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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 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, 2002

OR

[   ]

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

For the transition period from _____ to _____

Commission file number 0-18813

THQ INC.

Delaware (State or Other Jurisdiction of Incorporation or Organization)		13-3541686 (I.R.S. Employer Identification No.)
27001 Agoura Road Calabasas Hills, CA (Address of principal executive offices)		91301 (Zip Code)

Registrant’s telephone number, including area code: (818) 871-5000

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

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

Common stock, $0.01 par value: 39,646,526 shares (as of August 9, 2002).

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THQ INC. AND SUBSIDIARIES

INDEX

						PAGE
Part I — Financial Information
Item 1.				Consolidated Financial Statements:
				Consolidated Balance Sheets — June 30, 2002 and December 31, 2001			3
				Consolidated Statements of Operations — for the Three Months and Six Months Ended June 30, 2002 and 2001			4
				Consolidated Statements of Stockholders’ Equity — for the Year Ended December 31, 2001 and the Six Months Ended June 30, 2002			5
				Consolidated Statements of Cash Flows — for the Six Months June 30, 2002 and 2001			6
				Notes to Consolidated Financial Statements			7
Item 2.				Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3.				Quantitative and Qualitative Disclosures About Market Risk			23
Part II — Other Information
Item 1.				Legal Proceedings			24
Item 2.				Changes in Securities and Use of Proceeds			25
Item 4.				Submission of Matters to a Vote of Security Holders			26
Item 6.				Exhibits and Reports on Form 8-K			27
Signatures							28

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Part I — Financial Information

Item 1. Financial Statements.

THQ INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

				June 30,				December 31,
				2002				2001
				(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	172,742			$	171,059
	Short-term investments				55,878				35,106
		Cash, cash equivalents and short-term investments			228,620				206,165
	Accounts receivable — net				64,455				126,011
	Inventory				14,288				9,917
	Licenses				17,692				16,758
	Software development				49,012				34,664
	Income taxes receivable				852				290
	Prepaid expenses and other current assets				4,651				7,498
		Total current assets			379,570				401,303
Property and equipment — net					14,984				13,891
Licenses — net of current portion					31,148				8,345
Software development — net of current portion					2,843				4,466
Goodwill — net					48,247				48,202
Other long-term assets — net					8,158				11,759
TOTAL ASSETS				$	484,950			$	487,966
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	13,675			$	27,186
	Accrued expenses				17,328				22,944
	Accrued royalties				21,294				30,001
	Deferred income taxes				1,566				1,567
		Total current liabilities			53,863				81,698
Accrued royalties — net of current portion					14,925				6,686
Deferred income taxes					1,130				720
Commitments and contingencies					—				—
Stockholders’ equity:
Common stock, par value $.01, 75,000,000 shares authorized; 39,474,536 and 38,979,747 shares issued and outstanding as of June 30, 2002 and December 31, 2001, respectively					395				390
Additional paid-in capital					326,166				316,758
Accumulated other comprehensive loss					(485	)			(2,187	)
Retained earnings					88,956				83,901
		Total Stockholders’ equity			415,032				398,862
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY				$	484,950			$	487,966

See notes to consolidated financial statements.

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THQ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

			For the Three Months Ended								For the Six Months Ended
			June 30,								June 30,
			2002				2001				2002				2001
			(Unaudited)								(Unaudited)
Net sales			$	85,762			$	55,236			$	165,443			$	114,564
Costs and expenses:
	Cost of sales			32,497				23,558				66,176				51,883
	License amortization and royalties			7,099				4,507				14,163				9,261
	Software development amortization			11,587				3,580				22,388				9,050
	Product development			9,019				4,849				16,665				9,958
	Selling and marketing			11,424				7,947				21,182				15,611
	Payment to venture partner			1,500				339				3,072				1,763
	General and administrative			6,340				5,511				12,400				11,462
Total costs and expenses				79,466				50,291				156,046				108,988
Income from operations				6,296				4,945				9,397				5,576
Interest income, net				1,579				595				2,901				1,307
Other expenses				(3,006	)			—				(3,006	)			—
Income before income taxes				4,869				5,540				9,292				6,883
Income taxes				2,578				2,086				4,237				2,568
Net income			$	2,291			$	3,454			$	5,055			$	4,315
Net income per share — basic			$	.06			$	.11			$	.13			$	.14
Net income per share — diluted			$	.05			$	.10			$	.12			$	.13
Shares used in per share calculation — basic				39,392				32,028				39,231				31,448
Shares used in per share calculation — diluted				42,052				35,005				41,891				34,310

See notes to consolidated financial statements.

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THQ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except per share data)

				For the Year Ended December 31, 2001 and the Six Months Ended June 30, 2002 (Unaudited)
																Accumulated
												Additional				Other
				Common				Common				Paid-in				Comprehensive				Retained
				Shares				Stock				Capital				Loss				Earnings				Total
Balance at January 1, 2001					30,690,807			$	307			$	85,645			$	(1,715	)		$	47,888			$	132,125
Exercise of warrants and options					2,405,413				24				16,697				—				—				16,721
Issuance of common stock from secondary offering					4,596,222				46				154,559				—				—				154,605
Issuance of common stock for Rainbow acquisition					1,287,305				13				48,635				—				—				48,648
Stock compensation					—				—				299				—				—				299
Tax benefit related to the exercise of employee stock options					—				—				10,923				—				—				10,923
Comprehensive income:
	Net income				—				—				—				—				36,013				36,013
	Other comprehensive income
		Foreign currency translation adjustment			—				—				—				(703	)			—				(703	)
		Unrealized gain on investments			—				—				—				231				—				231
Comprehensive income																									35,541
Balance at December 31, 2001					38,979,747				390				316,758				(2,187	)			83,901				398,862
Exercise of warrants and options					494,789				5				5,058				—				—				5,063
Adjustments related to secondary offering					—				—				52				—				—				52
Adjustments related to Rainbow acquisition					—				—				(82	)			—				—				(82	)
Issuance of warrants					—				—				1,213				—				—				1,213
Stock compensation					—				—				101				—				—				101
Tax benefit related to the exercise of employee stock options					—				—				3,066				—				—				3,066
Comprehensive income:
	Net income				—				—				—				—				5,055				5,055
	Other comprehensive income
		Foreign currency translation adjustment			—				—				—				2,143				—				2,143
		Unrealized loss on investments			—				—				—				(441	)			—				(441	)
Comprehensive income																									6,757
Balance at June 30, 2002					39,474,536			$	395			$	326,166			$	(485	)		$	88,956			$	415,032

See notes to consolidated financial statements.

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THQ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

			For the Six Months Ended
			June 30,
			2002				2001
			(Unaudited)
Cash flows from operating activities:
Net income			$	5,055			$	4,315
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			2,914				2,086
	Amortization of licenses and software development			27,950				10,453
	Provision for doubtful accounts, discounts and returns			25,470				14,181
	Loss on disposal of property and equipment			11				30
	Stock compensation			101				141
	Tax benefit related to the exercise of employee stock options			3,066				8,928
	Deferred income taxes			—				220
	Write-off of Network Interactive Sports Ltd.			3,006				—
Changes in operating assets and liabilities:
	Accounts receivable			37,212				82,144
	Inventory			(3,541	)			2,837
	Licenses			(29,801	)			(13,920	)
	Software development			(33,357	)			(22,159	)
	Prepaid expenses and other current assets			2,280				454
	Accounts payable			(14,071	)			(11,524	)
	Accrued expenses			(5,389	)			(9,356	)
	Accrued royalties			(500	)			(5,571	)
	Income taxes receivable			(502	)			(12,420	)
Net cash provided by operating activities				19,904				50,839
Cash flows used in investing activities:
	Proceeds from sale of property and equipment			—				19
	Purchase of short-term investments			(20,950	)			—
	Acquisition of property and equipment			(3,563	)			(2,816	)
	Investment in Network Interactive Sports Ltd.			(221	)			(2,741	)
	(Increase) decrease in other long-term assets			(212	)			450
Net cash used in investing activities				(24,946	)			(5,088	)
Cash flows used in financing activities:
	Net decrease in short-term borrowings			—				(15,473	)
	Proceeds from issuance of common stock			52				—
	Proceeds from exercise of warrants and options			5,063				12,644
Net cash used in financing activities				5,115				(2,829	)
Effect of exchange rate changes on cash				1,610				(76	)
Net increase in cash and cash equivalents				1,683				42,846
Cash and cash equivalents — beginning of period				171,059				27,998
Cash and cash equivalents — end of period			$	172,742			$	70,844

See notes to consolidated financial statements.

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THQ INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of Presentation

In the opinion of management the accompanying interim balance sheet and related statements of operations, cash flows and stockholders’ equity include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with U.S. generally accepted accounting principles. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses. Examples include discounts, allowances and returns. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis and financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2001. Certain reclassifications have been made for consistent presentation.

2. Cash, Cash Equivalents and Short-Term Investments

We consider all highly liquid investments purchased with maturities less than three months to be cash equivalents.

Investments with a maturity greater than three months, but less than one year, at the time of purchase are considered to be short-term investments. We invest in highly liquid debt instruments with strong credit ratings. The carrying amount of the investments approximates fair value due to their short maturity. Unrealized gains and (losses) are recorded as a separate component of accumulated other comprehensive income. The investment in Yuke’s Co., Ltd. is also classified as available-for-sale and is included in other long-term assets in the accompanying balance sheets. The unrealized holding gain (loss) on the investment in Yuke’s Co., Ltd. at June 30, 2002 and December 31, 2001 was ($475,000) and $249,000, respectively.

3. Accounts Receivable

Accounts receivable are due primarily from domestic and foreign retailers and distributors including mass merchants and specialty stores. Accounts receivable at June 30, 2002 and December 31, 2001 consist of the following:

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4. Licenses

Minimum guaranteed payments for intellectual property licenses are initially recorded as an asset (licenses) and as a liability (accrued royalties) at the contractual amount upon execution of the contract when no significant performance remains with the licensor. When significant performance remains with the licensor, we record payments as an asset (licenses) when paid. Payments for intellectual property licenses are classified as current assets and current liabilities to the extent they relate to anticipated sales during the subsequent year and long-term assets and long-term liabilities if the sales are anticipated after one year.

Licenses are expensed to license amortization and royalties at the contractual royalty rate based on actual net product sales or on the ratio of current units sold to total projected units sold, whichever is higher. When, in management’s estimate, future cash flows will not be sufficient to recover previously capitalized costs, we expense these items to license amortization and royalties. Such charges are typically attributable to changes in market conditions or product quality considerations.

The gross carrying value of our licenses was $90.3 million and the related accumulated amortization is $41.5 million at June 30, 2002. For the three months and six months ended June 30, 2002, our aggregate amortization expense was $3.7 million and $7.3 million, respectively. We estimate that the current portion of licenses, $17.7 million, will be amortized over the next twelve months. We estimate that licenses — net of current portion, $31.1 million, will be amortized after June 30, 2003 over varying periods depending on the release dates of the related products.

5. Software Development

We utilize both independent software developers and internal development teams to develop our software. We account for software development costs in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” We capitalize software development costs once technological feasibility is established and such costs are determined to be recoverable against future revenues. For products where proven game engine technology exists, this may occur early in the development cycle. We capitalize the milestone payments made to independent software developers and the direct payroll costs for our internal development teams. We evaluate technological feasibility on a product-by-product basis. Amounts related to software development for which technological feasibility is not met are charged immediately to product development.

Capitalized software development is expensed to software development amortization at the contractual rate based on actual net product sales or on the ratio of current units sold to total projected units sold, whichever is higher. When, in management’s estimate, future cash flows will not be sufficient to recover previously capitalized costs, we expense these items to software development amortization. Such charges are typically attributable to changes in market conditions or product quality considerations.

The gross carrying value of our software development was $110.7 million and the related accumulated amortization is $58.8 million at June 30, 2002. For the three months and six months ended June 30, 2002, our aggregate amortization expense was $9.7 million and $20.6 million, respectively. We estimate that the current portion of software development, $49.0 million, will be amortized over the next twelve months. We estimate that software development — net of current portion, $2.8 million, will be amortized between June 30, 2003 and June 30, 2004 based on tentative release dates of the related products.

6. Goodwill and Other Intangible Assets

In accordance with the adoption of SFAS No. 142, on January 1, 2002, we no longer amortize goodwill. The following table reconciles net income and earnings per share as reported for the three months and six months ended June 30, 2002 and 2001 to net income and earnings per share as adjusted to exclude goodwill amortization.

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The changes in the carrying amount of goodwill for the six months ended June 30, 2002, are as follows:

Intangible assets, which are included in other long-term assets — net in the accompanying balance sheet are as follows:

Acquired Intangible Assets