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United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



(Mark One)



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



For the quarterly period ended March 31, 2003



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
|- |  | ----------------------------------------------------------------------------------------------------------



For the transition period from

to



Commission file number 000-29642



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FILM ROMAN, INC.

(Exact name of registrant as specified in charter)



|Delaware                          |  | 95-4585357            
|--------------------------------- |  | ----------------------
|(State or other jurisdiction      |  | (I.R.S. Employer      
|of incorporation or organization) |  | Identification Number)



12020
Chandler Boulevard, Suite 300

North Hollywood, California 91607

(Address of principal executive offices) (Zip Code)



(818) 761-2544

(Registrants telephone number, including area code)



Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90
days.    YES  x    NO ̈.



APPLICABLE ONLY TO CORPORATE ISSUERS:



Indicate the number of shares outstanding of
each of the issuers classes of common stock, as of the latest practicable date:



As of April 30, 2003, 8,577,690 shares of common stock, par value $.01 per share, were issued and outstanding.



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##### Table of Contents

TABLE OF CONTENTS



|PART I.    FINANCIAL INFORMATION |  |                                                                                                               
|-------------------------------- |  | --------------------------------------------------------------------------------------------------------------
|Item 1.                          |  | Financial Statements                                                                                          
|                                
|                                 |  | Consolidated Balance Sheets as of December 31, 2002 and March 31, 2003 (unaudited)                            
|                                
|                                 |  | Consolidated Statements of Operations for the Three Months Ended March 31, 2002 and March 31, 2003 (unaudited)
|                                
|                                 |  | Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and March 31, 2003 (unaudited)
|                                
|                                 |  | Notes to Consolidated Financial Statements                                                                    
|                                
|Item 2.                          |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                         
|                                
|Item 3.                          |  | Quantitative and Qualitative Disclosures about Market Risk                                                    
|                                
|Item 4.                          |  | Controls and Procedures                                                                                       
|                                
|PART II.    OTHER INFORMATION    |  |                                                                                                               
|                                
|Item 6.                          |  | Exhibits and Reports on Form 8-K                                                                              
|                                
|Signatures                       |  | 16                                                                                                            
|                                
|Certifications                   |  | 17                                                                                                            
|                                
|Index to Exhibits                |  | 18                                                                                                            



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PART I.    FINANCIAL INFORMATION



Item 1.    Financial Statements



FILM ROMAN, INC.



CONSOLIDATED BALANCE SHEETS

(Unaudited)



|                                                                                                                     |  | December 31, 2002 |             |   | March 31, 2003 (Note 1) |  
|-------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | - | ----------------------- | -
|                                                                                                                     |  |                   |             |   | (unaudited)             |  
|ASSETS                                                                                                               |  |                   |             |   |                         |  
|Cash and cash equivalents                                                                                            |  | $                 | 1,277,958   |   |                         | $
|Accounts receivable                                                                                                  |  |                   | 114,772     |   |                         |  
|Film costs, net of accumulated amortization of $39,927,593 (2002) and $10,488,118
(2003)                             |  |                   | 18,141,712  |   |                         |  
|Property and equipment, net of accumulated depreciation and amortizationof
$3,097,691 (2002) and $3,172,691 (2003) . |  |                   | 246,579     |   |                         |  
|Deposits and other assets                                                                                            |  |                   | 293,119     |   |                         |  
|                                                                                                                     |  |                   |             |   |                         |  
|Total Assets                                                                                                         |  | $                 | 20,074,140  |   |                         | $
|                                                                                                                     |  |                   |             |   |                         |  
|LIABILITIES AND STOCKHOLDERS DEFICIENCY                                                                             |  |                   |             |   |                         |  
|Accounts payable                                                                                                     |  | $                 | 1,842,904   |   |                         | $
|Accrued expenses                                                                                                     |  |                   | 2,098,354   |   |                         |  
|Deferred revenue                                                                                                     |  |                   | 22,026,710  |   |                         |  
|                                                                                                                     |  |                   |             |   |                         |  
|Total liabilities                                                                                                    |  |                   | 25,967,968  |   |                         |  
|Commitments and Contingencies                                                                                        |  |                   |            |   |                         |  
|Stockholders deficiency:                                                                                            |  |                   |             |   |                         |  
|Preferred Stock, $.01 par value, 10,000,000 shares authorized, none
issued                                           |  |                   |            |   |                         |  
|Common stock, $.01 par value, 40,000,000 shares authorized, 8,577,690 shares issued and
outstanding in 2002 and 2003 |  |                   | 85,777      |   |                         |  
|Additional paid-in capital                                                                                           |  |                   | 36,379,615  |   |                         |  
|Accumulated deficit                                                                                                  |  |                   | (42,359,220 | ) |                         |  
|                                                                                                                     |  |                   |             |   |                         |  
|Total stockholders deficiency                                                                                       |  |                   | (5,893,828  | ) |                         |  
|                                                                                                                     |  |                   |             |   |                         |  
|Total liabilities and stockholders deficiency                                                                       |  | $                 | 20,074,140  |   |                         | $
|                                                                                                                     |  |                   |             |   |                         |  





See accompanying notes



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FILM ROMAN, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                |  | Three Months endedMarch 31,
|--------------------------------------------------------------- |  | ---------------------------
|                                                                |  | 2002                       
|Revenue                                                         |  | $                          
|Cost of revenue                                                 |  |                            
|Selling, general and administrative expenses                    |  |                            
|                                                                |  |                            
|Operating income (loss)                                         |  |                            
|Interest income                                                 |  |                            
|                                                                |  |                            
|Income (loss) before provision for income taxes                 |  |                            
|Provision for income taxes                                      |  |                            
|                                                                |  |                            
|Net income (loss)                                               |  | $                          
|                                                                |  |                            
|Net income (loss), per common share basic & diluted             |  | $                          
|                                                                |  |                            
|Weighted average number of shares outstanding basic and diluted |  |                            
|                                                                |  |                            







See accompanying notes



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FILM ROMAN, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                                   |  | Three Months endedMarch 31, |           
|-------------------------------------------------------------------------------------------------- |  | --------------------------- | ----------
|                                                                                                   |  | 2002                        |           
|Operating activities:                                                                              |  |                             |           
|Net income (loss)                                                                                  |  | $                           | (816,267  
|Adjustments to reconcile net income (loss) to net cash (used in) provided by operating
activities: |  |                             |           
|Depreciation and amortization                                                                      |  |                             | 95,000    
|Amortization of film costs                                                                         |  |                             | 15,794,394
|                                                                                                  
|Changes in operating assets and liabilities:                                                       |  |                             |           
|Accounts receivable                                                                                |  |                             | (115,513  
|Film costs                                                                                         |  |                             | (9,010,176
|Deposits and other assets                                                                          |  |                             | (12,474   
|Accounts payable                                                                                   |  |                             | (583,013  
|Accrued expenses                                                                                   |  |                             | (416,980  
|Deferred revenue                                                                                   |  |                             | (5,903,141
|                                                                                                   |  |                             |           
|Net cash used in operating activities                                                              |  |                             | (968,170  
|                                                                                                  
|Investing activities:                                                                              |  |                             |           
|Additions to property and equipment                                                                |  |                             | (5,259    
|                                                                                                   |  |                             |           
|Net cash used in investing activities                                                              |  |                             | (5,259    
|                                                                                                  
|Financing activities:                                                                              |  |                             |           
|Net cash provided by financing activities                                                          |  |                             |          
|Net decrease in cash                                                                               |  |                             | (973,429  
|                                                                                                   |  |                             |           
|Cash and cash equivalents at beginning of period                                                   |  |                             | 2,776,757 
|                                                                                                   |  |                             |           
|Cash and cash equivalents at end of period                                                         |  | $                           | 1,803,328 
|                                                                                                   |  |                             |           
|Supplemental disclosure of cash flow information:                                                  |  |                             |           
|Cash paid during the period for:                                                                   |  |                             |           
|Income taxes                                                                                       |  | $                           |          
|                                                                                                   |  |                             |           





See accompanying notes



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FILM ROMAN, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(1)Basis of Presentation



Film Roman, Inc., a Delaware corporation (the Company), currently conducts all of its operations through its wholly owned subsidiaries, Film Roman, Inc., a California corporation; Namor Productions, Inc., a California
corporation; Chalk Line Productions, Inc., a California corporation; Diversion Entertainment, Inc., a Delaware corporation and Level 13 Entertainment, Inc., a Delaware corporation, and Special Project Films, Inc., a Delaware corporation. The
accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all
adjustments consisting only of normal recurring accruals considered necessary to present fairly the financial position of the Company as of March 31, 2003 and the results of its operations for the three months ended March 31, 2002 and 2003 and the
cash flows for the three months ended March 31, 2002 and 2003 have been included. The results of operations for interim periods are not necessarily indicative of the results, which may be realized for the full year. For further information, refer to
the financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2002 (the Form 10-K) filed with the Securities and Exchange Commission.



(2)Net Income (Loss) per Common Share



For the three months ended March 31, 2002 and 2003, the per
share data is based on the weighted average number of common shares outstanding during the periods. Common equivalent shares, consisting of outstanding stock options, are not included in the calculation because they are antidilutive.



(3)Film Costs



The components of unamortized film costs consist of the
following:



|                                |  | December 31 2002 |            | March 31 2003
|------------------------------- |  | ---------------- | ---------- | -------------
|                                |  |                  |            | (unaudited)  
|Film productions in process     |  | $                | 18,003,446 |              
|Film productions in development |  |                  | 138,266    |              
|                                |  |                  |            |              
|                                |  | $                | 18,141,712 |              
|                                |  |                  |            |              



(4) Stock
Option Employee Compensation



As allowed
under the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, we apply the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations to account for our employee stock-based compensation plans and, accordingly, do not recognize compensation expense. Furthermore, 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.



SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS No. 123, requires that
companies provide disclosure regarding the pro forma impact of the provisions of SFAS No. 123 in interim financial statements. The following table illustrates the effect on net income and



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earnings per share if the Company had applied the fair value recognition provisions of SFAS Statement No. 123 to stock-based employee
compensation.



|                                                                                                                                            |  | Three Months ended March 31                    |      
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------- | -----
|                                                                                                                                            |  | 2002                                           |      
|                                                                                                                                            |  | (In
thousands, except income/(loss) per share) |      
|Net Income/(loss), as reported                                                                                                              |  | $                                              | (816 
|Deduct: Total stock-based employee compensation expense determined under fair value
based method for all awards, net of related tax effects |  |                                                | (102 
|                                                                                                                                            |  |                                                |      
|Pro forma net income/(loss)                                                                                                                 |  | $                                              | (918 
|                                                                                                                                            |  |                                                |      
|Income/(loss), per share:                                                                                                                   |  |                                                |      
|Basic and dilutedas reported                                                                                                               |  | $                                              | (0.10
|Basic and dilutedpro forma                                                                                                                 |  | $                                              | (0.11





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



This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. The words expect, estimate, anticipate, predict, believe, plan, should, may and
projects and similar expressions and variations thereof are intended to identify forward-looking statements. Such forward-looking statements relate to, among other things, trends affecting the financial condition or results of operations
of the Company; the Companys future production and delivery schedule (including the number of episodes of programming to be produced and delivered during the 2003-2004 television season); plans to enter into new business areas beyond the
Companys core business of animation television production; the Companys objectives, planned or expected activities and anticipated financial performance and liquidity. These forward-looking statements are based largely on the
Companys current expectations and are subject to a number of risks and uncertainties, including without limitation, those described under the caption Managements Discussion and Analysis of Financial Condition and Results of
OperationsRisk Factors in the Companys Form 10-K for the year ended December 31, 2002. Actual results could differ from these forward-looking statements. The Company does not make projections of its future operating results and
undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.



General



Film Roman, Inc. (Film Roman or the Company) develops, produces and distributes a broad range of television
programming for the television network, cable television, first-run domestic syndication and international markets. The Company was founded in 1984 and has grown into one of the leading independent animation studios in the world. Film Roman has
produced and is producing some of the worlds best known animated series, including The Simpsons, King of the Hill, X-Men, The Mask, Bobbys World, The Twisted Tales of Felix the Cat and Garfield & Friends. Over the
years, the Company has primarily produced animation for television, both on a fee-for-services and a proprietary basis. While the Company is currently aggressively pursuing both of theses areas, the Company is also continuing to explore ways to
expand its production capabilities in animation beyond television, direct-to-video, commercials, and the Internet. As the Company moves into these other areas, it is also responding to the changes that are taking place in the media and entertainment
areas.



Production work on a fee-for-services
basis has historically accounted for the largest and most reliable portion of the Companys revenues. Fees paid to the Company for these production services generally range from $300,000 to $650,000 per episode and typically cover all direct
production costs plus a profit margin. The Company also produces programming for which it controls some of the proprietary rights (including, for example, international distribution and licensing and merchandising rights). The Company currently
produces only proprietary programming that has sufficient distribution licensing income to cover the projected production costs. Currently, the Company seeks to cover all of its production costs prior to production of its proprietary programs by
licencing the rights to those productions. As a result, the Company may recognize revenue associated with its proprietary programming over a period of years. Revenue from proprietary programming has not been material over the last several years.



The Company produces a limited number of
animated television series in any year and is substantially dependent on revenues from licensing these programs to broadcasters and from fees from producing programs for third parties. The Companys future performance will be affected by issues
facing all producers of animated programming, including risks related to the limited number of time slots allocated to childrens and/or animated television programming, the intense competition for those time slots, the limited access to
distribution channels (particularly for programs produced by independent studios), the declining license fees paid to producers of programming by broadcasters and the regulations implemented by the Federal Communications Commission (FCC)
governing program content. The Company seeks to limit its financial risk associated with its proprietary



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programming by obtaining commitments from third parties prior to production to cover all of its direct production costs.



The Company is also continuing expansion of its production
capabilities beyond free television, cable, direct-to-video, commercials, computer graphics and the Internet. The Companys future performance will be affected by unpredictable and changing factors that influence the success of an
individual television program or direct-to-video release such as personal taste of the public and critics as well as public awareness of a production and the successful distribution of a production. Although the Company intends to attempt to limit
the risks involved with television film and direct-to-video production, the Company will likely be unable to limit all financial risk, and the level of marketing, promotional and distribution activities and expenses necessary for such production
cannot be predicted with certainty.



The Companys 2003
Production Schedule



The Company is
currently scheduled to produce the following programming for the 2003-2004 broadcast season:



The Simpsons.    The Company is producing 22 new episodes of The Simpsons for exhibition
over the Fox Broadcasting Network. Entering its fifteenth season and still the longest-running prime time animated series in television history, The Simpsons has been honored with a number of awards, including a Peabody Award, Emmy Awards,
Annie Awards, Genesis Awards, International Monitor Awards and Environmental Media Awards, among numerous other honors. The Simpsons has transformed the way the television industry and audiences perceive animation and comedy series in
general.



King of the
Hill.    The Company is currently producing 22 new episodes of King of the Hill to be exhibited on the Fox Broadcasting Network. King of the Hill is the hit half-hour, animated comedy, voted the Best Television
Show of 1997 by TV Guide and Entertainment Weekly, that tells the hilarious stories about Hank Hill, his family and their neighbors in the fictional suburb of Arlen, Texas, the heartland of America.



X-Men.    The
Company is currently producing 9 episodes of X-Men, which airs Saturday mornings on the WB Network.



Tripping the Rift.    The Company has begun to fulfill an order from the Sci-Fi Channel for 13
episodes of Tripping the Rift, which will be produced through a Canadian Company, CineGroupe.



Free for All.    The Company is currently producing 7 episodes of Free for All for
Showtime.



Projects in
Development.    The Company is currently developing McShegney, Princesa and Jr. High Tech along with updating C-Bear and Jamal.



Results of Operations



Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002



Total revenue decreased by 26%, or $4.1 million, to $11.7
million for the quarter ended March 31, 2003, from $15.8 million for the quarter ended March 31, 2002. Total revenue decreased because fewer fee-for services episodes were delivered in 2003.



The Company delivered 18 fee-for-services episodes during the
quarter ended March 31, 2003 compared to 24 episodes in the comparable period in 2002. Fee-for-services revenue decreased 27%, or $4.2 million, to $11.5 million for the quarter ended March 31, 2003, from $15.7 million in the comparable period in
2002 due to a decrease in episodes delivered.



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Other revenue
increased to $0.2 million for the quarter ended March 31, 2003 compared to $0.1 million for the quarter ended March 31, 2002. The increase is primarily due to the higher revenue recognition in commercials, rebillables and visual effects department.



Total cost of revenue decreased by 33%, or $5.2
million, to $10.6 million for the quarter ended March 31, 2003, from $15.8 million for the quarter ended March 31, 2002. Total cost of revenue as a percentage of sales decreased 9% to 91% for the quarter ended March 31, 2003, from 100% in the
comparable period in 2002 due to higher fee-for-services margins. The Company has implemented economies and efficiencies in operations, overhead and production that has substantially increased gross margins.



Total selling, general and administrative expenses for the
quarter ended March 31, 2003 decreased by $0.1 million to $0.7 million from $0.8 million for the comparable period in 2002, due primarily to lower general and development administrative costs.



Operating income was $0.3 million for the quarter ended March
31, 2003, as compared to a loss of $0.8 million for the quarter ended March 31, 2002.



Critical Accounting Policies



Revenue and Cost Recognition.    The Company recognizes revenue based on Statement of Position 00-2 Accounting by Producers and Distributors of Films (SOP 00-2).



Revenue earned from fee-for-service productions is the
principal source of revenue earned by the Company. During 2002 and 2003, such revenues accounted for more than 90% of the Companys total revenues. License fees received by the Company for its work on fee-for-hire productions are recognized on
an episode-by-episode basis as each episode is completed and delivered to the customer in accordance with the terms of the existing arrangement.



Revenue earned from proprietary programs is recognized as such programs are exploited in the markets in which the Company has retained
ownership rights, typically upon the receipt of statements from the Companys licensees. In the event that a licensee pays the Company a nonrefundable minimum guarantee at the beginning of a license term, the Company will record this amount as
revenue if all of the criteria for recognition pursuant to SOP 00-2 is met.



Costs incurred in connection with the acquisition of story rights, the development of stories, production and allocable overhead are capitalized as film costs or expensed in accordance with SOP 00-2.
Film costs are stated at the lower of unamortized cost or fair value. The costs of fee-for-service produced episodes are capitalized and subsequently amortized to cost of revenues at the time revenue is recognized. If the costs of an episode are
expected to exceed the corresponding license fee, all costs incurred in excess of this license fee will be expensed to cost of revenues as incurred. The cost of each proprietary program is capitalized and is amortized in the proportion that revenue
realized relates to managements estimate of the total revenue expected to be realized from such programs.



The Companys cash flow is not necessarily related to revenue recognition and amortization of production costs. Cash is received and
costs are incurred (and paid) throughout the year. Historically, in the fourth quarter, and to a lesser extent the third quarter, cash used in operations typically exceeded cash generated by operations as completed shows were delivered to
broadcasters. The Company expects that cash used in or provided by operations will fluctuate greatly from quarter to quarter.



Overhead Allocation.    Overhead is allocated to particular productions on the basis of the total allocable
overhead times the ratio of direct production costs incurred on a program to total production costs incurred during the period. Total allocable overhead is determined on the basis of managements estimates of the percentage of overhead costs
that can be attributed to the productions in progress during the period.



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Liquidity and Capital
Resources



At March 31, 2003, the Company
had cash and short-term investments of approximately $0.6 million compared to $1.3 million at December 31, 2002. The Companys cash and short-term investment balances have continued to decline and the Company would expect cash balances to
decline further during fiscal 2003.



The Company
will need to secure additional equity or debt financing during fiscal 2003 in order to fund its operations and/or fulfill its growth strategies. However, operating losses, the Companys declining cash balances, trends in the entertainment
industry adversely affecting independent production companies similar to the Company and the Companys historical stock performance may make it difficult for the Company to attract equity investments on terms that are deemed to be favorable to
the Company. In addition, the Companys losses may make it more difficult for the Company to attract debt financing. As a consequence, there can be no assurance that the Company will be successful in arranging for additional equity or debt
financing at levels sufficient to meet its planned needs. The failure to obtain such financing could have an adverse effect on the implementation of the Companys growth strategies and its ability to continue its operation.



The Company has taken a substantial number of actions in order
to implement significant cost reductions, including reducing expenditures for development projects and in its corporate infrastructure. These cost reductions could adversely impact the Companys ability to implement its business plans resulting
in a possible adverse impact on its future operations. Management can not state for certain that its existing cash balances and cash equivalents, combined with anticipated cash flows will be sufficient to meet its cash requirements through at least
the next 12 months, all of the above conditions raise substantial doubt about the Companys ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.



For the three months ended March 31, 2003, net cash used in operating activities was approximately $0.7 million, principally due to cash
used in connection with film production activities. Cash used in investing activities for the three months ended March 31, 2003 was $28,481 due to additions to property and equipment. No cash was generated by financing activities for the three
months ended March 31, 2003.



Cash collected in
advance of revenue recognition is recorded as deferred revenue. As of March 31, 2003, the Company had a balance in its deferred revenue account of $17.9 million.



The following table summarizes the contractual obligations and commitments the Company has over the next 5
years:



|                           |  | 2003 |         | 2004 |   | 2005    |  | 2006 |        | 2007
|-------------------------- |  | ---- | ------- | ---- | - | ------- |  | ---- | ------ | ----
|Operating Lease Agreements |  | $    | 699,335 |      | $ | 30,860  |  | $    | 25,916 |     
|Employment Agreements      |  | $    | 309,139 |      | $ | 187,979 |  | $    |       |     



Risk Factors



The Companys business is subject to
numerous risk factors, not all of which can be known or anticipated and any one of which could adversely impact the Company or its financial condition. Some of those risk factors are as follows:



Company Has a History of Losses and Declining Cash Balances
and There Can Be No Assurance that It Will Be Able to Execute on Its Business Strategy.    The Company has accumulated losses of approximately $42.0 million through March 31, 2003. Because substantial portions of the
Companys expenses are fixed and its gross margin is relatively low, achieving profitability and positive cash flows depends upon Companys ability to generate and sustain substantially higher revenues. Although the Companys revenues
are relatively predicable



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and its strategy is to increase revenues and gross margin, it cannot be assured that the Company will be able to do so and consequently the
Company is very likely to experience additional losses and a further decline in its cash balances in 2003.



Dependence on a Limited Number of Television Programs.    The Companys revenue has historically come from
the production of a relatively small number of animated television programs. King of the Hill, The SimpsonsandX-Menaccounted for approximately 40%, 41% and 15% respectively, of the Companys total revenue for the year ended
December 31, 2002. King of the Hill, The SimpsonsandX-Menaccounted for approximately 40%, 52% and 6% respectively, of the Companys total revenue for the three months ended March 31, 2003. Film Roman cannot assure that
broadcasters will continue to broadcast the Companys proprietary or fee-for-services programs or that Film Roman will continue to be engaged to produce such programs.



Failure to Renew Licenses or Production Agreements.    There can be no assurance
that any of the programs being produced by the Company will be relicensed for additional broadcast seasons or renewed for production or, if so relicensed or renewed, that the terms of the license agreements or production agreements will be as
favorable to the Company as those of existing licenses or production agreements.



Declining Value of License Fee Agreements and Increasing Control of Proprietary Rights by Broadcasters.    Competition created by the emergence of new broadcasters (such as
UPN, WB, Nickelodeon and the USA Network) has provided television audiences with more choices, thereby, generally reducing the number of viewers watching any one program. As a result, the market share of, and license fees paid by, FOX, CBS, NBC and
ABC may continue to decrease and make it difficult for Film Roman to finance certain proprietary programs.



Risks of Vertical Integration.    Over the last decade, broadcasters, distributors and producers of television
and motion picture programming have become increasingly integrated vertically through mergers, acquisitions, partnerships, joint ventures or other affiliations. Film Roman has not entered into any of these relationships. As a result, the number of
time slots available for childrens and/or animated programming and, specifically, for animated programming supplied by independent animation studios, may decrease, making it more difficult to compete successfully for available time slots.



Current Programs May Not Sustain Their
Popularity and New Programs May Not Become Popular.    Film Roman derives substantially all of its revenue from the production and distribution of animated television programs. Each program is an individual artistic work, and
consumer reaction will determine its commercial success. Film Roman cannot assure that the Company will be able to continue to create entertaining episodes for its existing programs or that the Company will be able to create new programs that are
appealing to broadcasters.



Risks Related to
Expansion of Production of Proprietary Programming.    Film Roman intends to expand its production of programming for which the Company owns or controls certain licensing and/or distribution rights (proprietary
programming). These rights may include domestic and international broadcast distribution, home video distribution, licensing and merchandising and interactive/game development (proprietary rights). While Film Roman seeks to limit
the financial risk associated with the development of proprietary programming by obtaining commitments prior to production to cover a portion of its direct production costs, the Company cannot be sure that it will be able to recover the balance of
the production and overhead costs through the exploitation of its remaining rights.



Risk of Budget and Cost Overruns.    Although Film Roman reviews cost reports and updates the Companys cost projections regularly and has generally completed each of
the Companys productions within its budget, the Company cannot assure that the actual production costs for its programming will remain within budget. Significant cost or budget overruns could negatively impact the Companys gross margin
since the majority of the Companys revenues result from fixed fee arrangements.



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Revenues
and Costs Recognized in Certain Periods May Be Overstated or Understated Due to the Application of Entertainment Accounting Policies.    In 2001, Film Roman adopted SOP 00-2 regarding revenue recognition and amortization of
production costs. All costs incurred in connection with an individual program or film, including acquisition, development, production and allocable production overhead costs and interest, are capitalized as television and film costs. These costs are
stated at the lower of unamortized cost or fair value. For proprietary programs, Film Roman amortizes its estimated total production costs for an individual program or film in the proportion that revenue realized relates to managements
estimate of the total revenue expected to be received from such program or film. As a result, if revenue or cost estimates change with respect to a program or film, the Company may be required to write-down all or a portion of its unamortized costs
for the program or film. The Company cannot make assurances that these write-downs will not have a significant impact on its results of operations and financial condition.



Competition.    The creation, development, production and distribution of
television programming, together with the exploitation of the proprietary rights related to such programming, is a highly competitive business. Film Roman competes with producers, distributors, licensors and merchandisers, many of who are larger and
have greater financial resources than does the Company. Although the number of outlets available to producers of animated programming has increased with the emergence of new broadcasters, the number of time slots available to independent producers
of childrens and animated programming remains limited. Moreover, because license fees in the United States have dropped substantially recently, companies that do not rely on U.S. broadcast license fees to finance the production of animation
programming, particularly international animation companies that receive governmental subsidies, have achieved a competitive advantage. These companies now serve as an additional source of competition for the limited slots available to independent
animation companies. As a result of these factors, the Company cannot make assurances that it will be able to remain competitive.



Overseas Subcontractors.    Like other producers of animated programming, Film Roman subcontracts some of the
less creative and more labor-intensive components of its production process to animation studios located in low-cost labor countries, primarily in the Far East. As the number of animated feature films and animated television programs increases, the
demand for the services of overseas studios has increased substantially. This increased demand may lead overseas studios to raise their fees, which may result in increased production costs, or an inability to contract with the Companys
preferred overseas studios. Further, political considerations, such as acts of war or terrorism, may affect the Companys ability to obtain services from Far East countries.



Technological Changes; Possible Changes in Production of Products.    The
proliferation of new production technologies may change the manner in which the animation industry creates and distributes programming. Recently, certain animators have begun to use computer-generated animation, including three-dimensional digital
animation, instead of two-dimensional cell animation, to create their animated programming. Film Roman cannot be sure that the introduction and proliferation of three-dimensional digital animation or other technological changes will not cause the
Companys historical methods of producing animation to become less cost competitive or less appealing to its audiences. In addition, the Company cannot be sure that it will be able to adapt to such changes in a cost-effective manner.



Dependence upon Key
Personnel.    Film Romans success depends to a significant extent upon the expertise and services of John Hyde, President and Chief Executive Officer. Although the Company has employment agreements with Mr. Hyde, the
loss of services of Mr. Hyde could have an adverse effect on the Companys business, results of operations and financial condition. Film Roman does not currently carry key man life insurance policies on any of the Companys
executives.



Casualty
Risks.    Substantially all of the Companys operations and personnel are located in its North Hollywood headquarters, resulting in vulnerability to fire, flood, power loss, telecommunications failure or other local
conditions, including the risk of seismic activity. If a disaster were to occur, the Companys disaster recovery plans may not be adequate to protect the Company and its business interruption insurance may not fully compensate the Company for
its losses.



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Volatility
of Stock Price.    The Market price of the Companys Common Stock, which trades on the NASD OTCBB, could fluctuate significantly in response to operating results and other factors.



Impact of FCC Regulations.    The
policies of the current FCC indicate a potential lessening of government restrictions that may facilitate more vertical integration of companies than in the past. This could have an adverse effect on the availability of buyers for the Companys
product.



Potential Union
Activity.    There have been and may be efforts by the International Alliance of Theatrical Stage Employees (I.A.T.S.E.) Local Union 839 (Animation Guild) to collect enough signatures from employees to have an
election for representation of the Companys production employees. Union representation of the production employees could have an adverse effect on the Company.



Film Roman Does Not Intend to Pay Dividends.    Film Roman has never paid
dividends and currently does not intend to declare or pay dividends. The Company plans to follow a policy of retaining earnings to finance the growth of its business. Whether or not the Company declares or pays dividends is up to the Board of
Directors and will depend on results of operations, financial condition, contractual and legal restrictions and other factors the Board of Directors deems relevant at that time.



Item 3.    Quantitative and Qualitative Disclosures about Market Risk



The Company does not utilize market risk sensitive instruments (such as derivative financial instruments) for trading or other purposes.



The Company has low exposure to interest rate
risk. The Company currently does not have any debt (fixed or floating rate) other than trade liabilities and invests its cash assets in debt instruments with maturities of less than 90 days. Thus, a decrease (or increase) in future interest rates
will directly and proportionately decrease (or increase, respectively) the Companys future interest income. For the three months ended March 31, 2003, the Company earned interest income of $2,664.



The Company is not exposed to significant foreign exchange
rate risk. All of the Companys contracts with foreign subcontractors are dollar-denominated. The Company makes limited international sales in foreign currencies, the aggregate of which the Company estimates to be less than one percent of the
Companys yearly revenue.



Item 4.    Controls and Procedures



As of March 31, 2003, an evaluation was performed under the supervision and with the participation of the Companys management, including the CEO/CFO, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures. Based on that evaluation, the Companys management, including the CEO/CFO, concluded that the Companys disclosure controls and procedures were effective as of March 31,
2003. There have been no significant changes in the Companys internal controls or in other factors that could significantly affect internal controls subsequent to March 31, 2003.



Item 5.    Subsequent Event



On May 12, 2003, the Company entered into a letter of understanding with IDT Corporation to make an equity
investment in the Company, subject to execution of the definitive agreement.



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PART II.    OTHER INFORMATION



Item 6.    Exhibits and Reports on Form 8-K



(a)  Exhibits



The Exhibit, and the Index thereto, required to be filed by Item 601 of Regulation S-K are attached hereto.



(b)  Reports on Form 8-K



On February 7, 2003, it was announced that due to other commitments, Mike Medavoy and Daniel Villaneuva, effective as of February 5, 2003,
and Steve Tisch, effective as of February 6, 2003, have each resigned as directors of the Company.



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SIGNATURES



Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



Dated: May 15, 2003



FILM ROMAN, INC.By:

/s/    JOHN W.
HYDEJohn W. Hyde President and Chief Executive Officer and DirectorBy:

/s/    JOAN
THOMPSONJoan Thompson Chief Accounting Officer




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CERTIFICATIONS



I, John W. Hyde,
certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of Film Roman, Inc.;
| | -- |  | -----------------------------------------------------------------------



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



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



| | 4. |  | The registrants 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 we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | b) |  | 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 quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | a) |  | 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
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | 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 registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|May 15, 2003 |  | /s/    JOHN W. HYDE            
|------------ |  | -------------------------------
|             |  | John W. Hyde                   
|             |  | Title: Chief Executive Officer,
|             |  | Chief Financial Officer        



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INDEX TO EXHIBITS



|Exhibit Number |  | Description                                                                                                                                                                 
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|99.1           |  | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



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