003, June 2004 and November 2004 respectively.



We have a license agreement with Microsoft Corporation pursuant to which we have the non-exclusive right to utilize the Microsoft name and its proprietary
information and technology in order to develop and market software for use with the Xbox game console in North America and other territories on a title by title basis, the rights to which expire in November 2004.



Our business is dependent on the license agreements with Sony, Microsoft and
Nintendo. Substantially all of our products are manufactured by such authorized vendors of platform licensors who charge us an amount for each disk-based product or cartridge manufactured. This charge includes a manufacturing, printing, and
packaging fee as well as a royalty fee for the use of their respective names, proprietary information and technology.



Many of our products are based on the licensed content of major motion picture studios and other intellectual property holders including Vivendi-Universal
Studios, DreamWorks SKG, Classic Media, General Motors, Mattel, The Jim Henson Company, and others. Our license agreements for existing products and new products under development include Shrek, Robotech, Casper, The Land Before Time, The Muppets, Masters of the Universe, and Chevrolet Corvette. We are continuing the discussion and negotiation of additional licenses to develop new, high quality software products using content from such intellectual properties and creating original characters and stories on
which to base future consumer entertainment software



F-7



---

The licensing contracts with the licensors/studios are generally three to five years in duration. The
licenses are usually exclusive, worldwide and typically allow for multiple titles to be produced in all applicable localized languages to suit market needs by territory. We seek licenses that have strong brand awareness worldwide and franchises that
receive licensor support. The licenses usually allow products to be developed for multiple formats, including CD-ROMs, DVDs, and dedicated game console formats such as the Sony PlayStation, Sony PlayStation2, Microsoft Xbox, and proprietary disc
formats such as Nintendo GameCube.



Liquidity We have incurred net losses and historically
generated insufficient cash flows to fund operations and had to rely on debt and equity financings to fund operations. We have negative working capital of approximately $5.0 million at March 31, 2003



As of March 31, 2003, we had a Loan and Security Agreement with TDK USA
(TDK USA) providing for a combination of cash advances and letters of credit relating to the purchase of product not to exceed an aggregate amount of $30.0 million. On April 30, 2003, we reached an agreement with TDK USA to extend and
expand the agreement. The agreement now matures on March 31, 2004, 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 $37 million, $12 million of which
is at the discretion of TDK USA. We believe that this facility will provide sufficient working capital to fund our operations throughout fiscal 2004. As of March 31, 2003, the balance outstanding under this facility amounted to $23.8 million.



In addition to the credit available under the TDK USA
agreement, our business plan indicates that we will need additional financing to fund any expansion of our business subsequent to March 31, 2004. 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 agreement when it matures on March 31, 2004. 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, 2004. If we are unable to obtain additional financing or
extend the agreement, we may have to curtail or revise our planned operations.



We recently entered into a financial advisory services agreement with Europlay Capital Advisors, a Los Angeles, California-based private advisory firm specializing in media and entertainment companies. Europlay, which
specializes in the interactive entertainment industry and cross-border media transactions, will assist us in developing, structuring and securing alternative sources of capital and financing or other strategic alternatives. Such alternatives may
include, but are not limited to the sale, merger, consolidation, recapitalization or spin-off of the business, securities or assets of TDK Mediactive.



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- |  | ------------------------------------------



Basis of Presentation The consolidated financial statements include the financial statements of TDK Mediactive, Inc. and its wholly-owned
subsidiary. All inter-company balances and transactions have been eliminated in consolidation.



Estimates  The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the periods reported. Actual results could materially differ from those estimates.



F-8



---

Comprehensive Income We have adopted the provisions of SFAS 130, Reporting
Comprehensive Income. SFAS 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner
sources. To date we have not had any transactions that are required to be reported as comprehensive income other than net income (loss).



Concentration of Credit Risk  Financial instruments that potentially subject us to concentration of credit risk, consist principally of cash
and cash equivalents and accounts receivable. At times we maintain cash balances at certain financial institutions in excess of federally insured deposits. The Company performs periodic credit evaluations of its customers and maintains an allowance
for potential credit losses. We estimate credit losses based on an evaluation of historical experience and current industry trends. Although we expect to collect amounts due, actual collections may differ from the estimated amounts.



Major Customers  Sales to two major customers accounted for 24%
of consolidated revenues during the year ended March 31, 2003. Sales to three major customers accounted for 38% of consolidated revenues during the year ended March 31, 2002. Sales to two major customers accounted for 47% during the nine months
ended March 31, 2001. TDK Recording Media Europe SA, a related entity, accounted for 3%, 10%, and 30% of revenues during the same periods. Two customers accounted for approximately 24% and 19% of accounts receivable at March 31, 2003. Three
customers accounted for approximately 21%, 20%, and 12% of accounts receivable at March 31, 2002.



Major Vendors Purchases from two vendor accounted for approximately 25% and 14% of consolidated purchases for the year ended March 31, 2003.
Purchases from a major vendor accounted for approximately 46% of consolidated purchases for the year ended March 31, 2002. No vendor accounted for more than 10% during the nine months ended March 31, 2001.



Inventories  Inventories that consist primarily of software
video games and related packaging materials, are stated at the lower of cost or market, with cost determined on a first-in, first-out (FIFO) basis. 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.



Property and Equipment  Property and equipment are stated at
cost less accumulated depreciation and amortization. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the lease term
or the estimated life of the improvement.



Long-Lived
Assets  We periodically review the carrying value of long-lived assets, and if undiscounted future cash flows are believed to be insufficient to recover the remaining carrying value of a long-lived asset, the carrying value is written down
to its estimated fair value in the period the impairment is identified.



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 together 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.



F-9



---

Prepaid royalties are expensed at the contractual royalty rate based on actual net product sales. When,
in managements estimate, future revenues will not be sufficient to recover previously capitalized costs, we expense these costs to royalty expense that is included in cost of sales. If actual revenues or revised forecasted units fall below the
initial forecasted units, the charge to royalty expense may be larger than anticipated in any given quarter. As of March 31, 2003, the net carrying value of our licenses was $9.5 million.



Software Development Costs Software development costs include payments made to independent software developers
under development agreements as well as direct costs incurred for the development of products. We account for software development in accordance with Statement of Financial Accounting Standards (SFAS) 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 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. If actual or revised forecasted units fall below the initial forecasted units, the charge to software
development amortization may be larger than anticipated in any given quarter. As of March 31, 2003, the net carrying value of our software development was $ 12.6 million.



Fair Value of Financial Instruments The carrying value of financial instruments, consisting primarily of
accounts receivable, accounts payable, accrued expenses and loans payable, approximates fair value due to the maturity of these financial instruments and our borrowing costs.



Income Taxes  Deferred income taxes are provided for temporary differences between the financial statement and
income tax bases of our assets and liabilities, based on enacted tax rates. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred income tax assets will not be realized.



Revenue Recognition  Our revenue recognition policies are in
compliance with American Institute of Certified Public Accountants Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended. In December 1999, The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101) that outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to
revenue recognition policies in financial statements filed with the SEC.



Product Sales: 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 sell our products on a
no-return basis, in certain circumstances we may allow returns or grant price concessions on a negotiated basis. While we have no obligation to perform future services subsequent to shipment, we do 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.



F-10



---

Allowances for price protection, returns, and doubtful accounts.Product sales are
recognized net of allowances for price protection, returns and various anticipated customer discounts. Although we sell our products on a no-return basis, in certain circumstances we may allow returns, price concessions or allowances on a negotiated
basis. We may decide to provide price protection or allow returns for our products after we analyze



| |  |  | Inventory remaining in the retail channel;
| | - |  | ------------------------------------------

| |  |  | The rate of inventory sell-through in the retail channel; and
| | - |  | -------------------------------------------------------------

| |  |  | Our remaining inventory on hand.
| | - |  | --------------------------------



We maintain a policy of giving credits for price protection and returns, but do not give cash refunds. We establish sales allowances based on estimates of
future price protection and returns with respect to current period product revenue. In addition, management monitors the volume of our sales to retailers and distributors and their inventories because substantial overstocking in the distribution
channel can result in the requirement for substantial price protection or high returns in subsequent periods. Price protection and returns in future periods are inherently uncertain as unsold products in the distribution channels are exposed to
rapid changes in consumer preferences, market conditions or technological obsolescence due to new platforms, product updates or competing products. While management believes it can make reliable estimates for these matters, if we changed our
assumptions and estimates, our price protection and returns reserves would change, and therefore would impact the net revenue we report. In addition, if actual price protection and returns were significantly greater than the reserves we have
established, the actual results would decrease our reported revenue. Conversely, if actual price protection and returns were significantly less than our reserves, this would increase our reported revenue.



Similarly, management must use significant judgment and make estimates in
connection with establishing allowances for doubtful accounts in any accounting period. Management analyzes customer concentrations, customer credit-worthiness, and current economic trends when evaluating the adequacy of the allowance for doubtful
accounts. Material differences may result in the amount and timing of our bad debt expense for any period if management made different judgments or utilized different estimates. If our customers experience financial difficulties and are not able to
meet their ongoing financial obligations to us, our results of operations could be adversely impacted.



Earnings per Common Share (EPS) Weighted-average common shares used in the computation of basic EPS were 22,946,956 for the year
ended March 31, 2003; 22,877,051 for the year ended March 31, 2002 and 14,963,369 for the nine months ended March 31, 2001. Weighted-average common shares used in the computation of diluted EPS were 23,386,030 for the year ended March 31, 2002.
Stock options to purchase 2,611,758, 1,300,768 and 845,268 shares of common stock during the year ended March 31, 2003, March 31, 2002 and the nine months ended March 31, 2001 were outstanding but not included in the computation of diluted earnings
per share as their effect would be antidilutive.



Stock-Based Compensation. We account for our employee stock option plans under the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations. We account for equity instruments issued to other than employees for acquiring goods and services, typically rights to intellectual property, using the fair value at the date of grant.



At March 31, 2003, we had three stock-based compensation plans, which are
described more fully in Note 11. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.



F-11



---

The following table illustrates the effect on the net income and earnings per share if we had applied the
fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.



|                                                                                                                                           |  | YearEndedMarch 31, 2003 |        |   | YearEndedMarch 31, 2002 |   | Nine MonthsEnded March 31, 2001 | 
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | ------ | - | ----------------------- | - | ------------------------------- | 
|Net income (loss) as reported                                                                                                              |  | $                       | (8,300 | ) |                         | $ | 168                             | 
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of elated tax
effects |  |                         | 458    |   |                         |   | 167                             | 
|                                                                                                                                           |  |                         |        |   |                         |   |                                 | 
|Net income (loss) pro forma                                                                                                                |  | $                       | (8,758 | ) |                         | $ | 1                               | 
|                                                                                                                                           |  |                         |        |   |                         |   |                                 | 
|Net income (loss) per share:                                                                                                               |  |                         |        |   |                         |   |                                 | 
|Basic and diluted as reported                                                                                                              |  | $                       | (0.36  | ) |                         | $ | 0.01                            | 
|Basic and diluted pro forma                                                                                                                |  | $                       | (0.38  | ) |                         | $ | 0.00                            | 



The fair value of
each option granted was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the year ended March 31, 2003, March 31, 2002 and the nine months ended March 31, 2001: dividend yield of zero;
anticipated volatility of 113%, 154% and 163%; risk-free interest rate of 2.18%, 3.94% and 3.94%; and expected option lives of four years.



Recently Issued Accounting Pronouncements



In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires
that the liability for costs associated with an exit or disposal activity be initially measured at fair value and recognized when the liability is incurred. The provisions of SFAS No. 146 are required to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on our financial statements, as we have not initiated any exit or disposal activities.



In November 2002, FASB issued Interpretation (FIN) No. 45 
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The provisions of FIN No. 45 did not have an
impact on our financial statements.



In May 2003, the FASB
issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ( FAS 150). This statement affects the classification, measurement and
disclosure requirements of the following three types of freestanding financial instruments: 1) manditorily redeemable shares, which the issuing company is obligated to buy back with cash or other assets; 2) instruments that do or may require the
issuer to buy back some of its shares in exchange for cash or other assets, which includes put options and forward purchase contracts; and 3) obligations that can be settled with shares, the monetary value



F-12



---

of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely
with the value of the issuers shares. In general, FAS 150 is effective for all 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 adoption of FAS 150 is not expected to have an impact on the Companys consolidated financial position or disclosures.



|3. |  | CHANGE IN FISCAL YEAR
|-- |  | ---------------------



In December 2000 as a result of the acquisition by TDK USA of approximately 74% of the outstanding shares of our common stock, our Board of Directors
approved a change in our fiscal year-end from June 30 to March 31. This change resulted in a nine-month period for the fiscal period ended March 31, 2001.



|4. |  | INVENTORIES
|-- |  | -----------



Inventories consisted of the following (in thousands):



|                           |  | March 31, 2003 |       | March 31, 2002
|-------------------------- |  | -------------- | ----- | --------------
|Finished goods             |  | $              | 2,296 |               
|Raw materials (components) |  |                | 252   |               
|                           |  |                |       |               
|                           |  | $              | 2,548 |               
|                           |  |                |       |               



|5. |  | PROPERTY AND EQUIPMENT
|-- |  | ----------------------



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



|                                          |  | UsefulLives |  | March 31,2003 |        |   | March 31,2002 |  
|----------------------------------------- |  | ----------- |  | ------------- | ------ | - | ------------- | -
|Leasehold improvements                    |  | 4 years     |  | $             | 63     |   |               | $
|Computer equipment                        |  | 3 years     |  |               | 1,839  |   |               |  
|Office furniture and equipment            |  | 5 years     |  |               | 300    |   |               |  
|                                          |  |             |  |               |        |   |               |  
|                                          |  |             |  |               | 2,202  |   |               |  
|Accumulated depreciation and amortization |  |             |  |               | (1,248 | ) |               |  
|                                          |  |             |  |               |        |   |               |  
|                                          |  |             |  | $             | 954    |   |               | $
|                                          |  |             |  |               |        |   |               |  



Depreciation expense
amounted to $375,000 for the year end March 31, 2003, $197,000 for the year ended March 31, 2002 and $96,000 for the nine months ended March 31, 2001 and was included within general and administrative expenses.



|6. |  | LOAN FROM RELATED ENTITY
|-- |  | ------------------------



On March 29, 2001, we entered into an $8.0 million Loan and Security Agreement with TDK USA. The agreement provided for a combination of cash advances and
letters of credit relating to the purchase of product not to exceed an aggregate amount of $8.0 million and matured March 31, 2002. In connection with the agreement, we granted TDK USA a security interest in substantially all our assets. The
agreement provided for interest to be paid monthly at the annual rate of the higher of (i) the rate designated as London Interbank Offered Rate (LIBOR) for a one month period as published from time to time in the Wall Street Journal,
Money Rates Section plus two percent (2%) or (ii) the rate designated as the Prime Rate as published from time to time in the Wall Street Journal, Money Rates Section plus one percent (1%).



F-13



---

On April 30, 2003, we entered an amended and restated loan agreement that expires on March 31, 2004 that
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 $37 million, $12 million of which is at the discretion of TDK USA. TDK USA holds a security interest
in substantially all our assets. This agreement 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 $25 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 0.7 to 1.00 at June 30, 2003, September 30, 2003, .6 to 1.00 at December 31, 2003 and .53 to 1.00 at March 31, 2004,; (ii) maintain a net sales to net assets (as defined) ratio of not less than 1.40 to 1.00 at June 30, 2003, 1.20 to
1.00 at September 30, 2003, 2.10 to 1.00 at December 31, 2003, and 3.00 to 1.00 at March 31, 2004 . At March 31, 2003, we have an outstanding balance of approximately $23.8 million under the agreement at an interest rate of 5.87%



|7. |  | RELATED ENTITY TRANSACTIONS
|-- |  | ---------------------------



The majority of our international business is conducted via a republishing and distribution agreement dated February 28, 2000 with TDK Recording Media
Europe, SA, a wholly owned subsidiary of TDK Corporation, an affiliated company pursuant to which TDK Europe distributes our software titles throughout Europe and other territories. Under the terms of the TDK Europe agreement, we are paid a
republishing fee on each product sold. All costs of localization of the product, product boxes and collateral materials, as well as all costs of replication, marketing, warehousing and fulfillment, are borne by TDK Europe. Effective November 1, 2002
we signed a new agreement with TDK Europe whereby TDK Europe will have an non-exclusive right to distribute selected software titles offered by us and accepted by TDK Europe. The new agreement with TDK Europe supersedes the previous agreement,
extends through July 31, 2004. At March 31, 2003 we have deferred (unearned) revenue amounting to $931,000 related to these agreements.



|8. |  | DEFERRED REVENUE
|-- |  | ----------------



On May 23, 2002, we announced a strategic agreement with Activision Publishing, Inc 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 Awardñ winning feature film Shrek. 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. 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



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 the first Shrek sequel. The deferred revenue that will be recognized as income beginning at the time the sequel to the film Shrek is released, currently scheduled
for May 2004.



F-14



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|9. |  | COMMITMENTS AND CONTINGENCIES
|-- |  | -----------------------------



Guarantees  In November 2002, the FASB issued FIN No. 45 Guarantors Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others  an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34. The following is a summary of the Companys agreements that the Company has determined are
within the scope of FIN 45.



Under its bylaws, the Company has
agreed to indemnify its executive officers and directors for certain events or occurrences arising as a result of the officer or directors serving in such capacity. The term of the indemnification period is for the officers or
directors lifetime. However, the Company has a directors and officer liability insurance policy that limits its exposure and enables it to recover a portion of any amounts paid. As a result of its insurance policy coverage, the Company
believes the estimated fair value of these indemnification agreements is minimal and has no liabilities recorded for these agreements as of March 31, 2003.



The Company enters into indemnification provisions under agreements with other companies in its ordinary course of business, typically with business
partners, licensors, developers, contractors, customers, and landlords. Under these provisions the Company generally indemnifies and hold harmless the indemnified party for losses suffered or incurred as a result of the Companys acts or
omissions. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is not possible to
quantify although we have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, we believe the estimated fair value of these agreements is minimal and we have no liabilities
recorded for these agreements as of March 31, 2003



Employment Contracts We have employment agreements with four employees that expire on various dates through November 2004. An agreement with one corporate officer provides for, (i) annual adjustments based on the Consumer
Price Index; (ii) annual performance bonuses; (iii) options to purchase 500,000 shares of common stock that vest over a four year period and (iv) other normal employee benefits. Future minimum base salaries, by year and in the aggregate, consist of
(in thousands):



|Years Ending March 31, |  |  |  | Amount
|---------------------- |  |  |  | ------
|2004                   |  |  |  | $     
|2005                   |  |  |  |       



Legal
Proceedings  While we are a party to legal proceedings from time to time, such legal proceedings have been ordinary and incidental to our business and have not had a material adverse effect on us.



Operating Leases We lease facilities and certain equipment
under noncancelable operating leases that expire at various dates through May 2006.



F-15



---

The facility lease expense is being recognized on a straight-line basis over the term of the related
leases. The excess of the expense recognized over the amount paid is included in accounts payable and accrued expenses in the consolidated balance sheets. Future minimum lease payments as of March 31, 2003 are as follows (in thousands):



|Year Ending March
31,               |  | Capital Leases |    |   | Operating Leases
|----------------------------------- |  | -------------- | -- | - | ----------------
|2004                                |  |                | 9  |   |                 
|2005                                |  |                | 9  |   |                 
|2006                                |  |                | 8  |   |                 
|2007                                |  |                |   |   |                 
|                                    |  |                |    |   |                 
|Total                               |  |                | 26 |   |                 
|                                    |  |                |    |   |                 
|Less amount representing interest   |  |                | (4 | ) |                 
|                                    |  |                |    |   |                 
|Obligations under capital leases    |  |                | 22 |   |                 
|Obligations due within one year     |  |                | 7  |   |                 
|                                    |  |                |    |   |                 
|Long-term capital lease obligations |  | $              | 15 |   |                 
|                                    |  |                |    |   |                 



Rent expense under
operating lease agreements totaled $248,000 for the year ended March 31, 2003; $159,000 for the year ended March 31, 2002 and $147,000 for the nine months ended March 31, 2001 and included in general and administrative expenses in the consolidated
statements of operations.



Development Contracts We currently have a number of agreements with software developers for the development of video games. Under such agreements we pay a fixed fee, plus in many cases, a percentage of sales of the product developed. As of March 31, 2003, minimum
remaining commitments under such agreements are as follows (in thousands):



|Years Ending March
31, |  |  |  | Amount
|---------------------- |  |  |  | ------
|2004                   |  |  |  | $     
|2005                   |  |  |  |       



|10. |  | COMMON STOCK
|--- |  | ------------



Private Placement On November 27, 2000, we completed the sale of 16,667,000 shares of common stock to TDK USA for the purchase price of $.30
per share. We realized net proceeds of $4,904,489 (after deducting costs of $95,611). The net proceeds were utilized for working capital purposes. In connection with the sale we granted TDK USA certain registration rights with respect to the common
stock purchased.



Common Stock for Services During the nine months ended March 31, 2001 we exchanged 279,530 shares of common stock for obligations resulting from services rendered to us. Of these shares, 250,416 shares were issued to former directors who agreed to accept our shares in
exchange for accrued directors fees and 29,114 shares were issued to an employee in exchange for accrued compensation.



Warrants  In October 2001, we signed a one-year agreement with an investment banker to act as our financial advisor. As part of the
compensation, we granted the investment banker a five year-warrant to purchase 200,000 shares of our common stock at $1.00 per share. The value of this warrant in the amount of $83,539 has been recorded as additional paid-in capital and the
resulting prepaid asset was amortized over the term of the agreement.



F-16



---

|11. |  | STOCK OPTIONS AND WARRANT
|--- |  | -------------------------



The 1992 Stock Option Plan  In 1992, the Company adopted the 1992 Stock Option Plan (1992 Plan) authorizing the issuance of up to
2,000,000 shares of common stock to employees, officers and directors of the Company. Shares that are subject to an award but are not used because the terms and conditions of the award are not met, or any shares that are used by participants to pay
all or part of the purchase price of any option, may again be used for awards under the 1992 Plan. However, shares with respect to which a stock appreciation right has been exercised may not again be made subject to an award. On September 22, 1995,
the Board of Directors resolved that no additional grants shall be issued under the 1992 Plan.



The 1995 Stock Option Plan  Pursuant to the Companys restated 1995 Stock Option Plan (1995 Plan) we may grant up to 1,000,000 options for shares of the Companys common stock.
Options under the 1995 Plan may be granted in the form of incentive stock options or nonqualified stock options. The 1995 Plan terminates October 31, 2005 and is administered by a committee appointed by the Board of Directors of the Company. On
April 1, 2003 the number of shares that may be granted was increased to 4,000,000, subject to stockholder approval at the next meeting of stockholders.



Incentive stock options under the 1995 Plan are limited to persons who are employees of the Company and may not be granted at a price less than 100% of
the fair value of the stock as of the date of grant (110% as to any 10% stockholder at the time of grant). The term of each option may not exceed 10 years from the date of grant (five years for 10% stockholders). The committee on a case-by-case
basis determines vesting of the options, and the options are not exercisable unless the holder is currently employed with the Company.



The 1999 Director Stock Plan Pursuant to the 1999 Director Plan (1999 Plan), each non-employee director receives nonqualified
stock options to acquire 10,000 shares of Common Stock upon appointment as a director, and receives nonqualified stock options to acquire an additional 10,000 shares of Common Stock for each additional year that the non-employee director continues
to serve on the Board of Directors. Such options previously were granted pursuant to the 1995 Plan. Each option granted to a non-employee director vests and becomes exercisable as to 50% of the shares of Common Stock subject to the option on the
first anniversary date of the grant and as to the remaining 50% on the second anniversary date of the grant, and expires on the earlier of ten years from the date the option was granted, the expiration of the 1995 Plan or the 1999 Director Plan, as
applicable, or three weeks after the optionee ceases to be a director of the Company. The exercise price of such options is equal to 100% of the fair market value of the Common Stock subject to the option on the date on which such options are
granted. Each option is subject to the other provisions of the 1995 Plan or the 1999 Plan, as applicable. On February 18, 2003, the annual number of shares to be granted to each director was increased to 30,000 shares.



F-17



---

The following table summarizes option transactions during the periods presented under the aforementioned
plans (shares in thousands):



|                        |  | NumberofShares |   |  | Weighted- AveragePrice perShare
|----------------------- |  | -------------- | - |  | -------------------------------
|Balance, June 30, 2000  |  | 261            |   |  | $                              
|Granted                 |  | 703            |   |  | $                              
|Exercised               |  | (18            | ) |  | $                              
|Canceled                |  | (101           | ) |  | $                              
|                        |  |                |   |  |                                
|Balance, March 31, 2001 |  | 845            |   |  | $                              
|Granted                 |  | 488            |   |  | $                              
|Exercised               |  | (8             | ) |  | $                              
|Canceled                |  | (24            | ) |  | $                              
|                        |  |                |   |  |                                
|Balance, March 31, 2002 |  | 1,301          |   |  | $                              
|                        |  |                |   |  |                                
|Granted                 |  | 1,430          |   |  | $                              
|Exercised               |  | (47            | ) |  | $                              
|Canceled                |  | (72            | ) |  | $                              
|                        |  |                |   |  |                                
|Balance, March 31, 2003 |  | 2,612          |   |  | $                              
|                        |  |                |   |  |                                



The
following summarizes pricing and term information for options outstanding as of March 31, 2003 (in thousands):



|                        |  | Options Outstanding               |  | Options Exercisable          
|----------------------- |  | --------------------------------- |  | -----------------------------
|Range ofExercise Prices |  | NumberOutstandingat March 31,2003 |  | Weighted-AverageRemainingLife
|$0.06 - $0.38           |  | 670                               |  | 7.6                          
|$0.58 - $1.35           |  | 1,574                             |  | 6.1                          
|$1.50 - $1.90           |  | 298                               |  | 8.0                          
|$2.09 - $5.00           |  | 70                                |  | 4.6                          
|                        |  |                                   |  |                              
|                        |  | 2,612                             |  | 7.4                          
|                        |  |                                   |  |                              



F-18



---

|12. |  | INCOME TAXES
|--- |  | ------------



The provisions for income taxes comprise minimum state taxes only. A reconciliation of the provision for income taxes with the expected income tax expense
(benefit) computed by applying the federal statutory income tax rate to income (loss) before provision for income taxes is as follows (in thousands):



|                                         |  | YearEndedMarch 31, 2003 |        |   | YearEndedMarch 31, 2002 |   |     | NineMonthsEnded March 31, 2001 | 
|---------------------------------------- |  | ----------------------- | ------ | - | ----------------------- | - | --- | ------------------------------ | 
|Income tax expense (benefit) computed    |  |                         |        |   |                         |   |     |                                | 
|at federal statutory tax rate            |  | $                       | (2,822 | ) |                         | $ | 57  |                                | 
|State and local taxes                    |  |                         | (484   | ) |                         |   | 10  |                                | 
|Expenses not deductible for tax purposes |  |                         | 11     |   |                         |   | 10  |                                | 
|Losses (utilized) not benefited          |  |                         | 3,297  |   |                         |   | (75 | )                              | 
|                                         |  |                         |        |   |                         |   |     |                                | 
|                                         |  | $                       | 2      |   |                         | $ | 2   |                                | 
|                                         |  |                         |        |   |                         |   |     |                                | 



The components of the
net deferred income tax asset recorded in the accompanying consolidated balance sheets are as follows (in thousands):



|                                 |  | March 31, 2003 |        |   | March 31, 2002 |  
|-------------------------------- |  | -------------- | ------ | - | -------------- | -
|Reserves and accrued liabilities |  | $              | 1,732  |   |                | $
|Deferred revenue                 |  |                | 2,466  |   |                |  
|Net operating loss carryforwards |  |                | 5,651  |   |                |  
|Valuation allowance              |  |                | (9,849 | ) |                |  
|                                 |  |                |        |   |                |  
|                                 |  | $              |       |   |                | $
|                                 |  |                |        |   |                |  



At March 31, 2003, we
had federal and state net operating loss carry-forwards of approximately $15.0 million and $6.4 million, available to offset future taxable federal and state income. The federal and state carry-forwards expire in varying amounts through 2022 and
2007.



Due to the change in ownership provisions of the Tax
Reform Act of 1986, net operating loss carry-forwards for federal income tax reporting purposes are subject to annual limitations. The change of ownership that occurred during the year ended March 31, 2001, as a result of the investment by TDK USA,
caused the limitation of the Companys net operating loss carry-forwards. Approximately $11.0 million of the net operating loss carry-forward is subject to limitation.



F-19



---

|13. |  | Valuation and Qualifying Accounts
|--- |  | ---------------------------------



|Description                                           |  | Balance Beginning ofthe Period |       | Additions |   | Deductions |  | Balance  End of the Period
|----------------------------------------------------- |  | ------------------------------ | ----- | --------- | - | ---------- |  | ---------------------------
|                                                      |  | (in thousands)                
|Year ended March 31, 2003                             |  |                                |       |           |   |            |  |                            
|Allowance for possible losses, returns and allowances |  | $                              | 926   |           | $ | 10,871     |  | $                          
|Allowance for cooperative advertising                 |  |                                | 309   |           |   | 1,674      |  |                            
|                                                      |  |                                |       |           |   |            |  |                            
|                                                      |  | $                              | 1,235 |           | $ | 12,545     |  | $                          
|                                                      |  |                                |       |           |   |            |  |                            
|                                                      |  |                                |       |          
|Year ended March 31, 2002                             |  |                                |       |           |   |            |  |                            
|Allowance for possible losses, returns and allowances |  | $                              | 244   |           | $ | 1,957      |  | $                          
|Allowance for cooperative advertising                 |  |                                | 46    |           |   | 813        |  |                            
|                                                      |  |                                |       |           |   |            |  |                            
|                                                      |  | $                              | 290   |           | $ | 2,770      |  | $                          
|                                                      |  |                                |       |           |   |            |  |                            
|                                                      |  |                                |       |          
|Nine months ended March 31, 2001                      |  |                                |       |           |   |            |  |                            
|Allowance for possible losses, returns and allowances |  | $                              | 1     |           | $ | 1,247      |  | $                          
|Allowance for cooperative advertising                 |  |                                | 0     |           |   | 124        |  |                            
|                                                      |  |                                |       |           |   |            |  |                            
|                                                      |  | $                              | 1     |           | $ | 1,371      |  | $                          
|                                                      |  |                                |       |           |   |            |  |                            



|14. |  | Quarterly Financial Summary (Unaudited)
|--- |  | ---------------------------------------



|                          |  | Three Months Ended |       
|------------------------- |  | ------------------ | ------
|                          |  | March 31           |       
|Year ended March 31, 2003 |  |                    |       
|Net revenues              |  | $                  | 3,161 
|Gross profit (loss)       |  |                    | (3,267
|Net income (loss)         |  | $                  | (6,290
|Per share data:           |  |                    |       
|Basic                     |  | $                  | (0.27 
|Diluted                   |  | $                  | (0.27 
|                          |  |                    |       
|Year ended March 31, 2002 |  |                    |       
|Net revenues              |  | $                  | 6,564 
|Gross profit (loss)       |  |                    | 1,853 
|Net income (loss)         |  | $                  | (189  
|Per share data:           |  |                    |       
|Basic                     |  | $                  | (0.01 
|Diluted                   |  | $                  | (0.01 



F-20