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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 September 30, 2002





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. Employerof 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 October 31, 2002, 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 INFORMATIONItem 1.

Financial Statements

3Consolidated Balance Sheets as of December 31, 2001 and September 30, 2002 (unaudited)

3Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2001 and September 30, 2002 (unaudited)

4Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and September 30, 2002 (unaudited)

5Notes to Consolidated Financial Statements

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

7Item 3.

Quantitative and Qualitative Disclosures about Market Risk

14Item 4.

Controls and Procedures

14PART II.    OTHER INFORMATIONItem 6.

Exhibits and Reports on Form 8-K

15Signatures

16Certifications

17Index to Exhibits

18







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##### Table of Contents

PART I.    FINANCIAL INFORMATION





Item 1.    Financial Statements





FILM ROMAN, INC.





CONSOLIDATED BALANCE SHEETS


(Unaudited)





December 31, 2001


September 30, 2002 (Note
1)(unaudited)ASSETSCash and cash equivalents

$
2,776,757


$
1,908,658Accounts receivable


259,784



129,404Film costs, net of accumulated amortization of $50,663,342 (2001) and $67,878,714 (2002)


22,030,027



18,219,432Property and equipment, net of accumulated depreciation and amortization of $2,797,025 (2001) and $3,077,025 (2002)
..


493,552



244,224Deposits and other assets


612,492



523,479Total Assets

$
26,172,612


$
21,025,197LIABILITIES AND STOCKHOLDERS DEFICIENCYAccounts payable

$
1,678,063


$
840,580Accrued expenses


1,964,982



1,902,744Deferred revenue


26,312,646



24,072,315Total liabilities


29,955,691



26,815,639Commitments and ContingenciesStockholders 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 2001 and
2002


85,777



85,777Additional paid-in capital


36,379,615



36,379,615Accumulated deficit


(40,248,471
)


(42,255,834
)Total stockholders deficiency


(3,783,079
)


(5,790,442
)Total liabilities and stockholders deficiency

$
26,172,612


$
21,025,197








See accompanying notes







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FILM ROMAN, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





Three Months ended September 30,


Nine Months ended September 30,2001


2002


2001


2002Revenue

$
3,715,109


$
5,737,843


$
32,314,745


$
32,628,525Cost of revenue


4,457,596



5,851,168



32,424,340



32,144,232Selling, general and administrative expenses


1,289,604



910,763



3,202,801



2,510,631Operating loss


(2,032,091
)


(1,024,088
)


(3,312,396
)


(2,026,338
)Interest income


18,961



2,748



67,432



18,975Loss before cumulative effect of a change in accounting principle


(2,013,130
)


(1,021,340
)


(3,244,964
)


(2,007,363
)Cumulative effect of a change in accounting principle










(364,000
)


Net loss

$
(2,013,130
)

$
(1,021,340
)

$
(3,608,964
)

$
(2,007,363
)Loss before cumulative effect of a change in accounting principle, per common share basic & diluted

$
(0.23
)

$
(0.12
)

$
(0.38
)

$
(0.23
)Net loss per common share basic and diluted

$
(0.23
)

$
(0.12
)

$
(0.42
)

$
(0.23
)Weighted average number of shares outstanding basic and diluted


8,577,690



8,577,690



8,569,494



8,577,690











See accompanying notes







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##### Table of Contents




FILM ROMAN, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Nine Months endedSeptember 30,2001


2002Operating activities:Net loss

$
(3,608,964
)

$
(2,007,363
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


300,000



280,000Amortization of film costs


32,424,340



32,144,232Cumulative effect of a change in accounting principle


364,000



Changes in operating assets and liabilities:Accounts receivable


(201,452
)


130,380Film costs


(31,467,984
)


(28,333,637
)Deposits and other assets


(28,274
)


89,013Accounts payable


(418,860
)


(837,483
)Accrued expenses


(342,723
)


(62,238
)Deferred revenue


1,802,558



(2,240,331
)Net cash used in operating activities


(1,177,359
)


(837,427
)Investing activities:Additions to property and equipment


(91,706
)


(30,672
)Net cash used in investing activities


(91,706
)


(30,672
)Financing activities:Exercise of Stock Options


9,375



Net cash provided by financing activities


9,375



Net decrease in cash


(1,259,690
)


(868,099
)Cash and cash equivalents at beginning of period


4,203,221



2,776,757Cash and cash equivalents at end of period

$
2,943,531


$
1,908,658Supplemental disclosure of cash flow information:Cash paid during the period for:Income taxes

$
6,000


$
5,600





See accompanying notes







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##### Table of Contents




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; Film Roman Records, Inc., a Delaware corporation; Diversion Entertainment, Inc., a
Delaware corporation; 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 September 30, 2002 and the results of its operations for the three and nine months ended September 30, 2001 and 2002 and the cash flows for the nine months ended September 30, 2001 and 2002 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, 2001 (the Form 10-K) and the First Amendment to the Form 10-K (the Form 10-K/A) filed with the Securities and Exchange Commission.





(2)Net Loss per Common Share





For the three and nine months ended September 30, 2001 and 2002, 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, 2001

September 30, 2002(unaudited)Film productions in process

$
21,844,184

$
17,944,568Film productions in development


185,843


274,864$
22,030,027

$
18,219,432





(4)Conforming Presentation





Certain amounts presented in the September 30, 2001 Consolidated Statements of Operations and Cash Flows have been reclassified to
conform to the September 30, 2002 basis of presentation.





(5)Change in Accounting Principle





In June 2000, Statement of Position 00-2 Accounting by Producers or Distributors of Films (SOP 00-2) was issued.
SOP 00-2 establishes new financial accounting and reporting standards for producers and distributors of films, including changes in accounting for advertising, development and overhead costs. The Company adopted the provisions of SOP 00-2 as of
January 1, 2001. SOP 00-2 requires that certain indirect overhead costs and development costs for abandoned projects be charged directly to expense, instead of those costs being capitalized to film costs as was required under the previous accounting
model. In connection with the adoption of SOP 00-2, the Company recorded a non-cash charge of $364,000 to reduce the carrying value of its film inventory. Such amount is primarily due to the expensing of certain indirect overhead costs and
development costs for abandoned projects, which were previously capitalized. The non-cash charge is reflected as a cumulative effect of a change in accounting principle in the accompanying consolidated statement of operations for the nine months
ended September 30, 2001.




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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 2002-2003 television season); 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, 2001. 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 licenses 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, including motion pictures, cable, 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 $800,000 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 merchandising rights). Fees paid to the Company for these production services typically do not cover all direct production costs. Generally, the Company seeks to cover a portion of its production costs prior to
production of its proprietary programs and seeks to cover the remaining production costs through the exploitation of the proprietary rights associated with these programs. As a result, the Company may recognize revenue associated with its
proprietary programming over a period of years. Revenues from proprietary programming have 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 public acceptance of its programming, 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. While the Company seeks to limit its financial risk associated with its proprietary programming by
obtaining commitments from third parties prior




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to production to cover a portion of its direct production costs, there can be no assurance that the Company will be able to cover the balance of its production costs and overhead costs relating
to production, licensing and distribution through the exploitation of its proprietary rights. As a result of the foregoing risks, there can be no assurance that the Company will be able to generate revenues that exceed its costs.





The Company is also continuing to explore ways to expand its animated production capabilities beyond television, including
cable, direct-to-video, commercials 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 2002 Production Schedule





The Company has historically been a major producer of animated prime time, first run syndicated, and Saturday morning programming. The market for these programs is composed of television networks (ABC, CBS, NBC, FOX, UPN and
The WB); syndicators of first run programming that license programming on local stations nationwide (Columbia-Tristar, Universal, Paramount, King, Fox, MGM and Viacom); and cable networks and services (USA, Disney Channel, MTV, Fox Family, HBO,
Showtime and TNT).





The Company is currently scheduled to produce the following programming for the 2002-2003
broadcast season:





The Simpsons.    The Company is producing 22 new
episodes of The Simpsons for exhibition over the Fox Broadcasting Network. Entering its fourteenth 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 13 episodes of X-Men, which airs Saturday
mornings on the WB Network.





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





John Waters Patent Leather Dream House.    The Company is developing this late-night half-hour series for MTV to be produced through CineGroupe.





Hairballs.    The Company is currently developing this late-night half-hour series.





Projects in Development.    The Company is currently developing Rex
Riders for evening viewers and is developing Shlub, DeityandShawks for the kids market.




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Results of Operations





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





Total revenue increased by 54%, or $2.0 million, to $5.7 million for the quarter ended September 30, 2002, from $3.7 million for the quarter ended September 30, 2001. Total
revenue increased due to more fee-for-services episodes delivered in 2002 compared to the same period in 2001.





The Company delivered 9 fee-for-services episodes during the quarter ended September 30, 2002 compared to 6 episodes in the comparable period in 2001. Fee-for-services revenue increased 61%, or $2.0 million, to $5.3 million for
the quarter ended September 30, 2002, from $3.3 million in the comparable period in 2001 as a result of the increase in episodes delivered.





Other revenue remained constant at $0.4 million for the quarter ended September 30, 2002 and 2001.





Total cost of revenue increased by 31%, or $1.4 million, to $5.9 million for the quarter ended September 30, 2002, from $4.5 million for the quarter ended September 30, 2001. Total cost of revenue as a
percentage of sales decreased 18% to 102% for the quarter ended September 30, 2002, from 120% in the comparable period in 2001. The decrease is due to higher fee-for-service and commercial margins and a decrease in Level13 costs offset by a higher
write down of development projects.





Total selling, general and administrative expenses for the quarter ended
September 30, 2002 decreased by $0.4 million to $0.9 million from $1.3 million for the comparable period in 2001, due to one-time costs incurred in connection with the termination of certain administrative employees along with costs incurred from
the Pentamedia transaction in 2001.





Operating loss was $1.0 million for the quarter ended September 30, 2002, as
compared to a loss of $2.0 million for the quarter ended September 30, 2001.





Nine Months Ended September
30, 2002 Compared to Nine Months Ended September 30, 2001





Total revenue increased by 1%, or $0.3 million, to
$32.6 million for the nine months ended September 30, 2002, from $32.3 million for the nine months ended September 30, 2001. The increase was due primarily to an increase in the delivery of prime time fee-for-services episodes in 2002. This increase
was offset by a decrease because in 2001, the Company delivered a movie-of-the-week special and a live action direct-to-video two-hour film.





The Company delivered 47 prime time and other fee-for-services episodes during the nine months ended September 30, 2002 compared to 53 episodes in the comparable period in 2001. Fee-for-services
revenue increased 26%, or $6.5 million, to $31.6 million for the nine months ended September 30, 2002, from $25.1 million in the comparable period in 2001 as a result of the increase in prime time episodes delivered.





Other revenue decreased to $1.0 million for the nine months ended September 30, 2002 compared to $7.1 million for the nine months
ended September 30, 2001. The decrease is primarily due to the delivery of a movie-of-the-week special and a live action direct-to-video two-hour film in 2001.





Total cost of revenue decreased by 1%, or $0.3 million, to $32.1 million for the nine months ended September 30, 2002, from $32.4 million for the nine months ended September 30, 2001. Total cost of
revenue as a percentage of sales decreased by 1% to 99% for the nine months ended September 30, 2002, from 100% for the nine months ended September 30, 2001 primarily due to a negative direct-to-video margin incurred in 2001.





Total selling, general and administrative expenses for the nine months ended September 30, 2002 decreased by $0.7 million to
$2.5 million from $3.2 million for the nine months ended September 30, 2001, due to one-time costs incurred in connection with the termination of certain administrative employees, along with the costs incurred from the Pentamedia transaction
incurred in 2001.




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Operating loss was $2.0 million for the nine months ended September 30, 2002, as
compared to a loss of $3.3 million for the nine months ended September 30, 2001.





Industry Accounting Policies





Revenue and Cost Recognition.    Effective January 1, 2001, 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-services productions is the principal source of revenue earned by the Company. During 2000 and 2001, 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. 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.





Liquidity and Capital Resources





The Company may need to secure additional equity or debt financing during fiscal 2003 in order to fulfill its business strategies. Recent 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 significant 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
successfully run its operation.




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At September 30, 2002, the Company had cash and short-term investments of
approximately $1.9 million compared to $2.8 million at December 31, 2001. The Companys cash and short-term investment balances have continued to decline since December 31, 2001 and the Company expects cash to decline further during the next
quarter of 2002 and into 2003. In order to preserve cash, the Company has been required to reduce expenditures for development projects and in its corporate infrastructure, both of which may have a material adverse affect on the Companys
future operations. Further reductions in its cash balances could require the Company to make more significant cuts in its operations, which could adversely impact the Companys ability to execute its business plan, resulting in a possible
adverse impact on its future operations. There can be no assurance that the Company can achieve these reductions over a short enough period of time in order to allow it to continue as a going concern.





Management believes that its existing cash balances and short-term investments, combined with anticipated cash flow from operations, will
nevertheless be sufficient to meet its cash requirements for the foreseeable future. In the event that cash flows are not as anticipated, the Company has a strategy in place to implement further cost reductions. Accordingly, the consolidated
financial statements have been prepared on the basis that the Company will continue as a going concern.





For the
nine months ended September 30, 2002, net cash used for operating activities was approximately $0.8 million, principally due to cash used in connection with film production activities. For the nine months ended September 30, 2002, net cash used for
investing activities was $30,672 due to additions to property and equipment. No cash was generated by financing activities for the first nine months of 2002.





Cash collected in advance of revenue recognition is recorded as deferred revenue. As of September 30, 2002, the Company had a balance in its deferred revenue account of $24.1 million. There will be a
net cost of approximately $2.7 million to the Company (future receipts less future expenditures) to finish the programs for which cash has been collected in advance and included in deferred revenue.





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





2002

2003

2004

2005

2006Operating Lease Agreements

$
415,339

$
1,105,200

$
24,372

$
19,428

$
1,532Employment Agreements

$
156,260

$
450,975

$
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:





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.





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 33%, 30% and 16% respectively, of the Companys total revenue for the year ended December 31, 2001. King of the Hill, The SimpsonsandX-Menaccounted for approximately 35%, 50% and 12% respectively, of the Companys total revenue for the nine months ended September 30, 2002. 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.




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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 $42.3 million through September 30, 2002. 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 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 may experience additional losses and a further decline in its cash balances in 2002.





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.





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.





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.





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. 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




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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 whom 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.





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. In addition, the Company, its clients, domestic subcontractors and overseas subcontractors are all subject to the
possibility of acts of terror, acts of war, or threat of such acts. 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.





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.




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Potential Union Activity.    There are 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 nine months ended September 30,
2002, the Company earned interest income of $18,975.





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 September 30, 2002, 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 September 30, 2002. There have been no significant changes in the Companys
internal controls or in other factors that could significantly affect internal controls subsequent to September 30, 2002.




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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





No reports on Form 8-K were filed during the quarter ended September 30, 2002.




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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: November 14, 2002





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.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




November 14, 2002

/S/    JOHN W. HYDEName:  John W. HydeTitle:  Chief Executive Officer, Chief Financial Officer







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INDEX TO EXHIBITS





Exhibit Number

Description99.1

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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