**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

Washington, D.C. 20549

**FORM 10-K**

 

**x****ANNUAL REPORT PURSUANT TO            SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE**

**ACT OF 1934**

For            the fiscal year ended December 31, 2007

OR

**o****TRANSITION            REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**

**EXCHANGE ACT OF 1934**

For            the transition period from _______________ to _______________

 

Commission File No. 0-7843

|   | **4Kids Entertainment, Inc.**  |
|--------|-------------------------------------|

(Exact name of registrant as specified in its charter)

|   | **New York** | **13-2691380** |
|--------|--------------|----------------|

                  (State            or other jurisdiction            of                                                                                                    (I.R.S. Employer

                 incorporation            or            organization)                                                                                                       Identification No.)

 

|   | **1414 Avenue of the Americas, New York, New                            York** | **10019** |
|--------|--------------------------------------------------------------------------------|-----------|

                                   (Address            of principal executive            offices)                                                                  (Zip Code)

 

**Registrant’s telephone number, including area code: (212)            758-7666**

**Securities registered pursuant to Section 12(b) of the            Act:**

 

| Title of each class           | Name of each exchange on which                            registered |
|-------------------------------|----------------------------------------------------------------------|
| Common Stock, $0.01 par value | New York Stock Exchange                                              |

**Securities registered pursuant to Section 12(g) of the Act:            None**

 

Indicate by check mark if the registrant is a well-known seasoned            issuer, as defined in Rule 405 of the Securities Act. Yes __            NoX 

 

Indicate by check mark if the registrant is not required to file reports            pursuant to Section 13 or Section 15(d) of the Act. Yes___ NoX

 

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 the filing requirements for            the past 90 days. YesXNo            ___

 

Indicate by check mark if disclosure of delinquent filers pursuant to            Item 405 of Regulation S-K is not contained herein, and will not be contained, to the            best of the registrant’s knowledge, in definitive proxy or information statements            incorporated by reference in Part III of this Form 10-K or any amendment to this Form            10-K.o

 

Indicate by check mark whether the registrant is a large accelerated            filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.            See the definitions of "large accelerated filer,” “accelerated filer" and            “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check            one):

 

| Large accelerated filer ___ | Accelerated filerX | Non-accelerated filer ___ | Smaller reporting company ___ |
|-----------------------------|--------------------|---------------------------|-------------------------------|

(Do            not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as            defined in Rule 12b-2 of the Exchange Act). Yes___ NoX

 

The            aggregate market value of the voting stock held by non-affiliates of the registrant,            based on the closing price of the Common Stock on June 29, 2007 as reported on the New            York Stock Exchange Market, was approximately $138,818,400. Shares of Common Stock held            by each officer and director and by each person who owns 5% or more of the outstanding            Common Stock have been excluded from this computation in that such persons may be            deemed to be affiliates. This determination of affiliate status is not necessarily a            conclusive determination for other purposes.

 

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

|   | **Common Stock, $.01 Par Value** | **13,157,823** |
|--------|----------------------------------|----------------|

|   | (Title of Class) | (No. of Shares Outstanding at March 14, 2008) |
|--------|------------------|-----------------------------------------------|

 

**Portions of the registrant’s Proxy Statement for the Annual            Meeting of Stockholders to be held on May 20, 2008 are incorporated by reference into            Part III of this Annual Report on Form 10-K.**

 

----

**FORM 10-K REPORT INDEX**

 

 

| **10-K Part**

**and Item No.**                                                                          |                                                                                                                                                                                    | **Page No.**                                                                    |
|----------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------|
|                                                                                                     |                                                                                                                                                                                    |                                                                            |
| **PART I**                                                                                               |                                                                                                                                                                                    |                                                                            |
| Item 1                                                                                                   |  

Business                                                                                                                                                                        | 1                                                                               |
|  

Item 1A

                             

Item 1B

                             

Item 2 |  

Risk Factors

                             

Unresolved Staff Comments

                             

Properties                                                     | 4

                             

8

                             

9 |
| Item 3                                                                                                   |  

Legal Proceedings                                                                                                                                                               | 9                                                                               |
| Item 4                                                                                                   |  

Submission of Matters to a Vote of Security                            Holders                                                                                                  | 9                                                                               |
|                                                                                                     |                                                                                                                                                                                    |                                                                            |
| **PART II**                                                                                              |                                                                                                                                                                                    |                                                                            |
| Item 5                                                                                                   |  

Market for the Registrant’s Common Equity and                            Related Stockholder Matters and Issuer Purchases of Equity                            Securities | 10                                                                              |
| Item 6                                                                                                   |  

Selected Consolidated Financial Data                                                                                                                                            | 11                                                                              |
| Item 7                                                                                                   |  

Management’s Discussion and Analysis of Financial                            Condition and Results of Operations                                                          | 13                                                                              |
| Item 7A                                                                                                  |  

Quantitative and Qualitative Disclosures About Market                            Risk                                                                                           | 27                                                                              |
| Item 8                                                                                                   | Financial Statements and Supplementary Data                                                                                                                                             | 27                                                                              |
| Item 9                                                                                                   |  

Changes in and Disagreements with Accountants on                            Accounting and Financial Disclosure                                                                 | 27                                                                              |
| Item 9A                                                                                                  |  

Controls and Procedures                                                                                                                                                         | 27                                                                              |
| Item 9B                                                                                                  | Other Information                                                                                                                                                                       | 28                                                                              |
|                                                                                                     |                                                                                                                                                                                    |                                                                            |
| **PART III**                                                                                             |                                                                                                                                                                                    |                                                                            |
| Item 10                                                                                                  |  

Directors and Executive Officers of the                            Registrant                                                                                                   | 28                                                                              |
| Item 11                                                                                                  |  

Executive Compensation                                                                                                                                                          | 29                                                                              |
| Item 12                                                                                                  |  

Security Ownership of Certain Beneficial Owners and                            Management and Related Stockholder Matters                                                       | 29                                                                              |
| Item 13                                                                                                  |  

Certain Relationships and Related                            Transactions                                                                                                       | 29                                                                              |
| Item 14                                                                                                  |  

Principal Accountant Fees and Services                                                                                                                                          | 29                                                                              |
|                                                                                                     |                                                                                                                                                                                    |                                                                            |
| **PART IV**                                                                                              |                                                                                                                                                                                    |                                                                            |
| Item 15                                                                                                  |  

Exhibits and Financial Statement Schedules                                                                                                                                      | 29                                                                              |

 

----

**PART I**

 

Throughout this Annual Report on Form 10-K, we “incorporate by            reference” certain information in parts of other documents filed with the            Securities and Exchange Commission (the “SEC”). The SEC allows us to            disclose important information by referring to it in that manner. Please refer to such            information.

This            Annual Report on Form 10-K, including the sections titled "Item 1A. Risk            Factors" and "Item 7. Management's Discussion and Analysis of Financial Condition and            Results of Operations" contains forward-looking statements that relate to future events            or our future financial performance. We may also make written and oral forward-looking            statements in our Securities and Exchange Commission ("SEC") filings and otherwise. We            have tried, where possible, to identify such statements by using words such as            "believe," "expect," "intend," "estimate," "anticipate," "will," "project," "plan" and            similar expressions in connection with any discussion of future operating or financial            performance. Any forward-looking statements are and will be based upon our then-current            expectations, estimates and assumptions regarding future events and are applicable only            as of the dates of such statements. By their nature, forward-looking statements involve            risks and uncertainties that could cause actual results to differ materially from those            anticipated in any forward-looking statements. Such risks and uncertainties include            those described in "Item 1A. Risk Factors" below as well as other factors. We            undertake no obligation to update or revise any forward-looking statements, whether as            a result of new information, future events or otherwise.

**Item            1. Business.**

 

*General**Development and Narrative            Description of Business*- 4Kids Entertainment, Inc., together            with the subsidiaries through which the Company’s businesses are conducted (the            “Company”), is a diversified entertainment and media company specializing            in the youth oriented market with operations in the following business segments: (i)            Licensing; (ii) Advertising Media and Broadcast; (iii) Television and Film            Production/Distribution; and (iv) Trading Card and Game Distribution. The Company was            organized as a New York corporation in 1970.

 

***Licensing***- The Licensing business            segment consists of the results of operations of the following wholly-owned            subsidiaries of the Company: 4Kids Entertainment Licensing, Inc. (“4Kids            Licensing”); 4Sight Licensing Solutions, Inc. (“4Sight Licensing”);            4Kids Entertainment International, Ltd. (“4Kids International”); and 4Kids            Technology, Inc. (“4Kids Technology”). 4Kids Licensing is engaged in the            business of licensing the merchandising rights to popular children’s television            series, properties and product concepts (individually, the “Property” or            collectively the “Properties”). 4Kids Licensing typically acts as exclusive            merchandising agent in connection with the grant to third parties of licenses to            manufacture and sell all types of merchandise, including toys, videogames, trading            cards, apparel, housewares, footwear, books and other published materials, based on            such Properties. 4Sight Licensing is engaged in the business of licensing properties            and product concepts to adults, teens and “tweens”. 4Sight Licensing            focuses on brand building through licensing. 4Kids International, based in London,            manages Properties represented by the Company in the United Kingdom and European            marketplaces. 4Kids Technology develops ideas and concepts for licensing which            integrate new and existing technologies with traditional game and toy play            patterns.

 

The            Licensing segment accounted for approximately 41%, 44% and 47% of consolidated net            revenues for the years ended December 31, 2007, 2006 and 2005, respectively. The            “Yu-Gi-Oh!” and “Teenage Mutant Ninja Turtles” Properties            continue to be the two largest contributors in this business segment.

 

***Advertising Media and Broadcast***-            The Company, through a multi-year agreement with Fox Broadcasting Corporation            (“Fox”), leases Fox’s Saturday morning programming block            (“4Kids TV”) from 8am to 12pm eastern/pacific time (7am to 11am central            time). The Company provides substantially all programming content to be broadcast on            4Kids TV. 4Kids Ad Sales, Inc. (“4Kids Ad Sales”), a wholly-owned            subsidiary of the Company, retains all of the revenues from its sale of network            advertising time for the four-hour time period leased from Fox.

 

On            October 1, 2007, the Company and The CW Network, LLC ("The CW") entered into an            agreement (the "CW Agreement"), under which The CW granted to the Company the exclusive            right to program The CW's Saturday morning children's programming block that is            broadcast in most markets between 7am and 12pm ("The CW Kids Block") for an initial            term of five years beginning with The CW's 2008-2009 broadcast season.

 

Effective June 30, 2006, the Company’s wholly-owned subsidiary,            The Summit Media Group, Inc. (“Summit Media”), which previously provided            print and broadcast media planning and buying services for clients principally in the            children’s toy and game business, terminated its operations. As a consequence of            the termination of its operations, Summit Media no longer serves as a media buying            agency for third parties and is being classified as a discontinued            operation.

 

1

 

----

The            Advertising Media and Broadcast segment accounted for 29%, 23% and 23% of consolidated            net revenues for the years ended December 31, 2007, 2006 and 2005,            respectively.

 

***Television and Film Production/Distribution***- The Television and Film Production/Distribution business segment            consists of the results of operations of the following wholly-owned subsidiaries of the            Company: 4Kids Productions, Inc. (“4Kids Productions”); 4Kids Entertainment            Music, Inc. (“4Kids Music”); and 4Kids Entertainment Home Video, Inc.            (“4Kids Home Video”). 4Kids Productions produces and adapts animated and            live-action television programs and theatrical motion pictures for distribution to the            domestic and international television, home video and theatrical markets. 4Kids Music            composes original music for incorporation into television programming produced by 4Kids            Productions and markets and manages such music. 4Kids Home Video distributes home            videos associated with television programming produced by 4Kids Productions.

 

The            Television and Film Production/Distribution segment accounted for 29%, 33% and 30% of            consolidated net revenues for the years ended December 31, 2007, 2006 and 2005,            respectively.

 

***Trading Card and Game Distribution***-            Through its wholly-owned subsidiary, 4Kids Digital Games, Inc. (“4Kids            Digital”), the Company owns 55% of TC Digital Games LLC, a Delaware limited            liability company (“TC Digital”) that produces, markets and distributes the            “Chaotic” trading card game. In December 2006, 4Kids Digital acquired a 53%            ownership interest in TC Digital and entered into TC Digital’s operating            agreement (the “TCD Agreement”) with Chaotic USA Digital Games LLC            (“CUSA LLC”), a wholly-owned subsidiary of Chaotic USA Entertainment Group,            Inc. (“CUSA”). The TCD Agreement contains terms and conditions governing            the operations of TC Digital, and entitles 4Kids Digital and CUSA to elect two managers            to the entity’s Management Committee with 4Kids Digital having the right to break            any dead-locks. On December 18, 2007, 4Kids Digital purchased an additional 2%            membership interest in TC Digital from CUSA increasing 4Kids Digital’s ownership            percentage to 55%. The consideration for the purchase of the additional membership            interest was paid through the settlement of certain capital contributions required to            be made by CUSA to TC Websites under TC Websites’ operating agreement (the            “TCW Agreement”).

 

Through its wholly-owned subsidiary, 4Kids Websites, Inc. (“4Kids            Websites”), the Company owns 55% of TC Websites LLC, a Delaware limited liability            company (“TC Websites”) that owns and operates*www.chaoticgame.com*, the companion            website for the “Chaotic” trading card game which was launched as a public            beta version on October 24, 2007. In December 2006, 4Kids Websites purchased a 50%            membership interest in TC Websites from CUSA and entered into the TCW Agreement with            CUSA. The TCW Agreement contains terms and conditions governing TC Websites’            operations and entitles 4Kids Websites and CUSA to elect two managers to its Management            Committee. On December 18, 2007, 4Kids Websites entered into an agreement pursuant to            which it acquired an additional 5% ownership interest in TC Websites from CUSA, and the            TCW Agreement was concurrently amended to provide 4Kids Websites with the right to            break any deadlocks on TC Websites’ Management Committee, including with respect            to operational matters. The consideration for the purchase of the additional membership            interest was paid through the settlement of certain capital contributions required to            be made by CUSA to TC Websites under the TCW Agreement. 4Kids Websites had previously            used the equity method to account for its investment in TC Websites, where it did not            have control but had significant influence. As a result of 4Kids Websites’            increased ownership and operational control, TC Websites is consolidated in the            Company’s financial statements, subject to a minority interest.

TC            Digital and TC Websites are the exclusive licensees of certain patents covering the            uploading of coded trading cards to a website where online game play and community            activities occur. The*www.chaoticgame.com*website provides full access to all of its content and is free of charge            for all users. No purchase of trading cards is necessary to play the online version            where virtual playing decks are available to users who register on the website. These            two businesses enable the Company to offer traditional trading card game play with an            online digital play experience. In addition, it is anticipated that TC Digital and TC            Websites will diversify their product lines and will ultimately distribute and sell,            and create websites for other trading card games. The Company believes that its            ownership interests in TC Digital and TC Websites represent a potentially significant            addition to its business strategy.

Certain of the Company’s executive officers hold management            positions and have ownership interests in CUSA, CUSA LLC and certain other entities            with which TC Digital and TC Websites have engaged in transactions since their            formation. Information regarding these relationships can be found in Note 15 of the            Notes to the Company’s consolidated financial statements.

 

The            Trading Card and Game Distribution segment accounted for 1%, 0% and 0% of consolidated            net revenues for the years ended December 31, 2007, 2006 and 2005,            respectively.

 

*Financial Information About Industry Segments*- Financial information regarding the Company’s industry segments            can be found in Note 17 of the Notes to the Company’s consolidated financial            statements.

 

2

 

----

*Dependence on a Few Sources of Revenues*-The Company typically derives a substantial            portion of its revenues from a small number of Properties, which usually generate            revenues for only a limited period of time. The Company’s revenues are highly            subject to changing trends in the toy, game and entertainment businesses, causing            dramatic increases and decreases from year to year due to the popularity of particular            Properties. It is not possible to accurately predict the length of time that a Property            will be commercially successful and/or if a Property will be commercially successful at            all. Due to these factors, the Company must continually seek new properties from which            it can derive revenues. In addition, the Company also does not control the timing of            the release of products by licensees which can affect both the amount of licensing            revenues earned and the periods during which such revenues are recognized.

Three Properties, “Yu-Gi-Oh!”, “Teenage Mutant Ninja            Turtles” and “Viva Piñata” represented 45% of consolidated net            revenues for fiscal 2007. Two licensees, Microsoft Corporation and Konami Corporation,            represented 26% of consolidated net revenues for fiscal 2007. For more information on            the Company’s Revenues/Major Customers, please see Note 8 of the Notes to the            Company’s consolidated financial statements.

*Trademarks and Copyrights*- Except as            provided below, the Company generally does not own any trademarks or copyrights in            Properties which the Company represents as a merchandising agent. The trademarks and            copyrights are typically owned by the creators of the Properties or by other entities,            which may have expended substantial amounts of resources in developing or promoting the            Properties.

The            Company owns the copyrights and trademarks to “Charlie Chan” and the            “WMAC Masters” live action television series. The Company is also a joint            copyright holder of the “Cubix” CGI television series and the            “Teenage Mutant Ninja Turtles” and “Chaotic” animated            television series produced by 4Kids Productions.  Additionally, the Company is            also a joint copyright holder of the new “Chaotic” trading card artwork for            the “Chaotic” trading card game. The Company also jointly owns the            copyright to the “Chaotic” trading card game as it relates to            revisions to the original “Chaotic” trading card game previously sold in            Denmark.  The Company, through its 55% ownership interest in TC Websites, jointly            owns the intellectual property rights to the website, including certain proprietary            software contained in the website which enables “Chaotic” website visitors            to play the “Chaotic” trading card game online at*www.chaoticgame.com**.*

*Seasonal Aspects*- A substantial portion of            the Company’s revenues and net income are subject to the seasonal and trend            variations of the toy and game industry. Typically, a majority of toy orders are            shipped in the third and fourth calendar quarters. Historically, the Company’s            net revenues from toy and game royalties during the second half of the year have            generally been greater than during the first half of the year. Additionally,            advertising revenues derived from the sale of commercial time on 4Kids TV is generally            higher in the fourth quarter due to higher advertising rates typically charged to            children’s advertisers for advertising during the holiday season.

*Competition -*The Company’s principal            competitors in the area of merchandise licensing are the large media companies (e.g.,            Disney, Time Warner and Nickelodeon, which is owned by Viacom) with consumer            products/merchandise licensing divisions, toy companies, other licensing companies, and            numerous individuals who act as merchandising agents. There are also many independent            product development firms with which the Company competes. Many of these companies have            substantially greater resources than the Company and represent properties which have            been commercially successful for longer periods than the Properties represented by the            Company. The Company believes it would be relatively easy for a potential competitor to            enter its market in light of the relatively small investment required to commence            operations as a merchandising agent.

The            Company’s Advertising Media and Broadcast segment also operates in a highly            competitive marketplace against large media companies (e.g., Disney, Time Warner, CBS,            NBC and Nickelodeon) with substantially greater resources and distribution networks            than the Company. The Company’s ability to derive advertising revenue from the            sale of commercial time on 4Kids TV, and beginning with the 2008-2009 broadcast season,            The CW Kids Block, substantially depends on the popularity of the television shows that            the Company broadcasts. The Company also faces significant competition from other            television broadcasters and cable networks, which also broadcast children’s            television shows on Saturday mornings.

The            Company’s Television and Film Production/Distribution segment competes with all            forms of entertainment directed at children. There are a significant number of            companies that produce and/or broadcast television programming and distribute            theatrical motion pictures and home videos for the children’s audience. The            Company also competes with these companies to obtain creative talent to write, adapt,            score, provide voice-overs and produce the television programs and theatrical motion            pictures marketed by the Company and its subsidiaries.

The            Company’s Trading Card and Game Distribution segment will also be operating in a            highly competitive market against strong competition such as: (i)Wizards of the Coast,            which is owned by Hasbro and distributes the popular “Magic the

 

3

 

----

Gathering" trading card game; (ii) Upper Deck, a company that            distributes “Yu-Gi-Oh!” trading cards and sports cards; (iii) Topps, a            company that distributes sports cards; and (iv) Nintendo of America and Pokémon            USA, Inc., the companies that distribute the “Pokémon” trading card            game. The “Chaotic” website which is part of the Company’s Trading            Card and Game Distribution segment will also be competing with popular online            multiplayer game websites such as “World of Warcraft”, the website run by            Blizzard Entertainment, a subsidiary of Vivendi.

*Employees*- As of March 14, 2008, the            Company had a total of 233 full-time employees in its domestic and international            operations. Of the total, 96 employees were primarily rendering services for the            Licensing segment, 30 were primarily rendering services for the Advertising Media and            Broadcasting segment, 70 were primarily rendering services for the Television and Film            Production/Distribution segment and 37 were primarily rendering services for the            Trading Card and Game Distribution segment. The Company also hires additional employees            on a program-by-program basis whose compensation is typically allocated to the            capitalized cost of the related programming.

             

*Available Information*- The Company's            Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K            and all amendments to those reports, and the Proxy Statement for its Annual Meeting of            Stockholders are made available, free of charge, through its website,*www.4kidsentertainment.com*, as soon            as reasonably practicable after such reports have been filed with or furnished to the            Securities and Exchange Commission (the "SEC"). In addition, you may read and copy any            materials the Company files with the SEC at the SEC's Public Reference Room at 450            Fifth Street N.W., Washington, D.C. 20549. You may obtain information on the operation            of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an            Internet site, www.sec.gov that contains reports, proxy and information statements, and            other information regarding issuers that file electronically with the SEC.

*Executive Officers of the Company*

| **Name**                                                      | **Age**    |   | **Employed By Registrant Since** |   | **Recent Position(s) Held As Of March 14,                            2008**                                                                                                      |
|---------------------------------------------------------------|------------|--------|----------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Alfred R. Kahn                                                | 61         |   | 1987                             |   | Chairman of the Board of Directors and Chief Executive                            Officer (since 1991)                                                                           |
|  

Bruce R. Foster

                                |  

48 |   |  

2002                     |   |  

Executive Vice President and Chief Financial Officer                            (since 2005); Senior Vice President of Finance (2002 to                            2005) |
|  

Norman Grossfeld

                               |  

44 |   |  

1994                     |   |  

President of 4Kids Productions, Inc.                                                                                                                                     |
|  

Samuel R. Newborn

                              |  

53 |   |  

2000                     |   |  

Executive Vice President and General Counsel                                                                                                                             |
|  

Brian Lacey

                                    |  

57 |   |  

2003                     |   |  

Executive Vice President, International                                                                                                                                  |
|  

Daniel Barnathan                                      |  

53 |   |  

2002                     |   |  

President of 4Kids Ad Sales, Inc.                                                                                                                                        |
|  

Bryan Gannon                                          |  

50 |   |  

2006                     |   |  

Chief Executive Officer of TC Digital Games LLC and TC                            Websites LLC                                                                           |
|  

John Milito                                           |  

34 |   |  

2006                     |   |  

Executive Vice President of TC Digital Games LLC and TC                            Websites LLC                                                                          |

| **Item 1A.** | **Risk Factors.** |
|--------------|-------------------|

The            following significant factors, as well as others of which we are unaware or deem to be            immaterial at this time, could materially adversely affect our business, financial            condition or operating results in the future. Therefore, the following information            should be considered carefully together with other information contained in this            report. Past financial performance may not be a reliable indicator of future            performance, and historical trends should not be used to anticipate results or trends            in future periods.

 

 

4

 

----

The changing entertainment preferences of            consumers could adversely affect our business.

Our            business and operating results depend upon the appeal of our Properties, product            concepts and programming to consumers. Consumer entertainment preferences, as well as            industry trends and demands are continuously changing and are difficult to predict as            they vary over time. In addition, as entertainment properties often have short life            cycles, there can be no assurances that:

| (i)  | our current Properties, product concepts or programming                            will continue to be popular for any significant period of                            time; |
|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (ii)  | new Properties, product concepts or programming we                            represent or produce will achieve and or sustain popularity in the                            marketplace; |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (iii) | a Property’s life cycle will be sufficient to                            permit us to recover revenues in excess of the costs of advance                            payments, guarantees, development, marketing, royalties and other costs                            relating to such Property; or |
|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (iv) | we will successfully anticipate, identify and react to                            consumer preferences. |
|------|---------------------------------------------------------------------------------------------------------|

Our            failure to accomplish any of these events could result in reduced overall revenues,            which could have a material adverse effect on our business, financial condition and            results of operations. In addition, the volatility of consumer preferences could cause            our revenues and net income to vary significantly between comparable            periods.

Revenues from our Licensing segment are largely derived from a small            number of Properties and are subject to changing industry trends.

We            have historically derived a substantial portion of our licensing revenues from a small            number of Properties which usually generate revenues only for a limited period of time.            For the year ended December 31, 2007, we derived approximately 55% of our licensing            revenues from two Properties. Our licensing revenues are also subject to the changing            trends in the toy, game and entertainment industries. Consequently, our licensing            revenues may be subject to dramatic increases and decreases from particular sources            over time. In addition, we do not control the timing of the release of products by            licensees which can affect both the amount of licensing revenues earned and the periods            during which such revenues are recognized. A significant decrease in our licensing            revenues could have a material adverse impact on our financial condition and results of            operations.

Revenues from our Licensing segment are directly impacted by the            amount of retail shelf space dedicated to our Properties.

 

As            an exclusive merchandising agent, we grant licenses to third parties to manufacture and            sell all types of merchandise based on the Properties that we represent. The ability of            these third parties to design, manufacture, and ultimately market and sell this            merchandise through various distribution channels has a direct impact on our revenues.            If these third parties are not successful in obtaining optimal and adequate shelf space            for this merchandise at retail, the performance of certain Properties could suffer            which could have a material adverse impact on our financial condition and results of            operations.

 

Our operating margins could be adversely impacted by the mix of            Properties we represent.

 

Historically, the majority of the television episodes produced by our            production studio were English language dubbed versions of previously produced foreign            language programming. We were able to license television broadcast rights, home video            rights and merchandising rights to such foreign language programming for rights fees            that were substantially below the cost of producing original programming. Over the past            several years, we have begun shifting our strategic focus toward the production of more            original animated programming in an effort to obtain a higher percentage of revenues            and build the value of our programming library. The investment required to produce            original animated programming is substantially greater than our historical cost of            dubbing and adapting existing foreign language animated programming. Our production of            original programming funded in whole or in part by us has resulted in a substantial            increase in capitalized film costs that will be amortized based on overall market            acceptance and projected revenues. To the extent that a Property performs at a level            lower than our expectations, the ratio of amortization expense will increase and may            adversely impact our operating margins and results of operations. If our original            programming is not successful, we may be required to write down millions of dollars of            capitalized film costs associated with the unsuccessful series, which will have a            material adverse impact on our financial condition and results of            operations.

 

5

 

----

We must continually seek new Properties from which we can derive            revenues.

It            is difficult to predict whether a Property will be successful, and if so, for how long.            Because of this, we are constantly seeking new Properties that are already successful            or that we believe are likely to become successful in the future. If we are unable to            identify and acquire the rights to successful new Properties, our revenues, financial            condition and results of operations could be adversely affected.

Our business is seasonal and highly dependent on our performance            during the holiday season.

A            high percentage of our annual operating results have historically depended on our            performance during the holiday season. Sales of our licensed toy and game concepts are            seasonal and most retail sales of these products occur during the third and fourth            fiscal quarters. Also, as a result of the increased demand for commercial time by            children’s advertisers during the holiday season, a significant portion of the            revenues of 4Kids Ad Sales is generated during the fourth fiscal quarter. The financial            results of 4Kids TV and the future results of The CW Kids Block will be affected by how            successful they are in attracting viewers during the holiday season. As a result of the            seasonal nature of our business, we would be significantly and adversely affected by            unfavorable economic conditions and other unforeseen events during the holiday season,            such as a terrorist attack or a military engagement, that negatively affect the retail            environment or consumer buying patterns. In addition, a failure by us to supply            programming to 4Kids TV or The CW Kids Block during the holiday season could have a            material adverse impact on our financial condition and results of            operations.

We operate in a highly competitive marketplace.

*Licensing*. Our principal competitors in the            area of merchandise licensing are the large media companies (e.g., Disney, Time Warner            and Nickelodeon, which is owned by Viacom) with consumer products/merchandise licensing            divisions, toy companies, other licensing companies, and numerous individuals who act            as merchandising agents. There are also many independent product development firms with            which we compete. Many of these companies have substantially greater resources than we            do and represent properties which have been commercially successful for longer periods            than our Properties. We believe that it would be relatively easy for a potential            competitor to enter into this market in light of the relatively small investment            required to commence operations as a merchandising agent.

*Advertising Media and Broadcast*. Our            Advertising Media and Broadcast segment also operates in a highly competitive            marketplace against large media companies (e.g., Disney, Time Warner, CBS, NBC and            Nickelodeon, which is owned by Viacom) with substantially greater resources and            distribution networks than we have. Our ability to derive advertising revenues from the            sale of commercial time on 4Kids TV, and beginning for the 2008-2009 broadcast season,            The CW Kids Block, substantially depends on the popularity of the television shows that            we broadcast. We also face significant competition from other television broadcasters            and cable networks, which also broadcast children’s television shows on Saturday            mornings. Saturday morning broadcast television for children has been losing popularity            over the last few years to the children’s cable television channels such as            Nickelodeon, Cartoon Network and the Disney Channel. In addition, the popularity of the            internet, video on demand, digital video recording of programming and other trends have            caused a fragmentation of the audience. Both of these trends have resulted in lower            advertising revenues from the sale of advertising time on 4Kids TV. The continued            reduction of advertising revenues, as a result of these and other trends, has adversely            affected our business and the results of operations.

*Television and Film            Production/Distribution*. Our Television and Film            Production/Distribution segment competes with all forms of entertainment directed at            children. There are a significant number of companies that produce and/or broadcast            television programming and distribute theatrical motion pictures and home videos for            the children’s audience. We also compete with these companies to obtain creative            talent to write, adapt, score, provide voice-overs and produce the television programs            and theatrical motion pictures marketed by us.

*Trading Card and Game Distribution*. Our            Trading Card and Game Distribution segment operates in a highly competitive market            against strong competition such as: (i) Wizards of the Coast, which is owned by Hasbro            and distributes the popular “Magic the Gathering" trading card game; (ii) Upper            Deck, a company that distributes “Yu-Gi-Oh!” trading cards and sports            cards; (iii) Topps, a company that distributes sports cards; and (iv) Nintendo of            America and Pokémon USA, Inc., the companies that distribute the            “Pokémon” trading card game. The “Chaotic” website which            is part of the our Trading Card and Game Distribution segment is also competing with            popular online multiplayer game websites such as “World of Warcraft”, the            website run by Blizzard Entertainment, a subsidiary of Vivendi.

 

6

 

----

Our broadcasting costs may increase or our advertising revenues may            decrease due to events beyond our control.

The            success of our Advertising Media and Broadcastsegment is largely dependent on the            amount of advertising revenues generated from sales of network advertising on 4Kids TV            and beginning with the 2008-2009 broadcast season, The CW Kids Block. Recently, there            has been increased scrutiny of food advertising directed at children as a result of            childhood obesity concerns. In response to these concerns, several significant food            advertisers have reduced or eliminated advertising of food products directed toward            children resulting in a reduction in the advertising dollars spent in the            children’s television and internet advertising marketplace. In addition,            international, political and military developments may result in increases in            broadcasting costs or loss of advertising revenue due to, among other things, the            preemption of our programming.

Our Trading Card and Game Distribution segment presents certain            risks.

*Our trading card business is a relatively new business with a limited            operating history.*We expect to invest an aggregate amount            between approximately $15 and $20 million in TC Digital and TC Websites. These            companies have only a limited operating history and both operate in a highly            competitive trading card marketplace. TC Digital is initially distributing one product,            the “Chaotic” trading card game. If the “Chaotic” trading card            game is not successful, we will incur substantial losses.

We            commenced distribution of the “Chaotic” trading card game to the comic book            and hobby store distribution channels in October 2007. Additionally, we began to            distribute the “Chaotic” trading card game to mass market distribution            channels in January 2008. If the trading card game is not successful when initially            distributed to the comic and hobby store and mass market distribution channels, it is            possible that we will not receive substantial re-orders from these distribution            channels. Additionally, if distribution in the U.S. is not successful, it is possible            that international distribution could be adversely affected. If such events were to            occur, it would have a material adverse impact on our business and results of            operations.

*Card production delays or shortfalls and card inventory            risk.*Raw materials required for production of the            Company’s products are generally available. However, the unavailability of            certain raw materials or a significant increase in their cost could have a material            adverse affect on our future plans and operating results. Our production of cards to            meet anticipated retailer demand could cause an inventory surplus and result in            markdowns and increased inventory carrying costs for us on even our most successful            products. Additionally, if we underestimate demand for our products, we may be unable            to provide adequate supplies of popular products to retailers in a timely fashion, and            may consequently lose sales opportunities. A small percentage of our card sales are            subject to returns. Although the Company maintains return provisions, returns            considerably in excess of the Company’s provisions or a change in the percentage            of card sales on a returnable basis could materially and adversely affect our future            plans and results.

*There may be issues with the functionality of the            “Chaotic” website.*Each “Chaotic”            trading card has a unique code which enables the “Chaotic” card collector            to enter or upload the “Chaotic” trading card codes to the companion            website,*www.chaoticgame.com*.            The “Chaotic” website enables each “Chaotic” card collector to            battle online using the “Chaotic” cards that have been uploaded to the card            collector’s online account. The “Chaotic” website is currently            operated as a public beta version and is being developed and tested continually in such            environment. There can be no assurance that the “Chaotic” website will not            have operational issues which can be resolved in a timely manner. If the            “Chaotic” website were not to operate properly, the success of the trading            card game would be adversely affected. Such circumstances could require us to make            additional substantial investments in order to support, enhance or upgrade the            “Chaotic” trading game companion website beyond our current            expectations.

*Advertising revenues from the “Chaotic” website may be            less than anticipated.*Visitors to the “Chaotic”            website are not charged a fee for playing the “Chaotic” trading card game            online and the website will be supported by card royalty revenues and anticipated            advertising revenues. There can be no assurance that card royalty revenues and            anticipated advertising revenues will be sufficient to support the costs expected to be            incurred in the operation and maintenance of the website. If card royalty revenues and            anticipated advertising revenues are not sufficient to cover the costs of operating the            website, the losses may adversely impact our business and the results of            operations.

*Failure by the Company to protect its proprietary intellectual            property and information could have a material adverse effect on our business,            financial condition and results of operations.*The value of            the “Chaotic” website depends, in part, on our ability to protect patents            licensed by TC Digital and TC Websites covering the uploading of coded trading cards to            a website where online game play and community activities occur. The failure by the            Company to be able to protect successfully its proprietary intellectual property and            information could have a material adverse affect on our business, financial condition            and results of operations.

 

7

 

----

*Dependence on limited number of suppliers*.            The Company currently has a single source of supply for its trading cards. The loss of            this supplier for any reason could have a materially adverse effect on the Company's            future plans and results. Additionally, failure of the manufacturer to supply the            Company with quality products on a timely basis could have a material adverse affect on            the sales of the “Chaotic” trading cards.

Our future success is dependent on certain key            employees.

The            success of our business depends to a significant extent upon the skills, experience and            efforts of a number of senior management personnel and other key employees. In certain            instances, we have employment agreements in place as a method of retaining the services            of these key employees. The loss of the services of any of our senior management            personnel or other key employees could have a material adverse affect on our business,            results of operations or financial condition.

We may not be able to successfully protect our intellectual property            rights.

We            rely on a combination of copyright, trademark, patent and other proprietary rights laws            to protect the intellectual property rights that we own or license. It is possible that            third parties may challenge our rights to such intellectual property. In addition,            there is a risk of third parties infringing upon our licensors’ or our            intellectual property rights and producing counterfeit products. These events may            result in lost revenue as well as litigation, which may be expensive and time-consuming            even if a favorable outcome is obtained. There can be no assurance that adequate            remedies would be available for any infringement of the intellectual property rights            owned or licensed by the Company. Any such failure to successfully protect our            intellectual property rights may have a material adverse affect on our competitive            position.

We may be negatively affected by adverse general economic and other            conditions.

Conditions in the domestic and global economies are extremely            unpredictable and our business has been and in the future may be, impacted by changes            in such conditions. Softening global economies, stock market uncertainty and wavering            consumer confidence caused by economic weakness, the decline in the housing market, the            threat or occurrence of terrorist attacks, war or other factors generally affecting            economic conditions may adversely affect our business, financial condition and results            of operations.

We must be able to respond to rapidly changing technology occurring            within our industry.

Our            success will depend, in part, on our ability to anticipate and adapt to numerous            changes in our industry resulting from technological developments such as the internet,            broadband distribution of entertainment content and the adoption of digital television            standards. These new distribution technologies may diminish the size of the audience            watching broadcast television and require us to fundamentally change the way we market            and distribute our Properties. For example, digital technology is likely to accelerate            the convergence of broadcast, telecommunications, internet and other media and could            result in material changes in the regulations, intellectual property usage and            technical platforms on which our business relies. These changes could significantly            decrease our revenues or require us to incur significant capital            expenditures.

Potential labor disputes may lead to increased costs or disrupt the            operation of our business.

The            success of our business is dependent on our employees who are involved with our            domestic and international operations. Any labor dispute may adversely affect one or            more of our business segments through increased costs of operating such segment or            disruption of the operations of such segment which could adversely affect our results            of operations.

**Item            1B. Unresolved Staff Comments.**

None.

 

8

 

----

**Item            2. Properties.**

 

The            following table sets forth, with respect to properties leased (none are owned) by the            Company at December 31, 2007, the location of the property, the date on which the lease            expires and the use which the Company makes of such facilities:

 

 

| **Address**                                                                                        | **Expiration of Lease** | **Use**                                       | **Approximate Square Feet** |
|----------------------------------------------------------------------------------------------------|-------------------------|-----------------------------------------------|-----------------------------|
| 1414 Avenue of the Americas, 3rd,                            5th, and 6th FloorsNew York, New York | September 30, 2010      | Executive, Marketing,Sales and Administrative | 29,000                      |
|                                                                                               |                    |                                          |                        |
| 53 West 23rd Street, 11th                            FloorNew York, New York                       | June 30, 2017           | Production Facilities                         | 25,000                      |
|                                                                                               |                    |                                          |                        |
| 53 West 23rd Street, 6th                            FloorNew York, New York                        | February 29, 2012       | Website Development                           | 5,600                       |
|                                                                                               |                    |                                          |                        |
| 1st Floor Mutual House70 Conduit StreetLondon, England                                             | June 23, 2009           | International SalesOffice                     | 2,400                       |
|                                                                                               |                    |                                          |                        |
| 12481 High Bluff Drive, Suite 201

San Diego, California                                           | July 31, 2009           | Trading Card and Game Distribution            | 6,900                       |

 

The            executive, marketing, sales and administrative offices are utilized by the Licensing,            Advertising Media and Broadcast and Trading Card and Game Distribution segments. The            international sales office is utilized primarily by the Licensing Segment. The            production facility is utilized by the Television and Film Production/Distribution            segment. On February 18, 2008, the Company signed a lease expiring February 18, 2011            for an additional 4,200 square feet of office space in the San Diego, California            location. This additional space will be utilized by the Trading Card and Game            Distribution segment. The Company considers that, in general, its physical properties            are well maintained, in good operating condition and adequate for its            purposes.

 

**Item            3. Legal Proceedings.**

 

The            Company, from time to time, is involved in litigation arising in the ordinary course of            its business. The Company does not believe that such litigation to which the Company or            any subsidiary of the Company is a party or of which any of their Properties is the            subject will, individually or in the aggregate, have a material adverse affect on the            Company’s financial position or the results of its operations.

 

**Item            4. Submission of Matters to a Vote of Security Holders.**

 

During the Company’s fiscal quarterly period ended December 31,            2007, there were no matters submitted to a vote of security holders.

 

 

 

 

 

 

9

 

----

**PART II**

 

**Item            5. Market for Registrant’s Common Equity and Related Stockholder Matters and            Issuer Purchases of Equity Securities**

 

(a)*Market Information -*The Company’s Common Stock is listed for trading on the New York            Stock Exchange under the symbol “KDE”. The following table indicates high            and low sales quotations for the periods indicated based upon information supplied by            the New York Stock Exchange.

 

| **2007**       |   | **Low** |   | **High** |   |
|----------------|--------|---------|--------|----------|--------|
| First Quarter  |   | $       | 17.89  |     | $      | 20.31 |   |
| Second Quarter |   |    | 14.75  |     |   | 18.93 |   |
| Third Quarter  |   |    | 14.26  |     |   | 18.00 |   |
| Fourth Quarter |   |    | 10.72  |     |   | 19.90 |   |
|           |   |    |   |     |   |   |   |

 

| **2006**       |   | **Low** |   | **High** |   |
|----------------|--------|---------|--------|----------|--------|
| First Quarter  |   | $       | 15.60  |     | $      | 17.90 |   |
| Second Quarter |   |    | 15.07  |     |   | 17.55 |   |
| Third Quarter  |   |    | 14.09  |     |   | 17.29 |   |
| Fourth Quarter |   |    | 16.19  |     |   | 19.65 |   |
|           |   |    |   |     |   |   |   |

(b)*Holders –*The number of holders of record of the Company’s Common Stock on            March 14, 2008 was7,371. 

             

(c)*Dividends*- There            were no dividends or other distributions made by the Company during 2007 or 2006.            Future dividend policies will be determined by the Board of Directors based on the            Company’s earnings, financial condition, capital requirements and other existing            conditions. It is anticipated that cash dividends will not be paid to the holders of            the Company’s Common Stock in the foreseeable future.

 

(d)*Equity Compensation Plan            Information*- Information regarding the Company’s            equity compensation plans is incorporated by reference to Item 12 in Part III of this            Form 10-K.

             

(e)*Performance Graph -*The following graph compares the cumulative total shareholders return of            our common stock with the cumulative return of the Standard & Poor’s Small            Cap 600 Index (“S&P 600”), the Russell 2000 Index (“Russell            2000”) and a group of companies, consisting of The Walt Disney Company, Time            Warner, Inc., World Wrestling Entertainment, Inc., Marvel Entertainment, Inc. and            Mattel, Inc. (“Peer Group”) for the period beginning December 31, 2002 and            ending December 31, 2007. The graph assumes that $100 was invested on December 31,            2002, and that any dividends were reinvested.

 

 

10

 

----

 

|         | **December 31,** |
|--------------|------------------|
|         | **2002**         | **2003** | **2004** | **2005** | **2006** | **2007** |
| 4Kids        | $100.00          | $117.84 | $95.20 | $71.06 | $82.52 | $59.56 |
| S&P 600  | $100.00          | $137.53 | $167.23 | $178.35 | $203.44 | $200.96 |
| Russell 2000 | $100.00          | $147.25 | $174.24 | $182.18 | $215.64 | $212.26 |
| Peer Group   | $100.00          | $156.73 | $151.47 | $134.61 | $185.88 | $166.64 |

             

|   | (f) | *Purchases of Equity Securities by the                            Issuer*- |
|--------|-----|----------------------------------------------------------------------------|

             

**ISSUER PURCHASE OF EQUITY SECURITIES**

             

             

|  

                             

Period During 2007 |  

Total Number of SharesPurchased |  

Average PricePaid Per                            Share | Total Number of Shares Purchased as Part of Publicly                            Announced Plans orPrograms | Maximum Number of Shares that May Yet Be Purchased Under                            the Plans orPrograms(1) |
|----------------------------------------------------------------|-----------------------------------------|----------------------------------------------------------------|------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------|
| Jan. 1 – Jan. 31                                         | —                                 | —                                                        | —                                                                                                    | —                                                                                                     |
| Feb. 1 – Feb. 28                                         | —                                 | —                                                        | —                                                                                                    | —                                                                                                     |
| Mar. 1 – Mar. 31                                         | —                                 | —                                                        | —                                                                                                    | —                                                                                                     |
| Apr. 1 – Apr. 30                                         | —                                 | —                                                        | —                                                                                                    | —                                                                                                     |
| May 1 – May 31                                           | 8,205                                   | $17.13                                                         | —                                                                                                    | —                                                                                                     |
| Jun. 1 – Jun. 30                                         | —                                 | —                                                        | —                                                                                                    | —                                                                                                     |
| Jul. 1 – Jul. 31                                         | —                                 | —                                                        | —                                                                                                    | —                                                                                                     |
| Aug. 1 – Aug. 31                                         | —                                 | —                                                        | —                                                                                                    | —                                                                                                     |
| Sep. 1 – Sep. 30                                         | —                                 | —                                                        | —                                                                                                    | —                                                                                                     |
| Oct. 1 – Oct. 31                                         | —                                 | —                                                        | —                                                                                                    | —                                                                                                     |
| Nov. 1 – Nov. 30                                         | —                                 | —                                                        | —                                                                                                    | —                                                                                                     |
| Dec. 1 – Dec. 31                                         | 9,400                                   | $12.09                                                         | 9,400                                                                                                      | 990,600                                                                                                     |
| **Total**                                                      | **17,605**                              | **$14.44**                                                     | **9,400**                                                                                                  | **990,600**                                                                                                 |

             

(1) In May 2007, 8,205 shares were repurchased to discharge withholding            tax obligations upon the vesting of certain employees’ restricted stock awards.            Additionally, on December 4, 2007, the Company announced that the Board of Directors            authorized the Company to purchase up to 1,000,000 shares of the Company’s common            stock from time to time through December 31, 2008 in the open market or through            negotiated prices. The Company purchased 9,400 shares at an average price of $12.09 per            share in December 2007 under this authorization. As of March 14, 2008, 174,384 shares            of the Company’s common stock were subsequently purchased by the Company under            this authorization at an average price of $11.93 per share.

 

**Item            6. Selected Financial Data.**

(In            thousands of dollars, except per share data)

 

Our            selected consolidated financial data presented below has been derived from our audited            consolidated financial statements and should be read in conjunction with the related            notes thereto and “Item 7. Management’s Discussion and Analysis of            Financial Condition and Results of Operations”.

 

 

11

 

----

 

|                                                                            |   | **2007**   |   |   | **2006**   |   |   | **2005**   |   | **2004**   |   | **2003**   |
|---------------------------------------------------------------------------------|--------|------------|--------|--------|------------|--------|--------|------------|--------|------------|--------|------------|
| Net revenues                                                                    | $      | 55,609     |   | $      | 71,781     |   | $      | 80,607     | $      | 99,189     | $      | 98,194     |
|                                                                            |   |       |   |   |       |   |   |       |   |       |   |       |
| Costs and expenses:                                                             |   |       |   |   |       |   |   |       |   |       |   |       |
| Selling, general and administrative                                             |   | 44,180     |   |   | 39,155     |   |   | 33,835     |   | 33,437     |   | 30,933     |
| Production service costs                                                        |   | 7,195      |   |   | 11,259     |   |   | 8,851      |   | 10,029     |   | 7,819      |
| Cost of sales of trading cards                                                  |   | 352        |   |   | —    |   |   | —    |   | —    |   | —    |
| Amortization of television and film costs                                       |   | 8,179      |   |   | 8,041      |   |   | 9,790      |   | 9,639      |   | 10,549     |
| Amortization of 4Kids TV broadcast fee                                          |   | 21,472     |   |   | 22,462     |   |   | 26,408     |   | 27,859     |   | 27,003     |
| Total costs and expenses                                                        |   | 81,378     |   |   | 80,917     |   |   | 78,884     |   | 80,964     |   | 76,304     |
|                                                                            |   |       |   |   |       |   |   |       |   |       |   |       |
| (Loss) income from operations                                                   |   | (25,769    | )      |   | (9,136     | )      |   | 1,723      |   | 18,225     |   | 21,890     |
|                                                                            |   |       |   |   |       |   |   |       |   |       |   |       |
| Interest income                                                                 |   | 5,281      |   |   | 4,143      |   |   | 2,834      |   | 1,469      |   | 1,112      |
| Gain on sale of investment in equity                            securities      |   | —    |   |   | —    |   |   | 234        |   | —    |   | —    |
| Total other income                                                              |   | 5,281      |   |   | 4,143      |   |   | 3,068      |   | 1,469      |   | 1,112      |
|                                                                            |   |       |   |   |       |   |   |       |   |       |   |       |
| (Loss) income before income taxes                                               |   | (20,488    | )      |   | (4,993     | )      |   | 4,791      |   | 19,694     |   | 23,002     |
|                                                                            |   |       |   |   |       |   |   |       |   |       |   |       |
| (Provision for) benefit from income taxes                                       |   | (2,436     | )      |   | 3,506      |   |   | (1,762     | )      | (7,907     | )      | (9,172)    |
|                                                                            |   |       |   |   |       |   |   |       |   |       |   |       |
| Loss from unconsolidated operations –                                     |   |       |   |   |       |   |   |       |   |       |   |       |
| net of a tax benefit                                                            |   | —    |   |   | (280       | )      |   | —    |   | —    |   | —    |
| Loss on previously unconsolidated affiliate                                     |   | (498       | )      |   | —    |   |   | —    |   | —    |   | —    |
| Minority interest (Note 13)                                                     |   | 96         |   |   | 39         |   |   | —    |   | —    |   | —    |
|                                                                            |   |       |   |   |       |   |   |       |   |       |   |       |
| (Loss) income from continuing operations                                        |   | (23,326    | )      |   | (1,728     | )      |   | 3,029      |   | 11,787     |   | 13,830     |
|                                                                            |   |       |   |   |       |   |   |       |   |       |   |       |
| Income from discontinued operations                                             |   | —    |   |   | 722        |   |   | 2,040      |   | 943        |   | 969        |
|                                                                            |   |       |   |   |       |   |   |       |   |       |   |       |
| Net (loss) income                                                               | $      | (23,326    | )      | $      | (1,006     | )      | $      | 5,069      | $      | 12,730     | $      | 14,799     |
|                                                                            |   |       |   |   |       |   |   |       |   |       |   |       |
| Per share amounts:                                                              |   |       |   |   |       |   |   |       |   |       |   |       |
| Basic (loss) earnings per common share                                          |   |       |   |   |       |   |   |       |   |       |   |       |
| Continuing operations                                                           | $      | (1.77      | )      | $      | (0.13      | )      | $      | 0.23       | $      | 0.86       | $      | 1.04       |
| Discontinued operations                                                         |   | —    |   |   | 0.05       |   |   | 0.16       |   | 0.07       |   | 0.07       |
| Basic (loss) earnings per common share                                          | $      | (1.77      | )      | $      | (0.08      | )      | $      | 0.39       | $      | 0.93       | $      | 1.11       |
|                                                                            |   |       |   |   |       |   |   |       |   |       |   |       |
| Diluted (loss) earnings per common share                                        |   |       |   |   |       |   |   |       |   |       |   |       |
| Continuing operations                                                           | $      | (1.77      | )      | $      | (0.13      | )      | $      | 0.22       | $      | 0.82       | $      | 0.98       |
| Discontinued operations                                                         |   | —    |   |   | 0.05       |   |   | 0.15       |   | 0.07       |   | 0.07       |
| Diluted (loss) earnings per common share                                        | $      | (1.77      | )      | $      | (0.08      | )      | $      | 0.37       | $      | 0.89       | $      | 1.05       |
|                                                                            |   |       |   |   |       |   |   |       |   |       |   |       |
| Weighted average common shares outstanding -                            basic   |   | 13,209,495 |   |   | 13,104,051 |   |   | 13,115,687 |   | 13,683,756 |   | 13,292,852 |
| Weighted average common shares outstanding -                            diluted |   | 13,209,495 |   |   | 13,104,051 |   |   | 13,536,830 |   | 14,335,343 |   | 14,156,291 |

 

12

 

----

 

 

|                             |   | **Year Ended December 31,** |   |
|----------------------------------|--------|-----------------------------|--------|
|                             |   | **2007**                    |   |   | **2006** |   |   | **2005** |   |   | **2004** |   |   | **2003** |   |
| Other Operating Data:            |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash flow (used in) provided by: |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating activities             |   | $(13,821                    | )      |   | $(1,057 | ) |   | $   3,242 |   |   | $  21,639 |   |   | $  23,800 |   |
| Investing activities             |   | 20,576                      |   |   | (18,047 | ) |   | (62,207 | ) |   | 7,198 |   |   | (14,405 | ) |
| Financing activities             |   | 2                           |   |   | 1,445 |   |   | (16,956 | ) |   | (12,645 | ) |   | 6,408 |   |
|                             |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

|                       |   | **Year Ended December 31,** |   |
|----------------------------|--------|-----------------------------|--------|
|                       |   | **2007**                    |   |   | **2006** |   |   | **2005** |   |   | **2004** |   |   | **2003** |   |
|                       |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets               |        | $151,079                    |   |   | $181,395 |   |   | $183,938 |   |   | $205,015 |   |   | $193,280 |   |
| Working capital            |   | 65,135                      |   |   | 123,906 |   |   | 129,576 |   |   | 139,377 |   |   | 137,929 |   |
| Stockholders’ equity |   | 128,088                     |   |   | 154,737 |   |   | 153,397 |   |   | 163,978 |   |   | 160,487 |   |
|                       |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |

 

The            Company did not declare or pay any cash dividends during the five-year period ended            December 31, 2007.

 

**Item 7. Management’s Discussion and Analysis of Financial            Condition and Results of Operations.**

(In thousands of dollars unless otherwise specified)

 

The            following is a discussion and analysis of our financial position and results of            operations for each of the three years in the period ended December 31, 2007. This            commentary should be read in conjunction with our consolidated financial statements and            the notes thereto which begin on page F-1 under “Item 8. Financial Statements and            Supplementary Data”.

 

**Overview**

 

The            Company’s operating results for year ended December 31, 2007 reflect an overall            decrease in licensing revenues, production service revenues, and worldwide broadcast            sales from its Properties as compared to 2006. The decrease in licensing revenues            resulted primarily from reduced revenue on the “Yu-Gi-Oh!” Property and an            overall reduction in the Company’s licensing revenue worldwide. The decrease in            production service revenues is primarily attributable to the decline in the production            of the “Teenage Mutant Ninja Turtles”,“Pokémon” and “One Piece” television            series, partially offset by increased production service revenue on the “Viva            Piñata” television series. The results for the year ended December 31,            2007 were also negatively impacted by increased selling, general and administrative            expenses associated with the operations of the Company’s newly formed Trading            Card and Game Distribution companies, partially offset by decreased production service            costs.

 

**General**

 

The            Company receives revenues from the following four business segments: (i) Licensing;            (ii) Advertising, Media and Broadcasting; (iii) Television and Film            Production/Distribution; and (iv) Trading Card and Game Distribution. The Company            typically derives a substantial portion of its licensing revenues from a small number            of Properties, which usually generate revenues for only a limited period of time. The            Company’s revenues are highly subject to changing trends in the toy, game and            entertainment businesses, potentially causing dramatic increases and decreases from            year to year due to the popularity of particular Properties. It is not possible to            accurately predict the length of time a property will be commercially successful and/or            if a property will be commercially successful at all. Popularity of properties can vary            from months to years. As a result, the Company’s revenues from particular            Properties may fluctuate significantly between comparable periods.

 

The            Company’s licensing revenues have historically been derived primarily from the            licensing of toy and game concepts. As a result, a substantial portion of the            Company’s revenues and net income are subject to the seasonal variations of the            toy and game industry. Typically, a majority of toy orders are shipped in the third and            fourth calendar quarters resulting in increased royalties earned by the Company during            such calendar quarters. The Company recognizes revenues from the sale of advertising            time on 4Kids TV as more fully described in Note 2 of the Notes to the Company’s            consolidated financial statements. The Company’s advertising sales subsidiary,            4Kids Ad Sales, sells advertising time on 4Kids TV at higher rates

 

13

 

----

in            the fourth quarter due to the increased demand for commercial time by children’s            advertisers during the holiday season. As a result, much of the revenues of 4Kids Ad            Sales are earned in the fourth quarter when the majority of toy and video game            advertising occurs. As a result of the foregoing, the Company has historically            experienced greater revenues during the second half of the year than during the first            half of the year.

 

The            Company’s media buying subsidiary, Summit Media, which previously provided print            and broadcast media planning and buying services for clients principally in the            children’s toy and game business, terminated its operations effective June 30,            2006. In connection with the closing of Summit Media, the media buying operations have            been classified as a discontinued operation. As further discussed in Note 14 of the            Notes to the Company’s consolidated financial statements, the consolidated            financial statements have been reclassified to accommodate the reporting of this            business as a discontinued operation.

 

**Critical Accounting Policies**

 

The            Company’s accounting policies are fully described in Note 2 of the Notes to the            Company’s consolidated financial statements. Below is a summary of the critical            accounting policies, among others, that management believes involve significant            judgments and estimates used in the preparation of its consolidated financial            statements.

 

*Accounting for Film and Television Costs*-  In accordance with accounting principles generally accepted            in the United States and industry practice, the Company amortizes the costs of            production for film and television programming using the individual-film-forecast            method under which such costs are amortized for each film or television program in the            ratio that revenue earned in the current period for such title bears to            management’s estimate of the total revenues to be realized from all media and            markets for such title. All exploitation costs, including advertising and marketing            costs, are expensed as incurred.

 

Management regularly reviews, and revises when necessary, its total            revenue estimates on a title-by-title basis, which may result in a change in the rate            of amortization and/or a write-down of the film or television asset to estimated fair            value. The Company determines the estimated fair value for individual film and            television Properties based on the estimated future ultimate revenues and costs in            accordance with Statement of Position No. 00-2,*Accounting by            Producers and Distributors of Film*(“SOP No.            00-2”)*.*

 

Any            revisions to ultimate revenues can result in significant quarter-to-quarter and            year-to-year fluctuations in film and television write-downs and amortization. A            typical film or television series recognizes a substantial portion of its ultimate            revenues within the first three years of release. By then, the film or television            series has been exploited in the domestic and international television (network and            cable) and home video markets. In addition, a significant portion of licensing revenues            associated with the film or television series will have been realized. A similar            portion of the film’s or television series’ capitalized costs should be            expected to be amortized accordingly, assuming the film or television series is            profitable.

 

The            commercial potential of individual films and television programming varies            dramatically, and is not directly correlated with production or acquisition costs.            Therefore, it is difficult to predict or project the impact that individual films or            television programming will have on the Company’s results of operations. However,            the likelihood that the Company will report losses, particularly in the year of a            television series initial release, is increased as the applicable accounting literature            requires the immediate recognition of all of the production or acquisition costs            (through increased amortization) in instances where it is estimated that the ultimate            revenues of a film or television series will not recover those costs. Conversely, the            profit from a film or television series must be deferred and recognized over the entire            revenue stream generated by that film or television series. As a result, significant            fluctuations in reported income or loss can occur, particularly on a quarterly basis,            depending on release schedules and broadcast dates, the timing of advertising campaigns            and the relative performance of individual film or television series.

 

*Other Estimates* -   The Company estimates reserves for future returns of            product in the home video markets as well as provisions for uncollectible receivables.            In determining the estimate of home video product sales that will be returned, the            Company performs an analysis that considers historical returns, changes in customer            demand and current economic trends. Based on this information, a percentage of each            sale is reserved provided that the customer has the right to return unsold home video            inventory. The Company estimates the amount of uncollectible receivables for licensing            and advertising by monitoring delinquent accounts and estimating a reserve based on            contractual terms and other customer specific issues.

 

*Revenue Recognition*- The Company’s            revenue recognition policies for its four business segments are appropriate to the            circumstances of each segment’s business. See Note 2 of the Notes to the            Company’s consolidated financial statements for a discussion of these revenue            recognition policies.

 

 

14

 

----

*4Kids TV Broadcast Agreement*- The Company            broadcasts certain of its Properties on 4Kids TV, the Saturday morning programming            block that the Company leases from Fox. The cost of 4Kids TV has been and will continue            to be capitalized and amortized over each broadcast year based on estimated advertising            revenue. In developing estimated future revenues, the Company has made certain            assumptions with regard to the anticipated popularity of the television series that the            Company broadcasts on 4Kids TV and the general market demand and pricing of advertising            time for Saturday morning children’s broadcast television. The popularity of such            series impacts audience levels and the level of the network advertising rates that the            Company can charge. These estimates are based on historical trends, as well as the            Company’s subjective judgment of future customer demand and acceptance of its            television programming. Differences may result in the amount and timing of revenue for            any period if actual performance varies from the Company’s estimates. See Note 12            of the Notes to the Company’s consolidated financial statements for additional            information.

 

Management’s Discussion and Analysis of Financial Condition and            Results of Operations discusses the Company’s consolidated financial statements,            which have been prepared in accordance with accounting principles generally accepted in            the United States. The preparation of these financial statements requires management to            make estimates and assumptions that affect the reported amounts of assets and            liabilities and the disclosure of contingent assets and liabilities as of the date of            the financial statements and the reported amounts of revenues and expenses during the            reporting period. The Company continually evaluates the policies and estimates that it            uses to prepare its consolidated financial statements. In general, management’s            estimates and assumptions are based on historical experience, known trends or events,            information from third-party professionals and other factors that are believed to be            reasonable under the circumstances, the results of which form the basis for making the            judgments about carrying values of assets and liabilities that are not readily apparent            from other sources. Actual results may differ from these estimates under different            assumptions and conditions.

 

**Recently Issued Accounting Pronouncements –**In November 2007, the Financial Accounting Standards Board (the            “FASB”) issued Statement of Financial Accounting Standards            (“SFAS”) No. 141R,*Business            Combinations*(“SFAS No. 141R”), which continues            to require that all business combinations be accounted for by applying the acquisition            method. Under the acquisition method, the acquirer recognizes and measures the            identifiable assets acquired, the liabilities assumed, and any contingent consideration            and contractual contingencies, as a whole, at their fair value as of the acquisition            date. Under SFAS No. 141R, all transaction costs are expensed as incurred. SFAS No.            141R rescinds EITF Issue No. 93-7 (“EITF 93-7”). Under EITF 93-7, the            effect of any subsequent adjustments to uncertain tax positions were generally applied            to goodwill, except for post-acquisition interest on uncertain tax positions, which was            recognized as an adjustment to income tax expense. Under SFAS No. 141R, all subsequent            adjustments to these uncertain tax positions that otherwise would have impacted            goodwill will be recognized in the income statement. SFAS No. 141R will be applied            prospectively to business combinations for which the acquisition date is on or after            the beginning of the first annual reporting period beginning after December 15,            2008.

*Fair Value Measurements –*In            September 2006, the FASB issued SFAS No. 157,*Fair Value            Measurement*(“SFAS 157”). SFAS 157 defines            “fair value”, establishes a framework for measuring fair value and expands            disclosures about fair value measurements. SFAS 157 applies under other accounting            pronouncements that require or permit fair value measurements and is effective in part            for fiscal years beginning after November 15, 2007. The Company is currently evaluating            the impact the adoption of SFAS 157 will have on its consolidated financial position            and results of operations.

 

In            September 2006, the FASB issued SFAS No. 158,*Employers’ Accounting for Defined Benefit Pension and Other            Postretirement Plans—An Amendment of FASB            No.* *87, 88, 106 and            132(R)*(“SFAS 158”). SFAS 158 requires            that the funded status of defined benefit postretirement plans be recognized on            companies’ balance sheets and that changes in the funded status be reflected in            comprehensive income, effective for fiscal years ending after December 15, 2006.            SFAS 158 also requires companies to measure the funded status of each such plan as of            the date of its fiscal year-end, effective for fiscal years ending after            December 15, 2008. Since the Company does not currently have a defined benefit            postretirement plan, the adoption of SFAS 158 will not have any impact on its            consolidated financial position and results of operations.

In            February 2007, the FASB issued SFAS No. 159,*The Fair Value            Option for Financial Assets and Financial Liabilities,*(“SFAS 159”). SFAS 159 provides companies with an option to            report selected financial assets and financial liabilities at fair value. Unrealized            gains and losses on items for which the fair value option has been elected are reported            in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years            beginning after November 15, 2007. The Company is currently evaluating the impact            the adoption of SFAS 159 will have on its consolidated financial position and results            of operations.

 

In            November 2007, the FASB issued SFAS No. 160,*Accounting and            Reporting of Noncontrolling Interest*(“SFAS No.            160”). SFAS No. 160 requires that a noncontrolling interest (previously referred            to as a minority interest) be separately reported in the equity section of the            consolidated entity’s balance sheet. SFAS No. 160 also established accounting and            reporting standards for: (i) ownership interests in subsidiaries held by parties other            than the parent, (ii) the amount of consolidated net income attributable to the parent            and to the noncontrolling interest, (iii) changes in a parent’s            ownership

 

15

----

interest and (iv) the valuation of retained noncontrolling equity            investments when a subsidiary is deconsolidated. SFAS No. 160 is effective for the            Company beginning January 1, 2009. The Company is currently evaluating the impact            the adoption of SFAS No. 160 will have on its consolidated financial position and            results of operations.

 

In            June 2007, the FASB ratified EITF Issue No. 06-11,*Accounting for Income Tax Benefits of Dividends on Share-Based            Payment Awards*(“EITF 06-11”). EITF 06-11            requires that tax benefits generated by dividends paid during the vesting period on            certain equity-classified share-based compensation awards be classified as additional            paid-in capital and included in a pool of excess tax benefits available to absorb tax            deficiencies from share-based payment awards. EITF 06-11 is effective as of            January 1, 2008. The Company is currently evaluating the impact the adoption of            EITF 06-11 will have on its consolidated financial position and results of            operations.

 

In            December 2007, the FASB ratified EITF Issue No. 07-1,*Accounting for Collaborative Arrangements Related to the Development            and Commercialization of Intellectual Property*(“EITF            07-1”). The EITF concluded that a collaborative arrangement is one in which the            participants are actively involved and are exposed to significant risks and rewards            that depend on the ultimate commercial success of the endeavor. Revenues and costs            incurred with third parties in connection with collaborative arrangements would be            presented gross or net based on the criteria in EITF Issue No. 99-19,*Reporting Revenue Gross as a Principal versus Net as an            Agent*, and other accounting literature. Payments to or from            collaborators would be evaluated and presented based on the nature of the arrangement            and its terms, the nature of the entity’s business, and whether those payments            are within the scope of other accounting literature. The nature and purpose of            collaborative arrangements are to be disclosed along with the accounting policies and            the classification and amounts of significant financial statement amounts related to            the arrangements. Activities in the arrangement conducted in a separate legal entity            should be accounted for under other accounting literature; however required disclosure            under EITF 07-1 applies to the entire collaborative agreement. This Issue is effective            for fiscal years beginning after December 15, 2008, and is to be applied            retrospectively to all periods presented for all collaborative arrangements existing as            of the effective date. The Company is currently evaluating the impact that this            pronouncement may have on its consolidated financial position and results of            operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16

 

----

**Results of Operations**

 

The            following table sets forth our results of operations expressed as a percentage of total            net revenues for the three years ended December 31, 2007, 2006 and 2005.

                

|                                                                       |   |     |    |     |
|----------------------------------------------------------------------------|--------|----------|---------|----------|
|                                                                       |   | **2007** |    | **2006** |   | **2005** |   |
| Net revenues                                                               |   |     | 100     | %        |   | 100 | % |   | 100 | % |
|                                                                       |   |     |    |     |   |   |   |   |   |   |
| Costs and expenses:                                                        |   |     |    |     |   |   |   |   |   |   |
| Selling, general and administrative                                        |   |     | 79      |     |   | 55 |   |   | 42 |   |
| Production service costs                                                   |   |     | 13      |     |   | 16 |   |   | 11 |   |
| Cost of sales of trading cards                                             |   |     | 1       |     |   | — |   |   | — |   |
| Amortization of television and film costs                                  |   |     | 15      |     |   | 11 |   |   | 12 |   |
| Amortization of 4Kids TV broadcast fee                                     |   |     | 39      |     |   | 31 |   |   | 33 |   |
| Total costs and expenses                                                   |   |     | 147     |     |   | 113 |   |   | 98 |   |
|                                                                       |   |     |    |     |   |   |   |   |   |   |
| (Loss) income from operations                                              |   |     | (47)    |     |   | (13) |   |   | 2 |   |
|                                                                       |   |     |    |     |   |   |   |   |   |   |
| Interest income                                                            |   |     | 10      |     |   | 6 |   |   | 4 |   |
| Gain on sale of investment in equity                            securities |   |     | — |     |   | — |   |   | — |   |
| Total other income                                                         |   |     | 10      |     |   | 6 |   |   | 4 |   |
|                                                                       |   |     |    |     |   |   |   |   |   |   |
| (Loss) income before income taxes                                          |   |     | (37)    |     |   | (7) |   |   | 6 |   |
|                                                                       |   |     |    |     |   |   |   |   |   |   |
| (Provision for) benefit from income taxes                                  |   |     | (4)     |     |   | 5   |   |   | (2 | ) |
|                                                                       |   |     |    |     |   |   |   |   |   |   |
| Loss from unconsolidated operations –                                |   |     |    |     |   |   |   |   |   |   |
| net of a tax benefit                                                       |   |     | — |     |   | — |   |   | — |   |
| Loss from previously unconsolidated affiliate                              |   |     | (1)     |     |   | — |   |   | — |   |
| Minority interest                                                          |   |     | — |     |   | — |   |   | — |   |
|                                                                       |   |     |    |     |   |   |   |   |   |   |
| (Loss) income from continuing operations                                   |   |     | (42)    |     |   | (2) |   |   | 4 |   |
|                                                                       |   |     |    |     |   |   |   |   |   |   |
| Income from discontinued operations                                        |   |     | — |     |   | 1 |   |   | 2 |   |
|                                                                       |   |     |    |     |   |   |   |   |   |   |
| Net (loss) income                                                          |   |     | (42)    | %        |   | (1) | % |   | 6 | % |

 

**Year            Ended December 31, 2007 as compared to Year Ended December 31, 2006**

 

**Revenues**

 

Revenues for the years ended December 31, 2007 and 2006, by reportable            segment and for the Company as a whole, were as follows:

 

|                                        |
|---------------------------------------------|
|                                        |   | **2007** |   | **2006** |   | **$ Change** |   | **% Change** |
| Licensing                                   |   | $ | 22,561 |   | $ | 31,677 |   | $ | (9,116 | ) | (29 | )% |
| Advertising, Media and Broadcast            |   |   | 16,296 |   |   | 16,153 |   |   | 143 |   | 1 |   |
| Television and Film Production/Distribution |   |   | 15,976 |   |   | 23,951 |   |   | (7,975 | ) | (33 | ) |
| Trading Card and Game Distribution          |   |   | 776 |   |   | — |   |   | 776 |   | — |   |
| Total                                       |   | $ | 55,609 |   | $ | 71,781 |   | $ | (16,172 | ) | (23 | )% |

The            decrease in consolidated net revenues for 2007, as compared to 2006, was due to a            number of factors.

In the            Licensing segment, decreased revenues were primarily attributable to:

| (i) | decreased licensing revenues on the                            “Yu-Gi-Oh!”, “Winx Club” and“Pokémon” Properties, worldwide, the                            “G.I. Joe” Property, domestically and “Teenage Mutant                            Ninja Turtles” Property, internationally; partially offset                            by |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

17

 

----

| (ii) | increased revenue attributable to the “Teenage                            Mutant Ninja Turtles” Properties, domestically. |
|------|---------------------------------------------------------------------------------------------------------------------------------------|

The            “Yu-Gi-Oh!” Property, despite lower licensing revenues as compared to 2006,            continued to be the largest contributor to the Company’s revenues in this            business segment in 2007. In addition, revenue from the “Teenage Mutant Ninja            Turtles” Property was also one of the largest contributors in this segment in            2007.

In            the Advertising Media and Broadcast segment, revenues for 2007 remained relatively            consistent when compared to 2006.

In            the Television and Film Production/Distribution segment, the revenue decline for 2007,            as compared to 2006, primarily resulted from:

| (i) | decreased production service revenue from the                            “Teenage Mutant Ninja Turtles”,                            “Pokémon” and “One Piece” television                            series, domestically, as well as |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (ii) | decreased broadcast sales from the                            “Yu-Gi-Oh!”, “Mew Mew Power” and “One                            Piece” television series, internationally; partially offset                            by |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (iii) | increased international broadcast sales from the                            “Viva Piñata” television series. |
|-------|---------------------------------------------------------------------------------------------------------------------------------|

In            2007, the Trading Card and Game Distribution segment recorded its initial revenues as a            result of the October 2007 launch of the “Chaotic” trading card game to            comic and hobby stores, as well as smaller retail chains.

**Selling, General and Administrative Expenses**

Selling, general and administrative expenses increased 13%, or $5,025 to            $44,180 for the year ended December 31, 2007, when compared to 2006. The increase was            primarily due to the following:

| (i) | increased costs of approximately $4,120 and $4,010                            related to the operations of the Company’s newly formed ventures,                            TC Websites and TC Digital, respectively, as well as |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (ii) | increased website costs of approximately $1,500                            primarily related to the redesign and upgrade of                            the*www.4Kids.tv*website; partially offset by |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (iii) | decreased personnel costs of approximately                            $2,740, |
|-------|-------------------------------------------------------------------------------|

| (iv) | decreased advertising and promotion expense of                            approximately $1,090, as well as |
|------|------------------------------------------------------------------------------------------------------------|

| (v) | decreased computer supplies of approximately                            $660. |
|-----|-------------------------------------------------------------------------------|

 

**Cost of Sales of Trading Cards**

 

Cost            of sales of trading cards represents finished good inventory costs relating to the            October 2007 launch of the “Chaotic” trading card game.

 

**Production Service and Capitalized Film Costs**

 

|                                      |   | **2007** |   | **2006** |   | **$ Change** |   | **% Change** |
|-------------------------------------------|--------|----------|--------|----------|--------|--------------|--------|--------------|
| Production Service Costs                  |   | $        | 7,195  |     | $      | 11,259       |   | $            | (4,064 | ) | (36) | % |
| Amortization of Television and Film Costs |   |     | 8,179  |     |   | 8,041        |   |         | 138 |   | 2 |   |

 

The            decrease in production service costs during the year ended December 31, 2007, as            compared to the same period in 2006, was primarily due to decreased production costs            for the “Teenage Mutant Ninja Turtles”, “Pokémon”, and            “One Piece” television series, partially offset by increased production            costs for the work performed on the “Dinosaur King” and “Viva            Piñata” television series. When the Company is entitled to be paid for            such production costs, the Company categorizes them as production service costs and            reflects a corresponding amount in revenues for the amounts billed back to the property            owners.

 

Amortization of television and film costs remained relatively consistent            for the year ended December 31, 2007 when compared to the same period in            2006.

 

As of            December 31, 2007, there were $14,352 of capitalized film production costs in the            Company’s consolidated balance sheet relating primarily to various stages of            production on 291 episodes of animated programming. Based on management’s            ultimate revenue estimates as of December 31, 2007, approximately 56% of the total            completed and unamortized film and television costs are expected to be amortized during            the next year, and over 90% of the total completed and unamortized film and television            costs are expected to be amortized during the next three years.

 

 

18

 

----

**4Kids TV Broadcast Fee**

|                                   |   | **2007** |   | **2006** |   | **$ Change** |   | **% Change** |
|----------------------------------------|--------|----------|--------|----------|--------|--------------|--------|--------------|
| Amortization of 4Kids TV Broadcast Fee |   | $        | 21,472 |     | $      | 22,462       |   | $            | (990 | ) | (4) | % |
|                                        |        |          |        |          |        |              |        |              |  |  |  |  |

 

As a            result of the broadcast year (ending each year in September) being different than the            Company’s fiscal year (ending each year in December), the amount of the            amortization of the broadcast fee recognized from period to period will vary based            upon: (i) the amount of advertising revenue recognized during the period; and (ii) the            amount of advertising revenue already recognized for the broadcast year as a percentage            of the total amount expected to be recognized for the full broadcast year. The            Company’s amortization of the 4Kids TV broadcast fee decreased by $990 from            $22,462 in 2006 to $21,472 in 2007 in conjunction with the decreased fee for each of            the 2006-2007 and 2007-2008 broadcast seasons of approximately $5,312.

 

In            addition to advertising revenues, the operating costs of 4Kids Ad Sales and the            amortization of the 4Kids TV broadcast fee, the overall impact of 4Kids TV on the            Company’s results of operations includes:

 

| (i) | revenues generated from merchandise licensing, home                            videos and music publishing of 4Kids TV Properties; and |
|-----|----------------------------------------------------------------------------------------------------------------------------------------|

| (ii) | production and acquisition costs associated with the                            television programs broadcast on 4Kids TV. |
|------|----------------------------------------------------------------------------------------------------------------------------|

 

The            ability of the Company to further develop its merchandising and, to a lesser extent,            home video and music publishing revenue streams were significant components of its            evaluation process which resulted in the decision to lease an additional Saturday            morning children’s programming block from The CW, as described in Note 12 of the            Notes to the Company’s consolidated financial statements under “Broadcast            Agreements”. Other factors, such as lower guaranteed payments associated with the            five-hour broadcast period, additional units allocated to the Company for sale during            the CW Kids Block, an anticipated increase in network support due to a revenue sharing            arrangement, along with the availability of the CW Kids Block, also contributed to the            decision to lease another Saturday morning children’s block which will overlap            our current 4Kids TV block during the same Saturday morning time period for the            2008-2009 broadcast season.

 

**Interest Income**

 

Interest income increased 27%, or $1,138 to $5,281 for the year ended            December 31, 2007, as compared to 2006, as a result of the increasing interest rate            environment during the first half of 2007 when compared with 2006.

 

**Income (Loss) Before Income Taxes**

 

|                                        |   | **2007** |    | **2006** |   | **$ Change** |   | **% Change** |
|---------------------------------------------|--------|----------|---------|----------|--------|--------------|--------|--------------|
| Licensing                                   |   | $        | 9,321   |     | $      | 11,475       |   | $            | (2,154 | ) | (19 | )% |
| Advertising, Media and Broadcast            |   |     | (15,168 | )        |   | (14,805      | )      |         | (363 | ) | (2 | ) |
| Television and Film Production/Distribution |   |     | (5,069  | )        |   | (1,092       | )      |         | (3,977 | ) | (364 | ) |
| Trading Card and Game Distribution          |   |     | (9,572  | )        |   | (571         | )      |         | (9,001 | ) | (1,576 | ) |
| Total                                       |   | $        | (20,488 | )        | $      | (4,993       | )      | $            | (15,495 | ) | (310 | )% |

 

The            decrease in the Licensing segment profit for 2007, as compared to 2006, is primarily            attributable to lower licensing revenues from licensed Properties, partially offset by            decreased selling, general and administrative expenses attributable to the Licensing            segment and an increase in interest income allocated to this segment.

 

In            the Advertising Media and Broadcast segment, the segment loss for 2007 remained            relatively consistent as compared to the same period in 2006.

 

In            the Television and Film Production/Distribution segment, the increase in segment loss            for 2007 as compared to 2006 was primarily due to decreased production service            revenue.

 

In            the Trading Card and Game Distribution segment, the increase in segment loss was            attributable to the fact that since TC Digital and TC Websites commenced operations in            mid-December 2006, the majority of the start-up costs for this segment were incurred in            2007.

 

19

 

----

 

**Income Tax Expense**

 

The            net tax provision for the year ended December 31, 2007 reflected a deferred tax expense            of $2,436 related to the increase in the Company’s valuation reserve. The net tax            benefit of $3,506 for the year ended December 31, 2006 reflected a current tax benefit            of $2,963 and a deferred tax benefit of $543 related to the utilization of acquired net            operating loss carrybacks and carryforwards and other acquired timing            differences.

 

The            Company regularly reviews its deferred tax assets for recoverability taking into            consideration such factors as historical losses, projected future taxable income and            the expected timing of the reversals of existing temporary differences. SFAS No.            109, *Accounting for Income            Taxes*, requires the Company to record a valuation allowance            when it is more likely than not that some portion or all of the deferred tax assets            will not be realized. In view of the level of deferred tax assets as of December 31,            2007 and the Company’s historical losses from operations, the Company has            determined that the application of SFAS No. 109,*Accounting for            Income Taxes*requires the Company to record a full valuation            allowance against its net deferred tax assets.

 

If            the Company had not taken any valuation allowance, but rather recorded its 2007 loss            after giving effect to the tax benefit from such loss, the Company’s loss in 2007            would have decreased by $11,912 or $0.90 per share to a net loss of $11,414 or $0.87            per share.

 

In            the event that the Company earns pre-tax income in the future such that it will be able            to use some or all of its deferred tax assets, SFAS No.            109,*Accounting for Income            Taxes* permits the Company to reduce or eliminate the            valuation allowance. If the Company were to reverse the valuation allowance, in whole            or in part, the Company’s income statement for such reporting period would record            a reduction in income tax expense and an increase in net income, to the extent of the            reversal of the valuation allowance.

 

Our            effective tax rate for 2007 would have been a benefit of 45.4%. This rate differs from            the Federal statutory rate of 35% primarily due to the mix of income and losses, which            have tax rates that differ from the statutory rate, and due to permanent differences            and tax rate differences on subsidiaries.

 

The            Company files in multiple tax jurisdictions and from time to time is subject to audit            in certain tax jurisdictions. As of December 31, 2007, there were no outstanding tax            audits.

 

**Net Loss**

 

As a            result of the above, the Company had a net loss for the year ended December 31, 2007 of            $23,326, as compared to a net loss in 2006 of $1,006.

 

**Discontinued Operations**

 

Effective June 30, 2006, the Company’s wholly-owned subsidiary,            Summit Media, which previously provided print and broadcast media planning and buying            services for clients principally in the children’s toy and game business,            terminated its operations. As a consequence of the termination of its operations,            Summit Media no longer serves as a media buying agency for third parties.

 

The            results of operations for Summit Media are reported as a discontinued operation for the            years ended December 31, 2007 and 2006, and accordingly, the accompanying consolidated            financial statements have been reclassified separately to report the assets,            liabilities and operating results of this business.

 

The            following are the summarized results of discontinued operations for the media buying            business for the years ended December 31, 2007 and 2006:

 

|   |   | **2007** |   | **2006** |   |
|--------|--------|----------|--------|----------|--------|

| Net revenues                            |   | $      | — |   | $      | 2,852 |   |
|-----------------------------------------|--------|--------|---------|--------|--------|-------|--------|
| Income before income taxes              |   |   | — |   |   | 1,181 |   |
| Income taxes                            |   |   | — |   |   | 459   |   |
| Net income from discontinued operations |   | $      | — |   | $      | 722   |   |

 

 

20

 

----

 

**Year            Ended December 31, 2006 as compared to Year Ended December 31, 2005**

 

**Revenues**

 

Revenues for the years ended December 31, 2006 and 2005, by reportable            segment and for the Company as a whole, were as follows:

 

|                                        |   |
|---------------------------------------------|--------|
|                                        |   | **2006** |   | **2005** |   | **$ Change** |   | **% Change** |   |
| Licensing                                   |   | $ | 31,677 |   | $ | 37,616 |   | $ | (5,939 | ) | (16 | ) | % |
| Advertising, Media and Broadcast            |   |   | 16,153 |   |   | 18,660 |   |   | (2,507 | ) | (13 | ) |   |
| Television and Film Production/Distribution |   |   | 23,951 |   |   | 24,331 |   |   | (380 | ) | (2 | ) |   |
| Trading Card and Game Distribution          |   |   | — |   |   | — |   |   | — |   | — |   |   |
| Total                                       |   | $ | 71,781 |   | $ | 80,607 |   | $ | (8,826 | ) | (11 | ) | % |

The            decrease in consolidated net revenues for 2006, as compared to 2005, was due to a            number of factors. In the Licensing segment, decreased revenues were primarily            attributable to:

| (i) | reduced licensing revenues on the “Teenage Mutant                            Ninja Turtles”, “Yu-Gi-Oh!”, “American Kennel                            Club” and “Winx Club” Properties domestically;                            partially offset by |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (ii) | increased revenues attributable to the “Viva                            Piñata” Property domestically, and the “Winx                            Club” Property internationally. |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

The            “Yu-Gi-Oh!” Property continues to be the largest contributor to the            Company’s revenues in this business segment. The Company recorded revenues of            approximately $2,800 for the “Yu-Gi-Oh!” Property during the year ended            December 31, 2006, resulting from changes in the manner in which sales are calculated            by a licensee for purposes of computing the amount of certain marketing fees due to the            Company from such licensee. In addition, revenues for the “Teenage Mutant Ninja            Turtles” Property, despite lower licensing revenues as compared to 2005, along            with the “Cabbage Patch” Property, are also amongst the largest            contributors in this segment.

In            the Advertising Media and Broadcast segment, the decrease in revenues for 2006, as            compared to 2005, was due to reduced revenues from the sale of network advertising time            on 4Kids TV caused by an overall decrease in the 4Kids TV ratings.

In            the Television and Film Production/Distribution segment, the revenue decline for 2006,            as compared to 2005, primarily resulted from:

| (i) | decreased domestic broadcast sales from the                            “Pokémon”, “Yu-Gi-Oh!”, “Teenage                            Mutant Ninja Turtles” and “One Piece” television                            series; partially offset by |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (ii) | increased production service revenue from the                            “Viva Piñata” and “Chaotic” television                            series; as well as |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (iii) | increased international broadcast sales of the                            “Yu-Gi-Oh!” television series. |
|-------|----------------------------------------------------------------------------------------------------------------------|

**Selling, General and Administrative Expenses**

Selling, general and administrative expenses increased 16%, or $5,320 to            $39,155 for the year ended December 31, 2006, when compared to 2005. The increase was            primarily due to the following:

 

| (i) | severance expenses for certain former employees of                            approximately $1,800; |
|-----|-----------------------------------------------------------------------------------------------------|

| (ii) | increased international sales expenses and trade shows                            expenses totaling approximately $946; |
|------|-------------------------------------------------------------------------------------------------------------------------|

| (iii) | increased bad debt expense of approximately                            $448; |
|-------|------------------------------------------------------------------------------|

| (iv) | the write-off of developmental software totaling                            approximately $525; |
|------|-------------------------------------------------------------------------------------------------|

| (v) | increased compensation costs resulting from the issuance                            of restricted stock awards of approximately $346; as well as |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------|

| (vi) | increased various state taxes of approximately $384;                            partially offset by |
|------|-----------------------------------------------------------------------------------------------------|

| (vii) | decreased professional fees of approximately                            $890. |
|-------|-------------------------------------------------------------------------------|

 

21

 

----

 

**Production Service and Capitalized Film Costs**

 

|                                      |   | **2006** |   | **2005** |   | **$ Change** |   | **% Change** |   |
|-------------------------------------------|--------|----------|--------|----------|--------|--------------|--------|--------------|--------|
| Production Service Costs                  |   | $        | 11,259 |     | $      | 8,851        |   | $            | 2,408  |   | 27 |   | % |
| Amortization of Television and Film Costs |   |     | 8,041  |     |   | 9,790        |   |         | (1,749 | ) | (18 | ) |   |

 

The            significant increase in production service costs during the year ended December 31,            2006, as compared to the same period in 2005, was primarily due to increased production            costs for the work performed on the “Viva Piñata” and            “Chaotic” television series, partially offset by decreased costs for the            “Pokémon” and “Teenage Mutant Ninja Turtles” television            series. When the Company is entitled to be paid for such production costs, the Company            categorizes them as production service costs and reflects a corresponding amount in            revenue for the amount billed back to the property owners.

 

The            decrease in the amortization of television and film costs is principally due to a            reduction in the realized revenue on the “Teenage Mutant Ninja Turtles”,            “One Piece” and “Mew Mew Power” television series; partially            offset by the increased amortization of “Viva Piñata” and            “Funky Cops” television series during 2006.

 

As            of December 31, 2006, there were $14,827 of capitalized film production costs in the            Company’s consolidated balance sheet relating primarily to various stages of            production on 282 episodes of animated programming. Based on management’s            ultimate revenue estimates as of December 31, 2006, approximately 49% of the total            completed and unamortized film and television costs are expected to be amortized during            the next year, and over 90% of the total completed and unamortized film and television            costs are expected to be amortized during the next three years.

 

**4Kids TV Broadcast Fee**

|                                   |   | **2006** |   | **2005** |   | **$ Change** |   | **% Change** |   |
|----------------------------------------|--------|----------|--------|----------|--------|--------------|--------|--------------|--------|
| Amortization of 4Kids TV Broadcast Fee |   | $        | 22,462 |     | $      | 26,408       |   | $            | (3,946 | ) | (15 | )% |   |
|                                        |        |          |        |          |        |              |        |              |        |  |  |  |  |

 

As a            result of the broadcast year (ending each year in September) being different than the            Company’s fiscal year (ending each year in December), the amount of the            amortization of the broadcast fee recognized from period to period will vary based            upon: (i) the amount of advertising revenue recognized during the period; and (ii) the            amount of advertising revenue already recognized for the broadcast year as a percentage            of the total amount expected to be recognized for the full broadcast year. The            Company’s amortization of the 4Kids TV broadcast fee decreased by $3,946 from            $26,408 in 2005 to $22,462 in 2006 in conjunction with the decreased fee for the            2006-2007 broadcast season of approximately $5,312, as well as lower advertising            revenues recognized by the Company for the year ended December 31, 2006.

 

In            addition to advertising revenues, the operating costs of 4Kids Ad Sales and the            amortization of the 4Kids TV broadcast fee, the overall impact of 4Kids TV on the            Company’s results of operations includes:

 

| (i) | revenues generated from merchandise licensing, home                            videos and music publishing of 4Kids TV Properties; and |
|-----|----------------------------------------------------------------------------------------------------------------------------------------|

| (ii) | production and acquisition costs associated with the                            television programs broadcast on 4Kids TV. |
|------|----------------------------------------------------------------------------------------------------------------------------|

 

The            ability of the Company to further develop its merchandising and, to a lesser extent,            home video and music publishing revenue streams were significant components of its            evaluation process which resulted in the initial decision to lease the 4Kids TV            Saturday morning programming block and to extend the lease through the 2007-2008            broadcast season, as described in Note 13 under “4Kids TV Broadcast            Agreement” of the Notes to the Company’s consolidated financial            statements.

 

**Interest Income**

 

Interest income increased 46%, or $1,309 to $4,143 for the year ended            December 31, 2006, as compared to 2005, as a result of the increasing interest rate            environment and higher average cash balances invested.

 

**Income(Loss) Before Income Taxes**

 

|                                        |   | **2006** |    | **2005** |   | **$ Change** |   | **% Change** |   |
|---------------------------------------------|--------|----------|---------|----------|--------|--------------|--------|--------------|--------|
| Licensing                                   |   | $        | 11,475  |     | $      | 20,912       |   | $            | (9,437 | ) | (45 | ) | % |
| Advertising, Media and Broadcast            |   |     | (14,805 | )        |   | (16,041      | )      |         | 1,236  |   | 8 |   |   |
| Television and Film Production/Distribution |   |     | (1,092  | )        |   | (80          | )      |         | (1,012 | ) | (1,265 | ) |   |
| Trading Card and Game Distribution          |   |     | (571    | )        |   | —      |   |         | (571   | ) | — |   |   |
| Total                                       |   | $        | (4,993  | )        | $      | 4,791        |   | $            | (9,784 | ) | (204 | ) | % |

 

22

 

----

The            decrease in the Licensing segment profit for 2006, as compared to 2005, is primarily            attributable to lower licensing revenues from licensed Properties and increased            selling, general and administrative expenses attributable to this segment, partially            offset by an increase in interest income allocated to this segment.

 

In            the Advertising Media and Broadcast segment, the decrease in segment loss for 2006 as            compared to 2005 was substantially due to decreased amortization of the 4Kids TV            broadcast fee, partially offset by the reduced sale of network advertising            time.

 

In            the Television and Film Production/Distribution segment, the increase in segment loss            for 2006 as compared to 2005 was primarily due to decreased production service revenue,            partially offset by decreased amortization of television and film costs.

 

In            the Trading Card and Game Distribution segment, the increase in segment loss was            attributable to the fact that TC Digital and TC Websites commenced operations in            mid-December 2006 and consequently, there were no revenues in the segment in 2006 and            2005.

 

**(Benefit from) Income Tax Expense**

 

Income tax expense decreased 299%, or $5,268 to a benefit from income            taxes of $3,506 from a provision for income taxes of $1,762 for the year ended December            31, 2006, as compared to 2005. This decrease is primarily due to decreased income from            continuing operations and a shift in the Company’s investment strategy towards            tax exempt and tax advantaged securities during 2006. The Company’s effective tax            rate was a benefit from income taxes of 70% for 2006 and provision for income taxes of            37% for 2005.

 

**Net (Loss) Income**

 

As a            result of the above, the Company had a net loss for the year ended December 31, 2006 of            $1,006, as compared to net income in 2005 of $5,069.

 

**Discontinued Operations**

 

Effective June 30, 2006, the Company’s wholly-owned subsidiary,            Summit Media, which previously provided print and broadcast media planning and buying            services for clients principally in the children’s toy and game business,            terminated its operations. As a consequence of the termination of its operations,            Summit Media no longer serves as a media buying agency for third parties.

 

The            results of operations for Summit Media are reported as a discontinued operation for the            years ended December 31, 2006 and 2005, and accordingly, the accompanying consolidated            financial statements have been reclassified separately to report the assets,            liabilities and operating results of this business.

 

The            following are the summarized results of discontinued operations for the media buying            business for the years ended December 31, 2006 and 2005:

 

|                                    |   | **2006** |   | **2005** |   |
|-----------------------------------------|--------|----------|--------|----------|--------|
| Net revenues                            |   | $        | 2,852  |     | $      | 6,055 |   |
| Income before income taxes              |   |     | 1,181  |     |   | 3,454 |   |
| Income taxes                            |   |     | 459    |     |   | 1,414 |   |
| Net income from discontinued operations |   | $        | 722    |     | $      | 2,040 |   |

 

Under the terms of the Settlement Agreement entered into by Summit Media            with The Beacon Media Group LLC (“Beacon”), Sheldon Hirsch, Tom Horner and            Paul Caldera (the “Beacon Defendants”) on June 19, 2006, relating to the            lawsuit filed by Summit Media in Supreme Court, New York County against Beacon and the            Beacon Defendants, Summit Media will receive $2,000, in regularly scheduled payments            through 2010, in exchange for Summit Media’s discontinuation of the lawsuit. As            of December 31, 2006, the Company had received $200 of the scheduled payments related            to the lawsuit. The Company has included approximately $1,800 in net revenues for the            year ended December 31, 2006, relating to this agreement. In connection with the            termination of the Company’s media buying operations, the Company recorded            charges for severance and termination benefits in the amount of approximately $333            during the year ended December 31, 2006. The charges were attributable to the            elimination of ten positions, primarily representing sales and related support            functions in addition to certain other management positions.

 

23

 

----

**Liquidity and Capital Resources**

 

| **Financial Position** |
|------------------------|

 

Cash            and cash equivalents and short-term investments for the years ended December 31, 2007            and December 31, 2006 were as follows:

 

|                      |   | **2007** |   | **2006** |   | **$ Change** |   |
|---------------------------|--------|----------|--------|----------|--------|--------------|--------|
|                      |   |     |   |     |   |         |   |   |   |   |
| Cash and cash equivalents |   | $        | 24,872 |     | $      | 18,066       |   | $ | 6,806 |   |
| Investments               |   |     | 36,106 |     |   | 92,910       |   |   | (56,804 | ) |
|                      |   | $        | 60,978 |     | $      | 110,976      |   | $ | (49,998 | ) |
|                           |        |          |        |          |        |              |        |  |  |  |  |

 

Long-term investments for the years ended December 31, 2007 and December            31, 2006 were as follows:

 

|        |   | **2007** |   | **2006** |   | **$ Change** |   |
|-------------|--------|----------|--------|----------|--------|--------------|--------|
|        |   |     |   |     |   |         |   |   |   |   |
| Investments |   | $        | 31,806 |     | $      | ―      |   | $ | 31,806 |   |
|             |        |          |        |          |        |              |        |  |  |  |  |

 

During 2007, liquidity issues began to affect the global credit and            capital markets. As a result, securities known as auction rate securities            (“ARS”), which historically have had a liquid market and had their interest            rates reset periodically (e.g. monthly) through Dutch auctions, began to fail at            auction. These auction failures have caused ARS to become illiquid since investors are            hesitant to purchase these types of investments, which in turn has caused the fair            market values for these securities to decline.

As            of December 31, 2007, the Company held ARS having an aggregate principal amount of            approximately $60,000. The ARS held by the Company are private placement debt            securities with long-term nominal maturities and interest rates that reset monthly. The            Company’s investments in ARS represent interests in debt obligations issued by            banks and insurance companies that had at least an “A” credit rating at the            time of purchase by the Company, including bond insurers and re-insurers such as MBIA,            AMBAC, FGIC, FSA, RAM and Radian.

Many            of the ARS held by the Company at December 31, 2007, have also experienced failed            auctions due to the liquidity issues described above. As of December 31, 2007, the            estimated fair market value of the ARS held by the Company declined by $3,993 based            upon statements provided by the investment bank through which the Company holds such            securities. Although all of the ARS invested in by the Company have continued to pay            interest according to their stated terms and substantially all of the ARS invested in            by the Company continue to be a rated “A” or above, the Company recorded an            unrealized loss of $3,993 during 2007 resulting in a reduction in stockholders’            equity. Based on the factors above, and because the Company has the ability and the            intent to hold these investments until recovery of their fair value, which may not be            prior to the maturity of the applicable security, the Company does not consider these            investments to be other-than-temporarily impaired.

 

Although $10,000 in ARS owned by the Company as of December 31, 2007            have been redeemed subsequent to such date, the credit and capital markets, including            the market for ARS, has continued to deteriorate in 2008, and there have been            additional failed auctions affecting ARS owned by the Company. Although all of the            Company’s investments in ARS have continued to pay interest according to their            stated terms and substantially all of the ARS invested in by the Company continue to be            a rated “A” or above the Company’s unrealized loss on its ARS had            increased by $7,859, to $11,852 as of February 29, 2008, based upon statements provided            by the investment bank through which the Company holds such securities.

Given the failed auctions, many of the Company’s ARS are currently            illiquid.  Accordingly, the Company has reclassified $20,350 in ARS from current            to non-current assets at December 31, 2007 on its balance sheet due to the fact that            the Company believes that the liquidity of these ARS is unlikely            to be restored in a period less than twelve months from such date.

If            uncertainties in the credit and capital markets deteriorate further or the Company            experiences any rating downgrades on any investments in its ARS portfolio, the Company            may incur impairment charges to its investment portfolio, which could negatively affect            the Company’s financial condition, cash flow and reported earnings.

 

24

 

----

The            Company believes that based on the Company’s current cash, cash equivalents and            marketable securities, the current lack of liquidity affecting its portfolio of ARS            will not have a material impact on the Company’s liquidity or its ability to fund            its operations.

 

**Sources and Uses of Cash**

 

Cash            flows for the three years ended December 31, 2007, 2006 and 2005 were as            follows:

 

| ***Sources (Uses)*** |   | **2007** |    | **2006** |   | **2005** |   |   |
|----------------------|--------|----------|---------|----------|--------|----------|--------|--------|
| Operating Activities |   | $        | (13,821 | )        | $      | (1,057   | )      | $      | 3,242 |   |
| Investing Activities |   |     | 20,576  |     |   | (18,047  | )      |   | (62,207 | ) |
| Financing Activities |   |     | 2       |     |   | 1,445    |   |   | (16,956 | ) |
|                      |        |          |         |          |        |          |        |        |  |  |  |  |

 

Working            capital, consisting of current assets less current liabilities, was $65,135 as of            December 31, 2007 and $123,906 as of December 31, 2006.

 

***Operating Activities***

*2007*

Net            cash used in operating activities of $13,821 in 2007, primarily reflects a decrease in            the Company’s business performance. This decrease was partially offset by a            reduction of the Company’s tax assets attributable to a valuation allowance being            established against net operating loss carryforwards.

 

*2006*

Net            cash used in operating activities of $1,057 in 2006 primarily reflected lower net            income and decreased amortization of television and film costs, partially offset by            lower 4Kids TV broadcast fees paid to Fox.

 

*2005*

Net            cash provided by operating activities of $3,242 in 2005 primarily reflected higher net            income and a reduction in the Company’s obligations to licensors and payments            made for media obligations and accounts payable and accrued expenses, partially offset            by lower accounts receivable and participation advances.

 

***Investing Activities***

*2007*

Net            cash provided by investing activities of $20,576 in 2007 reflects a shift in the            Company’s investment strategy, implemented during 2007, to purchase taxable            investments with longer maturities to minimize the risk of short-term interest rate            fluctuations, partially offset by increased capitalized website costs related to the            development of the “Chaotic” website.

 

*2006*

Net            cash used in investing activities of $18,047 in 2006 reflected the Company’s            proceeds from the maturity of auction-rate securities that were purchased as an            investment. This increase was partially offset by the Company’s purchase of a 50%            membership interest in TC Websites.

 

*2005*

Net            cash used in investing activities of $62,207 in 2005 reflected Company’s purchase            of auction-rate securities as an investment strategy for its excess cash            balances.

 

***Financing Activities***

*2007*

Net            cash provided by financing activities of $2 in 2007 reflects proceeds from the exercise            of stock options, substantially offset by the purchase of treasury shares.

 

*2006*

Net            cash provided by financing activities of $1,445 in 2006 reflected the Company’s            proceeds from the exercise of stock options by the Company’s            employees.

 

*2005*

Net            cash used in financing activities of $16,956 in 2005 reflected the Company’s            purchase of shares of its treasury stock, partially offset by proceeds from the            exercise of stock options by the Company’s employees.

 

25

 

----

During 2007, the Company's cash flow from operations was impacted by            consumer demand for a limited number of its licensed Properties.  While the            Company strives to further diversify its revenue streams, management remains cognizant            of changing trends in the toy, game and entertainment business and the difficulty in            predicting the length of time a property will be commercially successful.  As a            result, the Company's revenues, operating results and cash flow from operations may            fluctuate significantly from year to year and present operating results are not            necessarily indicative of future performance.

 

Historically, the majority of the television-based Properties that the            Company represented were existing episodes of foreign programming that were adapted for            the United States and other markets. The Company’s strategic focus has shifted            toward Properties like “Chaotic” and “Teenage Mutant Ninja            Turtles”, where the Company is a joint copyright owner of the episodes.            Therefore, it is the Company’s intention to allocate a larger portion of its            capital resources to the production costs associated with developing original animated            programming resulting in increased capitalized film and television costs. Following the            commercial release of a Property, its overall market acceptance and resulting revenues            will directly impact the Company’s amortization of these capitalized film and            television costs. To the extent a Property performs at a level lower than the            Company’s expectations, the ratio of amortization expense to revenues realized            will increase. While the Company expects that the revenues associated with such            Properties will be sufficient to maintain its historical operating margins, there can            be no assurance that the marketing plans designed to achieve those revenues can be            executed in a manner to achieve its objectives.

 

**Broadcast Agreements**

 

*4Kids TV Broadcast Agreement*- In January            2002, the Company entered into a multi-year agreement with Fox to lease Fox’s            Saturday morning programming block (“4Kids TV”) which airs principally on            Saturday mornings from 8am to 12pm eastern/pacific time (7am to 11am central time). The            Company provides substantially all programming content to be broadcast on 4Kids TV and            retains all of the revenues from network advertising sales for the four-hour time            period. 4Kids Ad Sales manages and accounts for the ad revenue and costs associated            with 4Kids TV.

 

In            March 2006, the Fox agreement was extended for two broadcast years through the            2007-2008 broadcast season. As of December 31, 2007, no amounts remain to be paid for            the 2006-2007 broadcast season under the amended agreement. The broadcast fee for the            2007-2008 broadcast seasons is $20,000 as compared to the $25,312 paid for each            broadcast year during the initial term of the multi-year agreement. The fee is payable            in quarterly installments of $5,000 each year beginning in October 2006. Fox has            exercised its option to extend this agreement through its 2008-2009 broadcast season            under the same terms and conditions as in effect for the 2007-2008 broadcast            season.

 

*The CW Broadcast Agreement*- On October 1,            2007, the Company and The CW entered into the CW Agreement, under which The CW granted            to the Company the exclusive right to program The CW's Saturday morning children's            programming block that is broadcast in most markets between 7am and 12pm for an initial            term of five years beginning with The CW's 2008-2009 broadcast season.

Under the CW Agreement, the Company is obligated to make quarterly            minimum guaranteed payments which are subject to reduction under certain circumstances.            The Company and The CW will share advertising revenues earned from the sale of national            commercial time during The CW Kids Block with The CW's share to be applied against such            quarterly guarantee payments. In addition, The CW will be entitled under the CW            Agreement to participate in the Company's merchandising revenue from certain content            broadcast on The CW Kids Block, if such merchandising revenues exceed a certain annual            minimum.

In            addition to the broadcast fee and minimum guarantee paid to Fox and to be paid to The            CW, commencing with the 2008-2009 broadcast season, respectively, the Company incurs            additional costs to program each broadcast block and sell the related network            advertising time. These costs include direct programming costs to acquire, adapt and            deliver programming for the broadcast during the weekly broadcast blocks as well as            additional indirect expenses of advertising sales, promotion and            administration.

 

The            ability of the Company to further develop its merchandising and, to a lesser extent,            home video and music publishing revenue streams were significant components of its            evaluation process which resulted in the decision to lease an additional Saturday            morning children’s programming block from The CW, as described in Note 12 of the            Notes to the Company’s consolidated financial statements under “Broadcast            Agreements”. Other factors, such as lower guaranteed payments associated with the            five-hour broadcast period, additional units allocated to the Company for sale during            the CW Kids Block, and an anticipated increase in network support due to a revenue            sharing arrangement, also contributed to the decision to lease another Saturday morning            children’s block.

 

26

 

----

 

**Contractual Commitments**

 

The            Company has commitments under certain firm contractual arrangements (“firm            commitments”) to make future payments for goods and services. These firm            commitments secure the future rights to various assets and services to be usedin the normal course of operations. The following table summarizes the            Company’s material firm commitments as of December 31, 2007 and the impact that            such obligations are expected to have on the Company’s liquidity and cash flows            in future periods. The Company expects to fund these commitments primarily with            operating cash flows generated in the normal course of business.

 

 

| **Year Ending****December                            31,** | **CW Agreement** | **4Kids TV Broadcast****Agreement** |  

**Operating Leases** | **Total** |
|------------------------------------------------------------|------------------|-------------------------------------|------------------------------|-----------|
| 2008                                                       | $6,750           | $20,000                             | $ 2,706                      | $29,456   |
| 2009                                                       | 15,000           | 15,000                              | 2,442                        | 32,442    |
| 2010                                                       | 15,000           | —                             | 1,871                        | 16,871    |
| 2011                                                       | 15,000           | —                             | 1,075                        | 16,075    |
| 2012                                                       | 15,000           | —                             | 971                          | 15,971    |
| 2013 and after                                             | 8,250            | —                             | 5,286                        | 13,536    |
| Total                                                      | $75,000          | $35,000                             | $14,351                      | $124,351  |

 

 

On            February 18, 2008, the Company signed a lease for additional office space in the San            Diego, California location with aggregate rental payments of $620 for the term of the            lease, which has not been included in the table above. The Company’s contractual            obligations and commitments are detailed in the Company’s consolidated financial            statements, for additional information see Note 12.

 

**Item            7A. Quantitative and Qualitative Disclosures About Market Risk.**

 

**Foreign Currency Exchange Rate Fluctuations.**

 

From            time to time, the Company may be exposed to the risk of future currency exchange rate            fluctuations, which is accounted for as an adjustment to stockholders’ equity and            changes in the exchange rates between various foreign currencies and the U.S. dollar            may, as a result, have an impact on the accumulated other comprehensive income (loss)            component of stockholders’ equity reported by the Company, and such effect may be            material in any individual reporting period. The Company is currently not a party to            any market risk sensitive instruments, or any derivative contracts or other            arrangements that may reduce such market risk.

 

| **Item                            8.**   | **Financial Statements and Supplementary                            Data.** |
|----------------------------------------------------|-----------------------------------------------------------------------------|

 

The            Reports of Registered Public Independent Accounting Firms, our Consolidated Financial            Statements and Notes thereto appear in a separate section of this Form 10-K (beginning            on Page F-1 following Part IV). The index to our Consolidated Financial Statements is            included in Item 15.

 

| **Item                            9.**   | **Changes in and Disagreements with Accountants on                            Accounting and Financial Disclosure.** |
|----------------------------------------------------|----------------------------------------------------------------------------------------------------------------------|

 

None.

 

| **Item                            9A.**   | **Controls and Procedures.** |
|-----------------------------------------------------|------------------------------|

 

**Evaluation of Disclosure Controls and Procedures**

We            maintain a system of disclosure controls and procedures, as defined in Exchange Act            Rule 13a-15(e),which is designed to provide reasonable assurance that information,            which is required to be disclosed in our reports filed pursuant to the Securities and            Exchange Act of 1934, as amended (the “Exchange Act”), is accumulated and            communicated to management in a timely manner. At the end of the period covered by this            report, we carried out an evaluation, under the supervision and with the participation            of our management, including our Chief Executive Officer and Chief Financial Officer,            of the effectiveness of the design and operation of our disclosure controls and            procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation,            our Chief Executive Officer and Chief Financial Officer concluded that, as of the date            of such evaluation, our disclosure controls and procedures were effective in timely            alerting them to information relating to us that is required to be included in our            reports filed under the Exchange Act.

 

27

 

----

**Changes in Internal Control over Financial Reporting**

During the fourth quarter of 2007, there were no significant changes in            our internal control over financial reporting or in other factors that have materially            affected, or are reasonably likely to materially affect, our internal control over            financial reporting.

**Management's Report on Internal Control over Financial            Reporting**

Our            management is responsible for establishing and maintaining adequate internal control            over financial reporting. Internal control over financial reporting, as defined in            Exchange Act Rule 13a-15(f), is a process designed by, or under the supervision            of, our principal executive and principal financial officers and effected by our Board            of Directors, management and other personnel, to provide reasonable assurance regarding            the reliability of financial reporting and the preparation of financial statements for            external purposes in accordance with generally accepted accounting principles and            includes those policies and procedures that:

•Pertain to the maintenance of records that            in reasonable detail accurately and fairly reflect the transactions and dispositions of            our assets;

             

•Provide reasonable assurance that            transactions are recorded as necessary to permit preparation of financial statements in            accordance with generally accepted accounting principles, and that our receipts and            expenditures are being made only in accordance with authorizations of our management            and directors; and

             

•Provide reasonable assurance regarding            prevention or timely detection of unauthorized acquisition, use or disposition of our            assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial            reporting may not prevent or detect misstatements. Projections of any evaluation of            effectiveness to future periods are subject to the risk that controls may become            inadequate because of changes in conditions, or that the degree of compliance with the            policies or procedures may deteriorate. All internal control systems, no matter how            well designed, have inherent limitations. Therefore, even those systems determined to            be effective can provide only reasonable assurance with respect to financial statement            preparation and presentation. The scope of management's assessment of the effectiveness            of internal control over financial reporting includes all of our Company's consolidated            subsidiaries.

Our            management assessed the effectiveness of our internal control over financial reporting            as of December 31, 2007. In making this assessment, our management used the criteria            set forth by the Committee of Sponsoring Organizations of the Treadway Commission            (COSO) in "Internal Control-Integrated Framework." Based on this assessment, management            believes that, as of December 31, 2007, our internal control over financial reporting            was effective based on those criteria.

Eisner LLP, the independent registered public accounting firm that            audited the Consolidated Financial Statements included in this Annual Report on            Form 10-K, has issued an auditors' report on our internal control over financial            reporting.

**Item            9B.**  **Other            Information.**

 

None.

 

**PART III**

 

**Item            10. Directors and Executive Officers of the Registrant.**

 

Information concerning directors and officers of the Company is            incorporated by reference to the Company’s Definitive Proxy Statement on Schedule            14A to be filed with the Securities and Exchange Commission within 120 days after the            end of the Company’s fiscal year.

 

On            June 19, 2007, the Company filed with the New York Stock Exchange the Annual CEO            Certification regarding the Company’s compliance with the NYSE’s Corporate            Governance listing standards as required by Section 303A.12(a) of the New York Stock            Exchange Listed Company Manual.  

 

 

28

 

----

**Item            11. Executive Compensation.**

 

Information concerning executive and director compensation is            incorporated by reference to the Company’s Definitive Proxy Statement on Schedule            14A to be filed with the Securities and Exchange Commission within 120 days after the            end of the Company’s fiscal year.

 

**Item            12. Security Ownership of Certain Beneficial Owners and Management and Related            Stockholder Matters.**

 

Information concerning security ownership of each person known by the            Company to own beneficially more than 5% of the outstanding shares of Common Stock, of            each director of the Company and all officers and directors as a group and of the            Company’s equity compensation plans is incorporated by reference to the            Company’s Definitive Proxy Statement on Schedule 14A to be filed with the            Securities and Exchange Commission within 120 days after the end of the Company’s            fiscal year.

 

**Item            13. Certain Relationships and Related Transactions.**

 

Information concerning certain relationships and related transactions is            incorporated by reference to the Company’s Definitive Proxy Statement on Schedule            14A to be filed with the Securities and Exchange Commission within 120 days after the            end of the Company’s fiscal year.

 

**Item            14. Principal Accountant Fees and Services.**

 

Information concerning principal accountant fees and services is            incorporated by reference to the Company’s Definitive Proxy Statement on Schedule            14A to be filed with the Securities and Exchange Commission within 120 days after the            end of the Company’s fiscal year.

 

**PART IV**

 

**Item            15. Exhibits and Financial Statement Schedules.**

 

(1)            Financial Statements:

 

The            following Consolidated Financial Statements of 4Kids Entertainment, Inc. and            Subsidiaries are included in Item 8:

 

|                                                                                                                      | **Page**    |
|---------------------------------------------------------------------------------------------------------------------------|-------------|
|                                                                                                                      | **Number**  |
| Reports of Independent Registered Public Accounting                            Firms on Consolidated Financial Statements | F-1 to F-2  |
|                                                                                                                      |        |
|                                                                                                                      |        |
| Consolidated Balance Sheets - December 31, 2007 and                            2006                                       | F-3         |
|                                                                                                                      |        |
| Consolidated Statements of Operations - Years                            Ended                                            |        |
| December 31, 2007, 2006 and 2005                                                                                          | F-4         |
|                                                                                                                      |        |
| Consolidated Statements of Stockholders’ Equity                            and Comprehensive Income                 |        |
| (Loss) - Years Ended December 31, 2007, 2006 and                            2005                                     | F-5         |
|                                                                                                                      |        |
| Consolidated Statements of Cash Flows - Years                            Ended                                            |        |
| December 31, 2007, 2006 and 2005                                                                                          | F-6         |
|                                                                                                                      |        |
| Notes to Consolidated Financial Statements                                                                                | F-7 to F-30 |

 

(a)(2)            Financial Statement Schedules

 

All            schedules have been omitted because they are inapplicable, not required, or the            information is included in the financial statements or notes thereto.

 

(a)(3)            and (b) Exhibits.

See            Index of Exhibits annexed hereto.

 

29

 

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

4KIDS            ENTERTAINMENT, INC.

Date:            March 14, 2008

 

| By | /s/ Alfred R.                            Kahn      |
|----|-----------------------------------------------------------------------------|

|   | Alfred R. Kahn, |
|--------|-----------------|

|   | Chairman of the Board |
|--------|-----------------------|

 

Pursuant to the requirements of the Securities Exchange Act of 1934,            this report has been signed below by the following persons on behalf of the registrant            and in the capacities and on the dates indicated.

 

Date: March 14, 2008

|   | /s/Alfred R. Kahn |
|--------|-------------------|

|   | Alfred R. Kahn, |
|--------|-----------------|

|   | Chairman of the Board, |
|--------|------------------------|

|   | Chief Executive Officer and |
|--------|-----------------------------|

|   | Director |
|--------|----------|

 

Date: March 14, 2008

|   | /s/ Bruce R. Foster |
|--------|---------------------|

|   | Bruce R. Foster, |
|--------|------------------|

|   | Executive Vice President, |
|--------|---------------------------|

|   | Principal Financial |
|--------|---------------------|

|   | and Accounting Officer |
|--------|------------------------|

 

Date: March 14, 2008

|   | /s/ Samuel R. Newborn |
|--------|-----------------------|

|   | Samuel R. Newborn, |
|--------|--------------------|

|   | Executive Vice President, |
|--------|---------------------------|

|   | General Counsel and |
|--------|---------------------|

|   | Director |
|--------|----------|

 

Date: March 14, 2008

|   | /s/ Richard Block |
|--------|-------------------|

|   | Richard Block, |
|--------|----------------|

|   | Director |
|--------|----------|

 

Date: March 14, 2008

|   | /s/ Jay Emmett |
|--------|----------------|

|   | Jay Emmett, |
|--------|-------------|

|   | Director |
|--------|----------|

 

Date: March 14, 2008

|   | /s/ Michael Goldstein |
|--------|-----------------------|

|   | Michael Goldstein, |
|--------|--------------------|

|   | Director |
|--------|----------|

 

Date: March 14, 2008

|   | /s/ Randy O. Rissman |
|--------|----------------------|

|   | Randy O. Rissman, |
|--------|-------------------|

|   | Director |
|--------|----------|

 

30

 

----

| **Exhibit**

**Number** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|-------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.1                     | Certificate of Incorporation of the Registrant filed on                            April 28, 1970, as amended on October 12, 1971, as further amended on                            April 21, 1972, as further amended on July 17, 1979, as further amended                            on May 22, 1985, as further amended on July 30, 1986, as further                            amended on July 19, 1989, as further amended on November 16, 1995                            (changing the name of the Corporation to 4Kids Entertainment, Inc.).                            (1) |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.2                     | Certificate of Amendment to the Certificate of                            Incorporation of the Registrant, dated April 29, 1999. (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.3                     | Certificate of Amendment to the Certificate of                            Incorporation of the Registrant, dated May 18, 2000. (3)                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.4                     | Certificate of Amendment to the Certificate of                            Incorporation of the Registrant, dated August 15, 2007. (4)                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.5                     | Amended and Restated By-Laws of the Registrant adopted                            by the Board of Directors on August 15, 2007. (4)                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.1                     | Form of Common Stock Certificate. (5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.2                     | Rights Agreement dated as of August 15, 2007 between                            4Kids Entertainment and Continental Stock Transfer & Trust Co., as                            Rights Agent. (4)                                                                                                                                                                                                                                                                                                                                                                                 |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1                    | 1992 Stock Option Plan. (*) (6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.2                    | 1997 Stock Option Plan. (*) (7)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.3                    | 1998 Stock Option Plan. (*) (9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.4                    | 1999 Stock Option Plan. (*) (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.5                    | 2000 Stock Option Plan. (*) (3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.6                    | 2001 Stock Option Plan. (*) (9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.7                    | 2002 Stock Option Plan. (*) (10)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.8                    | 2003 Stock Option Plan. (*) (11)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.9                    | 2004 Stock Option Plan. (*) (12)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.10                   | 2005 Long-Term Incentive Compensation Plan. (*)                            (13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.11                   | 2006 Long-Term Incentive Compensation Plan. (*)                            (14)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.12                   | 2007 Long-Term Incentive Compensation Plan. (*)                            (15)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.13                   | Agreement between Nintendo of America, Inc. and the                            Registrant dated December 17, 1987. (16)                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.14                   | Agreement of Lease, dated March 28, 1988, between the                            Registrant and 1414 Avenue of the Americas Company (“1414                            Lease”). (17)                                                                                                                                                                                                                                                                                                                                                                                     |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.15                   | Amendment, dated July 8, 1994, to the 1414 Lease.                            (17)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.16                   | Amended and Restated Employment Agreement dated January                            1, 2002, between 4Kids Entertainment Licensing, Inc. and Alfred R.                            Kahn. (*)(18)                                                                                                                                                                                                                                                                                                                                                                                      |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.17                   | Second Amended and Restated Employment Agreement, dated                            December 15, 2006, among 4Kids Entertainment Licensing, Inc., 4Kids                            Entertainment, Inc. and Alfred R. Kahn. (*)(19)                                                                                                                                                                                                                                                                                                                                                   |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.18                   | Employment Agreement, dated January 1, 2002, between                            4Kids Productions, Inc. and Norman Grossfeld. (*)(18)                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.19                   | Amendment dated as of June 16, 2003, to the Employment                            Agreement between 4Kids Productions, Inc. and Norman Grossfeld.                            (*)(18)                                                                                                                                                                                                                                                                                                                                                                                                |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.20                   | Letter Agreement, dated March 2, 2006, between 4Kids                            Productions, Inc. and Norman Grossfeld. (*)(20)                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.21                   | Employment Agreement, dated January 1, 2002, between                            4Kids Entertainment Licensing, Inc. and Samuel R. Newborn.                            (*)(18)                                                                                                                                                                                                                                                                                                                                                                                                       |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.22                   | Amendment dated as of June 16, 2003, to the Employment                            Agreement between 4Kids Entertainment Licensing, Inc. and Samuel R.                            Newborn. (*)(18)                                                                                                                                                                                                                                                                                                                                                                                   |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.23                   | Letter Agreement, dated as of March 2, 2006, between                            4Kids Entertainment Licensing, Inc. and Samuel R. Newborn.                            (*)(20)                                                                                                                                                                                                                                                                                                                                                                                                       |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.24                   | Employment Agreement dated as of June 30, 2005, between                            4Kids Entertainment, Inc., and Steven M. Grossman. (*)(21)                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

31

----

 

| 10.25  | General Release Agreement of Steven M. Grossman dated as                            of April 6, 2006. (*)(22)                                                                                                                                     |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                              |
| 10.26  | Employment Agreement dated as of December 1, 2005,                            between 4Kids Entertainment Licensing, Inc., and Bruce R. Foster.                            (*)(15)                                                                |
|   |                                                                                                                                                                                                                                              |
| 10.27  | Amendment to Employment Agreement dated as of January                            30, 2007, among 4Kids Entertainment Licensing, Inc., 4Kids                            Entertainment, Inc. and Bruce R. Foster. (*)(23)                           |
|   |                                                                                                                                                                                                                                              |
| 10.28  | Amendment to Employment Agreement dated as of April 16,                            2007, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment,                            Inc. and Bruce R. Foster. (*)(24)                             |
|   |                                                                                                                                                                                                                                              |
| 10.29  | Employment Agreement dated as of July 1, 2003, between                            4Kids Entertainment Licensing, Inc. and Brian Lacey. (*)(25)                                                                                                    |
|   |                                                                                                                                                                                                                                              |
| 10.30  | Amendment to Employment Agreement, dated as of October                            16, 2006, among 4Kids Entertainment Licensing, Inc., 4Kids                            Entertainment, Inc. and Brian Lacey. (*)(26)                              |
|   |                                                                                                                                                                                                                                              |
| 10.31  | Amendment Agreement, dated March 14, 2006, between 4Kids                            Entertainment, Inc. and Fox Broadcasting Company. (*)(18)                                                                                                     |
|   |                                                                                                                                                                                                                                              |
| 10.32  | Employment Agreement, dated as of December 11, 2006,                            between TC Digital Games LLC and Bryan Gannon. (*)(27)                                                                                                            |
|   |                                                                                                                                                                                                                                              |
| 10.33  | Employment Agreement, dated as of December 11, 2006,                            between TC Digital Games LLC and John Milito. (*)(27)                                                                                                             |
|   |                                                                                                                                                                                                                                              |
| 10.34  | Settlement Agreement and Mutual General Release dated as                            of June 19, 2006 among The Summit Media Group, Inc., The Beacon Media                            Group LLC, Sheldon Hirsch, Tom Horner and Paul Caldera. (28) |
|   |                                                                                                                                                                                                                                              |
| 10.35  | Operating Agreement of TC Digital Games LLC, dated as of                            December 11, 2006, between 4Kids Digital Games, Inc. and Chaotic USA                            Entertainment Digital Games LLC. (27)                         |
|   |                                                                                                                                                                                                                                              |
| 10.36  | Operating Agreement of TC Websites LLC, dated as of                            December 11, 2006, between 4Kids Websites, Inc. and Chaotic USA                            Entertainment Group, Inc. (27)                                          |
|   |                                                                                                                                                                                                                                              |
| 10.37  | Operating Acquisition and Administration agreement dated                            June 28, 2002 between Cherry Lane Publishing Company, Inc. and 4Kids                            Entertainment Music, Inc. (included herein)                   |
|   |                                                                                                                                                                                                                                              |
| 10.38  | Saturday Morning Programming Block dated October 1, 2007                            between The CW Network, LLC. and 4Kids Entertainment, Inc. (included                            herein)                                                       |
|   |                                                                                                                                                                                                                                              |
| 10.39  | Membership Interest Purchase Agreement dated December                            18, 2007 between TC Digital Games, LLC, Chaotic USA Entertainment                            Group, Inc. and 4Kids Digital, Inc. (included herein)               |
|   |                                                                                                                                                                                                                                              |
| 10.40  | Membership Interest Purchase Agreement dated December                            18, 2007 between TC Websites LLC, Chaotic USA Entertainment Group, Inc.                            and 4Kids Websites, Inc. (included herein)                    |
|   |                                                                                                                                                                                                                                              |
| 21.1   | List of Subsidiaries of the Registrant.                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                              |
| 23.1   | Consent of Eisner LLP, Independent Registered Public                            Accounting Firm.                                                                                                                                                  |
|   |                                                                                                                                                                                                                                              |
| 31.1   | Certification of Chief Executive Officer pursuant to 18                            U.S.C. Section 1350, as adopted pursuant to Section 302 of the                            Sarbanes-Oxley Act of 2002.                                          |
|   |                                                                                                                                                                                                                                              |
| 31.2   | Certification of Chief Financial Officer pursuant to 18                            U.S.C. Section 1350, as adopted pursuant to Section 302 of the                            Sarbanes-Oxley Act of 2002.                                          |
|   |                                                                                                                                                                                                                                              |
| 32.1   | Joint Certification of Chief Executive Officer and Chief                            Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted                            pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.        |
|   |                                                                                                                                                                                                                                              |
|   | ______________                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                              |
| *      | Denotes a management contract or compensatory plan,                            contract or arrangement.                                                                                                                                           |
|   |                                                                                                                                                                                                                                              |
| (1)    | Incorporated by reference to Annual Report on Form 10-K                            for the year ended December 31, 1995 (File No. 000-07843).                                                                                                     |
|   |                                                                                                                                                                                                                                              |
| (2)    | Incorporated by reference to 1999 Proxy Statement for                            Annual Meeting of Shareholders held April 29, 1999 (File No.                            000-07843).                                                              |
|   |                                                                                                                                                                                                                                              |
| (3)    | Incorporated by reference to 2000 Proxy Statement for                            Annual Meeting of Shareholders held May 17, 2000 (File No.                            000-07843).                                                                |
|   |                                                                                                                                                                                                                                              |
| (4)    | Incorporated by reference to Current Report on Form 8-K                            dated August 15, 2007 (File No. 001-16117).                                                                                                                    |
|   |                                                                                                                                                                                                                                              |
| (5)    | Incorporated by reference to Registration Statement on                            Form S-1 declared effective March 7, 1986 (File No.                            33-3056).                                                                        |
|   |                                                                                                                                                                                                                                              |
| (6)    | Incorporated by reference to 1992 Proxy Statement for                            Annual Meeting of Shareholders held April 1992 (File No.                            000-07843).                                                                  |

32

----

 

| (7)    | Incorporated by reference to 1997 Proxy Statement for                            Annual Meeting of Shareholders held April 30, 1997 (File No.                            000-07843). |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                 |
| (8)    | Incorporated by reference to 1998 Proxy Statement for                            Annual Meeting of Shareholders held April 29, 1998 (File No.                            000-07843). |
|   |                                                                                                                                                                                 |
| (9)    | Incorporated by reference to 2002 Proxy Statement for                            Annual Meeting of Shareholders held May 23, 2001 (File No.                            001-16117).   |
|   |                                                                                                                                                                                 |
| (10)   | Incorporated by reference to 2002 Proxy Statement for                            Annual Meeting of Shareholders held May 23, 2002 (File No.                            001-16117).   |
|   |                                                                                                                                                                                 |
| (11)   | Incorporated by reference to 2003 Proxy Statement for                            Annual Meeting of Shareholders held May 23, 2003 (File No.                            001-16117).   |
|   |                                                                                                                                                                                 |
| (12)   | Incorporated by reference to 2004 Proxy Statement for                            Annual Meeting of Shareholders held May 27, 2004 (File No.                            001-16117).   |
|   |                                                                                                                                                                                 |
| (13)   | Incorporated by reference to 2005 Proxy Statement for                            Annual Meeting of Shareholders held May 26, 2005 (File No.                            001-16117).   |
|   |                                                                                                                                                                                 |
| (14)   | Incorporated by reference to 2006 Proxy Statement for                            Annual Meeting of Shareholders held May 26, 2006 (File No.                            001-16117).   |
|   |                                                                                                                                                                                 |
| (15)   | Incorporated by reference to 2007 Proxy Statement for                            Annual Meeting of Shareholders held May 25, 2007 (File No.                            001-16117).   |
|   |                                                                                                                                                                                 |
| (16)   | Incorporated by reference to Annual Report on Form 10-K                            for the year ended December 31, 1987 (File No. 000-07843).                                        |
|   |                                                                                                                                                                                 |
| (17)   | Incorporated by reference to Annual Report on Form 10-K                            for the year ended December 31, 1990 (File No. 000-07843).                                        |
|   |                                                                                                                                                                                 |
| (18)   | Incorporated by reference to Quarterly Report on Form                            10-Q for the quarter ended June 30, 2003 (File No.                            001-16117).           |
|   |                                                                                                                                                                                 |
| (19)   | Incorporated by reference to Current Report on Form 8-K                            dated December 21, 2006 (File No. 001-16117).                                                     |
|   |                                                                                                                                                                                 |
| (20)   | Incorporated by reference to Current Report on Form 8-K                            dated March 8, 2006 (File No. 001-16117).                                                         |
|   |                                                                                                                                                                                 |
| (21)   | Incorporated by reference to Current Report on Form 8-K                            dated July 7, 2005 (File No. 001-16117).                                                          |
|   |                                                                                                                                                                                 |
| (22)   | Incorporated by reference to Quarterly Report on Form                            10-Q for the quarter ended March 31, 2006 (File No.                            001-16117).          |
|   |                                                                                                                                                                                 |
| (23)   | Incorporated by reference to Current Report on Form 8-K                            dated January 13, 2006 (File No. 001-16117).                                                      |
|   |                                                                                                                                                                                 |
| (24)   | Incorporated by reference to Current Report on Form 8-K                            dated February 5, 2007 (File No. 001-16117).                                                      |
|   |                                                                                                                                                                                 |
| (25)   | Incorporated by reference to Annual Report on Form 10-K                            for the year ended December 31, 2005 (File No. 000-07843).                                        |
|   |                                                                                                                                                                                 |
| (26)   | Incorporated by reference to Current Report on Form 8-K                            dated November 2, 2006 (File No. 001-16117).                                                      |
|   |                                                                                                                                                                                 |
| (27)   | Incorporated by reference to Annual Report on Form 10-K                            for the year ended December 31, 2006 (File No. 000-07843).                                        |
|   |                                                                                                                                                                                 |
| (28)   | Incorporated by reference to Current Report on Form 8-K                            dated June 23, 2006 (File No. 001-16117).                                                         |
|   |                                                                                                                                                                                 |
|   |                                                                                                                                                                                 |

33

----

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING            FIRM**

 

The            Board of Directors and Stockholders

4Kids            Entertainment, Inc.

 

We            have audited the accompanying consolidated balance sheets of 4Kids Entertainment, Inc.            and Subsidiaries (the “Company”) as of December 31, 2007 and 2006 and the            related consolidated statements of operations, stockholders' equity and comprehensive            income (loss), and cash flows for each of the years in the three year period ended            December 31, 2007. These consolidated financial statements are the responsibility of            the Company's management. Our responsibility is to express an opinion on these            consolidated financial statements based on our audits.

 

We            conducted our audits in accordance with the standards of the Public Company Accounting            Oversight Board (United States). Those standards require that we plan and perform the            audit to obtain reasonable assurance about whether the financial statements are free of            material misstatement. An audit includes examining, on a test basis, evidence            supporting the amounts and disclosures in the financial statements. An audit also            includes assessing the accounting principles used and significant estimates made by            management, as well as evaluating the overall financial statement presentation. We            believe that our audits provide a reasonable basis for our opinion.

 

In            our opinion, the financial statements referred to above present fairly, in all material            respects, the consolidated financial position of the Company as of December 31, 2007            and 2006, and the consolidated results of their operations and their consolidated            cash flows for each of the years in the three year period ended December 31, 2007, in            conformity with accounting principles generally accepted in the United States of            America.

 

We            also have audited, in accordance with the standards of the Public Company Accounting            Oversight Board (United States), the Company’s internal control over financial            reporting as of December 31, 2007, based on criteria established in the Internal            Control - Integrated Framework issued by the Committee of Sponsoring Organizations of            the Treadway Commission, and our report dated March 13, 2008 expressed an unqualified            opinion thereon.

 

**/s/            Eisner LLP**

 

New            York, New York

March            13, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

F-1

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING            FIRM**

 

To the            Board of Directors and Stockholders

4Kids            Entertainment, Inc.

 

We            have audited 4Kids Entertainment, Inc. internal control over financial reporting as of            December 31, 2007, based on criteria established in Internal Control-Integrated            Framework issued by the Committee of Sponsoring Organizations of the Treadway            Commission (“COSO”). 4Kids Entertainment, Inc.’s management is            responsible for maintaining effective internal control over financial reporting and for            its assessment of the effectiveness of internal control over financial reporting,            included in the accompanying Management’s Report on Internal Control Over            Financial Reporting. Our responsibility is to express an opinion on the effectiveness            of the Company’s internal control over financial reporting based on our            audit.

We            conducted our audit in accordance with the standards of the Public Company Accounting            Oversight Board (United States). Those standards require that we plan and perform the            audit to obtain reasonable assurance about whether effective internal control over            financial reporting was maintained in all material respects. Our audit of internal            control over financial reporting included obtaining an understanding of internal            control over financial reporting, assessing the risk that a material weakness exists,            and testing and evaluating the design and operating effectiveness of internal control            based on the assessed risk and performing such other procedures as we considered            necessary in the circumstances. We believe that our audit provides a reasonable basis            for our opinion.

A            company’s internal control over financial reporting is a process designed to            provide reasonable assurance regarding the reliability of financial reporting and the            preparation of financial statements for external purposes in accordance with generally            accepted accounting principles. A company’s internal control over financial            reporting includes those policies and procedures that (i) pertain to the maintenance of            records that, in reasonable detail, accurately and fairly reflect the transactions and            dispositions of the assets of the company; (ii) provide reasonable assurance that            transactions are recorded as necessary to permit preparation of financial statements in            accordance with generally accepted accounting principles, and that receipts and            expenditures of the company are being made only in accordance with authorizations of            management and directors of the company; and (iii) provide reasonable assurance            regarding prevention or timely detection of unauthorized acquisition, use, or            disposition of the company’s assets that could have a material effect on the            financial statements.

 

Because of its inherent limitations, internal control over financial            reporting may not prevent or detect misstatements. Also, projections of any evaluation            of effectiveness to future periods are subject to the risk that controls may become            inadequate because of changes in conditions, or that the degree of compliance with the            policies or procedures may deteriorate.

 

In            our opinion, 4Kids Entertainment, Inc. maintained, in all material respects, effective            internal control over financial reporting as of December 31, 2007, based on the            COSO criteria.

 

We            also have audited, in accordance with the standards of the Public Company Accounting            Oversight Board (United States), the consolidated balance sheets of 4Kids            Entertainment, Inc. and subsidiaries as of December 31, 2007, and 2006, and the related            consolidated statements of operations, stockholders’ equity and comprehensive            income (loss), and cash flows for each of the years in the three year period ended            December 31, 2007, and our report dated March 13, 2008 expressed an unqualified opinion            on those financial statements.

 

**/s/ Eisner LLP**

 

New            York, New York

March 13, 2008

 

 

 

 

F-2

 

----

**4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2007 AND 2006**

(In            thousands of dollars, except share data)

                                                                                                                                                                                                                                                                                     

| **ASSETS:**                                                                                                                                                                                                                                                                                                                                      |   | **2007** |    | **2006** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Current assets:                                                                                                                                                                                                                                                                                                                                  |   |     |    |     |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                        |   | $        | 24,872  |     | $      | 18,066 |   |
| Investments                                                                                                                                                                                                                                                                                                                                      |   |     | 36,106  |     |   | 92,910 |   |
| Total cash, cash equivalents and investments                                                                                                                                                                                                                                                                                                     |   |     | 60,978  |     |   | 110,976 |   |
|                                                                                                                                                                                                                                                                                                                                             |   |     |    |     |   |   |   |
| Accounts receivable - net                                                                                                                                                                                                                                                                                                                        |   |     | 21,403  |     |   | 27,944 |   |
| Inventories                                                                                                                                                                                                                                                                                                                                      |   |     | 611     |     |   | — |   |
| Prepaid income taxes                                                                                                                                                                                                                                                                                                                             |   |     | 1,159   |     |   | 5,924 |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                                                                                                                        |   |     | 2,985   |     |   | 3,916 |   |
| Current assets from discontinued operations                                                                                                                                                                                                                                                                                                      |   |     | 372     |     |   | 326 |   |
| Deferred income taxes                                                                                                                                                                                                                                                                                                                            |   |     | — |     |   | 707 |   |
| Total current assets                                                                                                                                                                                                                                                                                                                             |   |     | 87,508  |     |   | 149,793 |   |
|                                                                                                                                                                                                                                                                                                                                             |   |     |    |     |   |   |   |
| Property and equipment - net                                                                                                                                                                                                                                                                                                                     |   |     | 4,255   |     |   | 2,126 |   |
| Long term investments                                                                                                                                                                                                                                                                                                                            |   |     | 31,806  |     |   | — |   |
| Accounts receivable - noncurrent, net                                                                                                                                                                                                                                                                                                            |   |     | 208     |     |   | 138 |   |
| Investment in unconsolidated affiliate                                                                                                                                                                                                                                                                                                           |   |     | — |     |   | 2,702 |   |
| Film and television costs - net                                                                                                                                                                                                                                                                                                                  |   |     | 14,352  |     |   | 14,827 |   |
| Non-current assets from discontinued                            operations                                                                                                                                                                                                                                                                       |   |     | 926     |     |   | 1,333 |   |
| Deferred income taxes - noncurrent                                                                                                                                                                                                                                                                                                               |   |     | — |     |   | 1,733 |   |
| Other assets - net (includes related party amounts of                            $4,265 and $2,664, respectively)                                                                                                                                                                                                                                |   |     | 12,024  |     |   | 8,743 |   |
| Total assets                                                                                                                                                                                                                                                                                                                                     |   | $        | 151,079 |     | $      | 181,395 |   |
|                                                                                                                                                                                                                                                                                                                                             |   |     |    |     |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’                            EQUITY:**                                                                                                                                                                                                                                                                       |   |     |    |     |   |   |   |
|                                                                                                                                                                                                                                                                                                                                             |   |     |    |     |   |   |   |
| Current liabilities:                                                                                                                                                                                                                                                                                                                             |   |     |    |     |   |   |   |
| Due to licensors                                                                                                                                                                                                                                                                                                                                 |   | $        | 4,420   |     | $      | 6,536 |   |
| Accounts payable and accrued expenses                                                                                                                                                                                                                                                                                                            |   |     | 14,969  |     |   | 14,317 |   |
| Current liabilities from discontinued                            operations                                                                                                                                                                                                                                                                      |   |     | — |     |   | 20 |   |
| Deferred revenue                                                                                                                                                                                                                                                                                                                                 |   |     | 2,984   |     |   | 5,014 |   |
| Total current liabilities                                                                                                                                                                                                                                                                                                                        |   |     | 22,373  |     |   | 25,887 |   |
|                                                                                                                                                                                                                                                                                                                                             |   |     |    |     |   |   |   |
| Deferred rent                                                                                                                                                                                                                                                                                                                                    |   |     | 618     |     |   | 771 |   |
| Total liabilities                                                                                                                                                                                                                                                                                                                                |   |     | 22,991  |     |   | 26,658 |   |
|                                                                                                                                                                                                                                                                                                                                             |   |     |    |     |   |   |   |
| Commitments and contingencies (Note 12)                                                                                                                                                                                                                                                                                                          |   |     |    |     |   |  |   |
| Stockholders’ equity                                                                                                                                                                                                                                                                                                                       |   |     |    |     |   |   |   |
| Preferred stock, $.01 par value - authorized, 3,000,000                            shares; none issued                                                                                                                                                                                                                                           |   |     | — |     |   | — |   |
| Common stock, $.01 par value - authorized, 40,000,000                            shares;

issued, 15,099,812 and 14,933,218 shares; outstanding                            13,332,207 and                                    13,183,218 shares in                            2007 and 2006, respectively |   |     | 151     |     |   | 149 |   |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                       |   |     | 63,679  |     |   | 62,859 |   |
| Accumulated other comprehensive (loss) income                                                                                                                                                                                                                                                                                                    |   |     | (2,562) |     |   | 1,329 |   |
| Retained earnings                                                                                                                                                                                                                                                                                                                                |   |     | 100,323 |     |   | 123,649 |   |
|                                                                                                                                                                                                                                                                                                                                                  |   |     | 161,591 |     |   | 187,986 |   |
| Less cost of 1,767,605 and 1,750,000 treasury shares in                            2007 and 2006, respectively                                                                                                                                                                                                                                   |   |     | 33,503  |     |   | 33,249 |   |
|                                                                                                                                                                                                                                                                                                                                             |   |     | 128,088 |     |   | 154,737 |   |
| Total liabilities and stockholders’                            equity                                                                                                                                                                                                                                                                      |   | $        | 151,079 |     | $      | 181,395 |   |
|                                                                                                                                                                                                                                                                                                                                                  |        |          |         |          |        |  |  |  |  |

 

 

See            notes to consolidated financial statements.

F-3

----

**4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005**

(In thousands of dollars, except share data)

                                                                                                                                                                                                                                                                                     

|                                                                       |   | **2007**   |   |   | **2006**   |   |   | **2005**   |   |
|----------------------------------------------------------------------------|--------|------------|--------|--------|------------|--------|--------|------------|--------|
|                                                                       |   |       |   |   |       |   |   |       |   |
| Net revenues                                                               | $      | 55,609     |   | $      | 71,781     |   | $      | 80,607     |   |
|                                                                       |   |       |   |   |       |   |   |       |   |
| Costs and expenses:                                                        |   |       |   |   |       |   |   |       |   |
| Selling, general and administrative                                        |   | 44,180     |   |   | 39,155     |   |   | 33,835     |   |
| Production service costs                                                   |   | 7,195      |   |   | 11,259     |   |   | 8,851      |   |
| Cost of sales of trading cards                                             |   | 352        |   |   | —    |   |   | —    |   |
| Amortization of television and film costs                                  |   | 8,179      |   |   | 8,041      |   |   | 9,790      |   |
| Amortization of 4Kids TV broadcast fee                                     |   | 21,472     |   |   | 22,462     |   |   | 26,408     |   |
| Total costs and expenses                                                   |   | 81,378     |   |   | 80,917     |   |   | 78,884     |   |
|                                                                       |   |       |   |   |       |   |   |       |   |
| (Loss) Income from operations                                              |   | (25,769    | )      |   | (9,136     | )      |   | 1,723      |   |
|                                                                       |   |       |   |   |       |   |   |       |   |
| Interest income                                                            |   | 5,281      |   |   | 4,143      |   |   | 2,834      |   |
| Gain on sale of investment in equity                            securities |   | —    |   |   | —    |   |   | 234        |   |
| Total other income                                                         |   | 5,281      |   |   | 4,143      |   |   | 3,068      |   |
|                                                                       |   |       |   |   |       |   |   |       |   |
| (Loss) income before income taxes                                          |   | (20,488    | )      |   | (4,993     | )      |   | 4,791      |   |
|                                                                       |   |       |   |   |       |   |   |       |   |
| (Provision for) benefit from income taxes                                  |   | (2,436)    |   |   | 3,506      |   |   | (1,762     | )      |
|                                                                       |   |       |   |   |       |   |   |       |   |
| Loss from unconsolidated operations –                                |   |       |   |   |       |   |   |       |   |
| net of a tax benefit                                                       |   | —    |   |   | (280       | )      |   | —    |   |
| Loss on previously unconsolidated affiliate                                |   | (498)      |   |   | —    |   |   | —    |   |
| Minority interest (Note 13)                                                |   | 96         |   |   | 39         |   |   | —    |   |
|                                                                       |   |       |   |   |       |   |   |       |   |
| (Loss) income from continuing operations                                   |   | (23,326    | )      |   | (1,728     | )      |   | 3,029      |   |
|                                                                       |   |       |   |   |       |   |   |       |   |
| Income from discontinued operations                                        |   | —    |   |   | 722        |   |   | 2,040      |   |
|                                                                       |   |       |   |   |       |   |   |       |   |
| Net (loss) income                                                          | $      | (23,326    | )      | $      | (1,006     | )      | $      | 5,069      |   |
|                                                                       |   |       |   |   |       |   |   |       |   |
| Per share amounts:                                                         |   |       |   |   |       |   |   |       |   |
| Basic (loss) earnings per common share                                     |   |       |   |   |       |   |   |       |   |
| Continuing operations                                                      | $      | (1.77      | )      | $      | (0.13      | )      | $      | 0.23       |   |
| Discontinued operations                                                    |   | —    |   |   | 0.05       |   |   | 0.16       |   |
| Basic (loss) earnings per common share                                     | $      | (1.77      | )      | $      | (0.08      | )      | $      | 0.39       |   |
|                                                                       |   |       |   |   |       |   |   |       |   |
| Diluted (loss) earnings per common share                                   |   |       |   |   |       |   |   |       |   |
| Continuing operations                                                      | $      | (1.77      | )      | $      | (0.13      | )      | $      | 0.22       |   |
| Discontinued operations                                                    |   | —    |   |   | 0.05       |   |   | 0.15       |   |
| Diluted (loss) earnings per common share                                   | $      | (1.77      | )      | $      | (0.08      | )      | $      | 0.37       |   |
|                                                                       |   |       |   |   |       |   |   |       |   |
| Weighted average common shares                                             |   |       |   |   |       |   |   |       |   |
| outstanding - basic                                                        |   | 13,209,495 |   |   | 13,104,051 |   |   | 13,115,687 |   |
| Weighted average common shares                                             |   |       |   |   |       |   |   |       |   |
| outstanding - diluted                                                      |   | 13,209,495 |   |   | 13,104,051 |   |   | 13,536,830 |   |
|                                                                       |   |       |   |   |       |   |   |       |   |

 

See            notes to consolidated financial statements.

F-4

----

**4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND            COMPREHENSIVE INCOME (LOSS)**

**YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005**

(In            thousands of dollars and shares)

 

|                                                                            | **Common Stock** |       | **Additional****Paid-In****Capital** |    | **Retained Earnings** |   | **Accumulated****Other****Comprehensive****Income/Loss** |   | **Less Treasury Stock** |    | **Total****Stockholders’****Equity** |   |
|---------------------------------------------------------------------------------|------------------|------------|--------------------------------------|---------|-----------------------|--------|----------------------------------------------------------|--------|-------------------------|---------|--------------------------------------------|--------|
| **Shares**                                                                      |             | **Amount** |
|                                                                            |             |       |                                 |    |                  |   |                                                     |   |                    |    |                                       |   |   |   |   |   |   |   |   |   |
| BALANCE, DECEMBER 31, 2004                                                      | 14,411           |       | $                                    | 144     |                  | $      | 58,068                                                   |   | $                       | 119,586 |                                       | $      | 1,124 |   | $ | (14,944 | ) | $ | 163,978 |   |
| Issuance of common stock and stock options                            exercised | 415              |       |                                 | 4       |                  |   | 1,345                                                    |   |                    | — |                                       |   | — |   |   | — |   |   | 1,349 |   |
| Tax benefit from exercise of stock options                                      | —          |       |                                 | — |                  |   | 2,002                                                    |   |                    | — |                                       |   | — |   |   | — |   |   | 2,002 |   |
| Acquisition of treasury stock, at cost                                          | —          |       |                                 | — |                  |   | —                                                  |   |                    | — |                                       |   | — |   |   | (18,305 | ) |   | (18,305 | ) |
| Comprehensive income:                                                           |             |       |                                 |    |                  |   |                                                     |   |                    |    |                                       |   |   |   |   |   |   |   |   |   |
| Net income                                                                      | —          |       |                                 | — |                  |   | —                                                  |   |                    | 5,069   |                                       |   | — |   |   | — |   |   | 5,069 |   |
| Translation adjustment                                                          | —          |       |                                 | — |                  |   | —                                                  |   |                    | — |                                       |   | (696 | ) |   | — |   |   | (696 | ) |
|                                                                            |             |       |                                 |    |                  |   |                                                     |   |                    |    |                                       |   |   |   |   |   |   |   |   |   |
| Total comprehensive income                                                      | —          |       |                                 | — |                  |   | —                                                  |   |                    | — |                                       |   | — |   |   | — |   |   | 4,373 |   |
|                                                                            |             |       |                                 |    |                  |   |                                                     |   |                    |    |                                       |   |   |   |   |   |   |   |   |   |
| BALANCE, DECEMBER 31, 2005                                                      | 14,826           |       | $                                    | 148     |                  | $      | 61,415                                                   |   | $                       | 124,655 |                                       | $      | 428 |   | $ | (33,249 | ) | $ | 153,397 |   |
| Issuance of common stock and stock options                            exercised | 107              |       |                                 | 1       |                  |   | 1,256                                                    |   |                    | — |                                       |   | — |   |   | — |   |   | 1,257 |   |
| Tax benefit from exercise of stock options                                      | —          |       |                                 | — |                  |   | 188                                                      |   |                    | — |                                       |   | — |   |   | — |   |   | 188 |   |
| Comprehensive loss:                                                             |             |       |                                 |    |                  |   |                                                     |   |                    |    |                                       |   |   |   |   |   |   |   |   |   |
| Net loss                                                                        | —          |       |                                 | — |                  |   | —                                                  |   |                    | (1,006  | )                                          |   | — |   |   | — |   |   | (1,006 | ) |
| Translation adjustment                                                          | —          |       |                                 | — |                  |   | —                                                  |   |                    | — |                                       |   | 901 |   |   | — |   |   | 901 |   |
|                                                                            |             |       |                                 |    |                  |   |                                                     |   |                    |    |                                       |   |   |   |   |   |   |   |   |   |
| Total comprehensive loss                                                        | —          |       |                                 | — |                  |   | —                                                  |   |                    | — |                                       |   | — |   |   | — |   |   | (105 | ) |
|                                                                            |             |       |                                 |    |                  |   |                                                     |   |                    |    |                                       |   |   |   |   |   |   |   |   |   |
| BALANCE, DECEMBER 31, 2006                                                      | 14,933           |       | $                                    | 149     |                  | $      | 62,859                                                   |   | $                       | 123,649 |                                       | $      | 1,329 |   | $ | (33,249 | ) | $ | 154,737 |   |
| Issuance of common stock and stock options                            exercised | 167              |       |                                 | 2       |                  |   | 820                                                      |   |                    | — |                                       |   | — |   |   | — |   |   | 822 |   |
| Acquisition of treasury stock, at cost                                          | —          |       |                                 | — |                  |   | —                                                  |   |                    | — |                                       |   | — |   |   | (254 | ) |   | (254 | ) |
| Comprehensive loss:                                                             |             |       |                                 |    |                  |   |                                                     |   |                    |    |                                       |   |   |   |   |   |   |   |   |   |
| Net loss                                                                        | —          |       |                                 | — |                  |   | —                                                  |   |                    | (23,326 | )                                          |   | — |   |   | — |   |   | (23,326 | ) |
| Translation adjustment                                                          | —          |       |                                 | — |                  |   | —                                                  |   |                    | — |                                       |   | 102 |   |   | — |   |   | 102 |   |
| Unrealized loss on marketable securities                                        | —          |       |                                 | — |                  |   | —                                                  |   |                    | — |                                       |   | (3,993 | ) |   | — |   |   | (3,993 | ) |
| Total comprehensive loss                                                        | —          |       |                                 | — |                  |   | —                                                  |   |                    | — |                                       |   | — |   |   | — |   |   | (27,217 | ) |
|                                                                            |             |       |                                 |    |                  |   |                                                     |   |                    |    |                                       |   |   |   |   |   |   |   |   |   |
| BALANCE, DECEMBER 31, 2007                                                      | 15,100           |       | $                                    | 151     |                  | $      | 63,679                                                   |   | $                       | 100,323 |                                       | $      | (2,562 | ) | $ | (33,503 | ) | $ | 128,088 |   |

 

 

See            notes to consolidated financial statements.

 

 

 

F-5

 

----

**4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005**

| (In thousands of dollars) |
|---------------------------|

 

|                                                                                                                |   | **2007** |   |   | **2006** |   |   | **2005** |   |
|----------------------------------------------------------------------------------------------------------------|--------|----------|--------|--------|----------|--------|--------|----------|--------|
| Cash flows from operating activities:                                                                          |   |     |   |   |     |   |   |     |   |
| Net (loss) income                                                                                              | $      | (23,326  | )      | $      | (1,006   | )      | $      | 5,069    |   |
| Adjustments to reconcile net (loss) income to net                            cash                              |   |     |   |   |     |   |   |     |   |
| (used in) provided by operating activities –                            continuing operations:           |   |     |   |   |     |   |   |     |   |
| Depreciation and amortization                                                                                  |   | 1,002    |   |   | 1,047    |   |   | 1,141    |   |
| Amortization of television and film costs                                                                      |   | 8,179    |   |   | 8,041    |   |   | 9,790    |   |
| Amortization of 4Kids TV broadcast fee                                                                         |   | 21,472   |   |   | 22,462   |   |   | 26,408   |   |
| Provision for doubtful accounts                                                                                |   | 837      |   |   | 630      |   |   | 195      |   |
| Deferred income taxes                                                                                          |   | 2,440    |   |   | (3       | )      |   | (38      | )      |
| Loss on investment in unconsolidated                            affiliate                                      |   | —  |   |   | 498      |   |   | —  |   |
| Gain on sale of investment in equity                            securities                                     |   | —  |   |   | —  |   |   | (234     | )      |
| Tax benefit on exercise of stock options                                                                       |   | —  |   |   | —  |   |   | 2,002    |   |
| Changes in operating assets and liabilities:                                                                   |   |     |   |   |     |   |   |     |   |
| Inventories                                                                                                    |   | (611     | )      |   | —  |   |   | —  |   |
| Accounts receivable                                                                                            |   | 5,700    |   |   | 4,786    |   |   | 5,878    |   |
| Film and television costs                                                                                      |   | (7,704   | )      |   | (10,660  | )      |   | (11,480  | )      |
| Prepaid income taxes                                                                                           |   | 4,765    |   |   | (3,612   | )      |   | 762      |   |
| Prepaid 4Kids TV broadcast fee                                                                                 |   | (20,788  | )      |   | (15,856  | )      |   | (26,023  | )      |
| Prepaid expenses and other current assets                                                                      |   | 931      |   |   | (2,233   | )      |   | (247     | )      |
| Other assets - net                                                                                             |   | (3,281   | )      |   | (1,819   | )      |   | 1,169    |   |
| Due to licensors                                                                                               |   | (2,116   | )      |   | (6,967   | )      |   | (3,356   | )      |
| Accounts payable and accrued expenses                                                                          |   | 521      |   |   | 4,972    |   |   | (3,291   | )      |
| Deferred revenue                                                                                               |   | (2,030   | )      |   | (283     | )      |   | (1,558   | )      |
| Deferred rent                                                                                                  |   | (153     | )      |   | (245     | )      |   | 5        |   |
|                                                                                                           |   |     |   |   |     |   |   |     |   |
| Net cash (used in) provided by operating activities                            – continuing operations   |   | (14,162  | )      |   | (248     | )      |   | 6,192    |   |
| Net cash provided by (used in) operating activities                            – discontinued operations |   | 341      |   |   | (809     | )      |   | (2,950   | )      |
| Net cash (used in) provided by operating                            activities                                 |   | (13,821  | )      |   | (1,057   | )      |   | 3,242    |   |
|                                                                                                           |   |     |   |   |     |   |   |     |   |
| Cash flows from investing activities:                                                                          |   |     |   |   |     |   |   |     |   |
| Proceeds from maturities of investments                                                                        |   | 138,688  |   |   | 184,872  |   |   | 53,938   |   |
| Purchase of investments                                                                                        |   | (117,683 | )      |   | (199,399 | )      |   | (116,254 | )      |
| Consolidation of previously unconsolidated                            affiliate                                |        | 2,702    |        |        | —  |        |        | —  |        |
| Purchase of property and equipment                                                                             |   | (3,136   | )      |   | (841     | )      |   | (857     | )      |
| Loss from disposal of property, plant, and                            equipment                                |   | 5        |   |   | 521      |   |   | 6        |   |
| Proceeds from sale of investment in equity                            securities                               |   | —  |   |   | —  |   |   | 960      |   |
| Purchase of investment in unconsolidated                            affiliate                                  |   | —  |   |   | (3,200   | )      |   | —  |   |
| Net cash provided by (used in) investing                            activities                                 |   | 20,576   |   |   | (18,047  | )      |   | (62,207  | )      |
|                                                                                                           |   |     |   |   |     |   |   |     |   |
| Cash flows from financing activities:                                                                          |   |     |   |   |     |   |   |     |   |
| Proceeds from exercise of stock options                                                                        |   | 256      |   |   | 1,257    |   |   | 1,349    |   |
| Purchase of treasury shares                                                                                    |   | (254     | )      |   | —  |   |   | (18,305  | )      |
| Tax benefit on exercise of stock options                                                                       |   | —  |   |   | 188      |   |   | —  |   |
| Net cash provided by (used in) financing                            activities                                 |   | 2        |   |   | 1,445    |   |   | (16,956  | )      |
| Effects of exchange rate changes on cash and cash                            equivalents                       |   | 49       |   |   | 583      |   |   | (696     | )      |
| Net increase (decrease) in cash and cash                            equivalents                                |   | 6,806    |   |   | (17,076  | )      |   | (76,617  | )      |
| Cash and cash equivalents, beginning of                            period                                      |   | 18,066   |   |   | 35,142   |   |   | 111,759  |   |
| Cash and cash equivalents, end of period                                                                       | $      | 24,872   |   | $      | 18,066   |   | $      | 35,142   |   |
| *Supplemental disclosure of cash flow                            information:*                                 |   |     |   |   |     |   |   |     |   |
| Cash paid during period for Income Taxes                                                                       | $      | 3        |   | $      | 87       |   | $      | 437      |   |
| *Supplemental schedule of non-cash investing and                            financing activities*              |   |     |   |   |     |   |   |     |   |
| Unrealized loss on marketable securities                                                                       | $      | (3,993   | )      | $      | —  |   | $      | —  |   |
| Vesting of restricted shares                                                                                   | $      | 566      |   | $      | —  |   | $      | —  |   |

See            notes to consolidated financial statements.

F-6

 

----

**4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005**

(In thousands of dollars, except share and per share data)

 

**1.            DESCRIPTION OF BUSINESS**

 

*General**Development and Narrative            Description of Business*- 4Kids Entertainment, Inc., together            with the subsidiaries through which its businesses are conducted (the            “Company”), is a diversified entertainment and media company specializing            in the youth oriented market with operations in the following business segments: (i)            Licensing; (ii) Advertising Media and Broadcast; (iii) Television and Film            Production/Distribution; and (iv) Trading Card and Game Distribution. The Company was            organized as a New York corporation in 1970.

 

***Licensing***- The Licensing business            segment consists of the results of operations of the following wholly-owned            subsidiaries of the Company: 4Kids Entertainment Licensing, Inc. (“4Kids            Licensing”); 4Sight Licensing Solutions, Inc. (“4Sight Licensing”);            4Kids Entertainment International, Ltd. (“4Kids International”); and 4Kids            Technology, Inc. (“4Kids Technology”). 4Kids Licensing is engaged in the            business of licensing the merchandising rights to popular children’s television            series, properties and product concepts (individually, the “Property” or            collectively the “Properties”). 4Kids Licensing typically acts as exclusive            merchandising agent in connection with the grant to third parties of licenses to            manufacture and sell all types of merchandise, including toys, videogames, trading            cards, apparel, housewares, footwear, books and other published materials, based on            such Properties. 4Sight Licensing is engaged in the business of licensing properties            and product concepts to adults, teens and “tweens”. 4Sight Licensing            focuses on brand building through licensing. 4Kids International, based in London,            manages Properties represented by the Company in the United Kingdom and European            marketplaces. 4Kids Technology develops ideas and concepts for licensing which            integrate new and existing technologies with traditional game and toy play            patterns.

 

***Advertising Media and Broadcast***-            The Company, through a multi-year agreement with Fox Broadcasting Corporation            (“Fox”), leases Fox’s Saturday morning programming block            (“4Kids TV”) from 8am to 12pm eastern/pacific time (7am to 11am central            time). The Company provides substantially all programming content to be broadcast on            4Kids TV. 4Kids Ad Sales, Inc. (“4Kids Ad Sales”), a wholly-owned            subsidiary of the Company, retains all of the revenue from its sale of network            advertising time for the four-hour time period leased from Fox.

 

On            October 1, 2007, the Company and The CW Network, LLC ("The CW") entered into an            agreement (the "CW Agreement"), under which The CW granted to the Company the exclusive            right to program The CW's Saturday morning children's programming block that is            broadcast in most markets between 7am and 12pm ("The CW Kids Block") for an initial            term of five years beginning with The CW's 2008-2009 broadcast season.

 

Effective June 30, 2006, the Company’s wholly-owned subsidiary,            The Summit Media Group, Inc. (“Summit Media”), which previously provided            print and broadcast media planning and buying services for clients principally in the            children’s toy and game business, terminated its operations. As a consequence of            the termination of its operations, Summit Media no longer serves as a media buying            agency for third parties and is classified as a discontinued operation.

 

***Television and Film Production/Distribution***- The Television and Film Production/Distribution business segment            consists of the results of operations of the following wholly-owned subsidiaries of the            Company: 4Kids Productions, Inc. (“4Kids Productions”); 4Kids Entertainment            Music, Inc. (“4Kids Music”); and 4Kids Entertainment Home Video, Inc.            (“4Kids Home Video”). 4Kids Productions produces and adapts animated and            live-action television programs and theatrical motion pictures for distribution to the            domestic and international television, home video and theatrical markets. 4Kids Music            composes original music for incorporation into television programming produced by 4Kids            Productions and markets and manages such music. 4Kids Home Video distributes home            videos associated with television programming produced by 4Kids Productions.

 

***Trading Card and Game Distribution***-            Through its wholly-owned subsidiary, 4Kids Digital Games, Inc. (“4Kids            Digital”), the Company owns 55% of TC Digital Games LLC, a Delaware limited            liability company (“TC Digital”) that produces, markets and distributes the            “Chaotic” trading card game. In December 2006, 4Kids Digital acquired a 53%            ownership interest in TC Digital and entered into TC Digital’s operating            agreement (the “TCD Agreement”) with Chaotic USA Digital Games LLC            (“CUSA LLC”), a wholly-owned subsidiary of Chaotic USA Entertainment Group,            Inc. (“CUSA”). The TCD Agreement contains terms and conditions governing            the operations of TC Digital, and entitles 4Kids Digital and CUSA to elect two managers            to the entity’s Management Committee with 4Kids Digital having the right to break            any dead-locks. On December 18, 2007, 4Kids Digital purchased an additional 2%            membership interest in TC Digital from CUSA increasing 4Kids Digital’s ownership            percentage to 55%. The consideration for the purchase of the additional membership            interest

            F-7

 

----

was            paid through the settlement of certain capital contributions required to be made by            CUSA to TC Websites under TC Websites’ operating agreement (the “TCW            Agreement”).

 

Through its wholly-owned subsidiary, 4Kids Websites, Inc. (“4Kids            Websites”), the Company owns 55% of TC Websites LLC, a Delaware limited liability            company (“TC Websites”) that owns and operates*www.chaoticgame.com*, the companion            website for the “Chaotic” trading card game which was launched as a public            beta version on October 24, 2007. In December 2006, 4Kids Websites purchased a 50%            membership interest in TC Websites from CUSA and entered into the TCW Agreement with            CUSA. The TCW Agreement contains terms and conditions governing TC Websites’            operations and entitles 4Kids Websites and CUSA to elect two managers to its Management            Committee. On December 18, 2007, 4Kids Websites entered into an agreement pursuant to            which it acquired an additional 5% ownership interest in TC Websites from CUSA, and the            TCW Agreement was concurrently amended to provide 4Kids Websites with the right to            break any deadlocks on TC Websites’ Management Committee, including with respect            to operational matters. The consideration for the purchase of the additional membership            interest was paid through the settlement of certain capital contributions required to            be made by CUSA to TC Websites under the TCW Agreement. 4Kids Websites had previously            used the equity method to account for its investment in TC Websites, where it did not            have control but had significant influence. As a result of 4Kids Websites’            increased ownership and operational control, TC Websites is consolidated in the            Company’s financial statements, subject to a minority interest.

TC            Digital and TC Websites are the exclusive licensees of certain patents covering the            uploading of coded trading cards to a website where online game play and community            activities occur. The*www.chaoticgame.com*website provides full access to all of its content and is free of charge            for all users. No purchase of trading cards is necessary to play the online version            where virtual playing decks are available to users who register on the website. These            two businesses enable the Company to offer traditional trading card game play with an            online digital play experience. In addition, it is anticipated that TC Digital and TC            Websites will diversify their product lines and will ultimately distribute and sell,            and create websites for other trading card games. The Company believes that its            ownership interests in TC Digital and TC Websites represent a potentially significant            addition to its business strategy.

Certain of the Company’s executive officers have interests in            CUSA, CUSA LLC and certain other entities with which TC Digital and TC Websites have            engaged in transactions since their formation. Information regarding these            relationships can be found in Note 15 of the Notes to the Company’s consolidated            financial statements.

 

**2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

***Principles of Consolidation***–            The accompanying consolidated financial statements include the accounts of 4Kids            Entertainment, Inc. and its wholly-owned subsidiaries and investments of more than 50%            in subsidiaries and other entities after elimination of significant intercompany            transactions and balances. While the Company maintained a 50% ownership interest in TC            Websites and did not control, but had significant influence, over such entity, the            Company’s investment in TC Websites was accounted for using the equity method. As            a result of the acquisition by the Company of an additional 5% ownership interest in            such entity and increased operational control, TC Websites has now been included in the            Company’s consolidated financial statements, as further discussed in Note 13. The            operations of Summit Media have been classified as a discontinued operation as a result            of the termination of Summit Media’s operations, effective June 30, 2006. As            further discussed in Notes 14, the consolidated financial statements have been            reclassified to reflect the reporting of this business as a discontinued operation.            These consolidated financial statements reflect the use of significant accounting            policies, as described below and elsewhere in the notes to the consolidated financial            statements.

 

Effective January 1, 2007, the Company adopted the provisions of            Financial Accounting Standards Board (the “FASB”) Interpretation            No. 48,*Accounting for Uncertainty in Income            Taxes*(“FIN 48”). FIN 48 prescribes the financial            statement recognition and measurement criteria for a tax position taken or expected to            be taken in a tax return. FIN 48 also requires additional disclosures related to            uncertain income tax positions. See Note 9, “Income Taxes”, for further            information.

 

***Revenue Recognition***–*Merchandise licensing revenues*:            Licensing revenues, net of licensor participations, are recognized when the underlying            royalties from the sales of the related products are earned. The Company recognizes            guaranteed royalties, net of licensor participations, at the time the arrangement            becomes effective if the Company has no significant direct continuing involvement with            the underlying Property or obligation to the licensee. Where the Company has            significant continuing direct involvement with the underlying Property or obligation to            the licensee, guaranteed minimum royalties, net of licensor participations, are            recognized ratably over the term of the license or based on sales of the related            products, if greater. Licensing advances and guaranteed payments collected but not yet            earned by the Company are classified as deferred revenue in the accompanying            consolidated balance sheets.

 

F-8

----

*Broadcast advertising revenues*:            Advertising revenues are recognized when the related commercials are aired and are            recorded net of agency commissions and net of an appropriate reserve when advertising            is sold together with a guaranteed audience delivery. Internet advertising revenues are            recognized on the basis of impression views in the period the advertising is displayed.            Commission income from the discontinued media planning and buying operations of Summit            Media, from both print and broadcast media, were recognized at the time the related            media was run.

 

*Episodic television series revenues*:            Television series initially produced for networks and first-run syndication are            generally licensed to domestic and foreign markets concurrently. The length of the            revenue cycle for episodic television varies depending on the number of seasons a            series remains in active exploitation. Revenues arising from television license            agreements, net of licensor participations, are recognized in the period that the films            or episodic television series are available for telecast.

 

Production and adaptation costs charged to the licensor are included in            net revenues and the corresponding costs are included in production service costs in            the accompanying consolidated statements of operations. Production service costs            included in net revenues amounted to $6,405, $10,120, and $8,288 in 2007, 2006, and            2005, respectively.

 

*Home video revenues*: Revenues from            home video and DVD sales, net of a reserve for returns, are recognized, net of licensor            participations, on the date that video and DVD units are shipped by the Company’s            distributor to wholesalers/retailers. Consistent with the practice in the home video            industry, the Company estimates the reserve for returns based upon its review of            historical returns rates and expected future performance.

 

*Music revenues*: Revenues from music            sales, net of licensor participations, and net of a reserve for returns, are recognized            on the date units are shipped by the Company’s distributor to            wholesalers/retailers as reported to the Company. In the case of musical performance            revenues, the revenue is recognized when the musical recordings are broadcast and/or            performed.

 

*Trading card revenues*: Emerging            Issue Task Force (“EITF”) Issue No. 00-21 -*Accounting for Revenue Arrangements with Multiple            Deliverables*, provides guidance on how and when to recognize            revenues for arrangements that may involve the delivery or performance of multiple            products, services and/or rights to use assets. Revenue arrangements with multiple            deliverables are required to be divided into separate units of accounting if the            deliverables in the arrangement meet certain criteria. Arrangement consideration must            be allocated among the separate units of accounting based on their relative fair            values. The Company has determined that because its trading card game is provided with            a web component, there is a multiple deliverable arrangement. However, since no            purchase of trading cards is necessary to access the website and cards are available            free of charge to users who register on the website, the Company has determined that            the selling price of the trading cards should be fully attributable to the cards.            Revenues from trading card sales, net of a reserve for returns and allowances, are            recognized on the date cards are shipped by the Company’s distributor to            wholesalers/retailers as reported to the Company.

 

***Advertising Expense***- Advertising            costs are expensed as incurred, except for costs related to the development of a            Property and/or animated or live-action television program commercial or media campaign            which are expensed in the period in which the commercial or campaign is first            presented. Advertising expense included in selling, general and administrative expenses            on the accompanying consolidated statements of income was $1,794, $2,191, and $1,927 in            2007, 2006 and 2005, respectively.

 

***Inventories**–*Inventories consist of finished goods inventory of trading cards and are            valued at the lower of cost or net realizable value. The cost of our inventory is            computed using the first-in, first-out method.

 

***Property and Equipment***- Property            and equipment are carried at cost, net of accumulated depreciation and amortization.            Depreciation is calculated on the straight-line method based on the estimated useful            lives of the assets, which range from 3 to 10 years. Amortization of leasehold            improvements is computed using the straight-line method over the estimated useful lives            of the related assets or, if shorter, the lease term. Costs associated with the repair            and maintenance of property are expensed as incurred.

 

***Website Development Costs -***The            Company capitalizes its website development costs for the*www.chaoticgame.com*website consistent with the provisions of EITF Issue 00-02,*Accounting for Website Development Costs*and American Institute of Certified Public Accountants            (“AICPA”) Statement of Position (“SOP”) 98-1,*Accounting for the Costs of Computer Software Developed or Obtained            for Internal Use.*Costs incurred during the preliminary            project stage are expensed as incurred, while application stage projects are            capitalized. The costs capitalized during the application stage are generally related            to employee and/or consulting services directly associated with the development of the            website. Website costs are included in property and equipment in the accompanying            consolidated balance sheets. Amortization commenced on October 24, 2007, once the            website went live and is amortized using the straight-line method over the estimated            useful life of three years.

F-9

----

***Impairment Of Long-Lived And Intangible Assets***- As required by Statement of Financial Accounting Standards            (“SFAS”) No. 144,*Accounting for the Impairment or            Disposal of Long-Lived Assets,*the Company assesses the            recoverability of long-lived assets for which an indication of impairment exists. The            recoverability of assets to be held and used is measured by comparing the carrying            amount of an asset to the future undiscounted net cash flows expected to be generated            by the asset. If an asset is considered to be impaired, the impairment to be recognized            is measured as the amount by which the carrying amount of the asset exceeds its fair            value. Fair value of long-lived assets is determined using the expected cash flows            discounted at a rate commensurate with the risk involved. The Company believes that the            future cash flows to be received from our long-lived assets will exceed the respective            assets’ carrying value, and accordingly has not recorded any impairment            losses.

 

***Cash and Cash Equivalents***- All            highly liquid investments with original maturities of three months or less are            classified as cash and cash equivalents. The fair value of cash and cash equivalents            approximates the amounts shown on the financial statements. Cash and cash equivalents            consist of unrestricted cash in various banks in which the Company maintains balances            in excess of the Federal Deposit Insurance Corporation (FDIC) insured limit of $100 per            bank account. At December 31, 2007 and 2006, the cash and cash equivalents in excess of            the insured limit aggregated $13,630 and $13,789, respectively.

 

***Prepaid 4Kids TV Broadcast Fee***– The Company capitalizes the broadcast fee paid to Fox and            amortizes the amount of such fee over the broadcast season based on estimated            advertising revenue. During the year ended December 31, 2007, the Company paid Fox and            certain Fox affiliates $15,525 and $5,263, attributable to the fifth and sixth            years’ broadcast fees, respectively, and during calendar year 2006, the Company            paid Fox and certain Fox affiliates $7,058 and $5,491, attributable to the fourth and            fifth years’ broadcast fees, respectively.

 

***Investments***– The            Company’s short-term investments principally consist of auction rate and debt            securities. Auction rate securities are generally rated A or better by one or more            national rating agencies and have contractual maturities of up to 30 years. The Company            classifies its investments in auction rate securities as “available for            sale.” The auction rate securities that the Company invests in generally have            interest reset dates that occur every 7 or 35 days and despite the long-term nature of            their stated contractual maturity, the historical operation of the auction rate            security market has given the Company the ability to quickly liquidate these securities            at ongoing auctions every 35 days or less.

During 2007, liquidity issues began to affect the global credit and            capital markets. As a result, securities known as auction rate securities            (“ARS”), which historically have had a liquid market and had their interest            rates reset periodically (e.g. monthly) through dutch auctions, began to fail at            auction. These auction failures have caused ARS to become illiquid since investors are            hesitant to purchase these types of investments, which in turn has caused the fair            market values for these securities to decline.

As            of December 31, 2007, the Company held ARS having an aggregate principal amount of            approximately $60,000. The ARS held by the Company are private placement debt            securities with long-term nominal maturities and interest rates that reset monthly. The            Company’s investments in ARS represent interests in debt obligations issued by            banks and insurance companies that had at least an “A” credit rating at the            time of purchase by the Company, including bond insurers and reinsurers such as MBIA,            AMBAC, FGIC, FSA, RAM and Radian.

Many            of the ARS held by the Company at December 31, 2007, have also experienced failed            auctions due to the liquidity issues described above. As of December 31, 2007, the            estimated fair market value of the ARS held by the Company declined by $3,993 based            upon statements provided by the investment bank through which the Company holds such            securities. Although all of the ARS invested in by the Company have continued to pay            interest according to their stated terms and substantially all of the ARS invested in            by the Company continue to be a rated “A” or above, the Company recorded an            unrealized loss of $3,993 during 2007 resulting in a reduction in stockholders’            equity. Based on the factors above, and because the Company has the ability and the            intent to hold these investments until recovery of their fair value, which may not be            prior to the maturity of the applicable security, the Company does not consider these            investments to be other-than-temporarily impaired.

 

Although $10,000 in ARS owned by the Company as of December 31, 2007            have been redeemed subsequent to such date, the credit and capital markets, including            the market for ARS, has continued to deteriorate in 2008, and there have been            additional failed auctions affecting ARS owned by the Company. Although all of the            Company’s investments in ARS have continued to pay interest according to their            stated terms and substantially all of the ARS invested in by the Company continue to be            a rated “A” or above the Company’s unrealized loss on its ARS had            increased by $7,859, to $11,852 as of February 29, 2008, based upon statements provided            by the investment bank through which the Company holds such securities.

 

F-10

----

 

Given the failed auctions, many of the Company’s ARS are currently            illiquid.  Accordingly, the Company has reclassified $20,350 in ARS from current            to non-current assets on its balance sheet due to the fact that the Company deems the            liquidity for these ARS to be restored in a period longer than twelve            months.

If            uncertainties in the credit and capital markets deteriorate further or the Company            experiences any rating downgrades on any investments in its ARS portfolio, the Company            may incur impairment charges to its investment portfolio, which could negatively affect            the Company’s financial condition, cash flow and reported earnings. The Company            believes that based on the Company’s current cash, cash equivalents and            marketable securities, the current lack of liquidity affecting its portfolio of ARS            will not have a material impact on the Company’s liquidity or its ability to fund            its operations.

 

***Film and Television Costs***–            The Company accounts for its film and television costs pursuant to AICPA SOP No.            00-2,*Accounting by Producers or Distributors of            Films*. The cost of production for television programming,            including overhead, participations and talent residuals is capitalized and amortized            using the individual-film-forecast method under which such costs are amortized for each            television program in the ratio that revenue earned in the current period for such            program bears to management’s estimate of the ultimate revenues to be realized            from all media and markets for such program. Management regularly reviews, and revises            when necessary, its ultimate revenue estimates on a title-by-title basis, which may            result in a change in the rate of amortization applicable to such title and/or a            write-down of the value of such title to estimated fair value. These revisions can            result in significant quarter-to-quarter and year-to-year fluctuations in film            write-downs and rates of amortization. If a total net loss is projected for a            particular title, the associated film and television costs are written down to            estimated fair value. All exploitation costs, including advertising and marketing costs            are expensed as incurred. Television adaptation and production costs that are adapted            and/or produced are stated at the lower of cost, less accumulated amortization, or fair            value.

 

***Fair Value of Financial Instruments***– The carrying amounts of cash and cash equivalents, accounts            receivable, prepaid expenses and other current assets, due to licensors, media payable,            accounts payable and accrued expenses, and other current liabilities approximate their            fair values principally because of the short-term maturities of these            instruments.

***Operating Leases -***The Company            accounts for all operating leases on a straight-line basis over the term of the lease.            In accordance with the provisions of FASB Statement No. 13,*Accounting for Leases,*any incentives or            rent escalations are recorded as deferred rent and are included as a component of rent            expense over the respective lease term.

 

***Use of Estimates***– The            preparation of financial statements in conformity with accounting principles generally            accepted in the United States of America requires management to make estimates and            assumptions that affect the reported amounts of assets and liabilities and disclosure            of contingent assets and liabilities at the date of the financial statements and the            reported amounts of revenues and expenses during the reporting period. These estimates            and assumptions are used in, but not limited to, certain areas of revenue recognition,            the amortization of televisions and film costs as well as the amortization of 4Kids TV            broadcast fees. Actual results could differ materially from those estimates.

***Reclassifications*****-**Certain reclassifications have been made to prior year amounts to            conform to the 2007 presentation.

***Translation of Foreign Currency —***In accordance with SFAS No. 130,*Reporting            Comprehensive Income*(“SFAS No. 130”), the            Company classifies items of other comprehensive income by their nature in the financial            statements and displays the accumulated balance of other comprehensive income            separately from retained earnings and additional paid-in capital in the equity section            of the consolidated balance sheet. The assets and liabilities of the Company’s            foreign subsidiary, 4Kids International have been recorded in their local currency and            translated to U.S. dollars using period-end exchange rates. Income and expense items            have been translated at the average rate of exchange prevailing during the period. Any            adjustment resulting from translating the financial statements of the foreign            subsidiary is reflected as “other comprehensive income”, net of related            tax. Comprehensive (loss) income for the years ended December 31, 2007, 2006 and 2005            was $(27,217), $(105), and $4,373, respectively, which included translation adjustments            of $102, $901, and $(696) for the respective periods.

 

***Concentration Of Credit Risk***-            Financial instruments, which potentially subject the Company to concentration of credit            risk, consist primarily of temporary cash investments and accounts receivable. The            majority of the cash and cash equivalents are maintained with major financial            institutions in the United States of America. The counterparties to the agreements            relating to investment instruments consist of various United States governmental units            and financial institutions of high credit standing. Credit risk on accounts receivable            is minimized by the Company by performing ongoing credit evaluations of its            customers’ financial condition and monitoring its exposure for credit losses and            maintaining allowances for anticipated losses.

 

F-11

----

 

***Income Taxes***– The Company is            subject to income taxes in both the United States and the United Kingdom. Income tax            expense (benefit) is provided for using the asset and liability method. Deferred income            taxes are recognized at currently enacted tax rates for the expected future tax            consequences attributable to temporary differences between amounts reported for income            tax purposes and financial reporting purposes. Deferred taxes are not provided for the            undistributed earnings of our subsidiary operating outside the U.S. that have been            permanently reinvested in the United Kingdom. The tax rate for the year ended December            31, 2007 is affected by the estimated valuation allowance against the Company’s            deferred tax assets. The Company regularly reviews its deferred tax assets for            recoverability taking into consideration such factors as recurring operating losses,            projected future taxable income and the expected timing of the reversals of existing            temporary differences. SFAS No. 109,*Accounting for Income            Taxes*, requires the Company to record a valuation allowance            when it is more likely than not that some portion or all of the deferred tax assets            will not be realized. In determining a conclusion that a valuation allowance is not            needed is difficult when there is negative evidence such as cumulative losses in recent            years. Based on thelevel of deferred tax assets as of December            31, 2007 and the level of historical losses realized, the Company has determined that            the uncertainty regarding the realization of these assets is sufficient to warrant the            establishment of a full valuation allowance against the Company’s net deferred            tax assets.

 

Our            assessment of the valuation allowance on the deferred tax assets could change in the            future based on our levels of pre-tax income and other tax-related adjustments. A            change in estimate of the valuation allowance, in whole or in part, would result in a            non-cash reduction in income tax expense during the period of the change. To the extent            there is a reversal of some or all of the valuation allowance, future financial            statements would reflect a decrease in non-cash income tax expense until such time as            our deferred tax assets are all used to reduce current taxes payable.

 

TC            Digital and TC Websites are limited liability companies and have elected to be treated            as partnerships for income tax purposes. As such, U.S. federal and state income taxes            (in the states which tax limited liability companies as partnerships) are the direct            responsibility of its members. We own 55% of the membership interests in both entities.            Thus, our respective portion of their activity is reported in the our consolidated            tax returns.

 

***Recently Issued Accounting            Pronouncements*****–**In            November 2007, the FASB issued SFAS No. 141R,*Business            Combinations*(“SFAS No. 141R”), which continues            to require that all business combinations be accounted for by applying the acquisition            method. Under the acquisition method, the acquirer recognizes and measures the            identifiable assets acquired, the liabilities assumed, and any contingent consideration            and contractual contingencies, as a whole, at their fair value as of the acquisition            date. Under SFAS No. 141R, all transaction costs are expensed as incurred. SFAS No.            141R rescinds EITF Issue No. 93-7 (“EITF 93-7). Under EITF 93-7, the effect of            any subsequent adjustments to uncertain tax positions were generally applied to            goodwill, except for post-acquisition interest on uncertain tax positions, which was            recognized as an adjustment to income tax expense. Under SFAS No. 141R, all subsequent            adjustments to these uncertain tax positions that otherwise would have impacted            goodwill will be recognized in the income statement. SFAS No. 141R will be applied            prospectively to business combinations for which the acquisition date is on or after            the beginning of the first annual reporting period beginning after December 15,            2008.

*Fair Value Measurements –*In            September 2006, the FASB issued SFAS No. 157,*Fair Value            Measurement*(“SFAS 157”). SFAS 157 defines            “fair value”, establishes a framework for measuring fair value and expands            disclosures about fair value measurements. SFAS 157 applies under other accounting            pronouncements that require or permit fair value measurements and is effective for            fiscal years beginning after November 15, 2007. The Company is currently evaluating the            impact the adoption of SFAS 157 will have on its consolidated financial position and            results of operations.

 

In            September 2006, the FASB issued SFAS No. 158,*Employers’ Accounting for Defined Benefit Pension and Other            Postretirement Plans—An Amendment of FASB            No.* *87, 88, 106 and            132(R)*(“SFAS 158”). SFAS 158 requires            that the funded status of defined benefit postretirement plans be recognized on            companies’ balance sheets and that changes in the funded status be reflected in            comprehensive income, effective for fiscal years ending after December 15, 2006.            SFAS 158 also requires companies to measure the funded status of each such plan as of            the date of its fiscal year-end, effective for fiscal years ending after            December 15, 2008. Since the Company does not currently have a defined benefit            postretirement plan, the adoption of SFAS 158 will not have any impact on its            consolidated financial position and results of operations.

In            February 2007, the FASB issued SFAS No. 159,*The Fair Value            Option for Financial Assets and Financial Liabilities,*(“SFAS 159”). SFAS 159 provides companies with an option to            report selected financial assets and financial liabilities at fair value. Unrealized            gains and losses on items for which the fair value option has been elected are reported            in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years            beginning after November 15, 2007. The Company is currently evaluating the impact            the adoption of SFAS 159 will have on its consolidated financial position and results            of operations.

F-12

 

----

In            November 2007, the FASB issued SFAS No. 160,*Accounting and            Reporting of Noncontrolling Interest*(“SFAS No.            160”). SFAS No. 160 requires that a noncontrolling interest (previously referred            to as a minority interest) be separately reported in the equity section of the            consolidated entity’s balance sheet. SFAS No. 160 also established accounting and            reporting standards for: (i) ownership interests in subsidiaries held by parties other            than the parent, (ii) the amount of consolidated net income attributable to the parent            and to the noncontrolling interest, (iii) changes in a parent’s ownership            interest and (iv) the valuation of retained noncontrolling equity investments when a            subsidiary is deconsolidated. SFAS No. 160 is effective for the            Company beginning January 1, 2009. The Company is currently evaluating the impact            the adoption of SFAS No. 160 will have on its consolidated financial position and            results of operations.

 

In            June 2007, the FASB ratified EITF Issue No. 06-11,*Accounting for Income Tax Benefits of Dividends on Share-Based            Payment Awards*(“EITF 06-11”). EITF 06-11            requires that tax benefits generated by dividends paid during the vesting period on            certain equity-classified share-based compensation awards be classified as additional            paid-in capital and included in a pool of excess tax benefits available to absorb tax            deficiencies from share-based payment awards. EITF 06-11 is effective as of            January 1, 2008. The Company is currently evaluating the impact the adoption of            EITF 06-11 will have on its consolidated financial position and results of            operations.

 

In            December 2007, the FASB ratified EITF Issue No. 07-1,*Accounting for Collaborative Arrangements Related to the Development            and Commercialization of Intellectual Property*. The EITF            concluded that a collaborative arrangement is one in which the participants are            actively involved and are exposed to significant risks and rewards that depend on the            ultimate commercial success of the endeavor. Revenues and costs incurred with third            parties in connection with collaborative arrangements would be presented gross or net            based on the criteria in EITF Issue No. 99-19,*Reporting            Revenue Gross as a Principal versus Net as an Agent*, and            other accounting literature. Payments to or from collaborators would be evaluated and            presented based on the nature of the arrangement and its terms, the nature of the            entity’s business, and whether those payments are within the scope of other            accounting literature. The nature and purpose of collaborative arrangements are to be            disclosed along with the accounting policies and the classification and amounts of            significant financial statement amounts related to the arrangements. Activities in the            arrangement conducted in a separate legal entity should be accounted for under other            accounting literature; however required disclosure under EITF 07-1 applies to the            entire collaborative agreement. This Issue is effective for fiscal years beginning            after December 15, 2008, and is to be applied retrospectively to all periods presented            for all collaborative arrangements existing as of the effective date. The Company is            currently evaluating the impact that this pronouncement may have on its consolidated            financial position and results of operations.

 

**3.            INVESTMENTS**

 

Investments consisted of the following as of:

 

|                                      |   | **December 31, 2007** |   |
|-------------------------------------------|--------|-----------------------|--------|
|                                      |   | **Amortized Cost**    |   | **Unrealized Loss** |   | **Estimated**

**Fair Value** |   |
|                                      |   |                  |   |   |   |   |   |   |   |
| Auction-Rate securities                   |   | $                     | 31,555 | $ | (385 | ) | $ | 31,170 |   |
| Range notes                               |   |                  | 5,000  |   | (64 | ) |   | 4,936 |   |
| Total short-term investments              |   | $                     | 36,555 | $ | (449 | ) | $ | 36,106 |   |
|                                      |   |                  |   |   |   |   |   |   |   |
| Auction-Rate securities – long-term |   | $                     | 30,350 | $ | (3,544 | ) | $ | 26,806 |   |
| Corporate bonds                           |   |                  | 5,000  |   | — |   |   | 5,000 |   |
| Total long-term investments               |   | $                     | 35,350 | $ | (3,544 | ) | $ | 31,806 |   |
|                                      |   |                  |   |   |   |   |   |   |   |

 

|                                       |   | **December 31, 2006** |   |
|--------------------------------------------|--------|-----------------------|--------|
|                                       |   | **Amortized Cost**    |   | **Unrealized Loss** |   | **Estimated**

**Fair Value** |   |
|                                       |   |                  |   |   |   |   |   |   |   |
| Auction-Rate securities – short-term |   | $                     | 92,910 | $ | — |   | $ | 92,910 |   |

 

F-13

----

The            net unrealized gains or losses on the ARS are reported as a separate component of            shareholders’ equity in other comprehensive income. Additionally, as of February            29, 2008, the unrealized loss increased to approximately $11,852 based on market value.            The Company believes that the current decline in the value of its investments is            attributable to a variety of factors including changes in interest rates, a short-term            disruption in the liquidity of auction-rate securities as well as a decrease in credit            quality of certain securities. Since the Company has the ability and intent to hold            these investments in auction rate securities until a recovery of its amortized cost,            which could be at maturity, and although the credit quality of certain securities has            decreased, the securities still maintain a high investment grade, the Company does not            consider these investments to be other-than-temporarily impaired.Due to the fact that the Company believes that the liquidity            for these ARS is unlikely to be restored in a period less than twelve months from            such date, the Company has reclassified $20,350 in ARS from current to non-current            assets on its balance sheet.

 

**4.            ACCOUNTS RECEIVABLE/DUE TO LICENSORS**

 

Generally, licensing contracts provide for the Company to collect, on            behalf of the licensor, royalties from the licensees. The Company records as accounts            receivable only its proportionate share of such earned royalties.

 

Due            to licensors represents amounts collected by the Company on behalf of licensors, which            are generally payable to such licensors after the close of each calendar quarter.            Additionally, accounts receivable include amounts due from customers for advertising            revenue earned from airing commercial spots on the 4Kids TV. Accounts receivable            related to discontinued operations has been excluded from this footnote and is            disclosed in Note 14.

 

Accounts receivable consisted of the following as of:

                

|                            |   | **December 31,** |   |
|---------------------------------|--------|------------------|--------|
|                            |   | **2007**         |   | **2006** |   |
| Gross accounts receivable       |   | $                | 23,013 |   | $ | 29,761 |   |
| Allowance for doubtful accounts |   |             | (1,402 | ) |   | (1,679 | ) |
|                            |   |             | 21,611 |   |   | 28,082 |   |
| Less: long-term portion         |   |             | (208   | ) |   | (138 | ) |
|                            |   | $                | 21,403 |   | $ | 27,944 |   |

**5.            FILM AND TELEVISION COSTS**

 

Film            and television costs consisted of the following as of:

        

|                      |   | **December 31,** |   |
|---------------------------|--------|------------------|--------|
|                      |   | **2007**         |   | **2006** |   |
| Opening balance           |   | $                | 14,827 |   | $ | 12,208 |   |
| Additions                 |   |             | 7,704  |   |   | 10,660 |   |
|                      |   |             | 22,531 |   |   | 22,868 |   |
| Amortization              |   |             | (8,179 | ) |   | (8,041 | ) |
| Ending Balance            |   | $                | 14,352 |   | $ | 14,827 |   |
|                      |   |             |   |   |   |   |   |
| Development/Preproduction |   | $                | 687    |   | $ | 1,317 |   |
| Production                |   |             | 1,809  |   |   | 4,261 |   |
| Completed not released    |   |             | 875    |   |   | 2,208 |   |
| Completed released        |   |             | 10,981 |   |   | 7,041 |   |
|                      |   | $                | 14,352 |   | $ | 14,827 |   |

      

Amortization of capitalized film and television costs were $8,179,            $8,041 and $9,790 in 2007, 2006 and 2005, respectively. Based on management’s            ultimate revenue estimates as of December 31, 2007, approximately 56% of the total            completed and unamortized film and television costs are expected to be amortized during            2008, and over 90% of the total completed and unamortized film and television costs are            expected to be amortized during the next three years.

 

F-14

----

**6.            PROPERTY AND EQUIPMENT**

 

Property and equipment consisted of the following as of:

        

|                                                                       |   | **December 31,** |   |
|----------------------------------------------------------------------------|--------|------------------|--------|
|                                                                       |   | **2007**         |   | **2006** |   |
|                                                                       |   |             |   |   |   |   |   |
| Computer equipment and software                                            |   | $                | 3,476  |   | $ | 2,686 |   |
| Website development                                                        |   |             | 1,289  |   |   | — |   |
| Machinery and equipment                                                    |   |             | 2,118  |   |   | 1,971 |   |
| Office furniture and fixtures                                              |   |             | 1,314  |   |   | 988 |   |
| Leasehold improvements                                                     |   |             | 3,090  |   |   | 3,013 |   |
| Office equipment                                                           |   |             | 395    |   |   | 188 |   |
|                                                                       |   |             | 11,682 |   |   | 8,846 |   |
| Less: accumulated depreciation and                            amortization |   |             | (7,427 | ) |   | (6,720 | ) |
|                                                                       |   | $                | 4,255  |   | $ | 2,126 |   |

 

**7. STOCKHOLDERS’ EQUITY**

The            Company has stock-based compensation plans for employees and non-employee members of            the Board of Directors. The plans provide for discretionary grants of stock options,            shares of restricted stock, and other stock-based awards. The plans are administered by            the Compensation Committee of the Board of Directors, consisting of non-employee            directors.

 

Effective January 1, 2006, the Company adopted SFAS No. 123-R (revised            2004),*Share-Based Payment*s,            utilizing the modified prospective method whereby prior periods are not restated for            comparability. SFAS 123-R requires recognition of stock-based compensation expense in            the statement of operations over the vesting period based on the fair value of the            award at the grant date. Previously, the Company used the intrinsic value method under            APB No. 25,*Accounting for Stock Issued to            Employees*(‘‘APB No. 25’’), as            amended by related interpretations of the FASB. Under APB No. 25, no compensation cost            was recognized for stock options because the quoted market price of the stock at the            grant date was equal to the amount per share the employee had to pay to acquire the            stock after fulfilling the vesting period. SFAS 123-R supersedes APB No. 25 as well as            SFAS 123,*Accounting for Stock-Based            Compensation*, which permitted pro forma footnote disclosures            to report the difference between the fair value method and the intrinsic value method.            The Company did not grant any stock options during the years ended December 31, 2007            and 2006, and at January 1, 2006, all of the Company’s outstanding options were            fully vested. Consequently, the adoption of this pronouncement did not have a material            effect on the Company’s consolidated financial position or results of            operations.

 

*Stock Options*

 

The            following table provides the pro forma effect on net earnings as if the            fair-value-based measurement method had been applied to all stock-based compensation            for the year ended December 31, 2005:

 

|                                      | **2005** |
|-------------------------------------------|----------|
| **Net income as reported**                | $5,069   |
|                                      |     |
| Deduct stock-based employee compensation  |     |
| expense determined under fair value based |     |
| method for all awards, net of tax         | 3,619    |
|                                      |     |
| **Pro forma net income**                  | $1,450   |
| **Net income per share:**                 |     |
| *Reported*                                |     |
| Basic                                     | $0.39    |
| Diluted                                   | $0.37    |
| *Pro forma*                               |     |
| Basic                                     | $0.11    |
| Diluted                                   | $0.11    |

 

                                                                                               F-15

----

The            Company issued stock option grants for 776 underlying shares at weighted average            exercise prices of $19.99 in 2005. The stock option grant has a (i) five year life;            (ii) was immediately exercisable with respect to 50 percent of the underlying shares;            and (iii) became exercisable with respect to the remaining 50 percent by December 31,            2005.

 

The            fair value of each option grant is estimated on the date of grant using the            Black-Scholes option-pricing model. The weighted average assumptions used for options            granted in 2005 included no dividend yield for the period, expected volatility of            approximately 38%, a risk-free interest rate of approximately 3.76% and an option            duration of 3.6 years. The weighted average fair value of options granted is $6.55 in            fiscal year 2005.

 

The            following table summarizes activity under the Company’s stock option plans for            the years ended December 31, 2007, 2006, and 2005:

 

|                             |   | **Shares**

**(In thousands)** |    | **Weighted****Average****Exercise****Price** |   | **Remaining**

**Contractual Life**

**(in years)** |   | **Aggregate****Intrinsic****Value**

**(in thousands)** |   |
|----------------------------------|--------|--------------------------------|---------|----------------------------------------------|--------|-----------------------------------------------------|--------|---------------------------------------------------------|--------|
| Outstanding at January 1, 2005   |   |                           | 2,396   |                                         | $      | 14.81                                               |   |                                                    |   |   |   |   |   |
| Granted                          |   |                           | 776     |                                         |   | 19.99                                               |   |                                                    |   |   |   |   |   |
| Exercised                        |   |                           | (415    | )                                            |   | 3.25                                                |   |                                                    |   |   |   |   |   |
| Forfeited, cancelled or expired  |   |                           | (75     | )                                            |   | 25.74                                               |   |                                                    |   |   |   |   |   |
|                             |   |                           |    |                                         |   |                                                |   |                                                    |   |   |   |   |   |
| Outstanding at December 31, 2005 |   |                           | 2,682   |                                         | $      | 17.79                                               |   |                                                    |   |   |   |   |   |
| Granted                          |   |                           | — |                                         |   | —                                             |   |                                                    |   |   |   |   |   |
| Exercised                        |   |                           | (107    | )                                            |   | 11.80                                               |   |                                                    |   |   |   |   |   |
| Forfeited, cancelled or expired  |   |                           | (294    | )                                            |   | 19.11                                               |   |                                                    |   |   |   |   |   |
|                             |   |                           |    |                                         |   |                                                |   |                                                    |   |   |   |   |   |
| Outstanding at December 31, 2006 |   |                           | 2,281   |                                         | $      | 17.90                                               |   |                                                    |   |   |   |   |   |
| Grants                           |   |                           | — |                                         |   | —                                             |   |                                                    |   |   |   |   |   |
| Exercised                        |   |                           | (133    | )                                            |   | 1.93                                                |   |                                                    |   |   |   |   |   |
| Forfeited                        |   |                           | (433    | )                                            |   | 20.67                                               |   |                                                    |   |   |   |   |   |
| Outstanding at December 31, 2007 |   |                           | 1,715   |                                         | $      | 18.43                                               |   |                                                    | 1.8    |   | $ | 1,792 |   |
|                             |   |                           |    |                                         |   |                                                |   |                                                    |   |   |   |   |   |
| Exercisable at December 31, 2007 |   |                           | 1,715   |                                         | $      | 18.43                                               |   |                                                    | 1.8    |   | $ | 1,792 |   |

 

The            aggregate intrinsic value is calculated as the difference between the exercise price of            the underlying awards and the quoted price of our common stock for those awards that            have an exercise price currently below the closing price. As of December 31, 2007, the            Company had options outstanding to purchase an aggregate of approximately 526,400            shares with an exercise price below the quoted price of the Company’s stock,            resulting in an aggregate intrinsic value of $1,792. During the years ended December            31, 2007 and 2006, the aggregate intrinsic value of options exercised under its stock            option plans was $1,328 and $561, respectively, determined as of the date of            exercise.

 

 

|                               |   | **Options Outstanding**                                |   | **Options Exercisable**                                                                    |
|------------------------------------|--------|--------------------------------------------------------|--------|--------------------------------------------------------------------------------------------|
| **Ranges of**

**Exercise Prices** |   | **Number Outstanding at 12/31/07**

**(in thousands)** |   | **Weighted Average Remaining Contractual                            Life**

**(in years)** |   |   | **Weighted Average Exercise Price** |   | **Number Exercisable at 12/31/07**

**(in thousands)** |   |   | **Weighted Average Exercise Price** |
| $ 3.10 - $ 4.66                    |   | 75                                                     |   | 0.9                                                                                        |   | $ | 3.10 |   | 75 |   | $ | 3.10 |
| $ 8.94 - $ 13.41                   |   | 451                                                    |   | 1.2                                                                                        |   |   | 10.85 |   | 451 |   |   | 10.85 |
| $ 13.42 - $ 20.11                  |   | 140                                                    |   | 4.0                                                                                        |   |   | 20.03 |   | 140 |   |   | 20.03 |
| $ 20.12 - $ 30.16                  |   | 949                                                    |   | 1.8                                                                                        |   |   | 21.45 |   | 949 |   |   | 21.45 |
| $ 30.17 - $ 33.28                  |   | 100                                                    |   | 2.0                                                                                        |   |   | 33.28 |   | 100 |   |   | 33.28 |
|                               |   |                                                   |   |                                                                                       |   |   |   |   |   |   |   |   |
| **Total**                          |   | 1,715                                                  |   | 1.8                                                                                        |   | $ | 18.43 |   | 1,715 |   | $ | 18.43 |

 

*Restricted Stock Awards*

 

The            Company granted restricted stock awards of approximately 162,000 shares on May 25, 2007            under its 2006 long-term incentive compensation plan and 145,000 and 4,000 shares on            May 23, 2006 and June 15, 2006,

 

F-16

----

respectively, under its 2005 long-term incentive compensation plan. The            restricted stock awards were granted to certain employees, including officers and            members of the Board of Directors, at grant prices of $16.79, $16.52 and $15.78 (in            each case, the average of the high and low stock price from the previous day of            trading) for the May 25, 2007, the May 23, 2006 and the June 15, 2006 grants,            respectively. The restricted stock awards vest annually over a period of four years            from the date of grant with accelerated vesting upon a change of control of the Company            (as defined in the applicable plan). During the restriction period, award holders do            not have the rights of stockholders and cannot transfer ownership. Additionally,            nonvested shares of award holders are subject to forfeiture. These awards are forfeited            and revert to the Company in the event of employment termination, except in the case of            death, disability, retirement or other specified events.

 

The            following table summarizes restricted stock activity under the Company’s            long-term incentive compensation plans for the years ended December 31, 2007 and            2006:

 

|                             |   | **Number of Shares**

**(in thousands)** |    | **Weighted- Average Grant Date Fair                            Value** |   |
|----------------------------------|--------|------------------------------------------|---------|------------------------------------------------------------------------|--------|
| Outstanding at January 1, 2006   |   |                                     | — |                                                                   | $      | — |   |   |
| Granted                          |   |                                     | 149     |                                                                   |   | 16.50 |   |   |
| Vested                           |   |                                     | — |                                                                   |   | — |   |   |
| Forfeited                        |   |                                     | (11     | )                                                                      |   | 16.52 |   |   |
|                             |   |                                     |    |                                                                   |   |   |   |   |
| Outstanding at December 31, 2006 |   |                                     | 138     |                                                                   | $      | 16.50 |   |   |
| Granted                          |   |                                     | 162     |                                                                   |   | 16.79 |   |   |
| Vested                           |   |                                     | (34     | )                                                                      |   | 16.49 |   |   |
| Forfeited                        |   |                                     | (12     | )                                                                      |   | 16.65 |   |   |
| Outstanding at December 31, 2007 |   |                                     | 254     |                                                                   | $      | 16.68 |   |   |
|                                  |        |                                          |         |                                                                        |        |  |  |  |  |  |  |

 

There were unrecognized compensation costs related to unvested            restricted stock awards granted under the Company’s 2006 and 2005 long-term            incentive compensation plans of approximately $2,232 and $1,289, respectively, for the            year ended December 31, 2007, and $0 and $1,936, respectively, for the year ended            December 31, 2006. The cost is expected to be recognized over a remaining            weighted-average period of 3.4 and 2.4 years under the 2006 and 2005 plans,            respectively. There were approximately 34,000 shares of restricted stock that vested            during the year ended December 31, 2007.

 

*Availability for Future Issuance -*As of            the year ended December 31, 2007, (i) options to purchase approximately 773,000 shares            of the Company’s common stock were available for future issuance under the            Company’s stock option plans and (ii) options to purchase a maximum of            approximately 845,000 shares of the Company’s common stock were available for            future issuance under the Company’s long-term incentive compensation plans,            reduced by four shares for each share of restricted stock awarded under the 2006 and            2005 plans, for which an aggregate of 45,000 shares were available for issuance as            options and reduced by two shares for each share of restricted stock awarded under the            2007 plan for which 800,000 shareswere available for issuance as            options. Additionally, approximately 8,205 shares of restricted stock, repurchased in            May 2007 to discharge withholding tax obligations upon the vesting of certain            employees’ restricted shares, were also available for issuance under the 2005            plan.

 

**8.            REVENUES/MAJOR CUSTOMERS**

 

Net            revenues included in the accompanying consolidated statements of operations are net of            licensor participations of $29,150, $36,085, and $54,492 in 2007, 2006 and 2005,            respectively. The percentages of revenue from major Properties and customers/licensees            are as follows:

 

|                                                                                                                                                                  |   | **December 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|
|                                                                                                                                                                  |   | **2007**         |   | **2006** |   | **2005** |   |
| Percentage of revenue derived from major Properties                            (revenue in excess of 10 percent of total revenue)                                     |   | 45               | %      | 37 | % | 42 | % |
| Number of major Properties                                                                                                                                            |   | 3                |   | 2 |   | 2 |   |
|                                                                                                                                                                  |   |             |   |   |   |   |   |
| Percentage of revenue derived from major                            customers/licensees (revenue in excess of 10 percent of total                            revenue) |   | 26               | %      | 15 | % | 16 | % |
| Number of major customers/licensees                                                                                                                                   |   | 2                |   | 1 |   | 1 |   |

 

F-17

----

Three Properties, “Yu-Gi-Oh!”, “Teenage Mutant Ninja            Turtles” and “Viva Piñata” represented 45% of consolidated net            revenues for fiscal 2007. Two properties, “Yu-Gi-Oh!” and “Teenage            Mutant Ninja Turtles” represented 37% and 42% of consolidated net revenues for            fiscal 2006 and 2005, respectively. Two licensees, Microsoft Corporation and Konami            Corporation, represented 26% of consolidated net revenues for fiscal 2007. One            licensee, Konami, represented 15% and 16% of consolidated net revenues for fiscal 2006            and 2005, respectively. As of December 31, 2007 and 2006, accounts receivable due from            these major customers/licensees discussed above represented 29% and 8% of the            Company’s gross accounts receivable, respectively.

 

**9.            INCOME TAXES**

 

The            Company adopted the provisions of FIN 48, effective January 1, 2007. FIN 48            clarifies the accounting for uncertainty in income taxes recognized in an            enterprise’s financial statements in accordance with SFAS No. 109,*Accounting for Income Taxes*. FIN 48            prescribes a recognition threshold and measurement attribute for financial statement            recognition and measurement of a tax position taken or expected to be taken in a tax            return. FIN 48 also provides guidance on the derecognition, classification, interest            and penalties, accounting in interim periods, disclosure and transition. The adoption            of this interpretation did not have a material effect on the Company’s            consolidated financial position or results of operations.

 

The            Company and its wholly-owned subsidiaries file income tax returns in the United States            and in the United Kingdom. The Company is no longer subject to examinations by income            tax authorities in most jurisdictions for years prior to 2003.

The            provision for (benefit from) income taxes consisted of the following:

  

|                                      |   | **Years Ended                            December 31,** |    |
|-------------------------------------------|--------|---------------------------------------------------------|---------|
|                                      |   | **2007**                                                |    | **2006** |   | **2005** |   |
|                                      |   |                                                    |    |   |   |   |   |   |   |   |
| Current tax (benefit):                    |   |                                                    |    |   |   |   |   |   |   |   |
| Federal                                   |   | $                                                       | — |   | $ | (3,037 | ) | $ | 925 |   |
| State and local                           |   |                                                    | — |   |   | 114 |   |   | 438 |   |
| Foreign                                   |   |                                                    | — |   |   | (40 | ) |   | 436 |   |
|                                      |   | $                                                       | — |   | $ | (2,963 | ) | $ | 1,799 |   |
| Deferred tax (benefit):                   |   |                                                    |    |   |   |   |   |   |   |   |
| Federal                                   |   |                                                    | 1,956   |   |   | (461 | ) |   | (29 | ) |
| State and local                           |   |                                                    | 455     |   |   | (81 | ) |   | (11 | ) |
| Foreign                                   |   |                                                    | 25      |   |   | (1 | ) |   | 3 |   |
|                                      |   |                                                    | 2,436   |   |   | (543 | ) |   | (37 | ) |
|                                      |   |                                                    |    |   |   |   |   |   |   |   |
| Provision for (benefit from) income taxes |   | $                                                       | 2,436   |   | $ | (3,506 | ) | $ | 1,762 |   |
|                                           |        |                                                         |         |  |  |  |  |  |  |  |  |  |

 

The domestic and foreign components            of pre-tax (loss) income are as follows:

 
|                                                       |   | **Years Ended                        December 31,** |
|-------------------------------------------------------|---|-----------------------------------------------------|
|                                                       |   | **2007**                                            |  |  | **2006** |  |  | **2005** |  |
|                                                       |   |                                                     |  |  |  |  |  |  |  |
| Domestic                                              | $ | (18,974                                             | ) |  | (4,767 | ) |  | 3,848 |  |
| Foreign                                               |   | (1,514                                              | ) |  | (226 | ) |  | 943 |   |
|    Pre-tax (loss)                    income | $ | (20,488                                             | ) |  | (4,993 | ) |  | 4,791 |   |

 

 

F-18

----

 

|                                          | **     2007** |  | **% of Pretax** |   | **2006**                                                |  | **% of Pretax**     |   |   | **2005** |   | **% of Pretax** |   |
|-----------------------------------------------|----------------------------------------|--|-----------------|--------|---------------------------------------------------------|--|---------------------|--------|--------|----------|--------|-----------------|--------|
|                                          |                                   |  |            |   |                                                    |  |                |   |   |     |   |            |   |
| Tax at Federal statutory rate                 | $(7,171)                               |  | (35.0)          | %      | $(1,698)                                                |  | (34.0)              | %      |   | $1,629   |   | 34.0            | %      |
| Increase (decrease) in:

Valuation allowances | 11,912                            |  | 58.1            |   | —                                                 |  | —             |   |   | —  |   | —         |   |
| Permanent differences                         |  (708)                            |  | (3.5)           |   |  

 (1,263)                         |  |  

(25.3)      |   |   | —  |   | —         |   |
| State and local taxes - net                   | (1,827)                                |  | (8.9)           |   |   

    (207)   |  |  

 (4.1) |   |   | 345      |   | 7.2             |   |
| Other - net                                   | 230                               |  | 1.2   |   |     (338)                 |  |  (6.8)         |   |   | (212     | )      | (4.5)           |   |
|  

Income tax provision (benefit)        | $2,436                            |  | 11.9            | %      | $(3,506)                                                |  | (70.2)              | %      |   | $1,762   |   | 36.7            | %      |

 

The            components of the net deferred tax assets (liabilities) are as follows:

 

|                                                                      |   | **December 31,** |     |
|---------------------------------------------------------------------------|--------|------------------|----------|
|                                                                      |   |             | **2007** |   |   | **2006** |   |
| Deferred Tax Assets:                                                      |   |             |     |   |   |   |   |
| Film and television costs                                                 |   | $                | 654      |   | $ | 434 |   |
| Accounts receivable allowances                                            |   |             | 337      |   |   | 681 |   |
| Foreign tax credits                                                       |   |             | 186      |   |   | 94 |   |
| Loss carryforwards                                                        |   |             | 9,749    |   |   | 584 |   |
| Restricted stock                                                          |   |             | 269      |   |   | 135 |   |
| Contributions                                                             |   |             | 172      |   |   | 89 |   |
| Deferred rent                                                             |   |             | 306      |   |   | 355 |   |
| Property and equipment                                                    |   |             | 758      |   |   | 707 |   |
| Gross deferred tax assets                                                 |   | $                | 12,431   |   | $ | 3,079 |   |
|                                                                      |   |             |     |   |   |   |   |
| Deferred Tax Liability:                                                   |   |             |     |   |   |   |   |
| Accrued minimum guarantees                                                |   | $                | (519     | ) | $ | (639 | ) |
| Gross deferred tax liability                                              |   | $                | (519     | ) | $ | (639 | ) |
|                                                                      |   |             |     |   |   |   |   |
| Valuation allowance                                                       |   | $                | (11,912  | ) | $ | — |   |
|                                                                      |   |             |     |   |   |   |   |
| Net deferred tax asset                                                    |   | $                | —  |   | $ | 2,440 |   |
| Amounts recognized in the Consolidated                            Balance |   |             |     |   |   |   |   |
| Sheets consist of:                                                        |   |             |     |   |   |   |   |
| Deferred tax asset – current                                        |   | $                | —  |   | $ | 707 |   |
| Deferred tax asset – non-current                                    |   |             | —  |   |   | 1,733 |   |
| Net deferred tax asset                                                    |   | $                | —  |   | $ | 2,440 |   |

 

 

A            reconciliation of activity for the Company’s deferred tax asset valuation            allowance is provided as follows:

 

|                                      |   |   | **Years Ended December 31,** |    |
|-------------------------------------------|--------|--------|------------------------------|---------|
|                                      |   |   | **2007**                     |    | **2006** |   | **2005** |
|                                      |   |   |                         |    |   |   |   |   |   |   |
|                                      |   |   |                         |    |   |   |   |   |   |   |
| Beginning balance                         |   |   | $                            | — |   | $ | — |   | $ | — |
| Provision for (benefit from) income taxes |   |   |                         | — |   |   | — |   |   | — |
| Charged to deferred tax assets            |   |   |                         | 11,912  |   |   | — |   |   | — |
|                                      |   |   | $                            | 11,912  |   | $ | — |   | $ | — |
|                                      |   |   |                         |    |   |   |   |   |   |   |
|                                           |        |        |                              |         |  |  |  |  |  |  |  |  |

 

F-19

 

----

The            expiration terms and amounts for which an allowance has been provided with respect to            the loss and credit carryforwards reflected in the gross deferred tax assets above are            comprised as follows:

 

| **Loss Carryforwards**   |   |   |   | **Expiration** |   |   | **Gross Amount** |   |   | **Allowance** |   |
|--------------------------|--------|--------|--------|----------------|--------|--------|------------------|--------|--------|---------------|--------|
|                     |   |   |   |           |   |   |             |   |   |          |   |
| Federal                  |   |   |   | 2027           |   | $      | 22,104           |   | $      | 22,104        |   |
| State and local          |   |   |   | 2016-2027      |   |   | 32,963           |   |   | 32,963        |   |
| Foreign                  |   |   |   | Indefinite     |   |   | 1,387            |   |   | 1,387         |   |
|                     |   |   |   |           |   |   |             |   |   |          |   |
|                     |   |   |   |           |   |   |             |   |   |          |   |
| **Credit Carryforwards** |   |   |   |           |   |   |             |   |   |          |   |
|                     |   |   |   |           |   |   |             |   |   |          |   |
| Foreign tax              |   |   |   | 2011-2012      |   | $      | 186              |   | $      | 186           |   |

 

 

The            Company records taxes on undistributed earnings of subsidiaries to the extent such            earnings are planned to be remitted and not permanently reinvested. The undistributed            earnings of subsidiaries on which no provision for foreign withholding or U.S. income            taxes has been made amounted to $253 and $380 at December 31, 2007 and 2006,            respectively. U.S. and foreign income taxes that would be payable if such earnings were            distributed may be lower than the amount computed at the U.S. statutory rate because of            the availability of tax credits.

 

Income            tax benefits related to the exercise of stock options reduced current taxes payable and            increased additional paid-in capital by $0, $188, and $2,002 in 2007, 2006 and 2005,            respectively.

 

**10.            EARNINGS PER SHARE**

 

The            Company applies SFAS No. 128,*Earnings per Share,*which requires the computation and presentation of earnings per share            (“EPS”) to include basic and diluted EPS. Basic EPS is computed based            solely on the weighted average number of common shares outstanding during the period.            Diluted EPS reflects all potential dilution of common stock. The following table            reconciles Basic EPS with Diluted EPS for the three years ended December 31, 2007, 2006            and 2005.

 

|                                                                                         |   | **Net Loss** |   | **Year Ended 2007 Weighted Average                            Shares** |   | **Per Share** |   |
|----------------------------------------------------------------------------------------------|--------|--------------|--------|------------------------------------------------------------------------|--------|---------------|--------|
| Basic loss per share –Loss available to common                            shareholders |   | $(23,326     | )      | 13,209,495                                                             |   | $(1.77        | )      |
|                                                                                         |   |         |   |                                                                   |   |          |   |
| Effect dilutive security – Stock                            options                    |   | —      |   | —                                                                |   | —       |   |
|                                                                                         |   |         |   |                                                                   |   |          |   |
| Diluted loss per share                                                                       |   | $(23,326     | )      | 13,209,495                                                             |   | $(1.77        | )      |

 

|                                                                                         |   | **Net Loss** |   | **Year Ended 2006 Weighted Average                            Shares** |   | **Per Share** |   |
|----------------------------------------------------------------------------------------------|--------|--------------|--------|------------------------------------------------------------------------|--------|---------------|--------|
| Basic loss per share –Loss available to common                            shareholders |   | $(1,006      | )      | 13,104,051                                                             |   | $(0.08        | )      |
|                                                                                         |   |         |   |                                                                   |   |          |   |
| Effect dilutive security – Stock                            options                    |   | —      |   | —                                                                |   | —       |   |
|                                                                                         |   |         |   |                                                                   |   |          |   |
| Diluted loss per share                                                                       |   | $(1,006      | )      | 13,104,051                                                             |   | $(0.08        | )      |

 

|                                                                                            |   | **Net Income** |   | **Year Ended 2005 Weighted Average                            Shares** |   | **Per Share** |   |
|-------------------------------------------------------------------------------------------------|--------|----------------|--------|------------------------------------------------------------------------|--------|---------------|--------|
| Basic loss per share – Income available to common                            shareholders |   | $5,069         |   | 13,115,687                                                             |   | $0.39         |   |
|                                                                                            |   |           |   |                                                                   |   |          |   |
| Effect dilutive security – Stock                            options                       |   | —        |   | 421,143                                                                |   | (0.02         | )      |
|                                                                                            |   |           |   |                                                                   |   |          |   |
| Diluted income per share                                                                        |   | $5,069         |   | 13,536,830                                                             | $      | $0.37         |   |

 

|   | F-20 |
|--------|------|

----

For            the years ended December 31, 2007, 2006 and 2005, 1,189,000, 1,620,850 and 1,914,600            shares, respectively, attributable to the exercise of outstanding options, were            excluded from the calculation of diluted EPS because the effect was            antidilutive.

 

**11.            DEFINED CONTRIBUTION PLAN**

 

The            Company participates in a 401(k) plan covering substantially all employees. Benefits            vest based on number of years of service. The Company’s policy is to match 25% of            the first 6% of the covered employee’s annual salary, as defined by the plan.            Contributions to the plan by the Company amounted to $170, $167 and $201 for the years            ended December 31, 2007, 2006 and 2005, respectively.

 

**12.            COMMITMENTS AND CONTINGENCIES**

 

|   | *a.* | *Bonus Plan*– Bonuses                            are eligible to key officers and employees in an amount, if any, to be                            determined in the sole discretion of the Compensation Committee of the                            Board of Directors in consultation with the CEO of 4Kids. For 2007,                            2006 and 2005, the Compensation Committee of the Board of Directors                            awarded the Chairman and CEO of the Company approximately $0, $225, and                            $0, respectively. An additional amount of approximately $0, $400, and                            $1,075 was awarded but not yet paid to employees at December 31, 2007,                            2006 and 2005, respectively. |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | *b.* | *Leases*- The Company leases                            certain office, administration and production facilities. Commitments                            for minimum rentals, not including common charges, under non-cancelable                            leases at the end of 2007 are as follows: |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

| **Year Ending**

**December 31,** |   | **Amount** |   |
|-----------------------------------|--------|------------|--------|
| 2008                              | $      | 2,706      |   |
| 2009                              |   | 2,442      |   |
| 2010                              |   | 1,871      |   |
| 2011                              |   | 1,075      |   |
| 2012                              |   | 971        |   |
| 2013 and after                    |   | 5,286      |   |
| Total                             | $      | 14,351     |   |

        

On February 18, 2008, the Company signed a lease for additional office            space in the San Diego, California with aggregate rental payments of $620 for the            duration of the lease which has not been included in the table above. Rent expense for            all operating leases charged against earnings amounted to $2,365, $1,843, and $1,908 in            2007, 2006 and 2005, respectively.     

             

|   | *c.* | *Litigation*- The Company,                            from time to time, is involved in litigation arising in the ordinary                            course of its business. The Company does not believe that such                            litigation to which the Company or any subsidiary of the Company is a                            party or of which any of their Properties is the subject will,                            individually or in the aggregate, have a material adverse affect on the                            Company’s financial position or the results of its                            operations. |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | *d.* | *Employment Contracts*- The                            Company has employment agreements and arrangements with its executive                            officers and certain management personnel. The agreements generally                            continue until terminated by the executive or the Company, and provide                            for severance payments under certain circumstances. The majority of the                            agreements and arrangements provide the employees with certain                            additional rights after a change of control (as defined in such                            agreements) of the Company occurs. The agreements include a covenant                            against competition with the Company which extends for a period of time                            after termination for any reason. As of December 31, 2007, if all of                            the employees under contract were terminated by the Company without                            good cause or following a change of control, under these contracts, the                            Company’s liability would be approximately $12,912 or $9,842,                            respectively. These employment agreements provide for an aggregate                            minimum annual base compensation of $5,672 expiring on various dates                            through 2012. |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

             

F-21

----

             

|   | *e.* | *Deferred Revenue*- Music                            Publishing - In July 2002, 4Kids Music granted a right to receive a 50%                            interest in the Company’s net share of the music revenues from                            currently existing music produced by the Company for its television                            programs (“Current Music Assets”) to an unaffiliated third                            party in an arms length transaction for $3,000 (the “Music                            Agreement”). Further, the Company agreed to grant a right to                            receive a 50% interest in the Company’s net share of music                            revenues from future music to be produced by the Company for its                            television programs (“Future Music Assets”) to the same                            third party for $2,000. In consideration of the grant of Future Music                            Assets, the Company received $750 in June 2003, $750 in June 2004 and                            $500 in June 2005. |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

The Company has deferred all amounts received under the contract, and            recognizes revenue as the Current Music Assets and Future Music Assets generate revenue            over the contract term. The Company expects and continues to produce additional new            music which, based on the success of the administrative service, continues to supply            the unaffiliated third party with this content. Since the Company continues to deliver            more than the amount of music required to be delivered under the Music Agreement, there            is no way to appropriately record the fair value of the future amounts to be delivered.            Based on EITF 00-21, the Company’s inability to fair value the future portion of            the music deliverables results in the entire amount to be recorded as deferred revenue.            The most appropriate and systematic method of accounting for this revenue relating to            the deferred portion would be to reduce this deferred amount dollar for dollar based on            the actual music earnings of the Company.  Pursuant to the above, the Company            recognized revenues of $461 and $665 for the years ended December 31, 2007 and 2006,            respectively. The Company has included $1,994 and $2,455 as deferred revenue on the            accompanying consolidated balance sheets as of December 31, 2007 and 2006,            respectively. 

             

Home Video – At various dates since May 2002, 4Kids Home Video,            entered into various agreements with an unaffiliated third party home video distributor            (the “Video Distributor”), pursuant to which 4Kids Home Video provides            ongoing advertising, marketing and promotional services with respect to certain home            video titles, that are owned or controlled by the Company and which are distributed by            the Video Distributor. The Video Distributor has paid the Company advances of $4,119            against 4Kids Home Video’s share of the distribution and service fee proceeds to            be realized by 4Kids Home Video from such titles. Pursuant to the above, the Company            recognized revenue of $122 and $220 for the years ended December 31, 2007 and 2006,            respectively. The Company has included $419 and $541 as deferred revenue on the            accompanying consolidated balance sheets as of December 31, 2007 and 2006,            respectively.

             

Other Agreements - In addition, the Company entered into other            agreements for various Properties and advertising time on the 4Kids TV in which the            Company has received certain advances and/or minimum guarantees. Accordingly, as of            December 31, 2007 and 2006 the unearned portion of these advances and guaranteed            payments were $571 and $2,018, respectively, and are included in deferred revenue on            the accompanying consolidated balance sheets.

             

*f.*       *Broadcast Agreements*- In January 2002, the            Company entered into a multi-year agreement with Fox to lease Fox’s Saturday            morning programming block (“4Kids TV”) which airs principally on Saturday            mornings from 8am to 12pm eastern/pacific time (7am to 11am central time). The Company            provides substantially all programming content to be broadcast on 4Kids TV and retains            all of the revenue from network advertising sales for the four-hour time period. 4Kids            Ad Sales manages and accounts for the ad revenue and costs associated with 4Kids            TV.

             

In March 2006, the Fox agreement was extended for two broadcast years            through the 2007-2008 broadcast season. As of December 31, 2007, no amounts remain to            be paid for the 2006-2007 broadcast season under the amended agreement. The broadcast            fee for each of the 2006-2007 and 2007-2008 broadcast seasons is $20,000 as compared to            the $25,312 paid for each broadcast year during the initial term of the multi-year            agreement. The fee is payable in quarterly installments of $5,000 each year beginning            in October 2006. Fox has exercised its option to extend this agreement through its            2008-2009 broadcast season under the same terms and conditions as in effect for the            2007-2008 broadcast season.

             

The costs of 4Kids TV is capitalized and amortized over each broadcast            year based on estimated advertising revenue for the related broadcast year. The Company            recorded amortization expenses of $21,472, $22,462, and $26,408 for the years ended            December 31, 2007, 2006 and 2005, respectively. During the year ended December 31,            2007, the Company paid Fox and certain Fox affiliates $15,525 and $5,263, attributable            to the 2006-2007 and 2007-2008 broadcast seasons fees, respectively, and during            calendar year 2006, the Company paid Fox and certain Fox affiliates $7,058 and $5,491,            attributable to the 2005-2006 and 2006-2007 broadcast seasons fees, respectively. As of            December 31, 2007 and 2006, there was no unamortized portion of these fees included in            “Prepaid 4Kids TV broadcast fee” on the accompanying consolidated balance            sheets.

|   | F-22 |
|--------|------|

 

----

As of December 31, 2007, the minimum guaranteed payment obligations            under the 4Kids TV Broadcast Agreement are as follows:

 

| **Year Ending**

**December 31,** |   | **Amount** |   |
|-----------------------------------|--------|------------|--------|
| 2008                              | $      | 20,000     |   |
| 2009                              |   | 15,000     |   |
| Total                             | $      | 35,000     |   |

             

On October 1, 2007, the Company and The CW entered into the CW            Agreement, under which The CW granted to the Company the exclusive right to program The            CW's Saturday morning children's programming block that is broadcast in most markets            between 7am and 12pm for an initial term of five years beginning with The CW's            2008-2009 broadcast season.

Under the CW Agreement, the Company is obligated to make quarterly            minimum guaranteed payments which are subject to reduction under certain circumstances.            The Company and The CW will share advertising revenues earned from the sale of national            commercial time during The CW Kids Block with The CW's share to be applied against such            quarterly guarantee payments. In addition, The CW will be entitled under the CW            Agreement to participate in the Company's merchandising revenue from certain content            broadcast on The CW Kids Block if such merchandising revenues exceed a certain annual            minimum.

As of December 31, 2007, the minimum guaranteed payment obligations            under the CW Agreement are as follows:

| **Year Ending**

**December 31,** |   | **Amount** |   |
|-----------------------------------|--------|------------|--------|
| 2008                              | $      | 6,750      |   |
| 2009                              |   | 15,000     |   |
| 2010                              |   | 15,000     |   |
| 2011                              |   | 15,000     |   |
| 2012                              |   | 15,000     |   |
| 2013                              |   | 8,250      |   |
| Total                             | $      | 75,000     |   |

             

The Company’s ability to recover the cost of its fee payable to            Fox and the minimum guarantee due to The CW will depend on the popularity of the            television programs the Company broadcasts on 4Kids TV and The CW Kids Block and the            general market demand and pricing of advertising time for Saturday morning            children’s broadcast television. The popularity of such programs, broadcast by            the Company on 4Kids TV and beginning in September 2008 on The CW Kids Block, impacts            audience levels and the level of the network advertising rates that the Company can            charge. Additionally, the success of the merchandise licensing programs and home video            sales based on such television programs broadcast on 4Kids TV and The CW Kids Block is            dependent on consumer acceptance of such television programs. If the Company estimates            that it will be unable to generate sufficient future revenue from advertising sales,            home video sales and merchandising licensing at levels to cover the cost of its            contractual obligation to Fox and/or The CW, the Company would record a charge to            earnings to reflect an expected loss on the Fox and The CW agreements in the period in            which the factors negatively affecting the recoverability of the fee payable become            known. The Company will be required to make certain assumptions and estimates about            future events such as advertising rates and audience viewing levels in evaluating its            ability to recover the cost of the broadcast fees. Such estimates and assumptions are            subject to market forces and factors beyond the control of the Company and are            inherently subject to change. There can be no assurance that the Company will be able            to recover the full cost of the broadcast fees and in the event it cannot, it would            record the resulting charge to earnings to reflect an expected loss on the broadcast            fee, which could be significant.

             

In addition to the broadcast fee and minimum guarantee paid to Fox and            to be paid to The CW, commencing with the 2008-2009 broadcast season, respectively, the            Company incurs additional costs to program each broadcast block and sell the related            network advertising time. These costs include direct programming costs to acquire,            adapt and deliver programming for the broadcast during the weekly broadcast blocks, as            well as additional indirect expenses of advertising sales, promotion and            administration.

 

F-23

----

|   | *g.* | *Contractual Arrangements*-                            During the normal course of business, the Company may enter into                            various agreements with third parties to license, acquire, distribute,                            broadcast, develop and/or promote Properties. The terms of these                            agreements will vary based on the services and/or Properties included                            within the agreement, as well as, geographic restrictions, duration,                            property and exploitation condition and results of                            operation. |
|--------|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | *h.* | *Stock Purchases*- In May                            2007, 8,205 shares of restricted stock at an average price of $17.13                            per share were repurchased to discharge withholding tax obligations                            upon the vesting of certain employees’ restricted stock awards.                            Additionally, in December 2007, the Board of Directors authorized the                            Company to purchase up to 1,000,000 shares of the Company’s                            common stock from time to time through December 31, 2008 in the open                            market or through negotiated prices. The Company purchased 9,400 shares                            at an average price of $12.09 per share in December 2007 under this                            authorization. As of March 14, 2008, 174,384 shares of the                            Company’s common stock were subsequently purchased by the Company                            under this authorization at an average price of $11.93 per                            share. |
|--------|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

**13.            MINORITY INTEREST**

 

a)*TC Digital Games LLC -*On December 11, 2006, 4Kids Digital and CUSA LLC entered into the TCD            Agreement with respect to the operation of TC Digital as a joint venture, with 4Kids            Digital owning 53% of TC Digital’s membership interests and CUSA LLC owning 47%            of TC Digital’s membership interests. On December 18, 2007, 4Kids Digital            purchased an additional 2% membership interest in TC Digital from CUSA for            approximately $200, increasing 4Kids Digital’s ownership percentage to 55%. The            consideration for the purchase of this additional membership interest was paid through            the settlement of capital contributions required to be made by CUSA to TC Websites            under the TCW Agreement. TC Digital is treated as a consolidated subsidiary of the            Company as a result of its majority ownership and its right to break any dead-locks            within the TC Digital Management Committee.

Minority interest of membership units in TC Digital represents the            minority members’ proportionate share of the equity in the entity. Income is            allocated to the membership units minority interest based on the ownership percentage            throughout the year. At December 31, 2006, the limited partner held 47% of the            common units of the entity. At December 18, 2007, the minority members’            proportionate share of the equity in the entity decreased by 2% to 45%. The following            table summarizes the membership units minority interest loss:

 

|                                                                                                                 | **Year Ended December 31, 2007**  |   | **Year Ended December 31,**        |   |
|----------------------------------------------------------------------------------------------------------------------|-----------------------------------|--------|------------------------------------|--------|
|                                                                                                                 | **Jan 1st –**

**Dec 17th** |   | **Dec 18th –**

**Dec 31st** |   | **Total** |   | **2006** |   |
| TC Digital net loss before common units minority                            interest                                 | $                                 | (4,055 | )                                  | $      | (497 | ) | $ | (4,552 | ) | $ | (546) |   |
| Minority interest percentage                                                                                         |                              | 47     | %                                  |   | 45 | % |   | * | % |   | 47 | % |
| Minority interest loss allocation                                                                                    |                              | (1,906 | )                                  |   | (224 | ) |   | (2,130 | ) |   | (257) |   |
| Less: Minority interest allocation related to                            discontinued operations                     |                              |   |                               |   |   |   |   | — |   |   | — |   |
| Total allocation of minority interest loss to continuing                            operations                       |                              |   |                               |   |   |   |   | (2,130 | ) |   | (257) |   |
| Less: Minority member capital contribution – net                            of tax of $0 and $30, respectively |                              |   |                               |   |   |   |   | — |   |   | 39 |   |
| Loss in excess of minority interest absorbed by 4Kids                            Digital                             |                              |   |                               |   |   |   | $ | (2,130 | ) | $ | (218) |   |
| **Percentage is a blended rate representing the entire                            year*                              |                              |   |                               |   |   |   |   |   |   |   |   |   |

 

b)*TC Websites LLC -*Under the terms of the TCW Agreement, 4Kids Websites and CUSA are each            entitled to elect two managers to TC Websites’ Management Committee. On December            18, 2007, 4Kids Websites entered into an agreement with CUSA and TC Websites pursuant            to which 4Kids acquired an additional 5% ownership interest in TC Websites from CUSA            for approximately $650 and the TCW Agreement was amended to provide 4Kids Websites with            the right to break any deadlocks on TC Websites' Management Committee with respect to            operational matters. The consideration for the purchase of this additional membership            interest was paid through the settlement of certain capital contributions required to            be made by CUSA to TC Websites under the TCW Agreement.

 

While the Company maintained a 50% ownership interest in TC Websites and            did not control, but had significant influence, over such entity, the Company’s            investment in TC Websites was accounted for using the equity method. As permitted by            Accounting Research Bulletin No. 51,*Consolidated Financial            Statements*, due to the increased membership interest and the            additional operational control, TC Websites’ financial statements are now            included in the Company’s 2007 consolidated financial statements as though it has            been acquired by the Company at the beginning of such year end, and accordingly,            revenues and expenses are included for the year ended December 31, 2007. A            pre-acquisition loss of $498 resulting from the 2006 net loss was recorded and shown as            a separate deduction on the Company’s statement of operations.

 

F-24

 

----

At            December 18, 2007, the minority members’ proportionate share of the equity in the            entity decreased by 5% to 45%. The following table summarizes the membership units            minority interest loss:

 

|                                                                                             | **Year Ended December 31, 2007**  |   | **Year Ended December 31,**        |   |
|--------------------------------------------------------------------------------------------------|-----------------------------------|--------|------------------------------------|--------|
|                                                                                             | **Jan 1st –**

**Dec 17th** |   | **Dec 18th –**

**Dec 31st** |   | **Total** |   | **2006** |   |
| TC Websites net loss before common units minority                            interest            | $                                 | (3,916 | )                                  | $      | (213 | ) | $ | (4,129 | ) | $ | (996) |   |
| Minority interest percentage                                                                     |                              | 50     | %                                  |   | 45 | % |   | * | % |   | 50 | % |
| Minority interest loss allocation                                                                |                              | (1,958 | )                                  |   | (96 | ) |   | (2,054 | ) |   | (498) |   |
| Less: Minority interest allocation related to                            discontinued operations |                              |   |                               |   |   |   |   | — |   |   | — |   |
| Total allocation of minority interest loss to continuing                            operations   |                              |   |                               |   |   |   |   | (2,054 | ) |   | (498) |   |
| Less: Minority member capital contribution                                                       |                              |   |                               |   |   |   |   | 96 |   |   | — |   |
| Loss in excess of minority interest absorbed by 4Kids                            Websites        |                              |   |                               |   |   |   | $ | (1,958 | ) | $ | (498) |   |
| **Percentage is a blended rate representing the entire                            year*          |                              |   |                               |   |   |   |   |   |   |   |   |   |

 

| **14.** | **DISCONTINUED OPERATION** |
|---------|----------------------------|

 

In            June 2006, the Company announced that the business of its media buying subsidiary,            Summit Media, would be terminated effective June 30, 2006. The results of operations            for Summit Media are reported as a discontinued operation for the periods ended            December 31, 2007, 2006 and 2005, and accordingly, the accompanying consolidated            financial statements have been reclassified separately to report the assets,            liabilities and operating results of this business.

 

The            following are the summarized results of discontinued operations for the media buying            business:

 

|                                |   | **December 31, 2007** |
|-------------------------------------|--------|-----------------------|
|                                |   | **2007**              |   | **2006** |   | **2005** |   |
| Net revenues                        |   | $                     | — | $ | 2,852 |   | $ | 6,055 |   |
| Income before income taxes          |   |                  | — |   | 1,181 |   |   | 3,454 |   |
| Provision for income taxes          |   |                  | — |   | 459 |   |   | 1,414 |   |
| Income from discontinued operations |   | $                     | — | $ | 722 |   | $ | 2,040 |   |

 

Under the terms of the Settlement Agreement entered into by Summit Media            with The Beacon Media Group LLC (“Beacon”), Sheldon Hirsch, Tom Horner and            Paul Caldera (the “Beacon Defendants”) on June 19, 2006, relating to the            lawsuit filed by Summit Media in Supreme Court, New York County against Beacon and the            Beacon Defendants, Summit Media will receive $2,000, in regularly scheduled payments            through 2010, in exchange for Summit Media’s discontinuation of the lawsuit. The            Company has included approximately $1,800 in net revenues for the year ended December            31, 2006, relating to this agreement. Through December 31, 2007, the Company had            received $500 of the scheduled payments related to the lawsuit.

 

The            major classes of assets and liabilities of the discontinued operation in the balance            sheet are as follows:

 

|                                                                        |   | **December 31,** |    | **December 31,** |
|-----------------------------------------------------------------------------|--------|------------------|---------|------------------|
|                                                                        |   | **2007**         |    | **2006**         |
| Accounts receivable                                                         |   | $                | — |             | $ | 24 |
| Prepaid expense and other current assets                                    |   |             | 372     |             |   | 302 |
| Current assets from discontinued operations                                 |   |             | 372     |             |   | 326 |
|                                                                        |   |             |    |             |   |   |
| Other receivable – noncurrent                                         |   |             | 926     |             |   | 1,333 |
|                                                                        |   |             |    |             |   |   |
| Noncurrent assets from discontinued                            operations   |   |             | 926     |             |   | 1,333 |
|                                                                        |   |             |    |             |   |   |
| Media payable                                                               |   |             | — |             |   | — |
| Accounts payable and accrued expenses                                       |   |             | — |             |   | 20 |
| Current liabilities from discontinued                            operations |   | $                | — |             | $ | 20 |

 

F-25

----

**15.            RELATED PARTY TRANSACTIONS**

 

*National Law Enforcement and Firefighters Children’s            Foundation*- The Company’s Chairman and Chief Executive            Officer is the founder and President of The National Law Enforcement and Firefighters            Children’s Foundation (the “Foundation”). The Foundation is a            not-for-profit organization dedicated to helping the children of law enforcement and            firefighting personnel and working with law enforcement and firefighting organizations            to provide all children with valuable social and life skill programs. During the years            ended December 31, 2007, 2006 and 2005, the Company contributed approximately $120,            $105, and $125, respectively, to the Foundation.

*Chaotic USA Entertainment Group, Inc. (“CUSA”)*- On December 11, 2006, 4Kids Digital and CUSA LLC, entered into the TCD            Agreement with respect to the operation of TC Digital as a joint venture, with 4Kids            Digital owning 53% of TC Digital’s membership interests and CUSA LLC owning 47%            of TC Digital’s membership interests. On December 18, 2007, 4Kids Digital            purchased an additional 2% membership interest in TC Digital from CUSA LLC increasing            4Kids Digital’s ownership percentage to 55%. TC Digital is treated as a            consolidated subsidiary of the Company as a result of its majority ownership in TC            Digital and its right to break any dead-locks within the TC Digital Management            Committee. Bryan Gannon (“Gannon”), President and Chief Executive Officer            of CUSA and John Milito (“Milito”), Executive Vice President and Chief            Operating Officer of CUSA, each own an interest of approximately32%in CUSA. Additionally, on December 11, 2006,            Gannon and Milito became officers of TC Digital.

As            of December 31, 2007, the Company has entered into the following transactions with CUSA            and CUSA LLC, or parties related to Gannon and Milito that are summarized            below:

|   | ° | *Employment Agreements –*On December 11, 2006, TC Digital entered into employment                            agreements through December 31, 2009, with Bryan Gannon, to serve as                            its President and Chief Executive Officer and John Milito, to serve as                            its Executive Vice President. Under the terms of the employment                            agreements, each of Gannon and Milito will receive an annual base                            salary of $350 with a one-time signing bonus of $125 and are eligible                            to receive additional bonuses at the sole discretion of TC                            Digital’s Management Committee, on which they serve with minority                            voting rights. Gannon and Milito are each entitled to receive a minimum                            bonus of $100 and $200 in 2007 and 2008, respectively, if TC Digital                            attains 60% of the projected revenues for those years approved by TC                            Digital’s Management Committee. As of December 31, 2007, no bonus                            had been earned under the employment agreements. |
|--------|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ° | *Chaotic Property Representation Agreement                            –*On December 11, 2006, 4Kids                            Licensing, CUSA and Apex Marketing, Inc. (“Apex”), a                            corporation in which Gannon holds 60% of the outstanding capital stock                            and Milito owns 39% of the outstanding capital stock, entered into an                            amended and restated Chaotic property representation agreement                            (“CPRA”) replacing the original Chaotic property                            representation agreement entered into by the parties in April 2005.                            Under the terms of the CPRA, 4Kids Licensing is granted exclusive                            television broadcast and production, merchandising licensing, and home                            video rights to the “Chaotic” Property worldwide in                            perpetuity, subject to certain limited exceptions. Under the terms of                            the CPRA, all “Chaotic” related income less approved                            merchandising and other expenses shall be distributed 50% to the                            Company and 50% to CUSA and Apex, excluding trading card royalties                            which are distributed 55% to 4Kids Digital and 45% to CUSA LLC based on                            the additional 2% interest purchased on December 18, 2007.                            Additionally, all approved production expenses for television episodes                            based on the “Chaotic” property are allocated 50% to 4Kids                            Licensing and 50% to CUSA and Apex. As of December 31, 2007, there were                            approximately $4,265 of production and merchandising expenses owed to                            4Kids Licensing by CUSA and Apex, collectively. |
|--------|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ° | *Patent License Agreements –*On December 11, 2006, TC Digital and TC Websites each                            entered into an agreement (the “Patent License Agreements”)                            with Cornerstone Patent Technologies, LLC (“Cornerstone”),                            a limited liability company, in which Gannon and Milito both hold a 25%                            membership interest. Pursuant to the Patent License Agreements, TC                            Digital and TC Websites obtained exclusive licenses (subject to certain                            exceptions) to use certain patent rights in connection with                            “Chaotic” and other trading card games which are uploaded                            to websites owned and operated by the combined entities. Additionally,                            each of TC Digital and TC Websites agreed to pay Cornerstone a royalty                            of 1.5% of the Manufacturers Suggested Retail Price for the sale of                            trading cards which amounted to $20 and $20, respectively, during 2007.                            On September 10, 2007, the Company purchased a 25% interest in such                            patents from Cornerstone for $750. During 2007, the Company earned                            royalties of $39 related to its portion of the patent. Included in this                            amount was $14 relating to the sales of “Chaotic” trading                            cards which is eliminated in the Company’s consolidated financial                            statements. |
|--------|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

             

F-26

 

----

| ° | *TCD Agreement –*Under                            the terms of the TCD Agreement, TC Digital is obligated to pay the                            following fees and/or royalties to: (i) 4Kids Digital equal to 3% of TC                            Digital’s gross revenues up to $350 per year for management                            services performed; (ii) 4Kids Digital and CUSA equal to 3% of net                            sales of each pack of trading cards sold; (iii) Dracco Company Ltd.                            (“Dracco”) equal to (x) 4% of the net sales of                            “Chaotic” trading cards and (y) an additional 1% of net                            sales of “Chaotic” trading cards above $50 million during a                            calendar year; and (iv) the Company equal to 6% of the net sales of                            “Chaotic” trading cards. The Company acquired its rights to                            receive royalties of 6% in respect to net sales of                            “Chaotic” trading cards under the TCD Agreement through                            purchases from Dracco of a 5% royalty stream on October 17, 2007 and 1%                            royalty stream, previously allocated to CUSA from Dracco, on December                            18, 2007 in exchange for one-time payments of $2,250 and $450,                            respectively. The consideration for the purchase of the 1% royalty                            stream for $450 was satisfied through the settlement of certain capital                            contributions required to be made by CUSA to TC Websites under the TCW                            Agreement. |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

4Kids Digital is required under the terms of the TCD Agreement and the            related loan and line of credit agreements to provide loans to TC Digital from time to            time in an aggregate amount up to $8,000 with a maturity date of December 31, 2010 and            an interest rate of 12%. Any transaction resulting in the sale of more than 50% of TC            Digital’s membership interests or in the sale of all or substantially all of TC            Digital’s assets occurring while there is no debt owed from TC Digital to 4Kids            Digital under the loan and line of credit or occurring prior to August 31, 2009            requires the consent of members of TC Digital holding two-thirds of its membership            interests (as opposed to a majority of its membership interests). During 2007, the            Company and CUSA earned royalties of $74 and $25 relating to the sales of            “Chaotic” trading cards under the TCD agreement, respectively. The            Company’s portion of royalties, as well as the 3% management fee was eliminated            in its consolidated financial statements.

             

|   | ° | *Chaotic Merchandise License Agreement                            –*On December 11, 2006, 4Kids                            Licensing, CUSA and TC Digital entered into a merchandise licensing                            agreement pursuant to which 4Kids Licensing and CUSA granted TC Digital                            exclusive rights to manufacture, produce and license                            “Chaotic” trading cards and related accessories through                            December 31, 2016. Under the terms of the agreement, TC Digital is                            obligated to pay a royalty on trading cards and all related accessories                            equal to (i) 4% of net sales to 4Kids Licensing while any amounts are                            outstanding to 4Kids Digital under the loan agreement or line of credit                            agreement or (ii) 8% of net sales of such cards and accessories, 55% of                            which will be paid to 4Kids Licensing and 45% of which will be paid to                            CUSA LLC based on the additional 2% interest purchased on December 18,                            2007. During 2007, no royalties had been earned under this                            agreement. |
|--------|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ° | *Operating Agreement of TC Websites LLC                            –*On December 11, 2006, 4Kids Websites                            entered into the TCW agreement with CUSA to purchase a 50% membership                            interest in TC Websites, which was amended on December 18, 2007 in                            connection with 4Kids Websites’ acquisition of an additional 5%                            ownership interest in TC Websites from CUSA. Under the terms of the TCW                            Agreement, TC Websites is obligated to pay fees to: (i) 4Kids Websites                            equal to 3% of gross revenues of TC Websites with a minimum fee of $100                            and a maximum fee of $200 per year for management services; (ii) Gannon                            equal to $100 for services as a senior executive; and (iii) Milito                            equal to $100 for services as a senior executive. Each member of TC                            Websites is obligated to make capital contributions on a pro-rata basis                            to the extent determined by its Management Committee to be necessary to                            fund the operation of the Website. Any transaction resulting in the                            sale of more than 50% of TC Websites’ membership interests or in                            the sale of all or substantially all of TC Digital’s assets                            requires the consent of members of TC Websites holding two-thirds of                            its membership interests (as opposed to a majority of its membership                            interests). |
|--------|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ° | *Right of First Negotiation Agreement**–*On December 11,                            2006, the Company entered into a letter agreement with TC Digital                            providing TC Digital with a right of first negotiation for the license                            of trading card rights represented by the Company as merchandise                            licensing agent for any third party property and for any property                            developed and wholly owned by the Company, through December 31, 2009,                            subject to the terms of the Company’s obligations to third                            parties and to other limitations. If the Company and TC Digital are                            unable to reach an agreement with respect to trading card rights within                            a specified period, the Company will be free to license such trading                            card rights to third parties on terms no less favorable to the Company                            as the last offer made to TC Digital during such                            negotiations. |
|--------|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

 

 

F-27

----

 

**16.            RIGHTS AGREEMENT**

 

On            August 15, 2007, the Board of Directors of the Company declared a dividend distribution            of one preferred stock purchase right (“Right”) for each outstanding share            of the Company’s common stock to shareholders of record at the close of business            on August 27, 2007. Each Right entitles the holder to purchase from the Company a unit            consisting of one one-thousandth of a share of the Company’s series A preferred            stock at a purchase price of $55.00 per unit, subject to adjustment. Thirty thousand            (30,000) shares of series A preferred stock have been initially reserved for issuance            upon exercise of the Rights. The description and terms of the Rights are set forth in a            Rights Agreement (the “Rights Agreement”), dated as of August 15, 2007,            between the Company and Continental Stock Transfer & Trust Co., as Rights            Agent.

 

Initially, the Rights will be attached to the Company’s common            stock. Subject to certain exceptions specified in the Rights Agreement, the Rights will            separate from the common stock and a distribution date (a “Distribution            Date”) will occur upon the earlier to occur of (i) the 10th business            day following the date of the first public announcement that any person or group of            affiliated or associated persons has become the beneficial owner of 15% or more of the            shares of the Company’s common stock then outstanding (an “Acquiring            Person”) and (2) the tenth business day following the commencement of a tender or            exchange offer by a person, if upon its consummation, such person, together with its            affiliates and associates, would become an Acquiring Person.

 

The            Rights are not exercisable until the Distribution Date and will expire at 5 p.m., New            York time, on August 14, 2017, unless earlier redeemed, exchanged, extended or            terminated by the Company as provided in the Rights Agreement.

 

In            the event that a person, alone or together with its affiliates and associates, becomes            an Acquiring Person, each holder of a Right will thereafter have the right to receive,            upon exercise, shares of the Company’s common stock having a value equal to two            times the exercise price of the Right provided, however, that all Rights beneficially            owned by such Acquiring Person (or an affiliate or associate thereof) will be null and            void. In the event that, after a person becomes an Acquiring Person, (i) the Company is            acquired in a business combination transaction in which it does not survive or in which            its common stock is changed or exchanged or remains outstanding but constitutes less            than 50% of the shares outstanding immediately following the merger, or (ii) 50% or            more of the Company’s assets, earning power or cash flow is sold or transferred,            each holder of a Right (except Rights which have previously been voided as set forth            above) shall thereafter have the right to receive, upon exercise, common stock of the            acquiring company having a value equal to two times the exercise price of the            Right.

 

At            any time until ten business days following the date a person becomes an Acquiring            Person, the Company may redeem the Rights in whole, but not in part, at a price of            $0.01 per Right (payable in cash, shares of common stock or other consideration deemed            appropriate by the Board of Directors of the Company). At any time after a person            becomes an Acquiring Person and prior to the acquisition by a person and its affiliates            and associates of fifty percent (50%) or more of the outstanding shares of the            Company’s common stock, the Board of Directors of the Company may exchange the            Rights (other than Rights which have become null and void), in whole or in part, at an            exchange ratio of one share of common stock, or one one-thousandth of a share of class            A preferred stock, per Right.

 

 

 

 

 

 

 

 

 

 

 

F-28

----

 

The            Company applies SFAS No. 131,*Disclosures about Segments of an            Enterprise and Related Information.*The Company has four            reportable segments: (i) Licensing; (ii) Advertising Media and Broadcast; (iii)            Television and Film Production/Distribution; and (iv) Trading Card and Game            Distribution. The Company’s reportable segments are strategic business units,            which, while managed separately, work together as a vertically integrated entertainment            company. The Company’s management regularly evaluates the performance of each            segment based on its net revenues, profit and loss after all expenses, including            amortized film and television costs and the 4Kids TV broadcast fee and interest income.            The accounting policies of the segments are the same as those described in the summary            of significant accounting policies. The Company’s Television and Film            Production/Distribution segment records inter-segment revenues and the Company’s            Advertising Media and Broadcast segment records inter-segment charges related to the            estimated acquisition costs of episodic television series for broadcast. In the opinion            of management, such acquisition costs represent the estimated fair value which would            have been incurred in a transaction between unaffiliated third parties on an arm length            basis. All inter-segment transactions have been eliminated in consolidation.

 

|                                      |   | **Licensing** |    | **Advertising Media and Broadcast** |   | **TV and Film Production/ Distribution** |   | **Trading Card and Game Distribution** |    | **Total** |   |
|-------------------------------------------|--------|---------------|---------|-------------------------------------|--------|------------------------------------------|--------|----------------------------------------|---------|-----------|--------|
| **2007:**                                 |   |          |    |                                |   |                                     |   |                                   |    |      |   |   |   |   |   |   |
| Net revenues from external customers      |   | $             | 22,561  |                                | $      | 16,296                                   |   | $                                      | 15,976  |      | $      | 776 |   | $ | 55,609 |   |
| Amortization of television and film costs |   |          | — |                                |   | —                                  |   |                                   | 8,179   |      |   | — |   |   | 8,179 |   |
| Amortization of 4Kids TV broadcast fee    |   |          | — |                                |   | 21,472                                   |   |                                   | — |      |   | — |   |   | 21,472 |   |
| Segment profit (loss)                     |   |          | 9,321   |                                |   | (15,168                                  | )      |                                   | (5,069  | )         |   | (9,572 | ) |   | (20,488 | ) |
| Segment assets                            |   |          | 102,041 |                                |   | 9,272                                    |   |                                   | 25,411  |      |   | 14,355 |   |   | 151,079 |   |
| Interest income                           |   |          | 5,049   |                                |   | 73                                       |   |                                   | 159     |      |   | — |   |   | 5,281 |   |
|                                      |   |          |    |                                |   |                                     |   |                                   |    |      |   |   |   |   |   |   |
| **2006:**                                 |   |          |    |                                |   |                                     |   |                                   |    |      |   |   |   |   |   |   |
| Net revenues from external customers      |   | $             | 31,677  |                                | $      | 16,153                                   |   | $                                      | 23,951  |      | $      | — |   | $ | 71,781 |   |
| Amortization of television and film costs |   |          | — |                                |   | —                                  |   |                                   | 8,041   |      |   | — |   |   | 8,041 |   |
| Amortization of 4Kids TV broadcast fee    |   |          | — |                                |   | 22,462                                   |   |                                   | — |      |   | — |   |   | 22,462 |   |
| Segment profit (loss)                     |   |          | 11,475  |                                |   | (14,805                                  | )      |                                   | (1,092  | )         |   | (571 | ) |   | (4,993 | ) |
| Segment assets                            |   |          | 140,771 |                                |   | 9,493                                    |   |                                   | 28,595  |      |   | 2,536 |   |   | 181,395 |   |
| Interest income                           |   |          | 4,086   |                                |   | 40                                       |   |                                   | 17      |      |   | — |   |   | 4,143 |   |
|                                      |   |          |    |                                |   |                                     |   |                                   |    |      |   |   |   |   |   |   |
| **2005:**                                 |   |          |    |                                |   |                                     |   |                                   |    |      |   |   |   |   |   |   |
| Net revenues from external customers      |   | $             | 37,616  |                                | $      | 18,660                                   |   | $                                      | 24,331  |      | $      | — |   | $ | 80,607 |   |
| Amortization of television and film costs |   |          | — |                                |   | —                                  |   |                                   | 9,790   |      |   | — |   |   | 9,790 |   |
| Amortization of 4Kids TV broadcast fee    |   |          | — |                                |   | 26,408                                   |   |                                   | — |      |   | — |   |   | 26,408 |   |
| Segment profit (loss)                     |   |          | 20,912  |                                |   | (16,041                                  | )      |                                   | (80     | )         |   | — |   |   | 4,791 |   |
| Segment assets                            |   |          | 137,384 |                                |   | 22,266                                   |   |                                   | 24,288  |      |   | — |   |   | 183,938 |   |
| Interest income                           |   |          | 2,724   |                                |   | 108                                      |   |                                   | 2       |      |   | — |   |   | 2,834 |   |
|                                      |   |          |    |                                |   |                                     |   |                                   |    |      |   |   |   |   |   |   |

 

Net            revenues from external customers and segment profit from discontinued operations have            been excluded from the Advertising, Media and Broadcast segment and are disclosed in            Notes 14. Conversely, discontinued operations relating to segment assets have been            included in segment reporting.

 

Additionally, through the Company’s London office and network of            international subagents, which allow it to license its Properties throughout the world,            the Company recognized net revenues from international sources primarily in Europe, of            $7,374, $11,357 and $10,943 for the years ended 2007, 2006 and 2005, respectively. At            December 31, 2007 and 2006, net assets of the Company’s London office were $6,600            and $7,606, respectively.

 

 

 

 

F-29

----

 

Following is a summary of the quarterly results of operations for the            years ended December 31, 2007 and 2006:

 
|                                                                                          | Fiscal Quarters |
|------------------------------------------------------------------------------------------|-----------------|
||
||
| Revenues                                                                                 |            |   | $ | 14,931 |   | $ | 12,009 |   | $ | 12,183 |   | $ | 16,486 |   |
|                                                                                          |                 |  |  |  |  |  |  |  |
| Loss from                    operations                                                  |            |   | $ | (1,918 | ) | $ | (5,224 | ) | $ | (6,814 | ) | $ | (11,813 | ) |
| Loss from                    continuing operations                                       |            |   | $ | (205 | ) | $ | (2,213 | ) | $ | (4,150 | ) | $ | (16,758 | ) |
| Loss from                    discontinued operations                                     |            |   |   | — |   |   | — |   |   | — |   |   | — |   |
|                                                                                          |                 |  |  |  |  |  |  |  |
| Net                    loss                                                              |            |   | $ | (205 | ) | $ | (2,213 | ) | $ | (4,150 | ) | $ | (16,758 | ) |
|                                                                                          |                 |  |  |  |
| Loss per                    common share:                                                |            |   |  |  |  |  |  |  |  |  |  |  |  |  |
|    Basic:                                                                 |            |   |  |  |  |  |  |  |  |  |  |  |  |  |
|      Continuing                    operations                   |            |   | $ | (0.02 | ) | $ | (0.17 | ) | $ | (0.31 | ) | $ | (1.26 | ) |
|      Discontinued                    operations                 |            |   |   | — |   |   | — |   |   | — |   |   | — |   |
|                                                                                          |                 |  |  |  |  |  |  |  |
|         Loss                    per common share |            |   | $ | (0.02 | ) | $ | (0.17 | ) | $ | (0.31 | ) | $ | (1.26 | ) |
|                                                                                          |                 |  |  |  |
|    Diluted:                                                               |            |   |  |  |  |  |  |  |  |  |  |  |  |  |
|      Continuing                    operations                   |            |   | $ | (0.02 | ) | $ | (0.17 | ) | $ | (0.31 | ) | $ | (1.26 | ) |
|      Discontinued                    operations                 |            |   |   | — |   |   | — |   |   | — |   |   | — |   |
|                                                                                          |                 |  |  |  |  |  |  |  |
|      Loss                    per common share                   |            |   | $ | (0.02 | ) | $ | (0.17 | ) | $ | (0.31 | ) | $ | (1.26 | ) |
|                                                                                          |                 |  |  |  |
|                                                                          | Fiscal Quarters |
|--------------------------------------------------------------------------|-----------------|
||
||
| Revenues                                                                 |            |   | $ | 19,253 |   | $ | 16,672 |   | $ | 17,562 |   | $ | 18,294 |   |
|                                                                          |                 |  |  |  |  |  |  |  |
| Income                    (loss) from operations                         |            |   | $ | 1,646 |   | $ | (3,013 | ) | $ | (2,190 | ) | $ | (5,579 | ) |
| Income                    (loss) from continuing operations              |            |   | $ | 1,628 |   | $ | (622 | ) | $ | (231 | ) | $ | (2,503 | ) |
| (Loss)                    income from discontinued operations            |            |   |   | (80 | ) |   | 656 |   |   | (34 | ) |   | 180 |   |
|                                                                          |                 |  |  |  |
|                                                                          |                 |  |  |  |  |  |  |  |
| Net income                    (loss)                                     |            |   | $ | 1,548 |   | $ | 34 |   | $ | (265 | ) | $ | (2,323 | ) |
|                                                                          |                 |  |  |  |
| Earnings                    (loss) per common share:                     |            |   |  |  |  |  |  |  |  |  |  |  |  |  |
|    Basic:                                                 |            |   |  |  |  |  |  |  |  |  |  |  |  |  |
|      Continuing                    operations   |            |   | $ | 0.12 |   | $ | (0.05 | ) | $ | (0.02 | ) | $ | (0.19 | ) |
|      Discontinued                    operations |            |   |   | — |   |   | 0.05 |   |   | — |   |   | 0.01 |   |
|                                                                          |                 |  |  |  |  |  |  |  |
| Earnings                    (loss) per common share                      |            |   | $ | 0.12 |   | $ | 0.00 |   | $ | (0.02 | ) | $ | (0.18 | ) |
|    Diluted:                                               |            |   |  |  |  |  |  |  |  |  |  |  |  |  |
|      Continuing                    operations   |            |   | $ | 0.12 |   | $ | (0.05 | ) | $ | (0.02 | ) | $ | (0.19 | ) |
|      Discontinued                    operations |            |   |   | — |   |   | 0.05 |   |   | — |   |   | 0.01 |   |
|                                                                          |                 |  |  |  |  |  |  |  |
|    Earnings                    (loss) per common share    |            |   | $ | 0.12 |   | $ | 0.00 |   | $ | (0.02 | ) | $ | (0.18 | ) |
|                                                                          |                 |  |  |  |

 

Quarterly amounts for earnings (loss) per share may not agree to annual            amount due to rounding.

 

******

 

F-30