|
|

|UNITED STATES 


SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-Q

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


For
the quarterly period ended September 30, 2005


OR

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



|For the transition period from
_____________ to _____________
|-------------------------------------------------------------



|Commission file number 0-7843
|-----------------------------



|4Kids Entertainment, Inc.
      (Exact name of Registrant as specified in its charter)
|--------------------------------------------------------------------------------------



|New York
      (State or other jurisdiction of 
      incorporation or organization) | 13-2691380
      (I.R.S. Employer
      Identification No.)
|------------------------------------------------------------------------------------ | -----------------------------------------------------------





|1414 Avenue of the Americas 
      New York, New York 10019 
      (212) 758-7666
      (Address, including zip code, and telephone number,
      including area code,
      of Registrants principal executive offices)
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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




        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes |X|    No |_|


Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_|    No|X|





At November 9, 2005, the number of
shares outstanding of the Registrants common stock, par value $.01 per share, was
12,702,143.

4Kids
Entertainment, Inc. and Subsidiaries


Table of Contents
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Page #
Part IFINANCIAL INFORMATION
|-----------------------------------

|Item 1. | Financial Statements                                                                                                                                                                 |   
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --
|        |                                                                                                                                                                                      |   
|        | Consolidated Balance Sheets as of
September 30, 2005
           (Unaudited) and December 31, 2004                                                                                    | 2 
|        |                                                                                                                                                                                      |   
|        | Consolidated Statements of Income for the three and nine months   
        ended September 30, 2005 and 2004 (Unaudited)                                                             | 3 
|        |                                                                                                                                                                                      |   
|        | Consolidated Statements of Stockholders' Equity and    Comprehensive Income for the nine months
        ended    September 30, 2005 (Unaudited) and the year ended December 31, 2004 | 4 
|        |                                                                                                                                                                                      |   
|        | Consolidated Statements of Cash Flows for the nine months   
        ended September 30, 2005 and 2004 (Unaudited)                                                                   | 5 
|        |                                                                                                                                                                                      |   
|        | Notes to Consolidated Financial Statements (Unaudited)                                                                                                                               | 6 
|        |                                                                                                                                                                                      |   
|Item 2. | Managements Discussion and Analysis of Financial
           Condition and Results of Operations                                                                                     | 14
|        |                                                                                                                                                                                      |   
|Item 3. | Quantitative and Qualitative Disclosures about Market
        Risk                                                                                                                   | 23
|        |                                                                                                                                                                                      |   
|Item 4. | Controls and Procedures                                                                                                                                                              | 23
|        |                                                                                                                                                                                      |   

# Part IIOTHER INFORMATION

|Item 1. | Legal Proceedings                                           | 24
|------- | ----------------------------------------------------------- | --
|        |                                                             |   
|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 24
|       
|Item 6. | Exhibits                                                    | 25

|Signatures |  | 26
|---------- |  | --

|Part I - FINANCIAL INFORMATION
Item 1.  Financial Statements4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES 

CONSOLIDATED BALANCE SHEETS
                                                 September 30, 2005 AND DECEMBER 31, 2004
                                             (In thousands of dollars, except share data)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ASSETS                                                                                   | 2005 | 2004       
|---------------------------------------------------------------------------------------- | ---- | -----------
|CURRENT ASSETS:                                                                          |      | (Unaudited)
|Cash and cash equivalents                                                                |      | $  84,451  
|Investments                                                                              |      | 19,548     
|                                                                                         |      |            
|                                                                                         |      |            
|Total cash and investments                                                               |      | 103,999    
|Accounts receivable - net                                                                |      | 26,852     
|Prepaid 4Kids TV broadcast fee, net of accumulated amortization                          |     
|of $79,968 and $64,306 in 2005 and 2004, respectively                                    |      | 13,945     
|Prepaid income taxes                                                                     |      | 1,939      
|Prepaid expenses and other current assets                                                |      | 2,618      
|Deferred income taxes                                                                    |      | --         
|                                                                                         |      |            
|Total current assets                                                                     |      | 149,353    
|                                                                                        
|PROPERTY AND EQUIPMENT - NET                                                             |      | 2,536      
|                                                                                        
|OTHER ASSETS:                                                                            |     
|Accounts receivable - noncurrent, net                                                    |      | 1,029      
|Investment in equity securities                                                          |      | 726        
|Film and television costs - net                                                          |      | 13,032     
|Deferred income taxes - noncurrent                                                       |      | 1,436      
|Other assets - net                                                                       |      | 8,927      
|                                                                                         |      |            
|TOTAL ASSETS                                                                             |      | $177,039   
|                                                                                         |      |            
|                                                                                         |      |            
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                     |     
|                                                                                        
|CURRENT LIABILITIES:                                                                     |     
|Due to licensors                                                                         |      | $    7,990 
|Media payable                                                                            |      | --         
|Accounts payable and accrued expenses                                                    |      | 10,352     
|Deferred revenue                                                                         |      | 5,564      
|Deferred income taxes                                                                    |      | 396        
|                                                                                         |      |            
|Total current liabilities                                                                |      | 24,302     
|                                                                                        
|DEFERRED RENT                                                                            |      | 1,093      
|                                                                                         |      |            
|Total liabilities                                                                        |      | 25,395     
|                                                                                         |      |            
|COMMITMENTS AND CONTINGENCIES (Note 3)                                                   |     
|                                                                                        
|STOCKHOLDERS' EQUITY                                                                     |     
|Preferred stock, $.01 par value - authorized, 3,000,000 shares; none issued              |      | --         
|Common stock, $.01 par value - authorized, 40,000,000 shares;                            |     
|issued, 14,451,143 and 14,411,768 shares; outstanding 12,778,143 and                     |     
|13,661,768 shares in 2005 and 2004, respectively                                         |      | 145        
|Additional paid-in capital                                                               |      | 58,638     
|Accumulated other comprehensive income                                                   |      | 617        
|Retained earnings                                                                        |      | 124,159    
|                                                                                         |      |            
|                                                                                         |      | 183,559    
|Less - cost of 1,673,000 and 750,000 treasury shares in 2005 and 2004,      respectively |      | 31,915     
|                                                                                         |      |            
|                                                                                         |      | 151,644    
|                                                                                         |      |            
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                               |      | $177,039   
|                                                                                         |      |            

|See notes to consolidated financial
statements.


2
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                                                 THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
                                             (In thousands of dollars, except share data)
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                          | Three Months Ended
September 30, | Nine Months Ended
September 30,
|------------------------------------------------------------------------- | -------------------------------- | -------------------------------
|
|NET REVENUES                                                              |                                  | $       20,522                 
|                                                                          |                                  |                                
|COSTS AND EXPENSES:                                                       |                                 
|Selling, general and administrative                                       |                                  | 8,802                          
|Production service costs                                                  |                                  | 2,093                          
|Amortization of television and film costs and 4Kids TV      broadcast fee |                                  | 7,248                          
|                                                                          |                                  |                                
|Total costs and expenses                                                  |                                  | 18,143                         
|                                                                          |                                  |                                
|INCOME FROM OPERATIONS                                                    |                                  | 2,379                          
|                                                                         
|INTEREST INCOME                                                           |                                  | 654                            
|                                                                          |                                  |                                
|INCOME BEFORE INCOME TAXES                                                |                                  | 3,033                          
|                                                                         
|INCOME TAXES                                                              |                                  | 1,055                          
|                                                                          |                                  |                                
|NET INCOME                                                                |                                  | $         1,978                
|                                                                          |                                  |                                
|PER SHARE AMOUNTS:                                                        |                                 
|Basic earnings per common share                                           |                                  | $            0.15              
|                                                                          |                                  |                                
|Diluted earnings per common share                                         |                                  | $            0.15              
|                                                                          |                                  |                                
|Weighted average common shares                                            |                                 
|outstanding - basic                                                       |                                  | 13,000,418                     
|                                                                          |                                  |                                
|Weighted average common shares                                            |                                 
|outstanding - diluted                                                     |                                  | 13,424,913                     
|                                                                          |                                  |                                

|See notes to consolidated financial
statements.


3
4KIDS ENTERTAINMENT,
INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS
OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME NINE MONTHS ENDED SEPTEMBER 30,
2005 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2004 (In thousands of dollars and shares)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                        |  |        |  |      |  |        
|--------------------------------------- |  | ------ |  | ---- |  | -------
|
|                                        |  |        |  |      |  |        
|BALANCE, DECEMBER 31, 2003              |  | 13,965 |  | $140 |  | $52,798
|Proceeds from exercise of stock options |  | 446    |  | 4    |  | 2,295  
|Tax benefit from exercise of stock      | 
|options                                 |  | --     |  | --   |  | 2,975  
|                                        |  |        |  |      |  |        
|Acquisition of treasury stock, at cost  |  | --     |  | --   |  | --     
|Comprehensive income:                   | 
|                                        |  |        |  |      |  |        
|Net income                              |  | --     |  | --   |  | --     
|                                        |  |        |  |      |  |        
|Translation adjustment                  |  | --     |  | --   |  | --     
|                                        |  |        |  |      |  |        
|Total comprehensive income              |  | --     |  | --   |  | --     
|                                        |  |        |  |      |  |        
|BALANCE, DECEMBER 31, 2004              |  | 14,411 |  | $144 |  | $58,068
|Proceeds from exercise of stock options |  | 40     |  | 1    |  | 440    
|Tax benefit from exercise of stock      | 
|options                                 |  | --     |  | --   |  | 130    
|                                        |  |        |  |      |  |        
|Acquisition of treasury stock, at cost  |  | --     |  | --   |  | --     
|Comprehensive income:                   | 
|                                        |  |        |  |      |  |        
|Net income                              |  | --     |  | --   |  | --     
|                                        |  |        |  |      |  |        
|Translation adjustment                  |  | --     |  | --   |  | --     
|                                        |  |        |  |      |  |        
|Total comprehensive income              |  | --     |  | --   |  | --     
|                                        |  |        |  |      |  |        
|BALANCE, SEPTEMBER 30, 2005             |  | 14,451 |  | $145 |  | $58,638
|                                        |  |        |  |      |  |        

|See notes to consolidated financial
statements.



4

4KIDS ENTERTAINMENT,
INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS
OF CASH FLOWS (UNAUDITED)NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (In thousands of dollars)
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                     | 2005 | 2004        
|-------------------------------------------------------------------- | ---- | ------------
|CASH FLOWS FROM OPERATING ACTIVITIES:                                |      |             
|Net income                                                           |      | $     4,573 
|Adjustments to reconcile net income to net cash (used in)            |     
|provided by operating activities:                                    |     
|Depreciation and amortization                                        |      | 872         
|Amortization of television and film costs and 4Kids TV broadcast fee |      | 21,651      
|Provision for doubtful accounts                                      |      | 15          
|Deferred income taxes                                                |      | 1,359       
|Tax benefit on exercise of stock options                             |      | 130         
|Changes in operating assets and liabilities:                         |     
|Accounts receivable                                                  |      | 12,922      
|Film and television costs                                            |      | (8,503      
|Prepaid income taxes                                                 |      | 1,135       
|Prepaid 4Kids TV broadcast fee                                       |      | (22,616     
|Prepaid expenses and other current assets                            |      | (859        
|Other assets - net                                                   |      | (844        
|Due to licensors                                                     |      | (8,869      
|Media payable                                                        |      | (3,723      
|Accounts payable and accrued expenses                                |      | (2,237      
|Deferred revenue                                                     |      | (1,291      
|Deferred rent                                                        |      | 82          
|                                                                     |      |             
|Net cash(used in) provided by operating activities                   |      | (6,203      
|                                                                     |      |             
|CASH FLOWS FROM INVESTING ACTIVITIES:                                |     
|Proceeds from maturities of investments                              |      | 42,423      
|Purchase of investments                                              |      | (45,904     
|Purchase of property and equipment                                   |      | (593        
|Proceeds from disposal of property, plant and equipment              |      | 6           
|                                                                     |      |             
|Net cash used in investing activities                                |      | (4,068      
|                                                                     |      |             
|CASH FLOWS FROM FINANCING ACTIVITIES:                                |     
|Proceeds from exercise of stock options                              |      | 441         
|Purchase of treasury shares                                          |      | (16,971     
|                                                                     |      |             
|                                                                     |      |             
|Net cash used in financing activities                                |      | (16,530     
|                                                                     |      |             
|EFFECTS OF EXCHANGE RATE CHANGES ON CASH                             |     
|AND CASH EQUIVALENTS                                                 |      | (507        
|                                                                     |      |             
|NET DECREASE IN CASH AND CASH EQUIVALENTS                            |      | (27,308     
|                                                                    
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                       |      | 111,759     
|                                                                     |      |             
|CASH AND CASH EQUIVALENTS, END OF PERIOD                             |      | $   84,451  
|                                                                     |      |             
|                                                                     |      |             
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                    |     
|                                                                    
|CASH PAID DURING THE PERIOD FOR:                                     |     
|Income Taxes                                                         |      | $        169
|                                                                     |      |             

|See notes to consolidated financial
statements.


5



4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                                             (In thousands of dollars, except share and per share data)
1. DESCRIPTION OF
BUSINESS


4Kids Entertainment, Inc. (the
Company), together with the subsidiaries through which the Companys
businesses are conducted (the Company), is a diversified entertainment and
media company specializing in the youth oriented market with operations in the following
business segments: Licensing, Advertising Media and Broadcast, Television and Film
Production/Distribution.


Licensing 
The Companys wholly-owned subsidiary, 4Kids Entertainment Licensing, Inc.
(4Kids Licensing), is engaged in the business of licensing the merchandising
rights to popular childrens television series, properties and product concepts
(collectively the Properties). 4Kids Licensing typically acts as exclusive
merchandising agent in connection with the grant to third parties of licenses to
manufacture and sell all types of merchandise, including toys, videogames, trading cards,
apparel, housewares, footwear, books and other published materials, based on such
Properties. 4Kids Entertainment International, Ltd. (4Kids International), the
Companys wholly-owned subsidiary based in London, manages the Properties represented
by the Company in the United Kingdom and European marketplaces.


4Kids Technology, Inc., a
wholly-owned subsidiary, develops ideas and concepts for licensing which integrate new and
existing technologies with traditional game and toy play patterns. Websites 4Kids, Inc., a
wholly-owned subsidiary, specializes in website development by creating websites designed
to enhance and support the marketing of childrens properties represented by the
Company.


Advertising Media and
Broadcast  The Company, through a multi-year agreement with Fox,
leases Foxs Saturday morning programming block from 8am to 12pm eastern/pacific time
(7am to 11am central time). In January 2005, the Company changed the name of the Saturday
morning programming block from Fox Box to 4Kids TV. The Company
provides substantially all programming content to be broadcast on 4Kids TV. 4Kids Ad
Sales, Inc., a wholly-owned subsidiary of the Company, retains all of the revenue from its
sale of network advertising time for the four-hour time period leased from Fox.


The Companys wholly-owned
subsidiary, The Summit Media Group, Inc. (Summit Media), provides print and
broadcast media planning and buying services for clients which are principally in the
childrens toy and game business. Summit Media is compensated by receiving a
percentage of the cost of the media it places.


Television and Film
Production/Distribution  The Companys wholly-owned subsidiary,
4Kids Productions, Inc. (4Kids Productions), produces and acquires animated
and live-action television programs and theatrical motion pictures for distribution to the
television, home video and theatrical markets. 4Kids Productions also adapts foreign
programming for the U.S. market and produces original animated television programming for
domestic and international broadcast. Additionally, 4Kids Productions produces original
music compositions for use with its television and film production activities.


4Kids Entertainment Music, Inc.
(4Kids Music), a wholly-owned subsidiary, markets and manages the musical
operations of the Company on certain existing and newly created music associated with its
television programming. 4Kids Entertainment Home Video, Inc. (4Kids Home
Video), a wholly-owned subsidiary, distributes home videos associated with
television programming produced by 4Kids Productions.


2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES


Basis of
Presentation  The consolidated financial statements, except for the
December 31, 2004 consolidated balance sheet and the consolidated statement of
stockholders equity for the year ended December 31, 2004, are unaudited. In the
opinion of management, the accompanying consolidated financial statements contain all
adjustments (consisting only of normal recurring adjustments) necessary to present fairly
the financial position of the Company as of September 30, 2005 and December 31, 2004 and
the results of operations for the three and nine months ended September 30, 2005 and 2004,
and stockholders equity for the nine months ended September 30, 2005 and the year
ended December 31, 2004, and comprehensive income, and cash flows for the nine months
ended September 30, 2005 and 2004. Because of the inherent seasonality and changing trends
of the toy, game, entertainment and advertising industries, operating results for the
Company on a quarterly basis may not be indicative of operating results for the full year.


These consolidated financial
statements should be read in conjunction with the Companys audited consolidated
financial statements and notes thereto, for the year ended December 31, 2004, which are
included in the Companys Annual Report on Form 10-K on March 16, 2005 and the
amended Forms 10-K/A on March 18, 2005 and April 29, 2005 with respect to such period that
have been filed with the Securities and Exchange Commission. All significant intercompany
accounts and transactions have been eliminated. The December 31, 2004 consolidated balance
sheet amounts are derived from the Companys audited consolidated financial
statements.


6
Revenue
Recognition  Merchandising licensing revenues:
Merchandise licensing revenues are recognized when the underlying royalties from the sales
of the related products are earned. The Company recognizes guaranteed minimum royalties at
the time the arrangement becomes effective if the Company has no significant direct
continuing involvement with the underlying property or obligation to the licensee. Where
the Company has significant continuing direct involvement with the underlying property or
obligation to the licensee, guaranteed minimum royalties are recognized ratably over the
term of the license or based on sales of the related products, if greater. Licensing
advances and guaranteed payments collected, but not yet earned by the Company, are
classified as deferred revenue in the accompanying consolidated balance sheets.


Broadcast advertising
revenues: Advertising revenues are recognized when the related commercials
are aired and are recorded net of agency commissions and an appropriate reserve when
advertising is sold together with a guaranteed audience delivery. Internet advertising
revenues are recognized on the basis of impression views in the period the advertising is
displayed. Fee-based commissions for media planning and buying services, for clients in
both print and broadcast media, are recognized at the time the related media runs.


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


Production and adaptation costs
charged to the licensor are included in net revenues and the corresponding costs are
included in production service costs in the accompanying consolidated statements of
income. Production service costs included in net revenues amounted to $2,093 and $6,215
for the three and nine months ended September 30, 2005, respectively, and $1,941 and
$6,942 for the three and nine months ended September 30, 2004, respectively.


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


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


Prepaid 4Kids TV Broadcast
Fee  The Company capitalizes the broadcast fee paid to Fox and
amortizes the amount of such fee over the broadcast season based on estimated advertising
revenue. During the nine months ended September 30, 2005, the Company paid Fox and certain
affiliates $6,752 and $15,864 attributable to the third and fourth years broadcast
fees, respectively, and during calendar year 2004, the Company paid Fox and certain
affiliates $6,934 and $19,228 attributable to the second and third years broadcast
fees, respectively. The unamortized portion of these fees of $13,945 and $6,991, are
included in Prepaid 4Kids TV broadcast fee on the accompanying consolidated
balance sheets as of September 30, 2005 and December 31, 2004, respectively.


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


7
Translation of Foreign Currency
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting Comprehensive Income, the Company classifies
items of other comprehensive income by their nature in the financial statements and
displays the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the consolidated balance
sheet. The assets and liabilities of the Companys foreign subsidiary, 4Kids
Entertainment International, have been recorded in their local currency and translated to
U.S. dollars using period-end exchange rates. Income and expense items have been
translated at the average rate of exchange prevailing during the period. Any adjustment
resulting from translating the financial statements of the foreign subsidiary is reflected
as other comprehensive income, net of related tax. Comprehensive income for
the three and nine months ended September 30, 2005, was $1,893 and $4,066, respectively,
which included translation adjustments of $(85) and $(507) for the respective periods.
Comprehensive income for the three and nine months ended September 30, 2004, was $2,460
and $7,768, respectively, which included translation adjustments of $(12) and $86 for the
respective periods.


Stock-Based Employee
Compensation:Stock-based compensation is accounted for using the intrinsic
value-based method in accordance with Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees(APB
No. 25). Under APB No. 25, because the exercise price of a companys employee
stock options equals the market price of the underlying stock on the date of the grant, no
compensation expense is recognized.


SFAS No. 123, Accounting for
Stock-Based Compensation(SFAS No. 123), establishes a fair value-based
method of accounting for employee stock-based compensation plans and encourages companies
to adopt that method. However, it also allows companies to continue to apply the intrinsic
value-based method currently prescribed under APB No. 25. The Company has elected to
continue to report stock-based compensation in accordance with APB No. 25. The table below
sets forth the pro forma disclosure of the effects of applying the fair value method to
all applicable awards granted. Under APB No. 25 and related interpretations, no
compensation cost has been recognized for the Companys stock options. Had
compensation cost for the Companys stock options been determined based on the fair
value at the grant date for those awards as permitted (but not required) under the
alternative method of SFAS No. 123, the Companys results of operations and related
per share amounts would have been reduced to the pro forma amounts indicated below.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | Three Months Ended
September 30, | Nine Months Ended
September 30,
|----------------------------------------- | -------------------------------- | -------------------------------
|
|Net income as reported                    |                                  | $1,978                         
|Deduct stock-based employee compensation  |                                 
|expense determined under fair value based |                                 
|method for all awards, net of tax         |                                  | 762                            
|                                          |                                  |                                
|Pro forma net income                      |                                  | $1,216                         
|                                          |                                  |                                
|Net income per share:                     |                                 
|Reported                                  |                                 
|Basic                                     |                                  | $   0.15                       
|                                          |                                  |                                
|Diluted                                   |                                  | $   0.15                       
|                                          |                                  |                                
|Pro forma                                 |                                 
|Basic                                     |                                  | $   0.09                       
|                                          |                                  |                                
|Diluted                                   |                                  | $   0.09                       
|                                          |                                  |                                

|The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option-pricing model. The
weighted average assumptions used for options granted in 2005 and 2004 included no
dividend yield for the periods, expected volatility of approximately 38% and 58% for 2005
and 2004, respectively, a risk-free interest rate of approximately 3.76% and 2.06% for
2005 and 2004, respectively, and an option duration of 3.6 and 3.7 years for 2005 and
2004, respectively.


Recently Issued Accounting
Pronouncements American Jobs Creation Act of 2004  On October 22,
2004, the President signed the American Jobs Creation Act of 2004(the
Act).  On December 21, 2004, the Financial Accounting Standards Board
(FASB) issued two FASB Staff Positions (FSP) regarding the
accounting implications of the Act related to (1) the deduction for qualified domestic
production activities  FSP SFAS No. 109-1 and (2) the one-time tax benefit for the
repatriation of foreign earnings  FSP SFAS No. 109-2.  The guidance in the
FSPs applies to financial statements for periods


8
ending after the date the Act was
enacted.  The Act provides a deduction of up to 9 percent (when fully phased-in) of
the lesser of (a) qualified production activities income, as defined by the Act, or (b)
taxable income (after the deduction for the utilization of any net operating loss
carryforwards).  This tax deduction is limited to 50 percent of W-2 wages paid by the
taxpayer.  The Act also creates a temporary incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing an 85 percent dividends received
deduction for certain dividends from controlled foreign corporations.  The Company
believes that the adoption of this new tax provision will not have a material effect on
its consolidated financial position or results of operations.


Share-Based Payments In
December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payments (SFAS No. 123-R). SFAS No.123-R is a revision of SFAS
No. 123, as amended, Accounting for Stock-Based Compensation, and supersedes
APB No. 25. SFAS No.123-R eliminates the alternative to use the intrinsic value
method of accounting that was provided in SFAS No. 123, which generally resulted in
no compensation expense recorded in the financial statements related to the issuance of
equity awards to employees. SFAS No. 123-R requires that the cost resulting from all
share-based payment transactions be recognized in the financial statements. SFAS No.
123-R establishes fair value as the measurement objective in accounting for share-based
payment arrangements and requires all companies to apply a fair-value-based measurement
method in accounting for generally all share-based payment transactions with employees.


SFAS No. 123-R is effective for
fiscal years beginning after June 15, 2005. The Company will adopt SFAS No. 123-R
effective January 1, 2006, using a modified prospective application. This application will
require the Company to record compensation expense for all awards granted after the
required effective date and for the unvested portion of previously granted awards that
remain outstanding at the date of adoption. The Company expects that the adoption of SFAS
No. 123-R will not result in the recording of compensation expense in 2006 as all of the
Companys currently outstanding unvested options will be fully vested by December 31,
2005.


Accounting Changes and Error
Corrections In June 2005, the FASB issued SFAS No. 154, Accounting Changes
and Error Corrections (SFAS No. 154). SFAS No. 154 replaces APB No. 20,
Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in
Interim Financial Statements, and changes the requirements for the accounting for, and
reporting of, a change in accounting principles.  SFAS No. 154 applies to all
voluntary changes in accounting principles and to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include specific
transition provisions.  SFAS No. 154 iseffective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. The Company
believes that the adoption of this pronouncement will not have a material effect on its
consolidated financial position or results of operations.


Determining the Amortization
Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a
Business Combination In June 2005, the Emerging Issues Task Force
(EITF) issued EITF Issue No. 05-6, Determining the Amortization Period
for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business
Combination (EITF No. 05-6). EITF No. 05-6provides that leasehold
improvements that are placed in service significantly after, and not contemplated at or
near the beginning of the lease term should be amortized over the shorter of the useful
life of the assets or a term that includes required lease periods and renewals that are
deemed to be reasonably assured at the date the leasehold improvements are purchased.
Leasehold improvements acquired in a business combination should be amortized over the
shorter of the useful life of the assets or a term that includes required lease periods
and renewals that are deemed to be reasonably assured at the date of acquisition. The
Company is required to apply EITF No. 05-6 to leasehold improvements that are
purchased or acquired in reporting periods beginning after June 30, 2005. The Company
believes that the adoption of this issue will not have a material effect on its
consolidated financial position or results of operations.


Accounting for Income Taxes
 In July 2005, the FASB issued an exposure draft of an Interpretation of SFAS No.
109, Accounting for Income Taxes. This proposed Interpretation would clarify the
accounting for uncertain tax positions. An enterprise would be required to recognize, in
its financial statements, the best estimate of the impact of a tax position only if that
position is probable of being sustained based solely on the technical merits of the
position. In evaluating whether the probable recognition threshold has been met, this
proposed Interpretation would require the presumption that the tax position will be
evaluated during an audit by taxing authorities. The term probable is used in this
proposed Interpretation consistent with its use in SFAS No. 5, Accounting for
Contingencies, to mean that the future event or events are likely to
occur. Individual tax positions that fail to meet the probable recognition threshold
will generally result in the inability to recognize the benefit of such position in the
financial statements. This proposed Interpretation also provides guidance on disclosure,
accrual of interest and penalties, accounting in interim periods and transition. If
adopted as proposed, this Interpretation would apply to financial statements effective as
of the end of the first fiscal year ending after December 15, 2005. The Company believes
that the Interpretation, if adopted as proposed, will not have a material effect on its
consolidated financial position or results of operations.



9
3. COMMITMENTS AND
CONTINGENCIES
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | The
Company has deferred all amounts received under the contract, and recognizes revenue as
the Current Music Assets and Future Music Assets generate revenue over the contract term.
Notwithstanding the foregoing, as of the date the Company has delivered all of the
Future Music Assets required under the contract, any portion of the $5,000 that remains
deferred and not recognized, will be recognized as revenue. Pursuant to the above,
the Company recognized revenues of $132 and $414 for the three and nine months ended
September 30, 2005, respectively, and $75 and $370 for the three and nine months ended
September 30, 2004, respectively. The Company has included $3,250 and $3,164 as deferred
revenue on the accompanying consolidated balance sheets as of September 30, 2005 and
December 31, 2004, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Home
Video  At various dates since May 2002, 4Kids Home Video, entered into various
agreements with an unaffiliated third party home video distributor (the Video
Distributor), pursuant to which 4Kids Home Video provides ongoing advertising,
marketing and promotional services with respect to certain home video titles that are
owned or controlled by the Company and which are distributed by the Video Distributor. The
Video Distributor has paid the Company cumulative advances of $3,845 (during the nine
months ended September 30, 2005 the Company received $175 in advances) against 4Kids Home
Videos share of the distribution and service fee proceeds to be realized by 4Kids
Home Video from such titles. Pursuant to the above, the Company recognized revenue of $23
and $67 for the three and nine months ended September 30, 2005, respectively, and $75 and
$258 for the three and nine months ended September 30, 2004, respectively. The Company has
included $541 and $433 as deferred revenue on the accompanying consolidated balance sheets
as of September 30, 2005 and December 31, 2004, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
Agreements  In addition, the Company entered into other agreements for various
properties and advertising time on 4Kids TV in which the Company has received certain
advances and/or minimum guarantees. As of September 30, 2005, and December 31, 2004, the
unearned portion of these advances and guaranteed payments were $1,773 and $3,258,
respectively, and are included in deferred revenue on the accompanying consolidated
balance sheets.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | 4Kids TV Broadcast Agreement  In January 2002, the Company entered
               into a multi-year agreement with Fox to lease Foxs Saturday morning
               programming block which airs on Saturday mornings from 8am to 12pm
               eastern/pacific time (7am to 11am central time), and which the Company
               originally called the Fox Box. In January 2005, the Company
               re-branded the Fox Box as 4Kids TV. The Company provides
               substantially all programming content to be broadcast on 4Kids TV and retains
               all of the revenue from network advertising sales for the four-hour time period.
               4Kids Ad Sales, Inc., a wholly-owned subsidiary of the Company manages and
               accounts for the ad revenue and costs associated with 4Kids TV. The agreement
               has an initial term of four broadcast years which began with the September 2002
               broadcast year, with the Company having the option to extend the term for up to
               two additional broadcast years. 4Kids pays a fee of $25,312 for each broadcast
               year during the initial term of the agreement.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
agreement provided for 50% of the fee for the first broadcast season to be paid within ten
days of the execution of the short form agreement in February 2002, with the balance of
the fee for the first broadcast year payable in four equal installments in September 2002,
December 2002, February 2003 and April 2003. The fee for each subsequent broadcast year is
payable 50% in the June preceding the beginning of the broadcast year (which begins in
September) with the balance of the fee for the broadcast year payable in
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10
|--

| | four equal
installments in September, December, February and April. All payments required to be made
on or prior to August 9, 2005 have been made. Additionally, the agreement requires the
Company to establish a $25,000 letter of credit for the benefit of Fox, which letter of
credit may be reduced by the Company as installments of the final years fee are
paid. As of September 30, 2005, the Company had received a commitment from a bank for the
letter of credit, but the letter of credit had not been issued pending completion of the
long form agreement with Fox. Upon the issuance of the letter of credit, the Company will
grant a security interest in its cash balances to the issuing bank to secure the amount of
such letter of credit and will appropriately disclose these amounts as restricted cash in
its consolidated financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
cost of 4Kids TV is capitalized and amortized over each broadcast year based on estimated
advertising revenue for the related broadcast year. The Company recorded amortization
expense of $5,104 and $15,662 for the three and nine months ended September 30, 2005,
respectively, and $6,699 and $17,404 for the three and nine months ended September 30,
2004. During the nine months ended September 30, 2005, the Company paid Fox and certain
Fox affiliates $6,752 and $15,864 attributable to the third and fourth years
broadcast fees, respectively, and during calendar year 2004, the Company paid Fox and
certain Fox affiliates $6,934 and $19,228 attributable to the second and third years
broadcast fees, respectively. The unamortized portion of these fees of $13,945 and $6,991,
are included in Prepaid 4Kids TV broadcast fee on the accompanying
consolidated balance sheets as of September 30, 2005 and December 31, 2004, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
agreement further provides that, at the Companys option, up to $10,300 of each
years fee may be paid by delivering shares of the Companys common stock. Over
the initial four year term of the agreement, the Company will pay Fox an aggregate fee of
$101,250. The Company also incurs additional costs to program the four hour block and to
sell the related network advertising time. These costs include direct programming costs to
acquire, adapt and deliver programming for broadcast during the weekly four hour block as
well as additional indirect expenses of advertising sales, promotion and administration.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of September 30, 2005, the minimum guaranteed payment obligations under the 4Kids TV
broadcast agreement are as follows:
| | ---------------------------------------------------------------------------------------------------------------------------

|Year ending
            
                     December 31, | Amount
|---------------------------------------------------------- | ------
|2005                                                       |       
|2006                                                       |       
|                                                           |       
|Total                                                      |       
|                                                           |       

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

| | d. | Contractual Arrangements  During the normal course of business, the
               Company may enter into various agreements with third parties to license,
               acquire, distribute, broadcast, develop and/or promote properties. The terms of
               these agreements will vary based on the services and/or properties included
               within the agreement, as well as the other terms and conditions set forth
               therein.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|11
|--

| | e. | Stock Purchases  During the third quarter of 2004, the Company
               completed the purchase of 750,000 shares of the Companys common stock at
               an average price of $19.93 per share that had previously been authorized by the
               Board of Directors in November 2003. In November 2004, the Board of Directors
               authorized the Company to purchase up to 1,000,000 additional shares of the
               Companys common stock from time to time through December 31, 2005 in the
               open market or through negotiated prices. Such purchases are to be made out of
               the Companys surplus. During the nine months ended September 30, 2005, the
               Company purchased 923,000 shares of the Companys common stock at an
               average price of $18.39 per share under the November 2004 authorization.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Stock Options Pursuant to its stock option plans, the Company
               issued stock option grants on April 25, 2005 and September 1, 2005 for
               approximately 650,000 and 125,000 underlying shares, respectively. The options
               were granted to certain employees, including officers and members of the Board
               of Directors, at an exercise price of $20.56 and $17.00, respectively (the
               average of the high and low stock price from the previous day of trading). Each
               of the stock option grants has a (i) five year life; (ii) is immediately vested
               and exercisable with respect to 50 percent of the underlying shares; and (iii)
               becomes vested and exercisable with respect to the remaining 50 percent on
               December 30, 2005 and December 31, 2005, respectively.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Related Party Transactions Brian Laceyhas been Executive
               Vice President of International for 4Kids since July 2003. Prior to joining
               4Kids, Mr. Lacey was the President and founder of Lacey Entertainment, a New
               York-based worldwide television marketing, production and distribution company
               (Lacey). Until July 2003, (when the agreement was terminated), Lacey
               provided consulting services to the Company under a fee-based agreement pursuant
               to which the Company agreed to pay Lacey a percentage of all programming sales
               placed by Lacey in the international marketplace as the cash payments for such
               programming sales were received. During the three months ended September 30,
               2005, Lacey was paid approximately $1,291 with respect to this agreement. As of
               September 30, 2005 and December 31, 2004, the Company has included $95 and
               $1,146, respectively, of accrued amounts due to Lacey in accounts payable and
               accrued expenses on its accompanying consolidated balance sheets.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | Subsequent Events Sale of Investment in Equity Securities In October 2005, the Company sold its 3% interest in The
               Pokémon Company (PUI) to Game Freak, Inc., Creatures, Inc.
               and Nintendo Co., Ltd. in equal shares for aggregate proceeds of $960. The
               Company had obtained its 3% interest in PUI through an initial investment of
               $726. As a result of this transaction, the Company will recognize a gain of
               approximately $234 during the three months ending December 31, 2005.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Treasury
stock  Subsequent to September 30, 2005, 77,000 additional shares of the
Companys common stock were purchased by the Company at an average price of $17.32
per share, which completed the purchase of 1,000,000 shares of the Companys stock
under the November 30, 2004 Board of Directors authorization.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12
4.    
          SEGMENT AND RELATED INFORMATION


The Company applies SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. The Company
has three reportable segments: (i) Licensing; (ii) Advertising, Media and Broadcast; and
(iii) Television and Film Production/Distribution. The Companys reportable segments
are strategic business units, which, while managed separately, work together as a
vertically integrated entertainment company. The Companys management regularly
evaluates the performance of each segment based on its net revenues, profit and loss after
all expenses, including amortized film, television costs and the 4Kids TV broadcast fee,
and interest income.


The accounting policies of the
segments are the same as those described in the summary of significant accounting
policies. Commencing in 2003, the Companys Television and Film Production/
Distribution segment recorded inter-segment revenues and the Companys Advertising,
Media and Broadcast segment recorded inter-segment charges related to the estimated
acquisition costs of episodic television series for broadcast. In the opinion of
management, such acquisition costs represent the estimated fair value which would have
been incurred in a transaction between unaffiliated third parties on an arms length basis.
All inter-segment transactions have been eliminated in consolidation.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                      | Licensing | Advertising
Media and
Broadcast | TV and Film
Production/
Distribution | Total    
|------------------------------------- | --------- | ------------------------------- | ------------------------------------ | ---------
|
|Three Months Ended September 30,      |           |                                 |                                      |          
|2005:                                 |          
|Net revenues  from external customers |           | $    9,149                      |                                      | $   5,034
|Amortization of television            |          
|and film costs and 4Kids TV           |          
|broadcast fee                         |           | --                              |                                      | 5,104    
|Segment profit (loss)                 |           | 5,087                           |                                      | (2,945   
|Interest income                       |           | 629                             |                                      | 25       
|                                     
|2004:                                 |          
|Net revenues  from external customers |           | $  11,489                       |                                      | $   4,837
|Amortization of television            |          
|and film costs and 4Kids TV           |          
|broadcast fee                         |           | --                              |                                      | 6,699    
|Segment profit (loss)                 |           | 6,459                           |                                      | (3,994   
|Interest income                       |           | 370                             |                                      | 5        
|                                     
|Nine Months Ended September 30,       |          
|2005:                                 |          
|Net revenues  from external customers |           | $  28,021                       |                                      | $ 14,072 
|Amortization of television            |          
|and film costs and 4Kids TV           |          
|broadcast fee                         |           | --                              |                                      | 15,662   
|Segment profit (loss)                 |           | 15,519                          |                                      | (9,307   
|Interest income                       |           | 1,979                           |                                      | 73       
|Segment assets                        |           | 129,992                         |                                      | 20,926   
|                                     
|2004:                                 |          
|Net revenues  from external customers |           | $  32,512                       |                                      | $ 13,929 
|Amortization of television            |          
|and film costs and 4Kids TV           |          
|broadcast fee                         |           | --                              |                                      | 17,404   
|Segment profit (loss)                 |           | 18,949                          |                                      | (9,686   
|Interest income                       |           | 938                             |                                      | 15       
|Segment assets                        |           | 149,716                         |                                      | 19,519   

|Additionally, through the
Companys London office and network of international subagents, which allow it to
license its properties throughout the world, the Company recognized net merchandise
licensing revenues from international sources, primarily in Europe, of $3,060 and $8,209
for the three and nine months ended September 30, 2005, respectively, and $2,373 and
$7,437 for the three and nine months ended September 30, 2004, respectively.


     _________________


13
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations(In thousands
of dollars unless otherwise specified)


Overview


The Companys results for the
nine months ended September 30, 2005 reflect an overall decrease in International program
sales, theatrical film sales, home video and licensing revenue for 4Kids properties
as compared to the same period in 2004. The decline in Yu-Gi-Oh! licensing
revenues in 2005 as compared with 2004 was partially offset by increased licensing revenue
domestically for the Cabbage Patch, Winx Club and the
American Kennel Club properties and internationally for the Shaman
King property. The 2005 results were also impacted by increased advertising and
promotional costs associated with the re-branding of the Fox Box to 4Kids TV and the
September 2005 launch of the new broadcast year.


General


The Company receives revenues from
its three business segments: (i) Licensing; (ii) Advertising, Media and Broadcasting; and
(iii) Television and Film Production/Distribution. 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. Since the
Companys licensing revenues are highly subject to changing trends in the toy, game
and entertainment businesses, the Companys licensing revenues from year-to-year from
particular properties are subject to dramatic increases and decreases. It is not possible
to accurately predict the length of time a property will be commercially successful or if
a property will be commercially successful at all. Popularity of properties can vary from
months to years. As a result, the Companys revenues from particular Properties may
fluctuate significantly between comparable periods.


The Companys licensing revenues
have historically been derived primarily from the licensing of toy and game concepts.
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 resulting in increased royalties
earned by the Company during such calendar quarters. In addition, the Companys media
buying subsidiary, Summit Media, provides media services to a significant number of toy
and video game companies which place a substantial portion of their overall annual
advertising in the fourth quarter. The Company recognizes revenue from the sale of
advertising time on 4Kids TV as more fully described in Note 2 to the Companys
consolidated financial statements. The Companys advertising sales subsidiary, 4Kids
Ad Sales, sells advertising time on 4Kids TV at higher rates in the fourth quarter due to
the increased demand for commercial time by childrens advertisers during the holiday
season. As a result, much of the revenues of Summit Media and 4Kids Ad Sales are earned in
the fourth quarter when the majority of toy and video game advertising occurs. As a result
of the foregoing, the Company has historically experienced greater revenues during the
second half of the year than during the first half of the year.


Critical Accounting
Policies


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


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


Management regularly reviews, and
revises when necessary, its total revenue estimates on a title-by-title basis, which may
result in a change in the rate of amortization and/or a write-down of the film or
television asset to estimated fair value. The Company determines the estimated fair value
for individual film and television properties based on the estimated future ultimate
revenues and costs in accordance with Statement of Position (SOP) No. 00-2,
Accounting by Producers and Distributors of Films (SOP No. 002).These ultimate revenues are also
used to amortize the capitalized film costs in accordance with SOP No. 00-2.


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

14
The commercial potential of
individual films and television programming varies dramatically, and is not directly
correlated with production or acquisition costs. Therefore, it is difficult to predict or
project the impact that individual films or television programming will have on the
Companys results of operations. However, the likelihood that the Company reports
losses, particularly in the year of a television series initial release, is increased as
the applicable accounting literature requires the immediate recognition of all of the
production or acquisition costs (through increased amortization) in instances where it is
estimated that the ultimate revenues of a film or television series will not recover those
costs. Conversely, the profit from a film or television series must be deferred and
recognized over the entire revenue stream generated by that film or television series. As
a result, significant fluctuations in reported income or loss can occur, particularly on a
quarterly basis, depending on release schedules and broadcast dates, the timing of
advertising campaigns and the relative performance of individual film or television
series.


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


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


4Kids TV Broadcast Agreement
 The Company broadcasts certain of its Properties on 4Kids TV, the Saturday morning
programming block that the Company leases from Fox. The cost of 4Kids TV has been and will
continue to be capitalized and amortized over each broadcast year based on estimated
advertising revenue. In developing future estimated revenues, the Company has made certain
assumptions with regard to the anticipated popularity of the television series the Company
broadcasts on 4Kids TV and the general market demand and pricing of advertising time for
Saturday morning childrens broadcast television. The popularity of such series
impacts audience levels and the level of the network advertising rates that the Company
can charge. These estimates are based on historical trends, as well as the Companys
subjective judgment of future customer demand and acceptance of its television
programming. Differences may result in the amount and timing of revenue for any period if
actual performance varies from the Companys estimates. See Note 3 of the Notes to
the Companys consolidated financial statements for a detailed discussion of the
4Kids TV broadcast agreement.


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


Recently Issued Accounting
Pronouncements American Jobs Creation Act of 2004  On October 22,
2004, the President signed the American Jobs Creation Act of 2004(the
Act).  On December 21, 2004, the Financial Accounting Standards Board
(FASB) issued two FASB Staff Positions (FSP) regarding the
accounting implications of the Act related to (1) the deduction for qualified domestic
production activities  FSP SFAS No. 109-1 and (2) the one-time tax benefit for the
repatriation of foreign earnings  FSP SFAS No. 109-2.  The guidance in the
FSPs applies to financial statements for periods ending after the date the Act was
enacted.  The Act provides a deduction of up to 9 percent (when fully phased-in) of
the lesser of (a) qualified production activities income, as defined by the Act, or (b)
taxable income (after the deduction for the utilization of any net operating loss
carryforwards).  This tax deduction is limited to 50 percent of W-2 wages paid by the
taxpayer.  The Act also creates a temporary incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing an 85 percent dividends received
deduction for certain dividends from controlled foreign corporations.  The Company
believes that the adoption of this new tax provision will not have a material effect on
its consolidated financial position or results of operations.


15
Share-Based Payments In
December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payments (SFAS No. 123-R). SFAS No.123-R is a revision of SFAS
No. 123, as amended, Accounting for Stock-Based Compensation, and supersedes
APB No. 25. SFAS No.123-R eliminates the alternative to use the intrinsic value
method of accounting that was provided in SFAS No. 123, which generally resulted in
no compensation expense recorded in the financial statements related to the issuance of
equity awards to employees. SFAS No. 123-R requires that the cost resulting from all
share-based payment transactions be recognized in the financial statements. SFAS No.
123-R establishes fair value as the measurement objective in accounting for share-based
payment arrangements and requires all companies to apply a fair-value-based measurement
method in accounting for generally all share-based payment transactions with employees.


SFAS No. 123-R is effective for
fiscal years beginning after June 15, 2005. The Company will adopt SFAS No. 123-R
effective January 1, 2006, using a modified prospective application. This application will
require the Company to record compensation expense for all awards granted after the
required effective date and for the unvested portion of previously granted awards that
remain outstanding at the date of adoption. The Company expects that the adoption of SFAS
No. 123-R will not result in the recording of compensation expense in 2006 as all of the
Companys currently outstanding unvested options will be fully vested by December 31,
2005.


Accounting Changes and Error
Corrections In June 2005, the FASB issued SFAS No. 154, Accounting Changes
and Error Corrections (SFAS No. 154). SFAS No. 154 replaces APB No. 20,
Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in
Interim Financial Statements, and changes the requirements for the accounting for, and
reporting of, a change in accounting principles.  SFAS No. 154 applies to all
voluntary changes in accounting principles and to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include specific
transition provisions.  SFAS No. 154 iseffective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. The Company
believes that the adoption of this pronouncement will not have a material effect on its
consolidated financial position or results of operations.


Determining the Amortization
Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a
Business Combination In June 2005, the Emerging Issues Task Force
(EITF) issued EITF Issue No. 05-6, Determining the Amortization Period
for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business
Combination (EITF No. 05-6). EITF No 05-6provides that leasehold
improvements that are placed in service significantly after, and not contemplated at or
near the beginning of the lease term should be amortized over the shorter of the useful
life of the assets or a term that includes required lease periods and renewals that are
deemed to be reasonably assured at the date the leasehold improvements are purchased.
Leasehold improvements acquired in a business combination should be amortized over the
shorter of the useful life of the assets or a term that includes required lease periods
and renewals that are deemed to be reasonably assured at the date of acquisition. The
Company is required to apply EITF No. 05-6 to leasehold improvements that are
purchased or acquired in reporting periods beginning after June 30, 2005. The Company
believes that the adoption of this issue will not have a material effect on its
consolidated financial position or results of operations.


Accounting for Income Taxes
 In July 2005, the FASB issued an exposure draft of an Interpretation of SFAS No.
109, Accounting for Income Taxes. This proposed Interpretation would clarify the
accounting for uncertain tax positions. An enterprise would be required to recognize, in
its financial statements, the best estimate of the impact of a tax position only if that
position is probable of being sustained based solely on the technical merits of the
position. In evaluating whether the probable recognition threshold has been met, this
proposed Interpretation would require the presumption that the tax position will be
evaluated during an audit by taxing authorities. The term probable is used in this
proposed Interpretation consistent with its use in SFAS No. 5, Accounting for
Contingencies, to mean that the future event or events are likely to
occur. Individual tax positions that fail to meet the probable recognition threshold
will generally result in the inability to recognize the benefit of such position in the
financial statements. This proposed Interpretation also provides guidance on disclosure,
accrual of interest and penalties, accounting in interim periods and transition. If
adopted as proposed, this Interpretation would apply to financial statements effective as
of the end of the first fiscal year ending after December 15, 2005. The Company believes
that the Interpretation, if adopted as proposed, will not have a material effect on its
consolidated financial position or results of operations.


16
Results of Operations


The following table sets forth our
results of operations expressed as a percentage of total net revenues for the three and
nine months ended September 30, 2005 and 2004.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     | Three Months Ended
September 30, | Nine Months Ended
September 30,
|------------------------------------ | -------------------------------- | -------------------------------
|
|Net Revenues                         |                                  | 100                            
|                                     |                                  |                                
|Selling, general & administrative    |                                  | 43                             
|Production service costs             |                                  | 10                             
|Amortization of television           |                                 
|and film costs and Fox broadcast fee |                                  | 35                             
|                                     |                                  |                                
|Total Costs and Expenses             |                                  | 88                             
|                                    
|Income from Operations               |                                  | 12                             
|Interest income                      |                                  | 3                              
|                                     |                                  |                                
|Income before income taxes           |                                  | 15                             
|                                    
|Income taxes                         |                                  | 5                              
|                                     |                                  |                                
|Net Income                           |                                  | 10                             
|                                     |                                  |                                

|Three and nine months ended
September 30, 2005 as compared to three and nine months ended September 30, 2004


Revenues


Revenues by reportable segment and
for the Company as a whole were as follows: For the three months ended September 30, 2005 and 2004
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                            | 2005 | 2004     | $ Change | % Change
|------------------------------------------- | ---- | -------- | -------- | --------
|Licensing                                   |      | $  9,149 |          | $11,489 
|Advertising Media & Broadcast               |      | 5,034    |          | 4,837   
|Television and Film Production/Distribution |      | 6,339    |          | 8,356   
|                                            |      |          |          |         
|                                            |      |          |          |         
|Total                                       |      | $20,522  |          | $24,682 
|                                            |      |          |          |         

For the nine months ended September 30, 2005 and 2004

|                                            | 2005 | 2004    | $ Change | % Change
|------------------------------------------- | ---- | ------- | -------- | --------
|Licensing                                   |      | $28,021 |          | $32,512 
|Advertising Media & Broadcast               |      | 14,072  |          | 13,929  
|Television and Film Production/Distribution |      | 17,692  |          | 22,805  
|                                            |      |         |          |         
|                                            |      |         |          |         
|Total                                       |      | $59,785 |          | $69,246 
|                                            |      |         |          |         

|The decrease in consolidated net
revenues for the three and nine months ended September 30, 2005, as compared to the same
periods in 2004, was due to a number of factors. In the Licensing segment,decreased revenues were primarily attributable to:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(i) | reduced domestic and international licensing revenue and marketing fees on
               Yu-Gi-Oh! related merchandise, trading cards and video game sales;
               and
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(ii) | reduced licensing revenues on the Teenage Mutant Ninja Turtles
               Kirby and Pokémon properties; partially offset by
|---- | -------------------------------------------------------------------------------------------------------------------------------------

|(iii) | increased revenues attributable to the Cabbage Patch, Winx
               Club and AKC properties domestically and the Shaman
               King property internationally.
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|17
|--

|Despite lower licensing revenues, the Yu-Gi-Oh! and Teenage Mutant Ninja
Turtle properties continue to be the two largest contributors in this business
segment. Revenues for the Cabbage Patch property, the third largest
contributor in this segment, have increased over the comparable periods of the prior year.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In the Advertising Media and
Broadcasting segment, revenues remained consistent for the three and nine months ended
September 30, 2005 when compared to the same periods in 2004. Revenues from increased
media buying commissions were partially offset by reduced ad sales revenues.


In the Television and Film
Production/Distribution segment, the revenue decline for the three and nine months ended
September 30, 2005 when compared to the same periods in 2004 primarily resulted from:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(i) | decreased sales related to the theatrical release of the Yu-Gi-Oh!
               movie in August 2004 with no corresponding theatrical release in 2005;
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(ii) | decreased domestic home video sales for the Yu-Gi-Oh! and
               Teenage Mutant Ninja Turtles television series; and
|---- | --------------------------------------------------------------------------------------------------------------------------------

|(iii) | decreased domestic and international broadcast sales of the
               Yu-Gi-Oh!, Pokémon and Teenage Mutant Ninja
               Turtles television series; partially offset by
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(iv) | increased domestic and international broadcast sales of the One
               Piece television series.
|---- | ---------------------------------------------------------------------------------------------------------

|Selling, General and
Administrative Expenses


Selling, general and administrative
expenses decreased 16%, or $1,671 to $8,802 and 3%, or $805 to $26,606 for the three and
nine months ended September 30, 2005, respectively, when compared to the same periods in
2004. The decreases were primarily due to the following:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(i) | decreased costs associated with guaranteed payments during the third quarter of
               2004 made by the Company to acquire the Yu-Gi-Oh! movie
               representation rights; and
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(ii) | decreased costs associated with the Companys television broadcast
               operations; partially offset by
|---- | -----------------------------------------------------------------------------------------------------------------

|(iii) | increased advertising and promotional costs to support the re-branding of the
               Fox Box to 4Kids TV and for the September 2005 launch of the new broadcast year.
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Production Service and
Capitalized Film Costs

Production service and capitalized
film costs were as follows:For the three months ended September 30, 2005 and 2004

|                                          | 2005 | 2004   | $ Change | % Change
|----------------------------------------- | ---- | ------ | -------- | --------
|Production Service Costs                  |      | $2,093 |          | $1,941  
|Amortization of Television and Film Costs |      | 2,144  |          | 1,709   

For the nine months ended September 30, 2005 and 2004

|                                          | 2005 | 2004   | $ Change | % Change
|----------------------------------------- | ---- | ------ | -------- | --------
|Production Service Costs                  |      | $6,215 |          | $6,942  
|Amortization of Television and Film Costs |      | 5,989  |          | 5,553   

|The increase in production service costs
during the three months ended September 30, 2005, as compared to the same period in 2004,
was primarily due to increased production costs for the work performed on producing the
Sonic X and Chaotic television series, partially offset by
decreased costs for the Pokémon television series. The decrease in
production service costs during the nine months ended September 30, 2005, as compared to
the same period in 2004, was primarily due to lower production costs attributable to the
Pokémon television series, and the production costs associated with the
Yu-Gi-Oh! movie which was substantially complete during 2004, partially offset
by increased production costs for the work performed on producing the One
Piece and Chaotic television series. When the Company is entitled to be
paid for such production costs, the Company categorizes them as production service costs
and reflects a corresponding amount in revenue for the amount billed back to the property
owners.


18
As of September 30, 2005, there was
$13,032 of capitalized film production costs in the Companys consolidated balance
sheet relating primarily to various stages of production on 400 episodes of animated
programming. Based on managements ultimate revenue estimates as of September 30,
2005, approximately 66% of the total completed and unamortized film and television costs
are expected to be amortized during the next year, and over 90% of the total completed and
unamortized film and television costs are expected to be amortized during the next three
years.


4Kids TV Broadcast Fee


The annual fee paid to Fox
Broadcasting and certain Fox affiliates is capitalized and amortized during each broadcast
year, which commences in September, based on estimated advertising revenues for the
applicable broadcast year. During the nine months ended September 30, 2005, the Company
paid Fox and certain Fox affiliates $6,752 and $15,864 attributable to the third and
fourth years broadcast fees, respectively, and during calendar year 2004, the
Company paid Fox and certain affiliates $6,934 and $19,228 attributable to the second and
third years broadcast fee, respectively. The unamortized portion of these fees of
$13,945 and $6,991 are included in Prepaid 4Kids TV broadcast fees on the
accompanying consolidated balance sheets as of September 30, 2005 and December 31, 2004,
respectively.


As a result of the broadcast year
(ending each year in September) being different than the Companys fiscal year
(ending each year in December), the amount of the amortization of the broadcast fee
recognized from period to period will vary based upon (i) the amount of advertising
revenue recognized during the period; and (ii) the amount of advertising revenue already
recognized for the broadcast year as a percentage of the total amount expected to be
recognized for the full broadcast year. Based on the decreased advertising revenue
recognized by the Company for the three months ended September 30, 2005, as compared to
the same period in 2004, the Companys amortization of the 4Kids TV broadcast fee
decreased $1,595 to $5,104, and based on the decreased advertising revenue recognized by
the Company for the nine months ended September 30, 2005, as compared to the same period
in 2004, the Companys amortization of the 4Kids TV broadcast fee decreased $1,742 to
$15,662.


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

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

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

|The ability of the Company to further
develop its merchandising and, to a lesser extent, home video and music publishing revenue
streams were significant components of its evaluation process which resulted in the
decision to lease the 4Kids TV Saturday morning programming block.


Interest Income


Interest income increased 74%, or
$279 to $654 and 116%, or $1,101 to $2,054 for the three and nine months ended September
30, 2005, as compared to the same periods in 2004, primarily as a result of increased
interest rates.


Income Tax Expense


Income tax expense decreased 38%, or
$649 to $1,055 and 46%, or $2,354 to $2,794 for the three and nine months ended September
30, 2005, as compared to the same periods in 2004, primarily due to decreased income
before income taxes and a reduction in the Companys effective tax rate to 38% during
2005 compared to 40% in 2004. The reduction in the effective tax rate is principally due
to a shift in the Companys investment strategy toward tax-exempt securities during
the current year.


Net Income


As a result of the above, the Company
had net income for the three and nine months ended September 30, 2005 of $1,978 and
$4,573, respectively, as compared to $2,531 and $7,741 for the same periods in 2004.

19
Liquidity and Capital
Resources


Financial Position


Cash and cash equivalents and
short-term investments as of September 30, 2005 and December 31, 2004 were as follows:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          | 2005 | 2004      | $ Change
|------------------------- | ---- | --------- | --------
|Cash and cash equivalents |      | $  84,451 |         
|Investments               |      | 19,548    |         
|                          |      |           |         
|                          |      |           |         
|                          |      | $103,999  |         
|                          |      |           |         

|During the nine months ended
September 30, 2005, the Companys cash and cash equivalents and short-term investment
balances decreased by $23,827 to $103,999, primarily as a result of cash payments made
under the 4Kids TV broadcast agreement of $22,616 and repurchases of common stock made
under the Companys stock repurchase program of $16,971. The decrease was partially
offset by collecting seasonally high fourth quarter accounts receivable during the nine
months ended September 30, 2005.


Working capital, consisting of
current assets less current liabilities, was $125,051 as of September 30, 2005 and
$139,699 as of December 31, 2004.


Sources and Uses of Cash


Cash flows for the nine months ended
September 30, 2005 and 2004 were as follows:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Sources              | 2005 | 2004    | $ Change
|-------------------- | ---- | ------- | --------
|Operating activities |      | $(6,203 | )       
|Investing activities |      | (4,068  | )       
|Financing activities |      | (16,530 | )       

|As of September 30, 2005, the Company
had invested $19,548 in short-term government obligations as compared to $16,067 as of
December 31, 2004, an increase of $3,481. During 2005, the Company purchased property and
equipment of $593, which was comprised primarily of computer and television production
equipment and leasehold improvements, as compared to purchases of property and equipment
of $625 for the first nine months of 2004. Purchases of property and equipment for the
remainder of 2005 are expected to be comparable to that of 2004.


Cash flows from financing activities,
including the proceeds received by the Company from the exercise of stock options by the
Companys employees, were primarily used for the purchase of the Companys
common stock. In November 2004, the Company announced that its Board of Directors had
authorized the Company to purchase up to 1,000,000 shares of its common stock in the open
market or through negotiated prices from time-to-time through December 31, 2005. Such
purchases are to be made out of the Companys surplus. As of September 30, 2005, the
Company had purchased 923,000 shares, under the authorization, at an average price of
$18.39 per share for a total purchase price of $16,971. Subsequent to September 30, 2005,
77,000 additional shares of the Companys common stock were purchased by the Company
at an average price of $17.32 per share, which completed the purchase of 1,000,000 shares
of the Companys stock under the November 30, 2004 Board of Directors authorization.


During 2005, the change in the
Companys positive cash flow from operations primarily resulted from a decline in
amounts due to licensors resulting from decreased overall consumer demand for a small
number of its licensed properties.  While the Company strives to further diversify
its revenue streams, management remains cognizant of changing trends in the toy, game and
entertainment business and the difficulty in predicting the length of time a property will
be commercially successful.  As a result, the Companys revenues, operating
results and cash flow from operations may fluctuate significantly from period to period
and present operating results that are not necessarily indicative of future performance.


20
4Kids TV Broadcast
Agreement


The Company broadcasts certain of its
properties on 4Kids TV, the Saturday morning programming block that the Company leases
from Fox. The cost of 4Kids TV has been and will continue to be capitalized and amortized
over each broadcast year based on estimated advertising revenue. In developing future
estimated revenues, the Company has made certain assumptions with regard to the
anticipated popularity of the television series the Company broadcasts on 4Kids TV and the
general market demand and pricing of advertising time for Saturday morning childrens
broadcast television. The popularity of such series impacts audience levels and the level
of the network advertising rates that the Company can charge. These estimates are based on
historical trends, as well as the Companys subjective judgment of future customer
demand and acceptance of its television programming. Differences may result in the amount
and timing of revenue for any period if actual performance varies from the Companys
estimates. See Note 3 of the Notes to the Companys consolidated financial statements
for a detailed discussion of the 4Kids TV Broadcast Agreement.


Contractual Commitments


The Companys contractual
obligations and commitments are detailed in the Companys Annual Report on Form 10-K
for the year ended December 31, 2004. As of September 30, 2005, the Companys
contractual obligations and commitments have not materially changed since December 31,
2004, except for the following:



Related Party
Transactions


Brian Laceyhas been Executive
Vice President of International for 4Kids since July 2003. Prior to joining 4Kids, Mr.
Lacey was the President and founder of Lacey Entertainment, a New York-based worldwide
television marketing, production and distribution company (Lacey). Until July
2003, (when the agreement was terminated), Lacey provided consulting services to the
Company under a fee-based agreement pursuant to which the Company agreed to pay Lacey a
percentage of all programming sales placed by Lacey in the international marketplace as
the cash payments for such programming sales were received. During the three months ended
September 30, 2005, Lacey was paid approximately $1,291 with respect to this agreement. As
of September 30, 2005 and December 31, 2004, the Company has included $95 and $1,146,
respectively, of accrued amounts due to Lacey in accounts payable and accrued expenses on
its accompanying consolidated balance sheets.


Forward Looking
Information and Risk Factors That May Affect Future Results


The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on
behalf of the Company. We may from time to time make written or oral statements that are
forward-looking, including statements contained in this report and other
filings with the Securities and Exchange Commission and in reports to our
stockholders. These forward-lookingstatements may relate to
such matters as anticipated financial performance,businessprospects,technological developments,new products, research and development activities,
liquidity, and similar mattersortodevelopments beyond our control,
including changes in domestic or global economic conditions. Forward-looking statements
are inherently subject to risks and uncertainties and are made on the basis of
managements views and assumptions as of the time the statements are made. There can
be no assurance, however, that our expectations will necessarily come to pass. A variety
of factors could cause our actual results and experience to differ materially from the
anticipated results or other expectations expressed or anticipated in our forward-looking
statements. The factors listed below are illustrative and other risks and uncertainties
may arise as are or may be detailed from time to time in our public announcements and
filings with the Securities and Exchange Commission.


The Companys revenues are
subject to the high volatility of consumer preferences with respect to entertainment.


The Companys business and
operating results ultimately depend upon the appeal of its Properties, product concepts
and programming to consumers. A decline in the popularity of our existing Properties or
the failure of new Properties and product concepts to achieve and sustain market
acceptance could result in reduced overall revenues, which could have a material adverse
effect on our business, financial condition and results of operations. Consumer
preferences with respect to entertainment are continuously changing and are difficult to
predict and can vary from months to years. Entertainment properties often have short life
cycles. There can be no assurances that:


     (1)    
          any of our current Properties, product concepts or programming will continue to
          be popular for any significant period of time;


     (2)    
          any new Properties, product concepts or programming we represent or produce will
          achieve an adequate degree of popularity; or


21
(3)    
          any Propertys life cycle will be sufficient to permit us to profitably
          recover advance payments, guarantees, development, marketing, royalties and
          other costs.


Our failure to successfully
anticipate, identify and react to consumer preferences could have a material adverse
effect on our revenues, profitability and results of operations. In addition, the
volatility of consumer preferences may cause our revenues and net income to vary
significantly between comparable periods.


A substantial portion of our
licensing revenue typically derives from a small number of properties.


We typically derive a substantial
portion of our licensing revenues from a small number of properties, which properties
usually generate revenues only for a limited period of time. Because our licensing
revenues are highly subject to the changing trends in the toy, game and entertainment
business, our licensing revenues from year to year from particular sources are subject to
dramatic increases and decreases.


Our business is typically seasonal
and, therefore, our annual operating results will depend significantly on our performance
during the holiday season.


Sales of our licensed toy and game
concepts are seasonal, with a majority of retail sales occurring during the third and
fourth calendar quarters. The revenues of Summit Media, which provides media services to a
significant number of toy and video game companies, and 4Kids Ad Sales, which sells
advertising time on 4Kids TV, are also seasonal, with a significant portion of the revenue
typically generated during the fourth quarter commensurate with the increased demand for
commercial time by childrens advertisers during the holiday season. In addition, if
our programming on 4Kids TV failed to attract viewers during the holiday season, such
failure could have a material adverse effect on our financial condition and results of
operations.


As a result of the seasonal nature of
our business, we would be significantly and adversely affected by unforeseen events, such
as a terrorist attack or a military engagement that negatively affect the retail
environment or consumer buying patterns, if such events were to impact the key selling
season.


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


We rely on a combination of trade
secret, copyright, trademark, patent and other proprietary rights laws to protect the
intellectual property we own or license. Third parties may try to challenge the ownership
by the Company or its licensors of such intellectual property. In addition, our business
is subject to the risk of third parties infringing on the intellectual property rights of
the Company or its licensors and producing counterfeit products. We may need to resort to
litigation in the future to protect the intellectual property rights of the Company or its
licensors, which could result in substantial costs and diversion of resources and could
have a material adverse effect on our business and competitive position.


We may be negatively
affected by adverse general economic conditions.


Current conditions in the domestic
and global economies are extremely uncertain. Adverse changes may occur as a result of
softening global economies, wavering consumer confidence caused by the threat or
occurrence of terrorist attacks, war or other factors affecting economic conditions
generally. Such changes could have a material adverse effect on our business, financial
condition and results of operations.


Other factors may affect
our performance.


A wide range of factors could materially
affect our performance, including the following:


Changes in Company-wide or
business-unit strategies, which may result in changes in the types or mix of businesses in
which the Company is involved or chooses to invest;


Technological developments that may
affect the distribution of the Companys creative products or create new risks to the
Companys ability to protect its intellectual property;


Labor disputes, which may lead to
increased costs or disruption of operations in any of the Companys business units;

22
International, political and military
developments that may, among other things, result in increases in broadcasting costs or
loss of advertising revenue due to pre-emptions of 4Kids TV.


If Alfred Kahn, our Chairman and CEO,
becomes unavailable due to death, disability or other termination of employment and an
acceptable replacement for Mr. Kahn is not found within a reasonable period of time, or
there is change of control of the Company resulting in a significant change of duties for
Mr. Kahn.


This list of factors that may affect
future performance and the accuracy of forward-looking statements are illustrative, but by
no means exhaustive. Accordingly, all forward-looking statements should be evaluated with
the understanding of their inherent uncertainty.


Item 3. Quantitative and
Qualitative Disclosures About Market Risk


Foreign Currency
Exchange Rate Fluctuations


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


Item 4. Controls and
Procedures


Evaluation of Disclosure
Controls and Procedures


The Company maintains disclosure
controls and procedures that are designed to ensure that information required to be
disclosed in our reports filed pursuant to the Securities and Exchange Act of 1934, as
amended (the Exchange Act) is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commissions rules
and forms, and that such information is accumulated and communicated to the Companys
management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls and
procedures.


As of the end of the period covered
by this report (the Evaluation Date), the Company carried out an evaluation,
under the supervision and with the participation of management, including the Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures. Based on the
foregoing, the Chief Executive Officer and the Chief Financial Officer concluded that, as
of the Evaluation Date, the Companys disclosure controls and procedures were
effective.


Changes in Internal
Control Over Financial Reporting


There were no changes in the
Companys internal control over financial reporting identified in connection with an
evaluation required by paragraph (d) of Exchange Act Rules 13a-15 and 15d-15
that occurred during the fiscal quarter ended September 30, 2005, as having materially
affected, or being reasonably likely to materially affect, the Companys internal
control over financial reporting.


23
Part II -OTHER
INFORMATION


Item 1. Legal Proceedings
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

# Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds

(c)    
          Purchases of Equity Securities by the Issuer

# ISSUER PURCHASES OF
EQUITY SECURITIES

|Period During 2005 | Total Number of
Shares Purchased | Average Price
Paid Per Share | Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs | Maximum Number
of Shares that May Yet Be
Purchased Under the
Plans or Programs (1)
|------------------ | -------------------------------- | ---------------------------- | -------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------
|Jan. 1 - Jan. 31   |                                  |                              |                                                                                  | 273,100                                                                           
|                  
|Feb. 1 - Feb. 28   |                                  |                              |                                                                                  | 76,900                                                                            
|                  
|Mar. 1 - Mar. 31   |                                  |                              |                                                                                  | -                                                                                 
|                  
|Apr. 1 - Apr. 30   |                                  |                              |                                                                                  | -                                                                                 
|                  
|May 1 - May 31     |                                  |                              |                                                                                  | 104,600                                                                           
|                  
|Jun. 1 - Jun. 30   |                                  |                              |                                                                                  | 145,400                                                                           
|                  
|Jul. 1 - Jul. 31   |                                  |                              |                                                                                  | -                                                                                 
|                  
|Aug. 1 - Aug. 31   |                                  |                              |                                                                                  | 127,000                                                                           
|                  
|Sep. 1 - Sep. 30   |                                  |                              |                                                                                  | 196,000                                                                           
|                  
|Total              |                                  |                              |                                                                                  | 923,000                                                                           
|                  

|(1) | In November 2004, the Board of Directors  authorized the Company to purchase up to 1,000,000  shares of the Company's common
       stock from time to time through  December 31, 2005 in the open market or through  negotiated  prices.  Such  purchases are to be
       made out of the Company's  surplus.  During the nine months ended  September 30, 2005, the Company  purchased  923,000 shares of
       the Company's stock at an average price of $18.39 per share under the November 2004 authorization.

       Subsequent to September 30, 2005,  77,000  additional  shares of the Company's  common stock were purchased by the Company at an
       average price of $17.32 per share,  which  completed the purchase of 1,000,000  shares of the Company's stock under the November
       2004 Board of Directors authorization.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|24
|--

# Item 6. Exhibits

(a) Exhibits

|31.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,              
|---- | ------------------------------------------------------------------------------------------
|     | as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                     
|    
|31.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,              
|     | as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                     
|    
|32.1 | Joint Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 
|     | U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

|25

SIGNATURES


Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4KIDS ENTERTAINMENT,
INC. Dated: November 9, 2005

By: /s/ Alfred R. Kahn

Alfred R. Kahn    Chairman
of the Board, Chief Executive Officer and               Director

By: /s/ Joseph P. Garrity

Joseph P. Garrity      Executive
Vice President, Treasurer, Chief Financial Officer,Principle Accounting Officer                and Director

|26
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