FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

For the fiscal year ended December 31, 1997

                                         OR

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

For the transition period from _______________ to _______________

                           Commission File 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: None

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

                          Common Stock, $.01 par value
--------------------------------------------------------------------------------
                                (Title of Class)

      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.

                              Yes  |X|     No |_|

      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. [X]

      State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: $8,050,512 (based upon the average of the high
and low prices of Registrant's Common Stock, $.01 par value, as of March 20,
1997).

      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                   2,944,831
----------------------------          --------------------------
     (Title of Class)                 (No. of Shares Outstanding
                                         at March 20, 1997)

      DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement on Schedule 14A
          for Annual Meeting of Shareholders to be held April 29, 1998.
      --------------------------------------------------------------------
<PAGE>

                                     PART I


Item 1.     Business

            (a) General Development of Business. 4Kids Entertainment, Inc.,(the
"Company" ) is a vertically integrated entertainment based company. The Company
provides a comprehensive range of services including toy design and development,
domestic and international merchandise licensing, media buying and planning,
international and domestic television distribution and television production.

The Company operates through four wholly owned subsidiaries, Leisure Concepts,
Inc., Leisure Concepts International, Inc., The Summit Media Group, Inc. and
4Kids Productions, Inc.

Leisure Concepts, Inc. is engaged primarily in the business of domestic and
international licensing of the commercial rights to properties, personalities,
and product concepts. Leisure Concepts typically acts as exclusive agent in
connection with the grant to third parties of licenses to manufacture and sell
all types of merchandise based on such properties, personalities and concepts.
The licensing of these rights has been primarily in the areas of toys, games and
other juvenile merchandise, although grants have also been made in other fields,
including the food, toiletries, apparel and footwear industries. These rights
are also licensed in connection with the production of television shows, motion
pictures and publications such as magazines, juvenile books and comic strips.

Leisure Concepts International, Inc. based in the Company's London office,
provides hands-on management of properties in the important United Kingdom and
European marketplace.

The Summit Media Group, Inc. provides media planning, buying and marketing
services primarily for toy and video game companies. Summit Media also provides
television distribution services.

4Kids Productions, Inc. is a television and home video production company
specializing in youth-oriented entertainment programming.


            (b) Financial Information About Industry Segments. For the past
three fiscal years, the Company has been engaged in only one industry segment.
Substantially all its revenue, operating profit or loss and identifiable assets
during such fiscal years were attributable to that segment.

            (c) Narrative Description of the Business.

                  (1) Licensing (Other Than Product Concepts). The Company's
licensing activities are conducted through its subsidiary, Leisure Concepts,
Inc. ("LCI"). The licenses in this category of activity are typically based upon
well-known


                                      - 2 -
<PAGE>

personalities, fictional and fanciful characters, and established properties
often from the entertainment field. These rights in some cases may be licensed
from the owners of such properties and sublicensed to others, or LCI may acquire
the right to represent such owners, usually exclusively, in the granting of such
rights to third parties, negotiating licensing arrangements directly with
manufacturers or users and supervising the implementation of the agreements.

            A license agreement offered to manufacturers in the industry or
industries LCI considers appropriate, may provide the right to manufacture and
sell a broad range of toy products of various categories (a "master toy
license") or it may be limited to the right to manufacture and sell a specific
product or product lines. The typical licensing arrangement provides for the
payment of royalties based upon a percentage of the manufacturer's aggregate net
sales, at wholesale, of the products in question. LCI usually retains between
15% and 50% of the owner's licensing royalties, which generally range from 4% to
12% of net wholesale sales.

            As part of the standard licensing arrangements, the manufacturer
usually pays LCI a nonrefundable advance which is applied in most cases against
a guaranteed minimum royalty. The percentage of sales or royalty rate, and any
nonrefundable advance on guaranteed minimum payment, are negotiated for each
transaction and vary from industry to industry and from property to property.
Generally the term of the license runs for one to three years, and may be
renewed if certain minimum annual payments are received under the license
agreement. In addition, the agreements usually provide that the rights under
license will revert to the owner unless the manufacturer commences its marketing
activities by a specified date and continues to market the products thereafter
on a regular basis. The average start-up or lead time necessary for product
manufacture and marketing is between approximately six and eighteen months. LCI
does not assist in financing any of these endeavors.

            In the case of licenses for motion picture and television
productions, the licensees pay fees for each production, sometimes preceded by
option payments, and, usually in connection with television series, rerun
payments for multiple exhibitions in the United States. In some cases LCI
participates in the "net profits" (that is, income less deduction of fees and
chargeable expenses and production costs) that may be realized from the
exploitation of the property in question.

            Licensing revenues accounted for approximately 38%, 32% and 41% of
consolidated net revenues for the years ended December 31, 1997, 1996 and 1995,
respectively.

            (2) Certain Licensed Properties Represented Exclusively by Leisure
Concepts, Inc. Among the licensed properties represented exclusively by LCI are
the following:



                                      - 3 -
<PAGE>

                  o     The animated weekly television series "Mr. Men" which
                        premiered in September, 1997 in syndication in the
                        United States and the development of a line of toys
                        based on the characters.

                  o     Nintendo of America Inc. ("Nintendo"), for the various
                        characters, trademarks, and copyrights arising out of
                        the software for the video cartridge games developed and
                        owned by Nintendo including the very successful Nintendo
                        64. LCI represents Nintendo on a worldwide basis, other
                        than Japan. These video games ranked among the top toy
                        sellers in the United States in 1995, 1996 and 1997.

                  o     The syndicated weekly TV show, "WMAC Masters", which
                        features the nation's first live action martial arts
                        competition series.

                  o     James Bond 007 representation for this classic character
                        of seventeen action films the most recent being
                        "Tomorrow Never Dies", released during the 1997 holiday
                        season.

                  o     World Championship Wrestling, "WCW" and the "NWO" highly
                        popular television program and live event sports
                        entertainment.


            (3) Company-Owned Properties. World Martial Arts Council ("WMAC") is
an entertainment-based property utilizing skilled martial arts professionals
that was developed and is owned by the Company. The WMAC Masters television
series was launched in September of 1995. The Company has entered into a master
toy license agreement under which Bandai has the right to market and distribute
toys and video games for the WMAC.

            "Charlie Chan" the fictional asian detective who has been the
subject of numerous films based on the character created by Earl DeBiggers
Charlie Chan movie rights have been optioned to Miramax films.

            (4) Product Concepts. The product concepts developed by LCI usually
consist of a novel theme for a line of merchandise. LCI may conceive of an idea
and then develop it at its expense by preparing drawings or models of the
products or examples of various uses of the concepts, including descriptions or
illustrations of plans for the marketing and merchandising of the product lines
in question. LCI will then seek to license the product concept to manufacturers
for which LCI will typically receive a royalty based upon the manufacturer's
wholesale sales. Other times, although LCI has not created the original concept,
it will assist in developing a concept, initially conceived by others, into a
commercially viable product line, in which case


                                      - 4 -
<PAGE>

LCI may act as the licensor, as the agent for the rights holder of the concept
in question or may simply receive a royalty for services rendered. LCI does not
typically finance the activities of the manufacturers to which it licenses
product concepts. However, LCI sometimes enters into arrangements under which it
defers its royalties until after the manufacturer has recouped its cost of
production. Furthermore, because the overhead associated with the development of
product concepts is relatively low, this activity has generally been profitable
for LCI. There can be no assurance, however, that the development of product
concepts will be successful in the future.

            Examples of product concepts are "Quiz Wiz", "2-XL," "Talk Girl" and
"Grave Danger," which the Company represents on a worldwide basis. "Quiz Wiz" is
an electronic hand-held computer answer game. "2-XL" is an interactive toy robot
that questions and teaches children about a variety of educational subjects. LCI
licenses these properties to Tiger Electronics Inc. ("Tiger"), which is a major
shareholder of the Company. Grave Danger is a board game licensed to Pressman
Toys.

            The Company's agreements with Tiger are on substantially similar
terms and conditions as other agreements for similar properties represented by
the Company. For a description of certain agreements among Tiger, Mr. Randy
Rissman, the President and controlling shareholder of Tiger and Alfred R. Kahn,
the Company's Chairman, see "Business Experience", "Executive Compensation",
"Security Ownership of Certain Beneficial Owners and Management" and "Certain
Relationships and Related Transactions" below.

            (5) Media Buying, Planning and Television Syndication. The Company's
subsidiary The Summit Media Group, Inc. ("Summit Media"), provides clients,
including among others, Tiger, with media planning, buying and marketing
services, and television syndication services. Media buying accounted for 49%,
42% and 33% of consolidated net revenues for the years ended December 31, 1997,
1996 and 1995, respectively. Summit Media's current syndications include
"Oscar's Orchestra," the animated television series designed to introduce
children to classical music, "WMAC Masters", the weekly live action martial arts
competition, "Mr. Men", an animated series based on the popular book series,
"Enchanted Tales", an animated television series based on famous fairy tales
produced by Sony Music, "VanPires" a computer generated children's animated
television show, "Voltron" a children's animated television show and "Mark's
Wired World" a live action television show covering computer topics including
the internet.


                                      - 5 -
<PAGE>

            (6) Television and Home Video Production. The Company's subsidiary
4Kids Productions, Inc. ("4Kids Productions") is a television and home video
production company specializing in youth-oriented entertainment programming.
4Kids Productions produced the "WMAC Masters" television series and is currently
in production on the adaptation of the Japanese television series "Pokemon" for
syndication beginning in September 1998.

            (7) Dependence on a Few Sources of Licensing Revenues. The Company
typically derives a substantial portion of its licensing revenues from a small
number of properties, which properties usually generate revenues only for a
limited period of time. Because the Company's licensing revenues are highly
subject to changing fashion in the toy and entertainment business, its licensing
revenues from year to year from particular sources are subject to dramatic
increases and decreases. It is not possible to precisely anticipate the length
of time a project will be commercially successful, if at all. Popularity of
properties can vary from months to years. In addition, the Company has little
control over the timing of guarantee and minimum payments, some of which are
made upon the execution and delivery of license agreements. Because of this, the
Company must continually seek new properties from which it can derive revenues.

            The only property which contributed licensing revenues individually
in excess of 10% of consolidated net revenues for fiscal 1997 was World
Championship Wrestling. The only client/licensee which contributed revenues
individually in excess of 10% of consolidated net revenues for fiscal 1997 was
Tiger Electronics, Inc. On February 9, 1998, Tiger Electronics, Inc. a major
customer of the Company and a related party, announced that it would be selling
substantially all of its Business Assets to Hasbro, Inc. The Company anticipates
maintaining a strong business relationship with both the Successor to Tiger and
Hasbro, Inc. after the aquisition.

            (8) Trademarks and Copyrights. The Company generally does not own
any trademarks or copyrights in properties which it licenses. These rights are
typically owned by the creator or by the entity, such as a master toy licensee
or television producer, which may expend substantial amounts in developing or
promoting the concept. The Company does own the copyrights and trademarks to
"Charlie Chan" and the Company's project "WMAC Masters".

            (9) Seasonal Aspects. 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. As a result, in the Company's usual experience, its
net income during the second half of the year will generally be greater than
during the first half of the year. In addition, Summit Media's business is also
seasonal as the majority of toy and video game advertising occurs in the second
half of the year.


                                      - 6 -
<PAGE>

            (10) Competition. The principal competitors of the Company's
licensing activities (including product concepts) are the product development,
merchandising, marketing and advertising departments of toy and other juvenile
merchandise manufacturers and motion picture studios as well as independent
advertising agencies, licensing companies and numerous individuals acting as
licensing representatives. 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 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. However, the ultimate success of a new entrant
in the field would depend on its access to toy and other manufacturers, sources
of properties to be licensed, its know-how in the negotiation and subsequent
administration of licenses, and the retail market acceptance of the property in
question.

            The Company's media buying, planning and television syndication
activities as well as its television and home video production activities
operate in highly competitive industries and face as competitors many companies
with substantially greater resources and distribution networks than the Company.

            (11) Employees. As of March 20, 1998, the Company had a total of 45
full-time employees.


Item 2.     Properties

            The following table sets forth, with respect to properties leased
(none are owned) by the Company at March 20, 1998, the location of the property,
the date on which the lease expires and the use which the Company makes of such
facilities:

                                                                     Approximate
                                                                        Square
Address                      Expiration of Lease        Use             Feet
-------                      -------------------        ---          -----------

1414 Avenue of the Americas    May 31, 2004         Executive and       13,900
New York, New York                                  Sales Office,
                                                    Media Buying
                                                    and Television
                                                    Production

11400 West Olympic Boulevard   March 18, 1999       Subleased            2,460
Los Angeles, California

116 Putney Bridge Road         September 29,        International        1,200
Alice court                     2002                Sales Office
London, England


            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


                                      - 7 -
<PAGE>

            In the fourth quarter of 1997, the Company settled the action
against Toymax, H.K. Ltd., and its wholly owned subsidiary, Toymax, Inc. in
connection with the Company's licensing of the "Creepy Crawlers" property to the
Farley Candy Company.

            As of March 20, 1998, there were no legal proceedings pending
against the Company other than routine litigation incidental to its business.
Some matters involve claims for large amounts as well as other relief. Although
the consequences are not presently known, in the opinion of management, they
will not materially affect the Company's liquidity, financial position or
results of operations.

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

            During the Company's fiscal quarterly period ended December 31,
1997, there were no matters submitted to a vote of security holders.

                                     PART II

Item 5. Market for Registrant's Common Equity and Related
        Stockholder Matters

            (a) The Company's Common Stock is traded on the Nasdaq National
Market System. The following table indicates high and low sales quotations for
the periods indicated based upon information supplied by Nasdaq, Inc. Such
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.


   1997                             Low                         High
   ----                             ---                         ----

First Quarter                       1                           2 1/4
Second Quarter                      1 1/4                       3 3/8
Third Quarter                       2 7/8                       4
Fourth Quarter                      2 1/2                       3 7/8


   1996                             Low                         High
   ----                             ---                         ----

First Quarter                       2 1/8                       3 5/8
Second Quarter                      2                           3
Third Quarter                       1                           2 3/8
Fourth Quarter                      1                           2 1/8


            (b) Number of Holders of Common Stock. The number of holders of
record of the Company's Common Stock on March 25, 1998 was 138, which does not
include individual participants in security position listings.


                                      - 8 -
<PAGE>

            (c) Dividends. There were no dividends or other distributions made
by the Company during 1997 or 1996. Future dividend policy 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) Stock Purchases. The Board of Directors has authorized the
Company to acquire up to 165,000 shares of its Common Stock on Nasdaq or
elsewhere. Such purchases are to be made out of the Company's surplus. No such
purchases were made by the Company during 1997.

Item 6.  Selected Financial Data


<TABLE>
<CAPTION>
                                        Year Ended December 31,
                ---------------------------------------------------------------------
                    1997          1996          1995            1994          1993
                -----------   -----------    -----------    -----------   -----------
<S>             <C>           <C>            <C>            <C>           <C>
Total Net       $10,116,800   $ 6,977,327    $ 6,617,279    $ 9,191,582   $10,909,024
Revenues

Income (Loss)       739,135      (239,304)      (947,850)       135,250     2,524,688
from
Continuing
Operations

Net Income              .25          (.08)          (.32)           .05           .88
(Loss) Per
Common Share
from
Continuing
Operations

Net Income              .23          (.08)          (.32)           .04           .76
(Loss) Per
Common Share
from
Continuing
Operations
Assuming Full
Dilution

Weighted          2,944,831     2,944,831      2,944,831      2,936,239     2,885,161
Average
Number of
Common Shares
Outstanding
</TABLE>


The Company did not declare or pay any cash dividends during the five-year
period ended December 31, 1997.



At Year
End              1997          1996          1995          1994          1993
              -----------  -----------   -----------   -----------   -----------
Total Assets  $39,319,077  $30,432,130   $25,968,575   $29,376,396   $20,933,958

Working         6,823,466    5,342,436     6,894,818     8,159,128     8,713,842
Capital

Stockholders   12,128,739   11,389,604    11,628,908    12,576,758    12,367,458
Equity


                                      - 9 -
<PAGE>

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

General

            The Company receives revenues from a number of sources, principally
licensing and media buying. The Company typically derives a substantial portion
of its licensing revenues from a small number of properties, which properties
usually generate revenues only for a limited period of time. Because the
Company's licensing revenues are highly subject to changing fashion in the toy
and entertainment business, its licensing revenues from year to year from
particular sources are subject to dramatic increases and decreases. It is not
possible to precisely anticipate the length of time a project will be
commercially successful, if at all. Popularity of properties can vary from
months to years. As a result, the Company's revenues and net income may
fluctuate significantly between comparable periods. The Company's revenues have
historically been primarily derived from the license of toy and game concepts.
Thus, 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. In
addition, the Company's media buying subsidiary concentrates its activities on
the youth oriented market. As a result, most of its revenue is earned in the
third and fourth quarters when the majority of toy and video game advertising
occurs. In the Company's usual experience, its net income during the second half
of the year will generally be greater than during the first half of the year.
However, the Company has little control over the timing of guarantee and minimum
payments, some of which are made upon the execution and delivery of license
agreements.

Results of Operation

Twelve Months Ended December 31, 1997 compared to Twelve Months Ended December
31, 1996.

            Consolidated net revenue for the year ended December 31, 1997
increased 45% or $3,140,000 as compared to the year ended December 31, 1996.
Increased licensing revenue was recognized from the Nintendo property based on
the sales of Nintendo's new N64 game system in 1997. Increased licensing revenue
was also recognized from the "World Championship Wrestling" property. During the
fourth quarter of 1997, the Company licensed Toy Biz for the master toy rights
relating to the WCW property. Additionally, the Company realized increased
licensing revenue from the James Bond 007 property relating to sales of the
Nintendo James Bond 007 "Golden Eye" video game which was released in September
of 1997 and was licensed through


                                      - 10 -
<PAGE>

the Company. While net revenues were positively impacted for the full year and
fourth quarter of 1997 by the James Bond property, the Company expects a decline
in revenue from the James Bond Property for 1998 because certain of the
Company's rights to license new merchandise have terminated effective December
31, 1997. Revenues were positively impacted by the Company's settlement of its
outstanding litigation with Toymax (see Item 3 Legal Proceedings). Offsetting
these gains were decreased licensing revenue from some of the Company's more
mature properties including Quiz Wiz and lower than anticipated royalties from
"Mr. Men".

            Revenue from the Company's media and television syndication services
increased over 1996 performance. These activities comprised 49% of total net
revenue for 1997 as compared to 42% in 1996. Commissions earned on the media
placed increased from the addition of new clients including Play by Play and Big
Time Toys. Additionally, increased spending levels from some of the Company's
existing clients generated gains in commission revenue during 1997. Increased
syndication revenue was recognized from the additional programs syndicated by
the Company for the 1997-1998 broadcast season. The Company syndicated six hours
of programming per week for the 1997/1998 season compared to three and one half
hours per week in the prior year. The Company's television and home video
activities comprised approximately 12% and 15% of total net revenue for 1997 and
1996. This revenue related primarily to the "WMAC Masters" syndicated television
program which began airing in September 1995.

            Selling, general and administrative expenses increased 13% or
$817,406 compared to 1996 as a result of increased costs associated with
expanded activity in the Company's media buying and TV distribution activities
as well as certain television production expenses which were not specifically
attributable to television program production. Additionally, bonus amounts which
are based on pre-tax income levels increased in 1997 due to the increased level
of pre-tax income. Overall selling, general and administrative expenses
decreased as a percentage of net revenue from 91.6% in 1996 to 71.3% in 1997.
The Company will continue to seek effective cost reductions without adversely
impacting the Company's business.

            At December 31, 1997 there were approximately $4,516,000 of
capitalized film production costs, which primarily relates to 26 episodes of
"WMAC Masters" and 22 episodes of "Monster Wars". "WMAC Masters" is a weekly
syndicated television program which began airing in September, 1995 produced by
the Company's 4Kids Productions subsidiary. The first thirteen episodes of WMAC
Masters were produced in cooperation with Renaissance Atlantic Films. Monster
Wars began syndication in October 1993.

            Amortization of capitalized film costs increased $564,285 for the
year ended December 31, 1997 as compared to the


                                      - 11 -
<PAGE>

prior year. Included in amortization expense for 1997 is an additional expense
in the fourth quarter of approximately $702,000 relating to the "Monster Wars"
television program. The charge occurred as a result of the Company's periodic
evaluation of net realizable value of its capitalized costs. Amortization rates
may change as a result of changes in estimated future revenue. At December 31,
1997 the percentage of unamortized film cost expected to be amortized within the
next three years is approximately 70%.

            As a result of the above, the Company reported a net income for 1997
of $739,135, as compared to the reported net loss in 1996 of $239,304.


Year Ended December 31, 1996 Compared to Year Ended December 31, 1995.

            Consolidated net revenue for the year ended December 31, 1996
increased 5% or $360,048 as compared to the year ended December 31, 1995.
Increase in revenue was recognized from the Nintendo property based on the
strength of the launch of Nintendo's new N64 game system in September 1996.
Increased revenue was also recognized from the "Mr. Men" property. This classic
English property is the subject of a new animated television program which has
been distributed in the U.S. by the Company's Summit Media Group and will begin
airing in the fall of 1997. The Company negotiated a license with Playmates Toys
for the master toy license for Mr. Men. Offsetting these gains were decreased
licensing revenue from some of the Company's more mature properties including
Polly Pocket and Creepy crawlers and international licensing revenue received
from the Company's network of independent subagents, which has not yet
benefitted from the Company's newer licensing properties.

            Revenue from the Company's media and television syndication services
increased over 1995 performance. These activities comprised 42% of total net
revenue for 1996 as compared to 33% in 1995. Commissions earned on the media
placed increased from the addition of new clients including Direct Connect,
Erector, Thinkway Toys and Trendmaster. Increased syndication revenue was
recognized from the Monday through Friday television program Mega Men
distributed by the Company. The Company's television and home video activities
comprised approximately 15% of total net revenue for 1996 and 1995. This revenue
related primarily to the 1996 Olympic specials produced for the Atlanta
Committee for the Olympic Games which ran on the NBC television network and the
"WMAC Masters" syndicated television program which began airing in September
1995.

            Selling, general and administrative expenses decreased 16% or
$1,181,232 compared to 1995 primarily as a result of staff reductions. Overall
selling, general and administrative expenses decreased as a percentage of net
revenue from 114.5 % in 1995 to 91.6% in 1996 due to the decline in SG & A
expenses and an


                                      - 12 -
<PAGE>

increase in net revenues. The Company will continue to seek effective cost
reductions without adversely impacting the Company's business.

            At December 31, 1996 there were approximately $5,697,439 of
capitalized film production costs, which relate to 26 episodes of "WMAC Masters"
and 22 episodes of "Monster Wars". "WMAC Masters" is a weekly syndicated
television program which began airing in September, 1995 produced by the
Company's 4Kids Productions subsidiary. The first thirteen episodes of WMAC
Masters were produced in cooperation with Renaissance Atlantic Films. Monster
Wars began syndication in October 1993.

            Amortization of capitalized film costs remained approximately the
same for the year ended December 31, 1995 as compared to the prior year.
Included in amortization expense for 1995 is an additional expense in the fourth
quarter of $280,000 relating to "Monster Wars" weekly television show. The
charge occurred as a result of the Company's periodic evaluation of net
realizable value of its capitalized costs. Amortization rates may change as a
result of changes in estimated future revenue. At December 31, 1996 the
percentage of unamortized film cost expected to be amortized within the next
three years exceeds 70%.

            As a result of the above, the Company reported a net loss for 1996
of $239,304, as compared to the reported net loss in 1995 of $947,850.

Liquidity and Capital Resources

            At December 31, 1997, the Company had working capital of $6,823,466,
as compared to working capital of $5,342,436 at December 31, 1996. The increase
in working capital of $1,481,030 is primarily due to higher current receivables
generated by the Company's increased fourth quarter activity relating to
licensing, media buying and television distribution.

            Cash and cash equivalents were generally consistent with the year
ago level decreasing $24,697 from December 31, 1996.

            Accounts receivable, net (current and non-current) increased from
$19,889,353 at December 31, 1996 to $30,443,106 at December 31, 1997. This
increase is primarily due to the greater activity in the media business. Media
payable primarily represents obligations to television stations for advertising
time purchased on behalf of clients. Media payable increased from $16,038,574 at
December 31, 1996 to $21,591,172 at December 31, 1997. This increase is due to
the timing of receipts and subsequent payments to television stations as well as
higher levels of media buying activities. Amounts due to licensors, which
represent the owners share of royalties collected, increased by $2,063,809 to
$3,480,768 from December 31, 1996. The increase is primarily due to higher
royalties collected during the fourth quarter as compared to the prior year
which are paid to licensors after the close of the quarter.


                                      - 13 -
<PAGE>

            On February 9, 1998, Tiger Electronics, Inc. a major customer of the
Company and a related party, announced that it would be selling substantially
all of its Business Assets to Hasbro, Inc. The Company anticipates maintaining a
strong business relationship with both the Successor to Tiger Electronics, Inc.
and Hasbro, Inc. after the acquisition.

            The Company is currently in the process of evaluating its
information technology infrastructure for the Year 2000 compliance. The Company
does not presently anticipate that the cost to modify its information technology
infrastructure to be Year 2000 compliant will be material to its financial
condition or results of operations. The Company does not anticipate any material
disruption in its operations as a result of any failure by the Company to be in
compliance. The Company does not currently have any information concerning the
Year 2000 compliance status of its suppliers and customers. In the event that
the Company's significant suppliers or customers do not successfully and timely
achieve Year 2000 compliance, the Company's business or operations could be
adversely affected.

            In the opinion of management, the Company will be able to finance
its business as currently conducted from its current working capital and the
$2,000,000 credit facility with The Chase Manhattan Bank, formerly Chemical
Bank, discussed in Note 9 to the financial statements. As of March 20, 1998
there were no amounts outstanding under this facility. As the Company explores
new and expanded opportunities in the youth oriented entertainment market,
including television production, it will seek additional financing alternatives.


Item 8. Financial Statements and Supplementary Data

            Financial Statements and Supplementary Data are attached hereto.

                                   PART III

Item 10. Directors and Executive Officers of the Company

            Incorporated by reference to the Company's Definitive Proxy
Statement on Schedule 14A with respect to Annual Meeting of Shareholders to be
held April 29, 1998.

Item 11. Executive Compensation

            Incorporated by reference to the Company's Definitive Proxy
Statement on Schedule 14A with respect to Annual Meeting of Shareholders to be
held April 29, 1998.


                                     - 14 -
<PAGE>

Item 12. Security Ownership of Certain Beneficial Owners and Management

            Incorporated by reference to the Company's Definitive Proxy
Statement on Schedule 14A with respect to Annual Meeting of Shareholders to be
held April 29, 1998.

Item 13. Certain Relationships and Related Transactions

            Incorporated by reference to the Company's Definitive Proxy
Statement on Schedule 14A with respect to Annual Meeting of Shareholders to be
held April 29, 1998.


                                    PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

      (a)  1.  Financial Statements:

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

                                                             Page
                                                            Number
                                                            ------

            Independent Auditors' Report                     F-1

            Consolidated Balance Sheets -                    F-2
            December 31, 1997 and 1996

            Consolidated Statements of                       F-3
            Operations - Years Ended
            December 31, 1997, 1996
            and 1995

            Consolidated Statements of                       F-4
            Stockholders' Equity - Years
            Ended December 31, 1997, 1996
            and 1995

            Consolidated Statements of                       F-5
            Cash Flows - Years Ended
            December 31, 1997, 1996
            and 1995


            Notes to Consolidated                        F-6 to F-14
            Financial Statements

     (a)  2. and (d)  Financial Statement Schedules:


                                     - 15 -
<PAGE>

            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 (c) Exhibits. See Index of Exhibits annexed hereto.

     (b)  Reports on Form 8-K

            The Company did not file any Current Reports on Form 8-K during the
quarterly period ended December 31, 1997.



                                      - 16 -
<PAGE>

                                   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.


Date:  March 31, 1998   4KIDS ENTERTAINMENT, INC.



                                    By __________________________________
                                                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 31, 1998               ________________________________
                                           Alfred R. Kahn,
                                       Chairman of the Board,
                                      Chief Executive Officer and
                                               Director


Date:  March 31, 1998               ________________________________
                                             Robert Glick,
                                               Director


Date:  March 31, 1998               ________________________________
                                            Gerald Rissman,
                                               Director


Date:  March 31, 1998               ________________________________
                                          Joseph P. Garrity,
                                    Executive Vice President,
                                    Treasurer, Principal Financial
                                    Officer and Principal Accounting
                                               Officer
<PAGE>

INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders of
4Kids Entertainment, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of 4Kids
Entertainment, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31,
1997.  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 generally accepted auditing
standards.  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, such consolidated financial statements present fairly, in
all material respects, the financial position of 4Kids Entertainment, Inc.
and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.


Deloitte & Touche LLP
March 27, 1998


                                      F-1
<PAGE>

4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
ASSETS                                                                  1997          1996
<S>                                                                 <C>           <C>

CURRENT ASSETS:
  Cash and cash equivalents                                         $ 2,805,573   $ 2,830,270
  Accounts receivable - net (Notes 2 and 6)                          28,173,085    17,625,331
  Film inventory - net (Note 3)                                       1,456,009     1,852,439
  Prepaid refundable income taxes (Note 5)                                3,279       522,763
  Prepaid expenses and other current assets                           1,061,999     1,008,300
                                                                    -----------   -----------
           Total current assets                                      33,499,945    23,839,103

FURNITURE, FIXTURES AND COMPUTER EQUIPMENT -
  Net of accumulated depreciation of $1,269,478 and $1,174,260          197,649       237,226

ACCOUNTS RECEIVABLE - Noncurrent, net (Notes 2 and 6)                 2,270,021     2,264,022

FILM INVENTORY - Noncurrent (Note 3)                                  3,060,000     3,845,000

SECURITY DEPOSITS AND OTHER ASSETS                                      291,462       246,779
                                                                    -----------   -----------

TOTAL ASSETS                                                        $39,319,077   $30,432,130
                                                                    ===========   ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Due to licensors (Note 2)                                         $ 3,480,768   $ 1,416,959
  Media payable (Note 2)                                             21,591,172    16,038,574
  Accounts payable and accrued expenses                                 927,954       787,579
  Taxes payable                                                         307,030            --
  Current deferred tax liability (Note 5)                               369,555       253,555
                                                                    -----------   -----------

           Total current liabilities                                 26,676,479    18,496,667

NONCURRENT DEFERRED TAX LIABILITY (Note 5)                              513,859       545,859
                                                                    -----------   -----------

           Total liabilities                                         27,190,338    19,042,526
                                                                    -----------   -----------

COMMITMENTS AND CONTINGENCIES (Note 9)

STOCKHOLDERS' EQUITY (Notes 7 and 10):
  Preferred stock, $.01 par value - authorized, 3,000,000 shares;
    none issued                                                              --            --
  Common stock, $.01 par value - authorized, 10,000,000 shares;
    issued 2,944,831 shares                                              29,448        29,448
  Additional paid-in capital                                          4,429,906     4,429,906
  Retained earnings                                                   7,669,385     6,930,250
                                                                    -----------   -----------

           Total stockholders' equity                                12,128,739    11,389,604
                                                                    -----------   -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                          $39,319,077   $30,432,130
                                                                    ===========   ===========
</TABLE>

See notes to consolidated financial statements.


                                       F-2
<PAGE>

4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                           1997            1996            1995
                                                       ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>
REVENUES:
  Net revenues (Notes 4 and 6)                         $ 10,116,800    $  6,977,327    $  6,617,279
                                                       ------------    ------------    ------------

COSTS AND EXPENSES:
  Selling, general and administrative (Note 9)            7,209,817       6,392,411       7,573,643
  Amortization of capitalized film cost (Note 3)          1,634,762       1,070,477       1,080,889
                                                       ------------    ------------    ------------

           Total costs and expenses                       8,844,579       7,462,888       8,654,532
                                                       ------------    ------------    ------------

                                                          1,272,221        (485,561)     (2,037,253)

INTEREST INCOME                                              70,914         122,257         334,403
                                                       ------------    ------------    ------------

INCOME (LOSS) BEFORE INCOME TAX
  PROVISION (BENEFIT)                                     1,343,135        (363,304)     (1,702,850)

INCOME TAX PROVISION (BENEFIT) (Note 5)                     604,000        (124,000)       (755,000)
                                                       ------------    ------------    ------------

NET INCOME (LOSS)                                      $    739,135    $   (239,304)   $   (947,850)
                                                       ============    ============    ============

PER SHARE AMOUNTS: (Note 8)
  Basic earnings per common share                      $       0.25    $      (0.08)   $      (0.32)
                                                       ============    ============    ============
  Diluted earnings per common share                    $       0.23    $      (0.08)   $      (0.32)
                                                       ============    ============    ============
</TABLE>


See notes to consolidated financial statements.


                                       F-3
<PAGE>

4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                            Additional
                                    Common Stock              Paid-in        Retained
                                Shares         Amount         Capital        Earnings         Total
                             ------------   ------------   ------------   ------------    ------------
<S>                             <C>               <C>         <C>            <C>            <C>
BALANCE, DECEMBER 31, 1994      2,944,831         29,448      4,429,906      8,117,404      12,576,758

  Net loss                             --             --             --       (947,850)       (947,850)
                             ------------   ------------   ------------   ------------    ------------

BALANCE, DECEMBER 31, 1995      2,944,831         29,448      4,429,906      7,169,554      11,628,908

  Net loss                             --             --             --       (239,304)       (239,304)
                             ------------   ------------   ------------   ------------    ------------

BALANCE, DECEMBER 31, 1996      2,944,831         29,448      4,429,906      6,930,250      11,389,604

  Net income                           --             --             --        739,135         739,135
                             ------------   ------------   ------------   ------------    ------------

BALANCE, DECEMBER 31, 1997      2,944,831   $     29,448   $  4,429,906   $  7,669,385    $ 12,128,739
                             ============   ============   ============   ============    ============
</TABLE>



See notes to consolidated financial statements.

                                      F-4
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                     1997            1996           1995
                                                                 ------------    ------------    ------------
<S>                                                              <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                              $    739,135    $   (239,304)   $   (947,850)
  Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
    Depreciation and amortization                                     107,742         143,135         216,514
    Amortization of capitalized film cost                           1,634,762       1,070,477       1,080,889
    Provision for losses on accounts receivable                             0         100,000         183,420
    Deferred income taxes                                              84,000         137,555        (632,252)
    Changes in operating assets and liabilities providing
      (using) cash:
      Accounts receivable                                         (10,553,753)     (3,002,885)        793,392
      Film inventory                                                 (453,332)     (3,025,295)     (2,610,944)
      Prepaid refundable income taxes                                 519,484         (39,876)        117,051
      Prepaid expenses and other current assets                       (53,699)       (304,085)       (288,073)
      Security deposits and other assets                              (44,683)        (47,944)        194,750
      Due to licensors                                              2,063,809        (196,647)       (186,429)
      Media payable                                                 5,552,598       4,610,389      (1,679,000)
      Taxes payable                                                   307,030               0               0
      Accounts payable and accrued expenses                           140,375         151,562           3,266
                                                                 ------------    ------------    ------------

           Net cash provided by (used in) operating activities         43,468        (642,918)     (3,755,266)
                                                                 ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of furniture, fixtures and computer equipment              (68,165)        (32,589)       (110,268)
                                                                 ------------    ------------    ------------

           Net cash used in investing activities                      (68,165)        (32,589)       (110,268)
                                                                 ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from short-term bank note                                  400,000               0               0
  Re-payment of short-term bank note                                 (400,000)             --              --
                                                                 ------------    ------------    ------------

           Net cash provided by financing activities                       --              --              --
                                                                 ------------    ------------    ------------

NET DECREASE IN CASH AND CASH EQUIVALENTS                             (24,697)       (675,507)     (3,865,534)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                        2,830,270       3,505,777       7,371,311
                                                                 ------------    ------------    ------------

CASH AND CASH EQUIVALENTS, END OF YEAR                           $  2,805,573    $  2,830,270    $  3,505,777
                                                                 ============    ============    ============
</TABLE>


See notes to consolidated financial statements.


                                       F-5
<PAGE>

4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
--------------------------------------------------------------------------------

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles of Consolidation - The consolidated financial statements include
     the accounts of all wholly-owned subsidiaries. All related significant
     intercompany balances and transactions have been eliminated in
     consolidation.

     Description and Accounting Basis for Revenues - 4Kids Entertainment, Inc.
     and subsidiaries (the "Company") is an integrated entertainment and media
     company specializing in the youth oriented market.

     Licensing Business - The Company's licensing subsidiary is engaged
     primarily in the business of licensing the commercial rights to properties,
     personalities, and product concepts. The Company typically acts as
     exclusive agent in connection with the grant to third parties of licenses
     to manufacture and sell all types of merchandise based on properties,
     personalities and concepts. The licensing of these rights has been
     primarily in the area of toys, games and other juvenile merchandise. Grants
     have also been made in other fields, including the food, toiletries,
     apparel and footwear industries. Additionally, these rights are licensed in
     connection with the production of television shows, motion pictures and
     publications such as magazines, juvenile books and comic strips.

     These license agreements often include nonrefundable minimum guaranteed
     royalties which are payable by the licensee. The Company records as revenue
     its proportionate share of the minimum guarantee when all material terms of
     the contracts have been agreed to by the parties and a cash payment or
     reasonable assurance of collectability is received. It is at this point
     that the Company has substantially performed all of its obligations under
     the contract.

     For contracts not providing minimum guaranteed royalties and for royalty
     amounts in excess of the minimum guarantee, the Company records revenue
     based upon its share of earned royalties from the sales of the related
     property.

     Television and Video Productions - The Company accounts for its activities
     associated with the production of entertainment programming in accordance
     with Statement of Financial Accounting Standards No. 53 ("SFAS No. 53"),
     Financial Reporting by Producers and Distributors of Motion Picture Films.
     Under SFAS No. 53, the Company capitalizes costs associated with each
     individual production. The capitalized costs are classified into current
     and noncurrent assets depending on an estimate of when revenues associated
     with those costs are anticipated to be recognized. Such costs are amortized
     against the related revenue as such revenue is recognized. Amortization
     rates may change as a result of changes in estimated future revenue.
     Periodically, the Company evaluates the anticipated future revenue against
     the net realizable value of the capitalized costs and, where appropriate,
     reduces the carrying value of such costs to their estimated net realizable
     amount which would result in a corresponding charge to earnings.

     Media Buying, Planning and Syndication Services - Through the Company's
     wholly-owned subsidiary, The Summit Media Group, Inc. ("Summit Media"), the
     Company provides media planning and buying services for both print and
     broadcast. Summit Media is compensated based on a percentage of the media


                                      F-6
<PAGE>

     it places. Such revenue is recognized at the time the related media runs.
     Summit Media also provides television syndication services for which it
     receives a fee based on a percentage of the advertising sales generated by
     the related program. Such revenue is recognized at the time the syndication
     services are completed and the advertising sales of the related program are
     reasonably known. Summit Media will reflect a liability for media payable
     and a corresponding receivable from its clients in circumstances where
     Summit Media assumes the payment obligation for media commitments.

     Furniture, Fixtures and Computer Equipment - Furniture, fixtures and
     computer equipment are recorded at cost. Depreciation is computed using
     various methods over the estimated lives of the assets.

     Imputed Interest - The Company imputes interest on the noncurrent portion
     of accounts receivable at an average rate of 7%.

     Cash and Cash Equivalents - At December 31, 1997 and 1996, the Company had
     cash equivalents consisting primarily of funds invested in Treasury bills
     of approximately $2,200,541 and $2,472,446, respectively, with original
     maturities of 90 days or less.

     Use of Estimates - The preparation of financial statements in conformity
     with generally accepted accounting principles 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. Actual results could differ from
     those estimates.

2.   ACCOUNTS RECEIVABLE - MEDIA PAYABLE/DUE TO LICENSORS

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

     Due to licensors represents amounts collected by the Company on behalf of
     licensors, which are generally payable to such licensors after the close of
     the quarter.

     Additionally, accounts receivable include amounts due from clients for
     earned commissions and the cost of related media placed on their behalf in
     circumstances where the Company has assumed the payment obligation for such
     media. In such circumstances, the Company will record a corresponding
     liability for media payable. Accounts receivable consist of the following:


                                                          December 31,
                                                     1997              1996
                                                 ------------      ------------
     Gross accounts receivable                   $ 30,839,263      $ 20,426,510
     Allowance for doubtful accounts                 (396,157)         (537,157)
                                                 ------------      ------------

                                                   30,443,106        19,889,353

     Less long-term portion                         2,270,021         2,264,022
                                                 ------------      ------------

                                                 $ 28,173,085      $ 17,625,331
                                                 ============      ============


                                      F-7
<PAGE>

3.   FILM INVENTORY

     At December 31, 1997, there were $4,516,009 of capitalized film costs,
     which relate to two completed works in release and one in progress.
     Amortization of capitalized film cost was $1,634,762, $1,070,477 and
     $1,080,889 in 1997, 1996 and 1995, respectively. During 1997 and 1995, the
     Company recorded charges of approximately $702,000 and $280,000,
     respectively, to reduce the carrying value of film inventory primarily
     related to producing the "Monster Wars" television program. This reduction
     of the carrying value was based on the Company's periodic evaluation of
     anticipated future revenue against the net realizable value of capitalized
     cost. Film inventory consists of the following components:

                                                         December 31,
                                                  1997                 1996
                                               -----------          -----------
Opening balance                                $ 5,697,439          $ 3,742,621

Additions                                          453,332            3,025,295
                                               -----------          -----------

                                                 6,150,771            6,767,916

Amortization                                    (1,634,762)          (1,070,477)
                                               -----------          -----------

                                                 4,516,009            5,697,439

Less noncurrent portion                         (3,060,000)          (3,845,000)
                                               -----------          -----------

                                               $ 1,456,009          $ 1,852,439
                                               ===========          ===========

4.   REVENUES/MAJOR CUSTOMERS

     Licensing revenue included on the Statements of Operations are net of
     licensor participations of approximately $7,232,498 in 1997, $3,610,934 in
     1996 and $6,068,880 in 1995.

     The percentages of revenue from major properties and customers/licensees
     are as follows:

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                              1997     1996       1995
                                                                              ----     ----       ----
<S>                                                                           <C>        <C>
Percentage of revenue derived from major properties (revenue in
    excess of 10 percent of total revenue)                                    10%        25%        -

  Number of major properties                                                   1          2         -

  Percentage of revenue derived from major customers/licensees
    (revenue in excess of 10 percent of total revenue)                        25%        31%       32%

  Number of major customers/licensees                                          1          1         1
</TABLE>


                                      F-8
<PAGE>

     Additionally, through the Company's London office and network of
     international subagents, which allow it to license its properties through
     the world, the Company recognized approximately $841,000, $554,000 and
     $972,000 in net revenue from international sources, primarily in Europe,
     for 1997, 1996 and 1995, respectively.

5.   INCOME TAXES

     The Company has provided for deferred income taxes in accordance with
     Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
     for Income Taxes," whereby deferred income taxes are determined based upon
     the enacted income tax rates for the years in which these taxes are
     estimated to be payable or recoverable. Deferred income taxes arise from
     temporary differences resulting from a difference between the tax basis of
     an asset or liability and its reported amount in the financial statements.

        The income tax (benefit) provision includes the following:

                                              Year Ended December 31,
                                      1997              1996             1995
                                    ---------        ---------        ---------
Current:
Federal                             $ 490,000        $(326,000)       $(295,000)
State and local                        30,000           30,000           31,000
                                    ---------        ---------        ---------

                                      520,000         (296,000)        (264,000)
                                    ---------        ---------        ---------
Deferred:
Federal                               (82,000)         248,000         (195,000)
State and local                       166,000          (76,000)        (296,000)
                                    ---------        ---------        ---------

                                       84,000          172,000         (491,000)
                                    ---------        ---------        ---------

                                    $ 604,000        $(124,000)       $(755,000)
                                    =========        =========        =========


                                      F-9
<PAGE>

     The provision for taxes as reported is different than the tax provision
     computed by applying the statutory Federal rate of 34 percent. The
     differences are as follows:

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                        1997           1996           1995
                                                    -----------    -----------    -----------
<S>                                                 <C>            <C>            <C>
Income (loss) before income tax provision           $ 1,343,135    $  (363,304)   $(1,702,850)
                                                    ===========    ===========    ===========

Provision (benefit) at the statutory Federal rate   $   457,000    $  (124,000)   $  (579,000)

Provision for state and local income taxes net of
  Federal income tax benefit                            129,000        (30,000)      (175,000)

Other                                                    18,000         30,000         (1,000)
                                                    -----------    -----------    -----------

                                                    $   604,000    $  (124,000)   $  (755,000)
                                                    ===========    ===========    ===========
</TABLE>

     The Company's deferred tax liabilities are net of deferred tax assets of
     approximately $990,000 and $1,130,000 at December 31, 1997 and 1996,
     respectively. The components of the deferred tax balances at December 31,
     1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                                               1997           1996
                                                           -----------    -----------
<S>                                                        <C>            <C>
Commissions on guarantees not currently recognized for
  tax reporting purposes                                   $(1,873,000)   $(1,779,000)

Tax benefit of state and local tax loss carryforwards          119,000        428,000

Provision for doubtful accounts not currently deductible
  for tax reporting purposes                                    71,000        231,000

Film inventory valuation adjustment not currently
  deductible for tax reporting purposes                        769,000        471,000

Depreciation, amortization and other charges deducted
  for tax reporting purposes                                    31,000       (150,000)
                                                           -----------    -----------

                                                           $  (883,000)   $  (799,000)
                                                           ===========    ===========
</TABLE>


6.   RELATED PARTY TRANSACTIONS

     The Company provided certain services to Tiger Electronics, Inc., ("Tiger")
     a corporation controlled by an individual who is a director and major
     beneficial shareholder of the Company. These transactions totaled
     approximately $2,550,000, $2,141,000 and $2,112,000 of net revenue in 1997,
     1996 and 1995, respectively.

     The Company had receivables from Tiger of approximately $21,791,754 and
     $13,156,682 at December 31, 1997 and 1996, respectively.


                                      F-10
<PAGE>

7.   STOCK OPTIONS

     The Company applies Accounting Principles Board Opinion No. 25, Accounting
     for Stock Issued to Employees, and related interpretations in accounting
     for its plans. Accordingly, no compensation expense has been recognized for
     its stock-based compensation plans. Had compensation cost for the Company's
     stock option plans been determined based upon the fair value at the grant
     date for awards under these plans consistent with the methodology
     prescribed under Statement of Financial Accounting Standards No. 123,
     Accounting for Stock-Based Compensation, the Company's net income (loss)
     and net income (loss) per share would have been decreased/(increased) by
     approximately $239,000, ($246,000) and ($438,000), or $.08, ($.08) and
     ($.15) per share for 1997, 1996 and 1995 respectively. The fair value of
     the options granted during 1997, 1996 and 1995 are estimated on the date of
     grant using the Black-Scholes option-pricing model with the following
     assumptions: dividend yield 0% for all years, volatility of 70% for 1997
     and 49% for 1996 and 1995, risk-free interest rate of 7% for all years and
     an expected life based on the life of the options.

     The Company has various stock option plans (the "Plans"). Options may be
     exercised for a period of not more than ten years after the date of grant.
     Unless otherwise determined by the Company's Stock Option Committee, each
     option will be immediately exercisable with respect to 50 percent of the
     shares subject to the option and will become exercisable with respect to
     the other 50 percent on the first anniversary of the date of grant. Certain
     of the Plans permit the Committee to grant nonqualified options, with an
     exercise price of not less than 85 percent of the fair market value of the
     common stock; all other options must be at 100 percent of the fair market
     value.

     Under the 1994 and 1992 Plans, in each of the two years following the
     adoption of the plan, the Company's chairman was granted options to
     purchase 100,000 shares and each outside director was granted options to
     purchase 50,000 shares.

     The Company has outstanding employee stock options as follows:


                                      F-11
<PAGE>

                                                                       Weighted
                                                                        Average
                                                     Exercise Price    Exercise
                                      Options          Per Share         Price

Outstanding at December 31, 1994      816,500    $ 2.625   -   $ 10.25   $6.32

Options granted                       349,500      2.625   -      3.81    3.39
Options expired                       (10,000)     3.125   -      9.75    8.09
                                    ---------    -------       -------   -----

Outstanding at December 31, 1995    1,156,000      2.625   -     10.25    5.43
                                    =========    =======       =======   =====

Options granted                       265,000     2.3125   -     2.375    2.33
Options expired                      (172,000)     2.375   -      9.75    3.24
                                    ---------    -------       -------   -----

Outstanding at December 31, 1996    1,249,000     2.3125   -     10.25    5.13
                                    =========    =======       =======   =====

Options granted                       417,500      1.375   -     1.585    1.39
Options expired                      (200,000)      5.00   -      5.75    5.38
                                    ---------    -------       -------   -----

Outstanding at December 31, 1997    1,466,500      1.375   -     10.25    4.10
                                    =========    =======       =======   =====

Exercisable at December 31, 1997    1,312,750    $1.3750   -   $ 10.25   $4.42
                                    =========    =======       =======   =====

     Under the Company's various stock option plans, 159,500 shares of the
     Company's common stock were available at December 31, 1997 for future
     issuance.

     In addition, in June 1992, the Board of Directors granted to its outside
     directors, who receive no cash compensation, options to purchase a total of
     100,000 shares of the Company's common stock at $5.75, the market price of
     the Company's common stock on the date of grant. Such options, which were
     immediately exercisable, expired in June 1997 without exercise.

     At December 31, 1997, there were 1,626,000 shares of the Company's common
     stock reserved for stock options.

     The following table summarizes information about fixed-price stock options
     outstanding at December 31, 1997:

<TABLE>
<CAPTION>
                                        Options Outstanding                           Options Exercisable
                            ---------------------------------------------       ------------------------------
                                                               Weighted                              Weighted
                               Number     Weighted Average      Average            Number             Average
        Range of            Outstanding       Remaing          Exercise          Exercisable         Exercise
     Exercise Prices        at 12/31/97   Contractual Life       Price           at 12/31/97           Price

<S>            <C>           <C>              <C>               <C>                <C>                 <C>
$ 1.3750  -    $ 3.8125      1,005,000        6.5 years         $  2.28            851,250             $ 2.45
$   5.00  -    $  6.125        216,500        6.0 years         $  5.72            216,500               5.72
$   9.75  -    $  10.25        245,000        6.0 years         $ 10.16            245,000              10.16
                             ---------                                           ---------
                             1,466,500                                           1,312,750
                             =========                                           =========
</TABLE>


                                      F-12
<PAGE>

8.   EARNINGS PER SHARE

     The Company adopted Statement of Accounting Standards ("SFAS") No. 128
     "Earnings per Share" which required a change in the computation and
     presentation of earnings per share ("EPS") to include basic and diluted EPS
     in place of primary and fully diluted EPS, respectively. 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. Prior periods have been restated to reflect the new
     standard. For 1996 and 1995 the weighted average number of common shares
     outstanding were 2,944,831 and the effect of stock options was
     antidilutive. The following table reconciles Basic EPS with Diluted EPS for
     the year ended December 31, 1997.

                                             For the Year Ended 1997
                                     ----------------------------------------
                                     Income          Shares         Per Share
                                     ------          ------         ---------

     Net Income                     $739,135

     Basic Earnings Per Share:

     Income Available to Common
     Shareholders                    739,135          2,944,831         $.25

     Effect of Dilutive Security

     Stock Options                                      225,048

     Diluted Earnings Per Share     $739,135          3,169,879         $.23

     Options to purchase 840,000, 1,249,000, and 1,156,000 shares of common
     stock at prices ranging from $2.3125 - $10.25 per share were outstanding in
     1997, 1996 and 1995, respectively, but were not included in the computation
     of diluted earnings per share because their effect would have been
     antidilutive.

9. COMMITMENTS AND CONTINGENCIES

     a.   Bonus Plan - Bonuses are based upon an amount up to 14 percent of
          pretax profits. Key officers and employees, as designated by the Board
          of Directors, can be included in the Bonus Plan. For 1997, the Board
          of Directors, under the Bonus Plan, awarded the Chairman and Chief
          Executive Officer of the Company approximately $177,000. An additional
          amount of approximately $35,000 under the Bonus Plan was granted to
          another officer in 1997. Due to the losses in 1996 and 1995, no
          bonuses were granted under the Bonus Plan.

     b.   Leases - The Company is obligated for future leases for office space.
          Certain leases provide for escalation clauses and renewal options.


                                      F-13
<PAGE>

          At December 31, 1997, future minimum lease payments were as follows:

          Year Ending                                             Amount

          1998                                                  $ 397,446
          1999                                                    388,099
          2000                                                    384,984
          2001                                                    384,984
          2002                                                    379,752
          Thereafter                                              533,071
                                                              -----------
                                                              $ 2,468,336
                                                              ===========

          Rent expense approximated $445,136, $460,183 and $487,544 in 1997,
          1996 and 1995, respectively.

     c.   Litigation - As of December 31, 1997, there were no legal proceedings
          pending against the Company other than routine litigation incidental
          to its business. Some matters involve claims for large amounts as well
          as other relief. Although the consequences are not presently known, in
          the opinion of management, they will not materially affect the
          Company's liquidity, financial position or results of operations. In
          October 1997, the Company settled the litigation it had brought
          against Toymax, H.K. Ltd., and its affliliate Toymax, Inc., in
          connection with the Company's licensing of the "Creepy Crawlers"
          property. The settlement provided for a payment to the Company and the
          exchange of mutual releases including releases of counterclaims
          brought against the Company.

     d.   Credit Facility -The Company's line of credit (the "Credit Facility")
          from Chase Bank which expired on June 30, 1997 has been renewed
          through June 30, 1998. Under the terms the Company may borrow from
          time to time for general working capital purposes up to $2 million.
          Any borrowings under the credit facility would be secured by the
          Company's receivables. The Credit Facility provides for an interest
          rate of 1% over the bank's prime rate and an annual commitment fee of
          3/4%. As of December 31, 1997 the Company had no borrowings under the
          Credit Facility.



10.  SUBSEQUENT EVENTS

     In January 1998, the Company granted options to purchase 40,000 shares to
     the Chairman and 20,000 shares to each of the outside directors at $2.75
     per share, the market price of the Company's common stock at that time. In
     addition, the company granted options to purchase 96,000 shares of the
     Company's common stock at $2.75, the market price of the Company's common
     stock on that date, to five employees, three of which are executive
     officers.

     On February 9, 1998, Tiger Electronics, Inc., a major customer of the
     Company and a Related Party (Note 6) announced that it would be selling
     substantially all of its Business Assets to Hasbro, Inc. The Company
     anticipates maintaining a strong business relationship with both the
     successor to Tiger Electronics, Inc. and Hasbro, Inc. after the
     acquisition. In addition, on March 4, 1998, a director and major beneficial
     shareholder of the Company, who is also a principal stockholder of Tiger
     Electronics, Inc., announced his resignation from the Company's Board of
     Directors.

                                     ******


                                      F-14
<PAGE>

Exhibit                                                                 Page
Number                              Description                        Number
------                              -----------                        ------

(3) (a) Certificate of Incorporation of the Registrant,
        as amended (13)
    (b) By-Laws of the Registrant adopted by the Board
        of Directors on March 28, 1991 (2)
    (c) Resolution of the Board of Directors of the
        Registrant adopted March 12, 1991 reducing the
        size of the Board from six directors to three
        directors (2)
(4) (a) Form of Common Stock Certificate (3)
(10)(a) Bonus Plan of the Registrant (*)(4)
    (b) 1985 Non-Qualified Stock Option Plan, as
        amended (*)(4)
    (c) 1986 Stock Option Plan, as amended (*)(4)
    (d) 1992 Stock Option Plan (*)(5)
    (e) 1993 Stock Option Plan (*)(6)
    (f) 1994 Stock Option Plan (*)(10)
    (g) 1995 Stock Option Plan (*)(11)
    (h) 1996 Stock Option Plan (*)(15)
    (i) Stock Option Agreement, dated June 10, 1992,
        between the Registrant and Randy O. Rissman (*)(7)
    (j) Stock Option Agreement, dated June 10, 1992,
        between the Registrant and Gerald Rissman (*)(7)
    (k) Agreement between Nintendo of America, Inc. and
        the Registrant dated December 17, 1987 (4)
    (l) Agreement of Lease, dated March 28, 1988,
        between the Registrant and 1414 Americas
        Company (2)
    (m) Amendment, dated July 8, 1994, to Agreement of
        Lease between the Registrant and 1414 Americas
        Company. (12)
    (n) Agreement of Lease, dated June 30, 1991,
        between the Registrant and Olympic Purdue
        Associates (the "Olympic Lease") (7)
    (o) First Amendment, dated January 3, 1994, to the
        Olympic Lease (7)
    (p) Agreement of Lease, dated March 23, 1993, between
        Leisure Concepts International, Inc. and Svenska
        Handelsbanken (7)
    (q) Employment Agreement, dated March 12, 1991
        between the Registrant and Alfred R. Kahn(*)(8)
    (r) Employment Agreement, dated June 3, 1991,
        between the Registrant and Joseph Garrity
        (*)(9)
    (s) Amendment, dated as of October 17, 1994, to the
        Employment Agreement between the Registrant and
        Joseph Garrity (*)(12)
    (t) Employment Agreement, dated January 1, 1995 between The
        Summit Media Group, Inc. and Sheldon Hirsch.(*)(13)
    (u) Employment Agreement, dated January 1, 1995 between The
        Summit Media Group, Inc. and Thomas J. Kenney. (*)(13)
<PAGE>

Exhibit                                                                 Page
Number                              Description                        Number
------                              -----------                        ------

    (v) Employment Agreement, dated January 9, 1996 between
        4 Kids Productions, Inc. and Norman Grossfeld. (*)(13)
    (w) Note, dated May 29, 1997, between the Registrant
        and Chemical Bank. (16)
    (x) Security Agreement, dated May 29, 1996, by and between
        Leisure Concepts, Inc. and Chemical Bank (16)
    (y) Security Agreement, dated May 29, 1996, by and between
        4Kids Productions, Inc. and Chemical Bank (16)
    (z) Security Agreement, dated May 29, 1996, by and between The
        Summit Media Group, Inc. and Chemical Bank (16)
    (aa)Amendment, dated as of January 1, 1997, to the Employment
        Agreement between the Registrant and Joseph P.
        Garrity(*)(16)
    (bb)Amendment, dated as of January 1, 1997, to the Employment
        Agreement between The Summit Media Group, Inc. and Sheldon
        Hirsch(*)(16)
    (cc)Amendment, dated as of January 1, 1997, to the Employment
        Agreement between The Summit Media Group, Inc. and Thomas
        Kenney(*)(16)
    (dd)Amendment, dated as of February, 1997, to the Employment
        Agreement between the Registrant and Alfred R.
        Kahn(*)(16).
    (21)List of Subsidiaries of the Registrant
    (24)Consent of Deloitte & Touche, Certified Public
        Accountants

-----------------------------------------------------------------

      (*) 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, 1989.

      (2) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1990.

      (3) Incorporated by reference to Registration Statement on Form S-1 (File
No. 33-3056) declared effective March 7, 1986.

      (4) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1987.

      (5) Incorporated by reference to 1992 Proxy Statement.

      (6) Incorporated by reference to 1993 Proxy Statement.

      (7) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1992.

      (8) Incorporated by reference to Amendment No. 1 to Schedule 13D of Alfred
Kahn, Tiger Electronics Inc. and Owen Randall Rissman dated February 22, 1991.
<PAGE>

      (9) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1991.

      (10) Incorporated by reference to 1994 Proxy Statement.

      (11) Incorporated by reference to 1995 Proxy Statement.

      (12) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1994.

      (13) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1995.

      (14) Incorporated by reference to Current Report on Form 8-K dated May 29,
1997.

      (15) Incorporated by reference to 1997 Proxy Statement.

      (16) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1996.