In eight short years, JAKKS Pacific, Inc. has grown from a small, traditional toy company into the fourth largest U.S. player in our $31 billion industry. We realized this accomplishment by adhering to our visionary and strategic business plan and by leveraging the valuable lessons we have learned along the way.

As evidence of our abilities in both regards, we continued to grow in 2002. In the most challenging economic and retail environments in recent history, we extended our run of 27 quarters of year-over-year top-line growth. We improved our net sales and net income in 2002 (see Financial Highlights), and we now have enjoyed a compounded annual growth rate of 75 percent over the past seven years. In comparison to our peer group, and the U.S. markets overall, we are proud of our performance in 2002, and our ability to weather the ups and downs of our industry.

This performance is also evident in the financial strength of our Company. At fiscal year-end, we reported $129.2 million in working capital, including $68.4 million in cash, and approximately $360.6 million in stockholders’ equity. We are confident that our financial position will bolster our ability to execute our strategic plan even in challenging times.

In June 2003, we consummated a private offering of our Convertible Senior Notes, which provided us net proceeds of $94 million to allow us to continue to implement our growth strategies.

Traditionally, the third quarter, as we ready for the fourth quarter holiday season, is the most robust quarter in the toy industry. While the third quarter remains a strong quarter for us, we have successfully avoided the marked fluctuations of seasonality by diversifying our revenue stream across all quarters. This has been our stated goal since our inception. In 1995, third quarter revenues accounted for 48 percent of our total sales. In 2002, they represented 32 percent. We credit this shift to the core tenets of our business plan. Namely, we have grown the Company through acquisitions with complementary and evergreen product lines, as well as those with product lines that further diversified our portfolio of product offerings. We have strengthened our design teams across all brands and have cultivated strategic relationships with multiple third-party factories, which create efficiencies in our manufacturing process. We have identified and accessed larger distribution channels, and we have secured evergreen licenses that have increased both our sales and our profile within the toy industry.

By making JAKKS a player for all seasons, we have built the financial strength that enables us to further diversify our business.

Among our accomplishments in 2002 were two accretive additions to our Company. In October, we completed our purchase of Toymax International, Inc., a top industry competitor, adding recognized brands and product lines to our portfolio, including Go Fly A Kite®, Funnoodle®, Laser Challenge™, Creepy Crawlers®, TV Games™, karaoke machines and radio-controlled vehicles, among others. Following Toymax, we acquired the assets of Trendmasters in December. Among the privately held company’s brands were The Storm™ brand of water guns, gliders and junior sports toys. We also acquired Trendmasters’ seasonal products for Halloween, Christmas and Easter.

Possibly as important to us as the acquired assets is the added shelf space they give us for our existing and increasingly diversified product lines. For example, we are marketing our Nickelodeon Gak Splat™ junior sports line of outdoor products alongside The Storm™ water guns in stores nationwide, and selling Trendmasters seasonal items with our Flying Colors/Pentech office supplies in crafts specialty stores.

We further enhanced our portfolio of brands in 2002 with internal development projects as well. One example is our recognition of the growing popularity of the dissolvable, breath-freshening mint strips that took the adult market by storm. We seized the opportunity to create a more appropriate version for kids and, in January 2003, launched our breakthrough and proprietary Tongue Tape™. The product not only garners us presence in a burgeoning candy category but also positions JAKKS Pacific as the “first-to-market” pioneer in creating candy-flavored tongue strips marketed to kids. We believe we’ll enjoy nice returns on our investment.

A key benefit of our growing reputation and profile has been our ability to secure important licenses. In December 2002 and February 2003, we were awarded three-year Master Toy Licenses for the Dragon Ball® franchise and Yu Yu Hakusho™—two top animé properties.

Under the agreement with FUNimation Products, Ltd., we are developing, manufacturing and distributing action figures, action figure accessories and vehicles based on the top Japanese animé franchise. These products join JAKKS’ boys action division, where we anticipate our finely tuned design and merchandising experts will infuse new energy and innovations to maximize the potential for both lines.

Through our acquisitions and internal product development, JAKKS Pacific now offers more than 4,000 SKUs and our most robust and diversified product portfolio ever. With every acquisition, we use our industry experience to recognize the strong drivers for each brand and product category. We use our resources to strengthen the product lines through more effective branding, increased use of innovation and improved manufacturing capabilities. This know-how enables us to recognize and eliminate redundant or poor performers among the acquired lines.

Lastly, we are pleased to report that our international expansion also is proceeding as planned. In 2002 this segment increased 33 percent to represent $53.2 million or 17.2 percent of total net sales, and we anticipate continued growth in this initiative in the coming year.

Just a few short but exciting years after our initial launch in the U.S. toy market, we have made our mark both domestically and globally. We believe this proves that we are a sound company that is here to stay. We have become diversified by design, while being careful to remain focused. We take pride in producing toys and aligning ourselves with brands that have staying power. We continually enrich our product mix and targeted niches so no one product or season bears the burden of carrying any given quarter, and we take pride in working closely with retailers to ensure their continued support and partnership.

We are proud of what we have built and look forward to growing our company as we always have—through a proven business strategy that has spurred steady growth over the past eight years and solidified our standing as a year-round player in the children’s toys and leisure products industry. Through all this, we continue to stay connected to our most important customer—children. We believe that there are no limits to the potential we can reach, just as there are no limits to a child’s imagination—because that is what inspires us.

A tradition of innovation, a commitment to customers and a dedication to growing our business—it is not just our purpose, it is our passion. For the accomplishments of the past year and for our future opportunities, we thank all of our employees, partners, vendors and stockholders for your continued contributions and support.

Sincerely,

Stephen G. Berman
President and COO

Jack Friedman
Chairman and CEO