<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

    FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

                                       OR

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


                         COMMISSION FILE NUMBER 0-25488


                        THE L.L. KNICKERBOCKER CO., INC.
             (Exact name of registrant as specified in its charter)


          CALIFORNIA                                             33-0230641
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)


         25800 COMMERCENTRE DRIVE                                  92630
         LAKE FOREST, CALIFORNIA                                (Zip Code)
(Address of principal executive offices)


         ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 595-7900

         Indicate by mark whether the issuer: (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 the past 90 days. Yes  X    No
                                       ---      ---

The number of shares outstanding of the registrant's Common Stock, as of July
30, 2001 was 46,987,728.

<PAGE>   2

                                TABLE OF CONTENTS


ITEM                                                                        PAGE
----                                                                        ----

                                     PART I

1.  FINANCIAL INFORMATION

    A. Condensed Consolidated Statements of Operations (unaudited)
         for the three month periods ended June 30, 2001
         and June 30, 2000..............................................      1

    B. Condensed Consolidated Statements of Operations (unaudited)
         for the six month periods ended June 30, 2001
         and June 30, 2000..............................................      2

    C. Condensed Consolidated Statements of Comprehensive Income/Loss
         (unaudited) for the three and six month periods ended
         June 30, 2001 and June 30, 2000................................      3

    D. Condensed Consolidated Balance Sheets at June 30, 2001
         (unaudited) and December 31, 2000..............................      4

    E. Condensed Consolidated Statements of Cash Flows (unaudited)
         for the six month periods ended June 30, 2001
         and June 30, 2000..............................................      5

    F. Notes to Condensed Consolidated Financial Statements
         (unaudited)....................................................      7

2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
    RESULTS OF OPERATIONS

    A. General Business Description.....................................     16

    B. Results of Operations............................................     17

    C. Liquidity and Capital Resources..................................     20

                                     PART II

1. LEGAL PROCEEDINGS ...................................................     23

3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........     24

6. EXHIBITS AND REPORTS ON FORM 8-K.....................................     25

   SIGNATURE............................................................     25

<PAGE>   3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE L.L. KNICKERBOCKER CO., INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(unaudited)

<TABLE>
<CAPTION>
                                              Three months ended June 30
                                            ------------------------------
                                                2001              2000
                                            ------------      ------------
<S>                                         <C>               <C>
Sales, net of returns                       $  6,658,000      $  8,765,000
Cost of sales                                  3,748,000         4,939,000
                                            ------------      ------------
Gross profit                                   2,910,000         3,826,000
Advertising expense                              164,000           158,000
Selling expense                                  791,000         1,028,000
General and administrative expense             1,742,000         2,489,000
                                            ------------      ------------
Operating income                                 213,000           151,000
Other income, net                                393,000            59,000
Interest expense                                 119,000           148,000
                                            ------------      ------------
Income before reorganization items and
  income tax expense                             487,000            62,000
Reorganization items                             307,000           712,000
                                            ------------      ------------
Income (loss) before income tax expense          180,000          (650,000)
Income tax expense                                    --            21,000
                                            ------------      ------------
Net income (loss)                           $    180,000      $   (671,000)
                                            ============      ============
Net income (loss) per share:
     Basic and diluted                      $       0.00      $      (0.01)
                                            ============      ============
Shares used in computing net income
  (loss) per share:
     Basic and diluted                        46,987,728        46,987,728
                                            ============      ============
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                       1

<PAGE>   4

THE L.L. KNICKERBOCKER CO., INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(unaudited)

<TABLE>
<CAPTION>
                                                    Six months ended June 30
                                                 ------------------------------
                                                     2001               2000
                                                 ------------      ------------
<S>                                              <C>               <C>
Sales, net of returns                            $ 12,017,000      $ 15,959,000
Cost of sales                                       6,820,000         9,155,000
                                                 ------------      ------------
Gross profit                                        5,197,000         6,804,000
Advertising expense                                   331,000           248,000
Selling expense                                     1,700,000         1,939,000
General and administrative expense                  3,805,000         5,435,000
                                                 ------------      ------------
Operating loss                                       (639,000)         (818,000)
Other income, net                                     458,000           163,000
Interest expense                                      265,000           432,000
                                                 ------------      ------------
Loss before reorganization items and
  income tax expense                                 (446,000)       (1,087,000)
Reorganization items                                  526,000           978,000
                                                 ------------      ------------
Loss before income tax expense                       (972,000)       (2,065,000)
Income tax expense                                      2,000            27,000
                                                 ------------      ------------
Net loss                                         $   (974,000)     $ (2,092,000)
                                                 ============      ============
Net loss per share:
     Basic and diluted                           $      (0.02)     $      (0.05)
                                                 ============      ============

Shares used in computing net loss per share:
     Basic and diluted                             46,987,728        46,403,856
                                                 ============      ============
</TABLE>


See accompanying notes to condensed consolidated financial statements.


                                       2

<PAGE>   5

THE L.L. KNICKERBOCKER CO., INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/LOSS
(unaudited)

<TABLE>
<CAPTION>
                                                    Three months ended             Six months ended
                                                         June 30,                       June 30,
                                                 -------------------------     --------------------------
                                                    2001           2000           2001            2000
                                                 ---------      ---------      ---------      -----------
<S>                                              <C>            <C>            <C>            <C>
Net income (loss)                                $ 180,000      $(671,000)     $(974,000)     $(2,092,000)
Other comprehensive income (loss):
    Unrealized loss on investment                                               (240,000)
    Reclassification adjustment for amount
      included in net income                       385,000                       385,000
    Foreign currency translation adjustments       (73,000)      (121,000)      (106,000)        (175,000)
                                                 ---------      ---------      ---------      -----------
Comprehensive income (loss)                      $ 492,000      $(792,000)     $(935,000)     $(2,267,000)
                                                 =========      =========      =========      ===========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                       3

<PAGE>   6

THE L.L. KNICKERBOCKER CO., INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

<TABLE>
<CAPTION>
                                                        June 30,        December 31,
                                                          2001              2000
                                                      ------------      ------------
<S>                                                   <C>               <C>
ASSETS

Cash and cash equivalents                             $    876,000      $  2,488,000
Restricted cash                                            125,000           135,000
Accounts receivable, net                                 3,839,000         4,501,000
Inventories                                              3,556,000         3,614,000
Prepaid expenses and other current assets                  837,000           842,000
                                                      ------------      ------------
   Total current assets                                  9,233,000        11,580,000

Property and equipment, net                              2,414,000         2,527,000
Investments                                                776,000         2,048,000
Other assets                                               793,000           816,000
Goodwill, net of accumulated amortization of
  $1,480,000 at June 30, 2001 and $1,374,000
  at December 31, 2000                                   1,064,000         1,171,000
                                                      ------------      ------------
                                                      $ 14,280,000      $ 18,142,000
                                                      ============      ============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Accounts payable                                      $  3,465,000      $  4,737,000
Accrued expenses                                         1,242,000         1,468,000
Notes payable                                            1,701,000         2,240,000
Commissions and royalties payable                          832,000           958,000
Interest payable                                           338,000           374,000
Income taxes payable                                       133,000           133,000
Current portion of long-term debt not
  subject to compromise                                    311,000           302,000
                                                      ------------      ------------
  Total current liabilities                              8,022,000        10,212,000

Long-term debt, less current portion not
  subject to compromise                                    269,000           358,000
Liabilities subject to compromise under
  reorganization proceeding                              8,426,000         9,074,000
                                                      ------------      ------------
  Total liabilities                                     16,717,000        19,644,000

Commitments and contingencies (Note 1)

Stockholders' deficit:
Preferred stock - no par value, authorized
  shares of 10,000,000, no issued and
  outstanding shares                                            --                --
Common stock - no par value, authorized
  shares of 100,000,000, issued and
  outstanding shares - 46,987,728 (2001 and 2000)       41,637,000        41,637,000

Additional paid-in capital                               6,012,000         6,012,000
Accumulated deficit                                    (45,525,000)      (44,551,000)
Accumulated other comprehensive loss                    (4,561,000)       (4,600,000)
                                                      ------------      ------------
  Total stockholders' deficit                           (2,437,000)       (1,502,000)
                                                      ------------      ------------
                                                      $ 14,280,000      $ 18,142,000
                                                      ============      ============
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                       4

<PAGE>   7

THE L.L. KNICKERBOCKER CO., INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(unaudited)

<TABLE>
<CAPTION>
                                                                  June 30
                                                         --------------------------
                                                            2001            2000
                                                         -----------    -----------
<S>                                                      <C>            <C>
Cash flows from operating activities:
Net loss                                                 $  (974,000)   $(2,092,000)
Adjustments to reconcile net loss to net cash
  (used in) provided by operating activities:
  Depreciation and amortization                              415,000        717,000
  Gain on sale of investments                               (325,000)       (10,000)
  Loss (gain) on disposition of fixed assets                  26,000         (1,000)
  Amortization of debt discount                                   --         60,000
  Property impairment charge                                      --        400,000
  Changes in operating accounts:
       Accounts receivable, net                              662,000      1,281,000
       Inventories                                            76,000      1,013,000
       Prepaid expenses and other current assets               5,000        719,000
       Other assets                                            5,000         42,000
       Accounts payable and accrued expenses                (417,000)      (891,000)
       Commissions and royalties payable                    (126,000)      (214,000)
       Income taxes payable                                       --        (30,000)
       Operating payables subject to compromise
          under reorganization proceeding                         --        247,000
                                                         -----------    -----------
Net cash (used in) provided by operating activities         (653,000)     1,241,000

Cash flows from investing activities:
  Acquisitions of property and equipment                    (234,000)      (413,000)
  Proceeds from sales of property and equipment                   --          8,000
  Proceeds from sales of investments                         625,000        486,000
                                                         -----------    -----------
Net cash provided by investing activities                    391,000         81,000

Cash flows from financing activities:
  Net repayments on line of credit                        (1,187,000)      (484,000)
  Payments on long-term debt                                 (61,000)       (45,000)
  Borrowings on long-term debt                                    --        189,000
                                                         -----------    -----------
 Net cash used in financing activities                    (1,248,000)      (340,000)

Effect of exchange rate changes on cash                     (102,000)       (42,000)
                                                         -----------    -----------

Net (decrease) increase in cash and cash equivalents      (1,612,000)       940,000
Cash and cash equivalents, beginning of period             2,488,000      1,510,000
                                                         -----------    -----------
Cash and cash equivalents, end of period                 $   876,000    $ 2,450,000
                                                         ===========    ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid for interest                                   $   309,000    $   158,000
                                                         ===========    ===========
Cash paid for income taxes                               $     2,000    $    57,000
                                                         ===========    ===========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                       5

<PAGE>   8

THE L.L. KNICKERBOCKER CO., INC.
(DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)


SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY:

During the six months ended June 30, 2001, the Company transferred shares of its
investment in Pure Energy Corporation, with a carrying value of $299,000 at the
time of transfer, in settlement of trade accounts payable of $1,117,000.

During the six months ended June 30, 2000 $219,000 of convertible debentures and
$22,000 of accrued interest was converted to common stock.

During the six months ended June 30, 2000, the Company financed the acquisition
of property and equipment through borrowings on long-term debt of $51,000.



See accompanying notes to condensed consolidated financial statements.


                                       6

<PAGE>   9

THE L.L. KNICKERBOCKER CO., INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1: REORGANIZATION AND BASIS OF REPORTING

Description of Business - The L.L. Knickerbocker Co., Inc. (LLK)
(debtor-in-possession) and subsidiaries (collectively, the Company) is in the
business of developing and selling celebrity and non-celebrity products which
include collectible items such as porcelain and vinyl dolls, teddy bears,
figurines, fine and costume jewelry, and other consumer products. The Company's
customers include major networks in the home shopping industry, retail and
wholesale distributors, and consumers. The dolls, bears and figurines are
manufactured by independent manufacturing facilities to the Company's
specifications. The fine and costume jewelry is manufactured by the Company and
by independent manufacturing facilities. The Company's distribution includes
home shopping channels, catalog mailings, direct mailings from customer lists,
retail stores, wholesale distributors, and the Internet.

Reorganization - On August 23, 1999 (the Petition Date), an involuntary petition
under Chapter 7 of the United States Bankruptcy Code (the Bankruptcy Code) was
filed against LLK by three of its creditors. On December 3, 1999 (the Conversion
Date), LLK (unconsolidated) filed an election to convert to reorganization under
Chapter 11 of the Bankruptcy Code (Chapter 11). LLK continues to conduct normal
business operations as a debtor-in-possession subject to the jurisdiction of the
United States Bankruptcy Court for the Central District of California (the
Bankruptcy Court). As a debtor-in-possession, LLK may not engage in transactions
outside the ordinary course of business without approval, after notice and
hearing, of the Bankruptcy Court.

Under Chapter 11, actions to enforce claims against LLK are stayed if the claims
arose, or are based on events that occurred, on or before the Petition Date, and
such claims cannot be paid or restructured prior to the conclusion of the
proceedings or approval of the Bankruptcy Court. In addition, under the
Bankruptcy Code, LLK may elect to assume or reject certain prepetition leases,
employment contracts, service contracts and other unexpired executory
prepetition contracts, all subject to Bankruptcy Court approval. Other
liabilities may arise or be subject to compromise as a result of rejection of
executory contracts or the Bankruptcy Court's resolution of claims for
contingencies and other disputed amounts. Liabilities subject to compromise
(Note 8) in the accompanying consolidated balance sheets represent the Company's
estimate of liabilities as of June 30, 2001 and December 31, 2000, subject to
adjustment in the reorganization process. On January 26, 2001, the Company
entered into a forbearance agreement with the bank and has begun making
principal and interest payments thereunder. The forbearance agreement with bank
expires on September 30, 2001.

On July 12, 2001, the Company signed a letter of intent ("LOI") with Brian
Blosil to sell substantially all of the assets of the Company in exchange for
the assumption of certain debts. The bankruptcy process requires that, in order
to maximize the value of the estate for creditors, the Company entertain overbid
offers. Accordingly, a hearing was scheduled for July 31, 2001 to approve
overbid procedures and a topping fee in connection with a proposed sale of
substantially all of the company's assets to Mr. Blosil (the "Motion"). In
consideration for the purchase of Knickerbocker's assets, the purchaser will
assume approximately $4 million of Knickerbocker's debts and liabilities and
will issue to the pre-petition unsecured creditors of Knickerbocker redeemable
preferred units with an aggregate redemption value of approximately $3 million.
The Motion asks the Bankruptcy Court to approve procedures related to the sale
of Knickerbocker's assets including the following: (1) the purchase price of
competing bids must be at least $6 million in cash plus a topping fee of 3%, (2)
competing bidders must provide to Knickerbocker a deposit of $1 million, (3)
Brian Blosil will have the opportunity to match any competing bid and (4) if
Brian Blosil does not match any competing bid, the assets will be sold to the
competing bidder and the 3% topping fee will be paid to Brian Blosil as
compensation for his costs and expenses. If the overbidding procedures are
approved and no substantial overbid for Knickerbocker's assets is received, it
is unlikely that the shareholders of Knickerbocker will receive any proceeds
from the sale of assets.


                                       7

<PAGE>   10

At the hearing, the Court approved the Motion as modified in open court. As a
result, there will be a hearing on sale of substantially all of the Company's
assets and to consider overbids on September 4, 2001 at 9:30 A.M. The overbid
procedures include funding a $480,000 deposit by August 29, 2001, an initial
overbid of at least $6,180,000, and subsequent overbids in additional $300,000
increments.

Basis of Reporting - The accompanying consolidated financial statements have
been presented in accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting by Entities Under
The Bankrupcty Code" (SOP 90-7) and have been prepared in conformity with
principles of accounting applicable to a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company's recurring losses from operations, the Chapter 11
filing and circumstances relating to this event, raise substantial doubt about
the Company's ability to continue as a going concern. A plan of reorganization
could materially change the amounts reported in the accompanying consolidated
financial statements, which do not give effect to adjustments to the carrying
values of assets and liabilities that may be necessary as a consequence of a
plan of reorganization. The Company's ability to continue as a going concern is
contingent upon, among other things, its ability to formulate a plan of
reorganization that will be confirmed by the Bankruptcy Court, to achieve
satisfactory levels of profitability and cash flow from operations, and obtain
financing sources to meet future obligations.

The Company filed a Plan of Reorganization and Disclosure Statement with the
Bankruptcy Court on March 30, 2000. The Bankruptcy Court scheduled a hearing on
the Disclosure Statement for May 5, 2000 and approved the Disclosure Statement.
Although the Disclosure Statement was approved, the underlying Plan of
Reorganization was withdrawn and the Company is now in the process, as
referenced in the preceding section, of selling substantially all its assets in
exchange for the assumption of certain debts.

Certain subsidiaries were not included in the Chapter 11 filings. Condensed
financial statements of the entity in reorganization are presented herein.

The information set forth in these condensed consolidated financial statements
is unaudited except for the December 31, 2000 balance sheet. These statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information, the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.

The accompanying condensed consolidated financial statements include the
accounts of The L.L. Knickerbocker Co., Inc.; its wholly-owned subsidiaries
Krasner Group, Inc., Harlyn International Co., Ltd., S.L.S. Trading Co., Ltd.,
and L.L. Knickerbocker (Thai) Co., Ltd., and its majority-owned subsidiary
Georgetown Collection, Inc. (collectively the Company). All intercompany
accounts and transactions have been eliminated.

In the opinion of management, all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation have been included. The
results of operations for the six month period ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2001. For further information, refer to the financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 2000.

New Accounting Pronouncements - In June 1998, the Financial Accounting Standards
Board (FASB), which establishes accounting and reporting standards, issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability at its fair value. The statement also requires that changes in the
derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The Company implemented SFAS No. 133 on January 1,
2001, which implementation was not material to the financial statements.


                                       8

<PAGE>   11

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
all business combinations be accounted for under the purchase method only and
that certain acquired intangible assets in a business combination be recognized
as assets apart from goodwill. SFAS No. 142 requires that ratable amortization
of goodwill be replaced with periodic tests of the goodwill's impairment and
that intangible assets other than goodwill be amortized over their useful lives.
SFAS No. 141 is effective for all business combinations accounted for by the
purchase method for which the date of acquisition is after June 30, 2001. The
provisions of SFAS No. 142 will be effective for fiscal years beginning after
December 15, 2001, and will thus be adopted by the Company, as required, in
fiscal year 2002. The impact of SFAS No. 141 and SFAS No. 142 on the Company's
financial statements has not yet been determined.

NOTE 2: NET LOSS PER SHARE

The Company computes loss per share pursuant to Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which requires
the dual presentation of basic and diluted earning per share. Shares issuable
upon the exercise of common stock warrants and options have been excluded from
the per share calculations for the periods because their effect is antidilutive.

NOTE 3: REORGANIZATION ITEMS

Professional fees and expenditures directly related to the Chapter 11 filing are
classified as reorganization items and are expensed as incurred. Reorganization
items for the three and six months ended June 30, 2001 and 2000 consisted
primarily of professional fees and a $400,000 property impairment charge
recorded in the three months ended June 30, 2000, related to a building in
Thailand owned by the Company, partially offset by interest income earned. Cash
paid for reorganization items during the three and six month periods ended June
30, 2001 amounted to $179,000 and $544,000, respectively.

NOTE 4: INVENTORIES

At June 30, 2001 and December 31, 2000 inventories, including $435,000 and
$454,000 of fine jewelry samples, respectively, classified as other long-term
assets, consist of the following:

                              June 30, 2001     December 31, 2000
                              -------------     -----------------

     Finished goods            $2,333,000          $2,568,000
     Work-in-progress             366,000             415,000
     Raw materials              1,292,000           1,085,000
                               ----------          ----------
                               $3,991,000          $4,068,000
                               ==========          ==========

NOTE 5: INVESTMENTS

During the six months ended June 30, 2001, the Company transferred shares of its
investment in Pure Energy Corporation, with a carrying value of $299,000 at the
time of transfer, in settlement of trade accounts payable of $1,117,000. The
transaction resulted in a gain to the Company of $818,000, which is included in
other income, net.

During the six months ended June 30, 2001, the Company sold its investment in
Ontro, Inc. with a carrying value of $731,000, net of unrealized loss on
investment of $385,000, for net proceeds of $623,000. The sale resulted in a
loss to the Company of $493,000, which is included in other income, net. During
the six months ended June 30, 2000, the Company sold a portion of its investment
in Ontro, Inc. with a carrying value of $476,000, and original cost of $173,000,
for net proceeds of $486,000. The sale resulted in a gain to the Company of
$10,000, which is included in other income, net.


                                       9

<PAGE>   12

NOTE 6: LINE OF CREDIT AND NOTES PAYABLE

Through July 16, 1999, the Company had available to use for working capital
purposes and to post letters of credit, a line of credit totaling $15,000,000,
subject to certain limits. The line of credit encompassed LLK, Georgetown
Collection, Inc. (GCI) and Krasner Group, Inc. (TKG). Certain credit limits were
established for each company. At the expiration of the line of credit on July
16, 1999, the Company did not have sufficient funds to pay off the line of
credit. As a result of the Chapter 7 filing described in Note 1, the financial
institution placed the Company's credit facility on an offering basis,
effectively reserving the right to discontinue funding the Company at any time.
As a result of the Chapter 11 filing (Note 1), all required repayments of
principal on the notes payable under the line of credit for LLK and GCI have
been suspended, except for certain principal repayments that have been approved
by the Bankruptcy Court. As of June 30, 2001, TKG had no borrowings outstanding
on the line of credit. The Company entered into an additional forbearance
agreement with the bank that called for $50,000 monthly payments from January
through May 2001. At June 15, 2001, the Company had the option to pay the Bank
$650,000 and extend the due date until September 30, 2001. The Company made the
January to May 2001 payments and the June 15, 2001 payment to the bank and at
September 30, 2001, the Company is required to repay the loan.

At June 30, 2001, the Company had $2,181,000 of cash borrowings outstanding,
representing amounts borrowed under the LLK sublimit, which is classified as
subject to compromise in the accompanying consolidated financial statements
(Note 8). Borrowings bear interest at the bank's base rate (11.5% at June 30,
2001) plus 4%. The Company has continued to accrue interest at the contractual
rate on these notes and in January 2001 began making the $50,000 payments on the
line of credit and at September 30, 2001, the Company is require to repay the
loan.

The Company's Thai subsidiaries have available lines of credit aggregating
125,000,000 Thai baht (approximately $2,750,000 at June 30, 2001). Outstanding
borrowings of $2,103,000 at June 5, 2001 bear interest at rates ranging from
3.5% to 8.25%. Restricted cash of $125,000 and $135,000 at June 30, 2001 and
December 31, 2000, respectively, secured one such line of credit.

NOTE 7: CONVERTIBLE DEBENTURES

1998 Debentures - In June 1998, the Company issued Convertible Debentures (the
1998 Debentures) with a face value of $7,000,000 in a private placement to
institutional investors. The 1998 Debentures accrue interest at the rate of 6%
per annum, payable upon conversion of the related debt. Through June 30, 2001,
the Company issued a total of 20,448,736 shares of its common stock in
connection with the conversion of $4,498,000 of the principal amount of the
Debentures, plus interest accrued through the conversion date of $238,000.

Under the terms of the 1998 Debentures the face amount of the Debentures,
aggregating $2,502,000, was due and payable by the Company. During the year
ended December 31, 2000, the Company extinguished 1998 Debentures with a face
amount of $1,650,000 by transferring certain shares in an investment owned by
the Company to the holders.

During the six months ended June 30, 2000, a total of $59,000 of noncash
interest expense was recorded relating to the 1998 Debentures, including $4,000
relating to the additional conversion discount recorded upon conversion (none in
2001).

1997 Debentures - In September 1997, the Company issued Convertible Debentures
(the 1997 Debentures) with a face value of $5,000,000 in a private placement to
an institutional investor. The 1997 Debentures accrue interest at the rate of 6%
per annum, payable upon conversion of the related debt or at debt maturity on
September 7, 2000. Through June 30, 2001, the Company has issued a total of
6,044,393 shares of its common stock in connection with the conversion of
$3,350,000 of the principal amount of the 1997 Debentures, plus interest accrued
through the conversion date of $218,000.


                                       10

<PAGE>   13

During the year ended December 31, 2000, the Company extinguished 1998
Debentures with a face amount of $2,042,000 by transferring certain shares in an
investment owned by the Company to the holders. At June 30, 2001, the remaining
face amount of the 1997 Debentures is classified as subject to compromise in the
accompanying consolidated financial statements (Note 8).

During the six months ended June 30, 2000, a total of $44,000 of noncash
interest expense was recorded relating to the 1997 Debentures.

NOTE 8: LIABILITIES SUBJECT TO COMPROMISE

Liabilities subject to compromise consist of the following at June 30, 2001 and
December 31, 2000:

<TABLE>
<CAPTION>
                                              June 30, 2001   December 31, 2000
                                              -------------   -----------------
<S>                                             <C>               <C>
Secured liabilities - notes payable to bank
  (Note 6)                                      $2,181,000        $2,829,000

Unsecured liabilities:
     Accounts payable, trade                     4,402,000         4,402,000
     Commissions and royalties payable             464,000           464,000
     Convertible debentures (Note 7)               459,000           459,000
     Other payables and accrued expenses           920,000           920,000
                                                ----------        ----------
                                                $8,426,000        $9,074,000
                                                ==========        ==========
</TABLE>

A plan of reorganization, if ultimately approved by the Company's impaired
prepetition creditors and stockholders and confirmed by the Bankruptcy Court,
may materially change the amounts and terms of these prepetition liabilities.
Such amounts were estimated as of June 30, 2001 and December 31, 2000, and the
Company anticipates that claims filed with the Bankruptcy Court by the Company's
creditors will require reconciliation to the Company's financial records. The
additional liability arising from the finalization of the reconciliation
process, if any, is not yet subject to reasonable estimation, and accordingly,
no provision has been recorded for these possible claims. The termination of
other contractual obligations and the settlement of disputed claims may create
additional prepetition liabilities. Such amounts, if any, will be recognized in
the consolidated balance sheet as they are identified and become subject to
reasonable estimation.

NOTE 9: CONTINGENCIES

The Company is a defendant in cases arising within the normal course of
business. Based on information currently available, it is the opinion of
management, based upon the advice of counsel, that the ultimate resolution of
pending legal proceedings should not have a material adverse effect on the
Company's consolidated financial statements. However, based on future
developments and as additional information becomes known, it is possible that
the ultimate resolution of such matters could have a material adverse effect on
the Company's results of operations in a particular future period. The
litigation settled at December 31, 2000 is subject to bankruptcy court approval.

NOTE 10: BUSINESS SEGMENT INFORMATION

The Company is engaged primarily in the design, manufacture and marketing of
branded collectibles and jewelry. The Company has three reportable segments: (1)
collectible and toy brands, (2) fashion jewelry brands and (3) fine jewelry. The
collectible and toy brands segment encompasses collectible dolls, toys, teddy
bears and figurines. The fashion jewelry brands encompass items manufactured by
the Company from non-precious metals, for sale primarily to the leading network
in the home shopping industry. The fine jewelry segment encompasses jewelry
manufactured by the Company with precious metals. Corporate activities including
financing transactions are reflected in the tables below as "Corporate". The
Company evaluates performance based on profit or loss from operations. The
operating segments are managed separately because each segment requires
different marketing strategies. The following table details the Company's
financial performance by operating segment for the three and six months ended
and as of June 30, 2001 and 2000.


                                       11

<PAGE>   14

<TABLE>
<CAPTION>
                                  Three months ended June 30,          Six months ended June 30,
                                  ----------------------------      ------------------------------
                                      2001            2000              2001              2000
                                  -----------      -----------      ------------      ------------
<S>                               <C>              <C>              <C>               <C>
Net sales
  Collectible and toy brands      $ 1,509,000      $ 3,553,000      $  3,766,000      $  6,236,000
  Fashion jewelry brands            3,061,000        3,097,000         4,389,000         5,519,000
  Fine jewelry                      2,088,000        2,115,000         3,862,000         4,204,000
  Corporate                                --               --                --                --
                                  -----------      -----------      ------------      ------------
  Consolidated                    $ 6,658,000      $ 8,765,000      $ 12,017,000      $ 15,959,000

Operating income (loss)
  Collectible and toy brands      $  (564,000)     $     6,000      $ (1,074,000)     $   (607,000)
  Fashion jewelry brands              643,000          432,000           320,000           552,000
  Fine jewelry                        282,000         (110,000)          411,000          (128,000)
  Corporate                          (148,000)        (177,000)         (296,000)         (635,000)
                                  -----------      -----------      ------------      ------------
  Consolidated                    $   213,000      $   151,000      $   (639,000)     $   (818,000)

Interest expense
  Collectible and toy brands      $        --      $        --      $         --      $         --
  Fashion jewelry brands                   --               --                --                --
  Fine jewelry                             --               --                --                --
  Corporate                           119,000          148,000           265,000           432,000
                                  -----------      -----------      ------------      ------------
  Consolidated                    $   119,000      $   148,000      $    265,000      $    432,000

Depreciation and amortization
  Collectible and toy brands      $    45,000      $    73,000      $     93,000      $    147,000
  Fashion jewelry brands              146,000          133,000           286,000           268,000
  Fine jewelry                         18,000          153,000            36,000           302,000
  Corporate                                --               --                --                --
                                  -----------      -----------      ------------      ------------
  Consolidated                    $   209,000      $   359,000      $    415,000      $    717,000

Capital expenditures
  Collectible and toy brands      $        --      $     8,000      $         --      $     30,000
  Fashion jewelry brands               94,000          116,000           174,000           189,000
  Fine jewelry                         12,000          139,000            60,000           194,000
  Corporate                                --               --                --                --
                                  -----------      -----------      ------------      ------------
  Consolidated                    $   106,000      $   263,000      $    234,000      $    413,000
                                  ===========      ===========      ============      ============
</TABLE>

                                       12

<PAGE>   15

<TABLE>
<CAPTION>
                                 Three months ended June 30,      Six months ended June 30,
                                 ---------------------------     --------------------------
                                    2001            2000            2001             2000
                                 -----------     -----------     -----------     -----------
<S>                              <C>             <C>             <C>             <C>
Total assets
  Collectible and toy brands     $ 3,851,000     $ 7,083,000     $ 3,851,000     $ 7,083,000
  Fashion jewelry brands           2,806,000       2,279,000       2,806,000       2,279,000
  Fine jewelry                     5,783,000       7,932,000       5,783,000       7,932,000
  Corporate                        1,840,000       5,893,000       1,840,000       5,893,000
                                 -----------     -----------     -----------     -----------
  Consolidated                   $14,280,000     $23,187,000     $14,280,000     $23,187,000

Geographic areas
  Sales to external customers:
    United States                $ 4,570,000     $ 6,650,000     $ 8,155,000     $11,755,000
    Thailand                       2,088,000       2,115,000       3,862,000       4,204,000
                                 -----------     -----------     -----------     -----------
    Consolidated                 $ 6,658,000     $ 8,765,000     $12,017,000     $15,959,000

  Long-lived assets:
    United States                $ 2,097,000     $ 2,490,000     $ 2,097,000     $ 2,490,000
    Thailand                       1,381,000       4,202,000       1,381,000       4,202,000
                                 -----------     -----------     -----------     -----------
    Consolidated                 $ 3,478,000     $ 6,692,000     $ 3,478,000     $ 6,692,000
                                 ===========     ===========     ===========     ===========
</TABLE>


                                       13

<PAGE>   16

NOTE 11: CONDENSED FINANCIAL STATEMENTS FOR THE DEBTOR ENTITY

The following are condensed unconsolidated financial statements for LLK:

                        The L.L. Knickerbocker Co., Inc.
                             (Debtor-in-Possession)
                            Condensed Balance Sheets
                                (unconsolidated)

<TABLE>
<CAPTION>
                                                   June 30, 2001    December 31, 2000
                                                   -------------    -----------------
<S>                                                 <C>               <C>
ASSETS:
  Cash and cash equivalents                         $    624,000      $  1,005,000
  Accounts receivable, net of allowance                  269,000         1,134,000
  Inventories                                          1,673,000         1,811,000
  Prepaid expenses and other current assets              750,000           726,000
                                                    ------------      ------------
    Total current assets                               3,316,000         4,676,000
  Investment in subsidiaries                           3,005,000         2,346,000
  Receivable from subsidiaries                           508,000         1,260,000
  Property and equipment, net                            437,000           555,000
  Investments                                            776,000         2,048,000
  Other assets                                            98,000            99,000
                                                    ------------      ------------
    Total assets                                    $  8,140,000      $ 10,984,000
                                                    ============      ============

LIABILITIES:
  Accounts payable                                  $  1,005,000      $  2,216,000
  Other accrued expenses                               1,146,000         1,196,000
                                                    ------------      ------------
    Total current liabilities                          2,151,000         3,412,000
  Liabilities subject to compromise
    under reorganization proceeding                    8,426,000         9,074,000

STOCKHOLDERS' DEFICIT:
  Common stock                                        41,637,000        41,637,000
  Additional paid-in capital                           6,012,000         6,012,000
  Accumulated deficit                                (45,525,000)      (44,551,000)
  Accumulated other comprehensive loss                (4,561,000)       (4,600,000)
                                                    ------------      ------------
    Total stockholders' deficit                       (2,437,000)       (1,502,000)
                                                    ------------      ------------
    Total liabilities and stockholders' deficit     $  8,140,000      $ 10,984,000
                                                    ============      ============
</TABLE>

                                       14

<PAGE>   17

                       The L.L. Knickerbocker Co., Inc.
                            (Debtor-in-Possession)
                      Condensed Statements of Operations
                               (unconsolidated)

<TABLE>
<CAPTION>
                                                Three months ended                  Six months ended
                                                      June 30,                         June 30,
                                            ----------------------------      ----------------------------
                                                2001             2000            2001             2000
                                            -----------      -----------      -----------      -----------
<S>                                         <C>              <C>              <C>              <C>
Net sales                                   $ 1,509,000      $ 3,553,000      $ 3,766,000      $ 6,236,000
Cost of sales                                 1,010,000        1,908,000        2,274,000        3,478,000
                                            -----------      -----------      -----------      -----------
Gross profit                                    499,000        1,645,000        1,492,000        2,758,000
Advertising expense                             155,000          147,000          321,000          204,000
Selling expense                                 352,000          563,000          934,000        1,111,000
General and administrative expense              704,000        1,104,000        1,607,000        2,684,000
Equity in (income) loss of subsidiaries        (928,000)         117,000         (766,000)          (1,000)
                                            -----------      -----------      -----------      -----------
Operating income (loss)                         216,000         (286,000)        (604,000)      (1,240,000)
Other income                                   (353,000)              --         (344,000)         (10,000)
Interest expense                                 82,000           73,000          186,000          281,000
Reorganization items                            307,000          312,000          526,000          578,000
Income tax expense                                   --               --            2,000            3,000
                                            -----------      -----------      -----------      -----------
Net income (loss)                           $   180,000      $  (671,000)     $  (974,000)     $(2,092,000)
                                            ===========      ===========      ===========      ===========
</TABLE>

                        The L.L. Knickerbocker Co., Inc.
                     Notes to Condensed Financial Statements
               As of June 30, 2001 and December 31, 2000 and for
                  the six months ended June 30, 2001 and 2000
                                (unconsolidated)

BASIS OF PRESENTATION

Generally Accepted Accounting Principles (GAAP) requires that certain entities
that meet specific criteria be consolidated with LLK including its wholly-owned
and majority-owned subsidiaries (non-debtors). For purposes of this presentation
LLK accounts for all subsidiaries using the equity method of accounting.

All entities that LLK would normally consolidate for GAAP purposes are being
accounted for under the equity method of accounting. The equity method of
accounting consists of recording an original investment in an investee as the
amount originally contributed. Subsequently this balance is
increased/(decreased) for LLK's share of the investee's income/(losses) and
increased for additional contributions and decreased for distributions received
from the investee. LLK's share of the investee's income/(loss) is recognized as
"Equity in (income) loss of subsidiaries" on the statement of operations.

In management's opinion, with the exception of those matters discussed above,
the financial statements of LLK contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the unconsolidated
financial position of LLK as of June 30, 2001 and December 31, 2000, and the
unconsolidated results of its operations for the three and six-month periods
ended June 30, 2001 and 2000.


                                       15

<PAGE>   18

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

The Company is in the businesses of developing and marketing branded collectible
and toy products, fine and fashion jewelry, and other consumer products. The
following discussion explains material changes in the results of operations of
The L.L. Knickerbocker Co., Inc. (LLK) and subsidiaries for each of the periods
discussed and significant developments affecting financial condition since the
end of fiscal 2000.

CHAPTER 11 REORGANIZATION

On August 23, 1999 (the Petition Date), an involuntary petition under Chapter 7
of the United States Bankruptcy Code (the Bankruptcy Code) was filed against LLK
by three of its creditors. On December 3, 1999 (the Conversion Date), LLK
(unconsolidated) filed an election to convert to reorganization under Chapter 11
of the Bankruptcy Code (Chapter 11). LLK continues to conduct normal business
operations as a debtor-in-possession subject to the jurisdiction of the United
States Bankruptcy Court for the Central District of California (the Bankruptcy
Court). As a debtor-in-possession, LLK may not engage in transactions outside
the ordinary course of business without approval, after notice and hearing, of
the Bankruptcy Court.

Under Chapter 11, actions to enforce claims against LLK are stayed if the claims
arose, or are based on events that occurred, on or before the Petition Date, and
such claims cannot be paid or restructured prior to the conclusion of the
proceedings or approval of the Bankruptcy Court. Other liabilities may arise or
be subject to compromise as a result of rejection of executory contracts,
including leases, or the Bankruptcy Court's resolution of claims for
contingencies and other disputed amounts. Substantially all liabilities as of
the Petition Date are intended to be dealt with in accordance with a plan of
reorganization filed by the Company that must be voted upon by all classes of
impaired creditors and approved by the Bankruptcy Court. The Creditor's
Committee has been formed and it reviews transactions outside the ordinary
course of business and is participating in the formulation of the plan of
reorganization.

The Company has estimated the amount of prepetition liabilities subject to
settlement under reorganization proceedings; however the Company anticipates
that claims filed with the Bankruptcy Court by the Company's creditors will be
reconciled to the Company's financial records. This reconciliation process
and/or the termination of other contractual obligations and the settlement of
disputed claims may create additional prepetition liabilities.

On March 30, 2000, the Company filed a Plan of Reorganization and Disclosure
Statement with the United States Bankruptcy Court, pursuant to which LLK would
emerge from Chapter 11 bankruptcy proceedings. The Bankruptcy Court scheduled a
hearing on the Disclosure Statement for May 5, 2000 and approved the Disclosure
Statement. Although the Disclosure Statement was approved, the underlying Plan
of Reorganization was withdrawn and the Company is now in the process of
formulating and negotiating a revised Plan of Reorganization. The Plan of
Reorganization previously filed was withdrawn by the Company when it became
apparent that the Company could not raise the capital necessary under the Plan
of Reorganization to fulfill the obligation to unsecured creditors.

On July 12, 2001, the Company signed a letter of intent ("LOI") with Brian
Blosil to sell substantially all of the assets of the Company in exchange for
the assumption of certain debts. The bankruptcy process requires that, in order
to maximize the value of the estate for creditors, the Company entertain overbid
offers. Accordingly, a hearing was scheduled for July 31, 2001 to approve
overbid procedures and a topping fee in connection with a proposed sale of
substantially all of the company's assets to Mr. Blosil (the "Motion"). In
consideration for the purchase of Knickerbocker's assets, the purchaser will
assume approximately $4 million of Knickerbocker's debts and liabilities and
will issue to the pre-petition unsecured creditors of Knickerbocker redeemable
preferred units with an aggregate redemption value of approximately $3 million.
The Motion asks the Bankruptcy Court to approve procedures related to the sale
of Knickerbocker's assets including the following: (1) the purchase price of
competing bids must be at least $6 million in cash plus a topping fee of 3%, (2)
competing bidders must provide to Knickerbocker a deposit of $1 million, (3)
Brian Blosil will have the opportunity to match any competing bid and (4) if
Brian Blosil does not match any competing bid, the assets will be sold to the
competing bidder and the 3% topping fee will be paid to Brian Blosil as
compensation for his costs and expenses. If the overbidding procedures are
approved and no substantial overbid for Knickerbocker's assets is received, it
is unlikely that the shareholders of Knickerbocker will receive any proceeds
from the sale of assets.


                                       16

<PAGE>   19

At the hearing, the Court approved the Motion as modified in open court. As a
result, there will be a hearing on sale of substantially all of the Company's
assets and to consider overbids on September 4, 2001 at 9:30 A.M. The overbid
procedures include funding a $480,000 deposit by August 29, 2001, an initial
overbid of at least $6,180,000, and subsequent overbids in additional $300,000
increments.

The consolidated financial statements have been presented on the basis that the
Company will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company's recurring losses from operations, the Chapter 11 filing and
circumstances relating to this event, raise substantial doubt about the
Company's ability to continue as a going concern. A plan of reorganization, if
approved, could materially change the amounts reported in the accompanying
consolidated financial statements, which do not give effect to adjustments to
the carrying values of assets and liabilities that may be necessary as a
consequence of a plan of reorganization. The Company's ability to continue as a
going concern is contingent upon, among other things, its ability to finalize a
plan of reorganization that will be confirmed by the Bankruptcy Court, its
ability to achieve satisfactory levels of profitability and cash flow from
operations, and its ability to obtain financing sources to meet future
obligations.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2001 AND 2000

NET SALES

Net sales decreased to $6,658,000 for the three months ended June 30, 2001 from
$8,765,000 for the three months ended June 30, 2000, a decrease of $2,107,000 or
24.0%. The $2,107,000 decrease in net sales was comprised of decreases in sales
of $189,000 in catalog-driven dolls, $1,855,000 in wholesale collectible doll
sales, $36,000 in fashion jewelry sales and $27,000 in fine jewelry net sales.
The decrease in wholesale collectible sales was due primarily to timing
differences in large shipments to the Company's major home shopping network
customer and due to the discontinuance of two celebrity-driven collectible lines
in 2000. The decreases in fashion and fine jewelry sales were due primarily to
the timing of shipments to certain customers. In certain circumstances, large
orders to customers, particularly those to home shopping networks, may move from
one quarter to another causing large comparative differences between comparable
quarters. The Company continues to assess the potential of sales expansion of
existing products through new distribution channels, as well as continuing to
develop new product categories.

GROSS PROFIT

Gross profit decreased to $2,910,000 for the three months ended June 30, 2001
from $3,826,000 for the three months ended June 30, 2001, a decrease of
$916,000, or 23.9%. As a percentage of net sales, gross profit for the quarter
was consistent at 43.7% in 2001 and 2000.

ADVERTISING EXPENSE

Advertising expense increased to $164,000 for the three months ended June 30,
2001 from $158,000 for the three months ended June 30, 2000, an increase of
$6,000, or 3.8%. Included in advertising expense are advertisement printing
costs, catalog-printing costs, media space in magazines, and advertisement
creative and development costs.

SELLING EXPENSE

Selling expense decreased to $791,000 for the three months ended June 30, 2001
from $1,028,000 for the three months ended June 30, 2000, a decrease of
$237,000, or 23.1%. As a percentage of net sales, selling expense increased from
11.7% in 2000 to 11.9% in 2001. The increase in selling expense as a percentage


                                       17

<PAGE>   20

of net sales was due primarily to comparable tradeshow and advertising expenses
compared to a lower sales base in 2001. Selling expense includes royalty
expense, commission expense, trade show expenses, and other sales promotion
expenses.

GENERAL AND ADMINISTRATIVE EXPENSE

General and administrative expense decreased to $1,742,000 for the three months
ended June 30, 2001 from $2,489,000 for the three months ended June 30, 2000, a
decrease of $747,000, or 30.0%. The percentage of net sales represented by these
expenses decreased from 28.4% in 2000 to 26.2% in 2001. The dollar decrease in
general and administrative expenses was due primarily to the Company's
aggressive cost cutting efforts and continuous focus on reducing overhead in its
operations.

OTHER INCOME

Other income increased to $393,000 for the three months ended June 30, 2001 from
$59,000 for the three months ended June 30, 2000, a change of $334,000. The
increase in other income is primarily attributable to a net gain on sale of
investments in the three months ended June 30, 2001 of $349,000. Other income in
2000 consists primarily of foreign currency gains from transactions of the
Company's Thailand operations due to fluctuations in the Thai baht.

INTEREST EXPENSE

Interest expense decreased to $119,000 for the three months ended June 30, 2001
from $148,000 for the three months ended June 30, 2000. The decrease in interest
expense relates primarily to the extinguishment of $3,692,000 of convertible
debentures in 2000 and to lower average borrowings outstanding on the Company's
lines of credit. Included in interest expense for the three months ended June
30, 2000 is noncash interest related to convertible debentures of ($19,000).
Noncash interest in 2000 relates to amortization of debt discount and of debt
issuance costs. In the three months ended June 30, 2000, the Company reversed
$64,000 of noncash face value accrued interest recorded in the first three
months of 2000. The remaining balance of interest expense includes interest on
borrowings from working capital lines of credit and mortgages on buildings owned
by the Company.

REORGANIZATION ITEMS

Costs associated with the Company's Chapter 11 filing amounted to $307,000 and
$712,000 for the three months ended June 30, 2001 and 2000, respectively, which
were comprised primarily of professional fees, net of interest income, and a
$400,000 property impairment charge recorded in the three months ended June 30,
2000, related to a building in Thailand owned by the Company. The Company
anticipates that additional reorganization costs will be incurred throughout the
Chapter 11 reorganization.

NET INCOME (LOSS)

As a result of the foregoing factors, net income increased to $180,000 for the
three months ended June 30, 2001 from net loss of $671,000 for the three months
ended June 30, 2000, a change of $851,000.

SIX MONTHS ENDED JUNE 30, 2001 AND 2000

NET SALES

Net sales decreased to $12,017,000 for the six months ended June 30, 2001 from
$15,959,000 for the six months ended June 30, 2000, a decrease of $3,942,000 or
24.7%. The $3,942,000 decrease in net sales was comprised of decreases in sales
of $226,000 in catalog-driven dolls, $2,244,000 in wholesale collectible sales,
$1,130,000 in fashion jewelry sales, and $342,000 in fine jewelry net sales. The
decrease in wholesale collectible sales was due primarily to the discontinuance
of two celebrity-driven collectible lines in 2000. The decreases in fashion and
fine jewelry sales were due primarily to the timing of shipments to certain
customers. In certain circumstances, large orders to customers, particularly
those to home shopping networks, may move from one quarter to another causing
large comparative differences between comparable quarters. The Company continues
to assess the potential of sales expansion of existing products through new
distribution channels, as well as continuing to develop new product categories.


                                       18

<PAGE>   21

GROSS PROFIT

Gross profit decreased to $5,197,000 for the six months ended June 30, 2001 from
$6,804,000 for the six months ended June 30, 2000, a decrease of $1,607,000, or
23.6%. As a percentage of net sales, gross profit for the six months increased
to 43.2% in 2001 from 42.6% in 2000. The increase in the gross profit percentage
in 2001 from 2000 was due primarily to a combination of lowering distribution
costs and marketing products that meet certain minimum gross margins.

ADVERTISING EXPENSE

Advertising expense increased to $331,000 for the six months ended June 30, 2001
from $248,000 for the six months ended June 30, 2000, an increase of $83,000, or
33.5%. The increase in advertising expense in 2001 was due primarily to catalog
mailing costs incurred in connection with the Company's remaining direct
response brand, the Magic Attic Club. In the comparable 2000 period, the Company
mailed fewer catalogs and, therefore, incurred lower advertising expense.
Included in advertising expense are advertisement printing costs,
catalog-printing costs, media space in magazines, and advertisement creative and
development costs.

SELLING EXPENSE

Selling expense decreased to $1,700,000 for the six months ended June 30, 2001
from $1,939,000 for the six months ended June 30, 2000, a decrease of $239,000,
or 12.3%. As a percentage of net sales, selling expense increased from 12.1% in
2000 to 14.1% in 2001. The increase in selling expense as a percentage of net
sales was due primarily to comparable tradeshow and advertising expenses
compared to a lower sales base in 2001. Selling expense includes royalty
expense, commission expense, trade show expenses, and other sales promotion
expenses.

GENERAL AND ADMINISTRATIVE EXPENSE

General and administrative expense decreased to $3,805,000 for the six months
ended June 30, 2001 from $5,435,000 for the six months ended June 30, 2000, a
decrease of $1,630,000, or 30.0%. The percentage of net sales represented by
these expenses decreased from 34.1% in 2000 to 31.7% in 2001. The dollar
decrease in general and administrative expenses was due primarily to the
Company's aggressive cost cutting efforts and continuous focus on reducing
overhead in its operations. Included in the comparable 2000 period was a reserve
for legal settlement that increased comparable 2000 general and administrative
expenses.

OTHER INCOME

Other income increased to $458,000 for the six months ended June 30, 2001 from
$163,000 for the six months ended June 30, 2000, a change of $295,000. The
increase in other income is primarily attributable to a net gain on sale of
investments in the six months ended June 30, 2001 of $325,000. Other income in
2000 consists primarily of foreign currency gains from transactions of the
Company's Thailand operations due to fluctuations in the Thai baht.


                                       19

<PAGE>   22

INTEREST EXPENSE

Interest expense decreased to $265,000 for the six months ended June 30, 2001
from $432,000 for the six months ended June 30, 2000. The decrease in interest
expense relates primarily to the extinguishment of $3,692,000 of convertible
debentures in 2000 and to lower average borrowings outstanding on the Company's
lines of credit. Included in interest expense for the six months ended June 30,
2000 is noncash interest related to convertible debentures of 103,000. Noncash
interest in 2000 relates to amortization of debt discount and of debt issuance
costs. The remaining balance of interest expense includes interest on borrowings
from working capital lines of credit and mortgages on buildings owned by the
Company.

REORGANIZATION ITEMS

Costs associated with the Company's Chapter 11 filing amounted to $526,000 and
$978,000 for the six months ended June 30, 2001 and 2000, respectively, which
were comprised primarily of professional fees, net of interest income, and a
$400,000 property impairment charge recorded in the three months ended June 30,
2000, related to a building in Thailand owned by the Company. The Company
anticipates that additional reorganization costs will be incurred throughout the
Chapter 11 reorganization.

NET LOSS

As a result of the foregoing factors, net loss decreased to $974,000 for the six
months ended June 30, 2001 from net loss of $2,092,000 for the six months ended
June 30, 2000, a decrease in net loss of $1,118,000.

LIQUIDITY AND CAPITAL RESOURCES

Cash flow used in operations was $653,000 for the six months ended June 30, 2001
compared to cash provided from operations of $1,241,000 in the comparable 2000
period. The $1,894,000 decrease in cash flow from operations was due primarily
to increases in inventory purchases and prepaid expenses, increased payments on
accounts payable and commissions, partially offset by lower net losses.

Under Chapter 11, actions to enforce certain claims against the Company are
stayed if the claims arose, or are based on, events that occurred on or before
the Petition Date. The ultimate terms of settlement of these claims will be
determined in accordance with a plan of reorganization, which requires the
approval of the impaired prepetition creditors and stockholders and confirmation
by the Bankruptcy Court. Other liabilities may arise or be subject to compromise
as a result of rejection of executory contracts, including leases, or the
Bankruptcy Court's resolution of claims for contingencies and other disputed
amounts. The ultimate resolution of such liabilities, all of which are subject
to compromise, are parts of the plan of reorganization filed with the Bankruptcy
Court on March 30, 2000. On March 30, 2000, the Company filed a Plan of
Reorganization and Disclosure Statement with the United States Bankruptcy Court,
pursuant to which Knickerbocker would emerge from Chapter 11 bankruptcy
proceedings. The Bankruptcy Court scheduled a hearing on the Disclosure
Statement for May 5, 2000 and approved the Disclosure Statement. Although the
Disclosure Statement was approved, the underlying Plan of Reorganization was
withdrawn and the Company is now in the process of formulating and negotiating a
revised Plan of Reorganization. Until the plan of reorganization is confirmed by
the Bankruptcy Court, only such payments on prepetition obligations that are
approved by the Bankruptcy Court will be made. There is no assurance that a plan
of reorganization will be approved or confirmed by the Bankruptcy Court.

Inherent in a successful plan of reorganization is a capital structure that will
enable the Company to generate sufficient cash flow after reorganization to meet
its restructured obligations and current obligation. Accordingly, the rights of
prepetition creditors and the ultimate payment of their claims may be
substantially altered and, in some cases, eliminated under the Bankruptcy Code.
It is not possible at this time to predict the ultimate outcome of the Chapter
11 filing or its effects on the Company's business or on the interest of
creditors or stockholders.


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<PAGE>   23

On July 12, 2001, the Company signed a letter of intent ("LOI") with Brian
Blosil to sell substantially all of the assets of the Company in exchange for
the assumption of certain debts. The bankruptcy process requires that, in order
to maximize the value of the estate for creditors, the Company entertain overbid
offers. Accordingly, a hearing was scheduled for July 31, 2001 to approve
overbid procedures and a topping fee in connection with a proposed sale of
substantially all of the company's assets to Mr. Blosil (the "Motion"). In
consideration for the purchase of Knickerbocker's assets, the purchaser will
assume approximately $4 million of Knickerbocker's debts and liabilities and
will issue to the pre-petition unsecured creditors of Knickerbocker redeemable
preferred units with an aggregate redemption value of approximately $3 million.
The Motion asks the Bankruptcy Court to approve procedures related to the sale
of Knickerbocker's assets including the following: (1) the purchase price of
competing bids must be at least $6 million in cash plus a topping fee of 3%, (2)
competing bidders must provide to Knickerbocker a deposit of $1 million, (3)
Brian Blosil will have the opportunity to match any competing bid and (4) if
Brian Blosil does not match any competing bid, the assets will be sold to the
competing bidder and the 3% topping fee will be paid to Brian Blosil as
compensation for his costs and expenses. If the overbidding procedures are
approved and no substantial overbid for Knickerbocker's assets is received, it
is unlikely that the shareholders of Knickerbocker will receive any proceeds
from the sale of assets.

At the hearing, the Court approved the Motion as modified in open court. As a
result, there will be a hearing on sale of substantially all of the Company's
assets and to consider overbids on September 4, 2001 at 9:30 A.M. The overbid
procedures include funding a $480,000 deposit by August 29, 2001, an initial
overbid of at least $6,180,000, and subsequent overbids in additional $300,000
increments.

As described in Note 6 to the consolidated financial statements, through July
16, 1999, the Company had a line of credit that encompassed The L.L.
Knickerbocker Co., Inc. (LLK), Georgetown Collection, Inc. (GCI) and Krasner
Group, Inc. (TKG). Certain credit limits were established for each company.
Borrowing availability was determined by an advance rate on eligible accounts
receivable and inventory. At the expiration of the line of credit on July 16,
1999, the Company did not have sufficient funds to pay off the line of credit.
The Company entered into a forbearance agreement with the financial institution
(the Bank) initially extending the general terms of the line of credit until
August 30, 1999 and in the event certain conditions were met, until September
20, 1999. The forbearance agreement limited the Company's use of the credit
facility to total borrowings of $6,250,000. As a result of the Chapter 7 filing,
the Bank placed the Company's credit facility on an offering basis, effectively
reserving the right to discontinue funding the Company at any time. As a result
of the Chapter 11 filing, all required repayments of principal on the notes
payable under the line of credit for LLK and GCI were suspended, except for
certain principal repayments that have been approved by the Bankruptcy Court. As
of June 30, 2001, TKG had no borrowings outstanding from the Bank. The Company
has entered into an additional forbearance agreement with the Bank that called
for $50,000 monthly payments from January through May of 2001. At June 2001, the
Company had the option to pay the Bank $650,000 and extend the due date until
September 30, 2001. The Company made the June 15, 2001 payment to the bank.

At June 30, 2001, the Company had $2,181,000 of cash borrowings outstanding,
representing amounts borrowed under the LLK sublimit, which is classified as
subject to compromise in the accompanying consolidated financial statements.
Borrowings bear interest at the bank's base rate (11.5% at June 30, 2001) plus
4%. The Company has continued to accrue interest at the contractual rate on
these notes.

The Company's Thai subsidiaries have available lines of credit aggregating
125,000,000 Thai baht (approximately $2,750,000 at June 30, 2001). Outstanding
borrowings of $1,825,000 at June 30, 2001 bear interest at rates ranging from
3.5% to 8.25%. Restricted cash of $125,000 and $135,000 at June 30, 2001 and
December 31, 2000, respectively, secured one such line of credit.

In connection with the Chapter 11 filing, the Company filed, and the Bankruptcy
Court approved, a motion for use of cash collateral. Under the terms of this
motion the Company is authorized to use all cash and cash equivalents, which are
the cash collateral of the Bank, to pay ordinary and necessary operating
expenses in an amount equal to 93% of new accounts receivable.

As indicated above, the Company has entered into a forbearance agreement with
its Bank, which called for monthly payments of $50,000 through June of 2001. At
June 2001, the Company either needed to pay the Bank in full or make a payment
of $650,000 to buy another three month extension until September of


                                       21

<PAGE>   24

2001. The Company made the June 15, 2001 payment to the bank. At September 2001,
the Company will need to pay the Bank in full. The Company is taking measures to
obtain a new secured lender to refinance the existing Bank. The Company believes
that its ongoing operating cash flow and proceeds from sale of investments
should enable the Company to meet liquidity requirements until substitute
financing is obtained. However, notwithstanding all of the events and
circumstances described above, there is substantial uncertainty with respect to
the Company's liquidity. The Company's ability to meet its obligations as they
come due and successfully emerge from Chapter 11 is contingent upon, among other
things, its ability to formulate a Plan of Reorganization that will be confirmed
by the Bankruptcy Court, to achieve satisfactory levels of profitability and
cash flow from operations, and obtain financing sources to meet future
obligations.

SEASONALITY AND QUARTERLY RESULTS

The Company's business is subject to seasonal fluctuations. The Magic Attic Club
brand of dolls, which was acquired effective October 18, 1996, has historically
experienced greater sales in the latter portion of the year. Because of the
seasonality of the Company's business, results for any quarter are not
necessarily indicative of the results that may be achieved for the full fiscal
year.

INFLATION

The Company does not believe that inflation has had a material effect on the
results of operations in the recent past. There can be no assurance that the
Company's business will not be affected by inflation in the future.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board (FASB), which establishes
accounting and reporting standards, issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability at its fair value.
The statement also requires that changes in the derivative's fair value be
recognized in earnings unless specific hedge accounting criteria are met. The
Company implemented SFAS No. 133 on January 1, 2001, which implementation was
not material to the financial statements.

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
all business combinations be accounted for under the purchase method only and
that certain acquired intangible assets in a business combination be recognized
as assets apart from goodwill. SFAS No. 142 requires that ratable amortization
of goodwill be replaced with periodic tests of the goodwill's impairment and
that intangible assets other than goodwill be amortized over their useful lives.
SFAS No. 141 is effective for all business combinations accounted for by the
purchase method for which the date of acquisition is after June 30, 2001. The
provisions of SFAS No. 142 will be effective for fiscal years beginning after
December 15, 2001, and will thus be adopted by the Company, as required, in
fiscal year 2002. The impact of SFAS No. 141 and SFAS No. 142 on the Company's
financial statements has not yet been determined.

FORWARD-LOOKING STATEMENTS

When used in this document, the words "believes," "anticipates," "expects" and
similar expressions are intended to identify in certain circumstances
forward-looking statements. Such statements are subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
projected, including risks related to the dependence on sales to QVC; the
acceptance in the marketplace of new products; the ability to source raw
materials at prices favorable to the Company; currency fluctuations; and other
risks outlined in the Company's previously filed public documents, copies of
which may be obtained without cost from the Company. Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
statements. The Company also undertakes no obligation to update these
forward-looking statements.


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<PAGE>   25

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

BANKRUPTCY PROCEEDING

On August 23, 1999 (the Petition Date), an involuntary petition under Chapter 7
of the United States Bankruptcy Code (the Bankruptcy Code) was filed against
Knickerbocker by three of it's creditors. On December 3, 1999 (the Conversion
Date), Knickerbocker (unconsolidated) filed an election to convert to
reorganization under Chapter 11 of the Bankruptcy Code (Chapter 11).
Knickerbocker continues to conduct normal business operations as a
debtor-in-possession subject to the jurisdiction of the United States Bankruptcy
Court for the Central District of California (the Bankruptcy Court). As a
debtor-in-possession, Knickerbocker may not engage in transactions outside the
ordinary course of business without approval, after notice and hearing, of the
Bankruptcy Court.

Under Chapter 11, actions to enforce claims against Knickerbocker are stayed if
the claims arose, or are based on events that occurred, on or before the
Petition Date, and such claims cannot be paid or restructured prior to the
conclusion of the proceedings or approval of the Bankruptcy Court. Other
liabilities may arise or be subject to compromise as a result of rejection of
executory contracts, including leases, or the Bankruptcy Court's resolution of
claims for contingencies and other disputed amounts. Substantially all
liabilities as of the Petition Date are intended to be dealt with in accordance
with a plan of reorganization to be filed by the Company that will be voted upon
by all classes of impaired creditors and approved by the Bankruptcy Court. The
Creditors' Committee has been formed and it reviews non-ordinary course of
business transactions and is participating in the formulation of the plan of
reorganization.

On March 30, 2000, the Company filed a Plan of Reorganization and Disclosure
Statement with the United States Bankruptcy Court, pursuant to which
Knickerbocker would emerge from Chapter 11 bankruptcy proceedings. The
Bankruptcy Court scheduled a hearing on the Disclosure Statement for May 5, 2000
and approved the Disclosure Statement. Although the Disclosure Statement was
approved, the underlying Plan of Reorganization was withdrawn and the Company is
now in the process of formulating and negotiating a revised Plan of
Reorganization.

On July 12, 2001, the Company signed a letter of intent ("LOI") with Brian
Blosil to sell substantially all of the assets of the Company in exchange for
the assumption of certain debts. The bankruptcy process requires that, in order
to maximize the value of the estate for creditors, the Company entertain overbid
offers. Accordingly, a hearing was scheduled for July 31, 2001 to approve
overbid procedures and a topping fee in connection with a proposed sale of
substantially all of the company's assets to Mr. Blosil (the "Motion"). In
consideration for the purchase of Knickerbocker's assets, the purchaser will
assume approximately $4 million of Knickerbocker's debts and liabilities and
will issue to the pre-petition unsecured creditors of Knickerbocker redeemable
preferred units with an aggregate redemption value of approximately $3 million.
The Motion asks the Bankruptcy Court to approve procedures related to the sale
of Knickerbocker's assets including the following: (1) the purchase price of
competing bids must be at least $6 million in cash plus a topping fee of 3%, (2)
competing bidders must provide to Knickerbocker a deposit of $1 million, (3)
Brian Blosil will have the opportunity to match any competing bid and (4) if
Brian Blosil does not match any competing bid, the assets will be sold to the
competing bidder and the 3% topping fee will be paid to Brian Blosil as
compensation for his costs and expenses. If the overbidding procedures are
approved and no substantial overbid for Knickerbocker's assets is received, it
is unlikely that the shareholders of Knickerbocker will receive any proceeds
from the sale of assets.

At the hearing, the Court approved the Motion as modified in open court. As a
result, there will be a hearing on sale of substantially all of the Company's
assets and to consider overbids on September 4, 2001 at 9:30 A.M. The overbid
procedures include funding a $480,000 deposit by August 29, 2001, an initial
overbid of at least $6,180,000, and subsequent overbids in additional $300,000
increments.


                                       23

<PAGE>   26

LITIGATION

Plaintiff Michael Elam filed an action in Orange County Superior Court (Case No.
759883) on or about February 16, 1996, against Louis L. Knickerbocker, Tamara
Knickerbocker and the Company alleging causes of action including, but not
limited to, conversion, breach of fiduciary duty, debitatus assumpsit,
intentional interference with contract, constructive trust, breach of oral
agreement, specific performance, money had and received, open book account and
spoliation of evidence. The defendants vigorously opposed the lawsuit. The
plaintiff filed a claim in the bankruptcy in the amount of $2,500,000, which was
settled by the Company during 2000 requiring the Company to transfer 1,189
shares of its investment in Pure Energy Corporation stock with a carrying value
of $101,000 to the plaintiff.

The Company brought claims against State Street Bank and Trust Company ("State
Street") in federal district court in Boston, Massachusetts (Civil Action No.
97-12573-NO, U.S. District Court, D. MA) for conversion, breach of contract,
unjust enrichment, a declaratory judgment and violation of Massachusetts General
Laws, c. 93A arising from State Street's wrongful retention of 72,188 shares of
the Company's common stock after the Company's obligations to State Street under
a Settlement Agreement of the prior indebtedness of Georgetown Collection, Inc.,
a subsidiary acquired in 1996, had been paid in full. The stock retained by
State Street had an original value of $617,000. State Street denies liability
and brought a counterclaim against the Company for breach of contract and
specific performance seeking $102,000 in damages, plus attorneys fees and costs.
During 2000, the Company settled with State Street Bank in the amount of $85,000
and has received court approval for such settlement.

Finance Authority of Maine, Coastal Enterprises, Inc, and the Southern Maine
Economic Development District brought claims in federal district court in
Portland, Maine (Civil Action No.98-2235-8, U.S. District Court, D. Maine) for
breach of contract, indemnification and specific performance arising from the
Company's performance under certain settlement documents following the
acquisition of the subsidiary, Georgetown Collection, Inc., in 1996. The
plaintiffs were seeking an order requiring the Company to purchase 63,030 shares
of the Company's stock previously transferred to plaintiffs for $11.50 per
share, plus interest and attorneys fees. The Company answered and denied
liability on plaintiffs' claims. The Company has settled with Finance Authority
of Maine and Coastal Enterprises in the amounts of $160,000 and $55,000,
respectively, and has received court approval for such settlements. The Southern
Maine Economic Development District matter is stayed and no settlement has been
reached.

The Company is involved in certain other legal and administrative proceedings
and threatened legal and administrative proceedings arising in the normal course
of its business. While the outcome of such proceedings and threatened
proceedings cannot be predicted with certainty, in the opinion of management,
the ultimate resolution of these matters individually or in the aggregate will
not have a material adverse effect on the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in interest rates affecting the cost of its bank debt.

Foreign Currency - The Company has subsidiary operations in Thailand, and
accordingly, the Company is exposed to transaction gains and losses that could
result from changes in foreign currency exchange rates. The Company uses the
local currency (Thai baht) as the functional currency for its Thai subsidiaries.
Translation adjustments resulting from the process of translating foreign
currency financial statements into U.S. dollars were not significant in fiscal
2001 and in the six month period ended June 30, 2001 due to the fact that the
exchange rate remained relatively constant throughout the period. Under the
current circumstances, the Company believes that the foreign currency market
risk is not material. The Company actively monitors its foreign exchange
exposure and evaluates possible strategies to reduce its risk. Should
circumstances change, the Company intends to implement appropriate strategies at
such time that it determines that the benefits outweigh the associated costs.
There can be no assurance that management's efforts to reduce foreign exchange
exposure will be successful.


                                       24

<PAGE>   27

Interest Rates - To the extent the Company borrows under its credit facilities,
the Company would be exposed to market risk related to changes in interest
rates. At June 30, 2001, the Company had $3,882,000 outstanding under the
Company's credit facilities, including $2,181,000 which is classified as subject
to compromise.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

(b) REPORTS ON FORM 8-K:

    There were no reports on Form 8-K filed during the quarter for which this
    report is filed.

                                    SIGNATURE

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.


                                                THE L.L. KNICKERBOCKER CO., INC.


Date: August 14, 2001                           By: /s/ Anthony P. Shutts
                                                    ----------------------------
                                                        Anthony P. Shutts
                                                        Chief Financial Officer
                                                        (Principal financial and
                                                        accounting officer)


                                       25