|
|

|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, 2003


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 |_|



At November 13, 2003, the number of
shares outstanding of the Registrants common stock, par value $.01 per share, was
13,419,068.

4Kids
Entertainment, Inc. and Subsidiaries


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

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

|Item 1.                   | Financial Statements                                                                                                     |   
|------------------------- | ------------------------------------------------------------------------------------------------------------------------ | --
|                          |                                                                                                                          |   
|                          | Consolidated Balance Sheets as of September 30, 2003
           (Unaudited) and December 31, 2002                        | 2 
|                          |                                                                                                                          |   
|                          | Consolidated Statements of Income for the three and nine    months
        ended September 30, 2003 and 2002 (Unaudited) | 3 
|                          |                                                                                                                          |   
|                          | Consolidated Statements of Cash Flows for the nine    months
        ended September 30, 2003 and 2002 (Unaudited)       | 4 
|                          |                                                                                                                          |   
|                          | Notes to Consolidated Financial Statements (Unaudited)                                                                   | 5 
|                          |                                                                                                                          |   
|Item 2.                   | Managements Discussion and Analysis of Financial
           Condition and Results of Operations                         | 14
|                          |                                                                                                                          |   
|Item 3.                   | Quantitative and Qualitative Disclosures about Market
        Risk                                                       | 21
|                          |                                                                                                                          |   
|Item 4.                   | Controls and Procedures                                                                                                  | 21
|                          |                                                                                                                          |   
|Part IIOTHER INFORMATION |                                                                                                                          |   
|                          |                                                                                                                          |   
|Item 6.                   | Exhibits and Reports on Form 8-K                                                                                         | 22
|                          |                                                                                                                          |   
|Signatures                | 23                                                                                                                      



| |  | 
| |  | 



---





|Part I-FINANCIAL INFORMATION
|----------------------------

|Item 1. Financial Statements
|----------------------------

|4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
|------------------------------------------

|CONSOLIDATED BALANCE SHEETS
|---------------------------

|(In thousands of dollars, except share data)
|--------------------------------------------

|                                                                | September 30, | December 31,
|--------------------------------------------------------------- | ------------- | ------------
|
|ASSETS                                                         
|                                                               
|CURRENT ASSETS:                                                 |               |             
|Cash and cash equivalents                                       |               |             
|Investments                                                     |               |             
|Accounts receivable - net                                       |               |             
|Prepaid Fox broadcast fee - net                                 |               |             
|Prepaid/refundable income taxes                                 |               |             
|Advances to licensors                                           |               |             
|Prepaid expenses and other current assets                       |               |             
|                                                                |               |             
|Total current assets                                            |               |             
|                                                               
|PROPERTY AND EQUIPMENT - net                                    |               |             
|ACCOUNTS RECEIVABLE -  net                                      |               |             
|INVESTMENT IN EQUITY SECURITIES                                 |               |             
|FILM AND TELEVISION COSTS -  net                                |               |             
|DEFERRED INCOME TAXES                                           |               |             
|OTHER ASSETS - net                                              |               |             
|                                                                |               |             
|TOTAL ASSETS                                                    |               |             
|                                                                |               |             
|                                                                |               |             
|LIABILITIES AND STOCKHOLDERS' EQUITY                            |               |             
|                                                               
|CURRENT LIABILITIES:                                            |               |             
|Due to licensors                                                |               |             
|Media payable                                                   |               |             
|Accounts payable and accrued expenses                           |               |             
|Deferred revenue                                                |               |             
|Deferred income taxes                                           |               |             
|                                                                |               |             
|Total current liabilities                                       |               |             
|                                                               
|DEFERRED RENT                                                   |               |             
|                                                                |               |             
|Total liabilities                                               |               |             
|                                                                |               |             
|COMMITMENTS AND CONTINGENCIES                                   |               |             
|                                                               
|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, 13,403,568 and 13,135,008 shares in 2003 and            |               |             
|2002, respectively                                              |               |             
|Additional paid-in capital                                      |               |             
|Accumulated other comprehensive income                          |               |             
|Retained earnings                                               |               |             
|                                                                |               |             
|Total stockholders' equity                                      |               |             
|                                                                |               |             
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                      |               |             
|                                                                |               |             

|See notes to consolidated financial
statements.
-2-
|---------------------------------------------------

| |  | 
| |  | 



---



|4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
|------------------------------------------

|CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
|---------------------------------------------

|(In thousands of dollars, except share data)
|--------------------------------------------

|                                              | Three Months Ended | Nine Months Ended
|--------------------------------------------- | ------------------ | -----------------
|
|
|NET REVENUES                                  |                    |                  
|                                              |                    |                  
|COSTS AND EXPENSES:                           |                    |                  
|Selling, general and administrative           |                    |                  
|Production service costs                      |                    |                  
|Amortization of television and film costs and |                    |                  
|Fox broadcast fee                             |                    |                  
|                                              |                    |                  
|Total costs and expenses                      |                    |                  
|                                              |                    |                  
|INCOME FROM OPERATIONS                        |                    |                  
|                                             
|INTEREST INCOME                               |                    |                  
|                                              |                    |                  
|INCOME BEFORE INCOME TAX                      |                    |                  
|PROVISION                                     |                    |                  
|                                             
|INCOME TAX PROVISION                          |                    |                  
|                                              |                    |                  
|NET INCOME                                    |                    |                  
|                                              |                    |                  
|PER SHARE AMOUNTS:                            |                    |                  
|Basic earnings per common share               |                    |                  
|                                              |                    |                  
|Diluted earnings per common share             |                    |                  
|                                              |                    |                  
|Weighted average common shares                |                    |                  
|outstanding - basic                           |                    |                  
|                                              |                    |                  
|Weighted average common shares                |                    |                  
|outstanding - diluted                         |                    |                  
|                                              |                    |                  

|See notes to consolidated financial
statements.
-3-
|---------------------------------------------------

| |  | 
| |  | 



---



|4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
|------------------------------------------

|CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|-------------------------------------------------

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

|                                                                | Nine Months Ended
|--------------------------------------------------------------- | -----------------
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                           |                  
|Net income                                                      |                  
|Adjustments to reconcile net income to net cash                 |                  
|provided by (used in) operating activities:                     |                  
|Depreciation and amortization                                   |                  
|Amortization of television and film costs and Fox broadcast fee |                  
|Provision for doubtful accounts                                 |                  
|Deferred income taxes                                           |                  
|Tax benefit on exercise of stock options                        |                  
|Changes in operating assets and liabilities:                    |                  
|Accounts receivable                                             |                  
|Film and television costs                                       |                  
|Prepaid/refundable income taxes                                 |                  
|Prepaid Fox broadcast fee                                       |                  
|Advances to licensors                                           |                  
|Prepaid expenses and other current assets                       |                  
|Other assets - net                                              |                  
|Due to licensors                                                |                  
|Media payable                                                   |                  
|Accounts payable and accrued expenses                           |                  
|Income taxes payable                                            |                  
|Deferred revenue                                                |                  
|Deferred rent                                                   |                  
|                                                                |                  
|Net cash provided by (used in) operating activities             |                  
|                                                                |                  
|CASH FLOWS FROM INVESTING ACTIVITIES:                           |                  
|Proceeds from maturities of investments                         |                  
|Purchase of investments                                         |                  
|Purchase of property and equipment                              |                  
|                                                                |                  
|Net cash used in investing activities                           |                  
|                                                                |                  
|CASH FLOWS FROM FINANCING ACTIVITIES -                          |                  
|Proceeds from exercise of stock options                         |                  
|                                                                |                  
|EFFECTS OF EXCHANGE RATE CHANGES ON CASH                        |                  
|AND CASH EQUIVALENTS                                            |                  
|                                                                |                  
|NET DECREASE IN CASH AND CASH EQUIVALENTS                       |                  
|                                                               
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                  |                  
|                                                                |                  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                        |                  
|                                                                |                  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:               |                  
|CASH PAID DURING THE PERIOD FOR:                                |                  
|Income Taxes                                                    |                  
|                                                                |                  

|See notes to consolidated financial
statements.


-4-
|-----------------------------------------------------

|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., 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, and Television and Film
Production/Distribution.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | LicensingThe Companys wholly-owned subsidiaries, 4Kids Entertainment
Licensing, Inc. (4Kids Licensing) and 4Kids Entertainment International, Ltd.
(4Kids International), are engaged in the business of licensing the
commercial rights to popular childrens properties, personalities and product
concepts. 4Kids Licensing typically acts as exclusive agent in connection with the grant
to third parties of licenses to manufacture and sell all types of merchandise based on
such properties, personalities and concepts. The licensing of these rights has been
primarily in the areas of toys, electronic games, trading cards, food, toiletries,
apparel, housewares, footwear and publishing rights. 4Kids Licensing also licenses
merchandising rights in connection with certain television shows and motion pictures
produced by the Company. 4Kids International, which is based in London, manages the
Companys properties in the United Kingdom and European marketplace.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 the
Fox Broadcasting Company (Fox), leases Foxs Saturday morning
programming block (the Fox Box). The Company provides all programming content
to be broadcast on the Fox Box, which generally airs on Saturday mornings from 8am to
12pm eastern/pacific time (7am to 11am central time), and retains all of the revenue from
network advertising sales for the four-hour time period. 4Kids Ad Sales, Inc., a
wholly-owned subsidiary, manages and accounts for the revenue and costs associated with
the Fox Box.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys wholly-owned subsidiary, The Summit Media Group, Inc. (Summit Media),
provides media planning and buying services for clients in both print and broadcast
media. 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 for distribution to the television,
home video and theatrical markets. 4Kids Productions adapts foreign programming for the
US market and also 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-5-
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| |  | 
| |  | 



---



| | 4Kids
Entertainment Music, Inc. ("4Kids Music"), a wholly-owned subsidiary, markets and
administers the musical operations for 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, markets and administers the Companys
home video operations associated with its television programming.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2.  SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

| | Basis
of Presentation  The consolidated financial statements, except for
the December 31, 2002 consolidated balance sheet, 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, 2003 and December 31, 2002 and the
results of operations for the three and nine month periods ended September 30, 2003 and 2002 and
cash flows for the nine months ended September 30, 2003 and 2002. Because of the
inherent seasonality and changing trends of the toy and game, entertainment and advertising
industries, operating results in 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, 2002, which are included in the Companys Annual Report on Form 10-K with
respect to such period filed with the Securities and Exchange Commission on March 31,
2003. All significant intercompany accounts and transactions have been eliminated. The
December 31, 2002 consolidated balance sheet amounts are derived from the Companys
audited consolidated financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue
RecognitionMerchandise licensing revenues: Merchandise licensing revenues are recognized
when the underlying royalties from the sales of the related products are earned.  The
Company recognizes guaranteed 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 with 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 that
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 revenues: Television series initially produced for
networks and first-run syndication are generally licensed to domestic and foreign markets
concurrently. The length of the revenue cycle for episodic television varies depending on
the number of seasons a series remains in active exploitation. Revenues arising from
television license agreements are recognized in the periods that the films or episodic
television series are available for telecast.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Production
and adaptation costs reimbursed or charged to the licensor are included in net revenue
and the corresponding costs are included in production service costs in the accompanying
consolidated statements of income.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-6-
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| |  | 
| |  | 



---



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

| | Music
revenues:Revenues from music sales, net of a reserve for returns, are
recognized based 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 total revenues
to be realized from all media and markets for such program. 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 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ReclassificationsCertain amounts reported for the prior period
have been reclassified to conform to the current periods presentation.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | Translation of Foreign CurrencyThe assets and liabilities of the Company's foreign subsidiary
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; which is a component of stockholders equity.
  Comprehensive income for the three and nine months ended September 30, 2003 was $2,916 and $9,569, respectively,
which included translation adjustments of $49 and $87 for the respective periods.  Comprehensive income for the
three and nine months ended September 30, 2002 is the same as net income for the periods.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Earnings Per Share  The Company applies SFAS No. 128, Earnings per share,
 which requires the computation and presentation of earnings per share (EPS) to include basic
and diluted EPS.  Basic EPS is computed solely on the weighted average number of common share outstanding during the period.
Diluted EPS reflects all potential dilution of common stock.  Total dilution was due to stock options
and increased the weighted average common shares outstanding by 922 shares and 845 shares for the three and nine months ended September 30, 2003, respectively,
and 1,081 shares and 1,069 shares for the three and nine months ended September 30, 2002, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock-Based Compensation The
Company accounts for stock-based compensation under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB No. 25). Under
FASB Interpretation 44, Accounting for Certain Transactions involving Stock
Compensation, an Interpretation of APB No. 25, outside directors are considered
employees for purposes of applying APB No. 25 if they are elected by shareholders.
Consequently, no compensation expense for employees and directors is recognized.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-7-
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| |  | 
| |  | 



---



| | The
following table illustrates the pro forma effect on net income and net income per basic
and diluted shares had the Company applied the fair value recognition provisions of SFAS
No. 123 for the three and nine months ended September 30, 2003 and 2002.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 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 2003
and 2002 included no dividend yield for both periods, expected volatility of
approximately 55.3% and 47.9% for 2003 and 2002, respectively, a risk-free interest rate of
approximately 1.4% and 2.2% for 2003 and 2002, respectively, and an option duration of 4 years for both periods.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Recently
Issued Accounting Pronouncements  Costs Associated with Exit or
Disposal Activities -   In June 2002, Financial Accounting Standards
Board (FASB) issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS No. 146). Such
standard requires costs associated with exit or disposal activities (including
restructurings) to be recognized when the costs are incurred, rather than at a date of
commitment to an exit or disposal plan. SFAS No. 146 nullifies Emerging Issue Task
Force (EITF) Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). Under SFAS No. 146, a liability related to
an exit or disposal activity is not recognized until such liability has actually been
incurred whereas under EITF Issue No. 94-3 a liability was recognized at the time of
a commitment to an exit or disposal plan. The provisions of this standard are effective
for exit or disposal activities initiated after December 31, 2002. The adoption of
this standard by the Company did not have a material effect on its consolidated financial
position or results of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-8-
|---

| |  | 
| |  | 



---



| | Guarantees
 In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. Such Interpretation elaborates on the disclosures to be made
by a guarantor about its obligations under certain guarantees issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this Interpretation apply to guarantees issued
or modified after December 31, 2002. The Company adopted the disclosure provisions of this
Interpretation in its financial statements as of and for the year ending after
December 31, 2002. The adoption of this standard by the Company did not have a
material effect on its consolidated financial position or results of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Consolidation
of Variable Interest Entities  On January 17, 2003, the FASB issued
Interpretation No. 46, Consolidation of Variable Interest Entities. Such
Interpretation addresses consolidation of entities that are not controllable through
voting interests or in which the equity investors do not bear the residual economic risks
and rewards. These entities have been commonly referred to as special purpose entities.
The Interpretation provides guidance related to identifying variable interest entities
and determining whether such entities should be consolidated. It also provides guidance
related to the initial and subsequent measurement of assets, liabilities and
noncontrolling interests in newly consolidated variable interest entities and requires
disclosures for both the primary beneficiary of a variable interest entity and other
beneficiaries of the entity. Such Interpretation is effective for newly created variable
interest entities beginning February 1, 2003 and for existing variable interest entities
as of the third quarter of 2003. However, in October 2003, the FASB permitted companies
to defer the third quarter 2003 effective date to December 31, 2003, in whole or in part,
and indicated that it would provide further clarification of this Interpretation before
December 31, 2003. The Company is currently evaluating the provisions of this Interpretation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Derivative
Instruments and Hedging Activities  In April 2003, the FASB issued SFAS No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS
No. 149). SFAS No. 149 amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. SFAS No. 149 is effective for contracts entered
into or modified after June 30, 2003, except as stated in the statement for hedging
relationships designated after June 30, 2003. The adoption of this standard by the
Company did not have a material effect on its consolidated financial position or results
of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-9-
|---

| |  | 
| |  | 



---



| | In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity.  SFAS No.
150 requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities.  The financial
instruments affected include mandatorily redeemable stock, certain financial instruments
that require or may require the issuer to buy back some of its shares in exchange for
cash or other assets and certain obligations that can be settled with shares of stock.  SFAS
No. 150 is effective for all financial instruments entered into or modified after May 31,
2003, and to all other instruments that exist as of the beginning of the first interim
financial reporting period after June 15, 2003.  The Company adopted the provisions
of SFAS 150 on July 1, 2003.  The adoption of this standard by the Company did not have a material
effect on its consolidated financial position or results of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 any such litigation to which the Company or any subsidiary of the
               Company is a party or of which any of their properties is the subject will,
               individually or in the aggregate, have a material adverse effect on the
               Companys consolidated financial position or the results of its operations.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Deferred Revenue  Music Publishing  In July 2002, 4Kids Music
               granted a right through 2011 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 granted 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 will receive $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 revenue of $68 and $347 for the three and nine months ended
September 30, 2003, respectively and $314 for both the three and nine months ended September
30, 2002.  The Company has included $3,089 and $2,686 as deferred revenue on the accompanying
consolidated balance sheets as of September 30, 2003 and December 31,
2002, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Home
Video  In May 2002, 4Kids Home Video entered into an agreement 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 an
advance of $1,300 against 4Kids Home Videos share of the service fee proceeds to be
realized by 4Kids Home Video from such titles. Pursuant to the above, the Company
recognized revenue of $0 and $587 for the three and nine months ended September 30, 2003, respectively
and $713 for both the three and nine months ended September 30, 2002.  The Company has included
$587 as deferred revenue on the accompanying consolidated balance sheets as of December
31, 2002. As of September 30, 2003, the advance has been fully recognized as revenue.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
Agreements  In addition, the Company has entered into other agreements for various
properties in which the Company has received certain advances and/or minimum guarantees.
Accordingly, as of September 30, 2003 and December 31, 2002, the unearned portion of these advances and
guaranteed payments received was $2,047 and $703, respectively, and are included as deferred revenue on the accompanying consolidated
balance sheets.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-10-
|----

| |  | 
| |  | 



---



| | c. | Master Toy License  4Kids Licensing is the exclusive Merchandise Licensing
               Agent for the Pokémon property outside Asia. The master toy
               licensee (Licensee) for the Pokémon property and
               The Pokémon Company LLC (the assignee of certain rights and obligations
               of Nintendo of America Inc. with respect to the Pokémon
               property) entered into an agreement (the Agreement) effective
               January 1, 2001.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the terms of the Agreement, Licensee is required to pay a minimum royalty for the period
starting January 1, 2001 and ending December 31, 2003. Since all of the conditions under
the Agreement were met and the full amount of the minimum guaranteed royalties were
payable by the Licensee, the Company earned $7,500 over the period of the Agreement. For
each of the nine months ended September 30, 2003 and 2002, the Company earned royalties
relating to the Agreement of $2,500. During 2003, the Agreement was amended extending the
term to December 31, 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Fox Broadcast Agreement  In January 2002, the Company entered into
               a multi-year agreement with Fox to lease the Fox Box. The Company is providing
               all programming content for the Fox Box and commenced doing so with the
               broadcast year beginning in September of 2002. The agreement has an initial term
               of four broadcast years, with the Company having the option to extend the term
               for up to two additional broadcast years. 4Kids will pay 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 season 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 four
equal installments in September, December, February and April. All payments required to be
made on or prior to September 30, 2003 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, 2003, 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 the Fox Box is capitalized and amortized over each broadcast season based on
estimated advertising revenue. The Company recorded amortization expense of $7,167 and $17,836 for the three
and nine months ended September 30, 2003, respectively, and $1,393 for both the three and nine months ended September
30, 2002.  As of September 30, 2003, the Company paid Fox and certain affiliates $15,820 attributed
to the second years broadcast fee, and as of December 31, 2002, the Company paid $19,301 attributed to the first years broadcast fee.
The unamortized portion of these fees of $14,170 and $9,857, are included in Prepaid Fox broadcast fee on the accompanying
consolidated balance sheets as of September 30, 2003 and December 31, 2002, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-11-
|----

| |  | 
| |  | 



---



| | 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 will incur additional costs to program the four hour block and to
sell the related network advertising time. These costs will 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, 2003, the minimum guaranteed payment obligations under the
Fox Broadcast Agreement are as follows:
| | ----------------------------------------------------------------------------------------------------------------------

|Year ending
December 31,       |  | Amount | 
|------------------------------ |  | ------ | 
|October 1, - December 31, 2003 |  |        | 
|2004                           |  |        | 
|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 the Fox Box and the
general market demand and pricing of advertising time for Saturday morning childrens
broadcast television. The popularity of such programs impacts audience levels 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 the Fox Box 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 at levels 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 will be
required to make certain assumptions and estimates about future events such as advertising
rates and audience viewing levels in evaluating its ability to recover the cost of the Fox
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 Fox fee
and in the event it cannot, it would record the resulting charge to earnings to reflect an
expected loss on the Fox fee, which could be significant.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 upon its net
revenues, profit and loss after all expenses, including amortized film, television costs
and the Fox 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 arms length
basis. All inter-segment transactions have been eliminated in consolidation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-12-
|----

| |  | 
| |  | 



---



|                                          | Licensing | Advertising
Media and
Broadcast | Television and
Film Production/
Distribution | Total
|----------------------------------------- | --------- | ------------------------------- | -------------------------------------------- | -----
|Three Months Ended                        |           |                                 |                                              |      
|September 30,                             |           |                                
|2003                                      |           |                                
|                                          |           |                                
|Net revenues from external customers      |           | $                               | 13,046                                       |      
|                                          |           |                                 |                                              |      
|Amortization of television and film costs |           |                                
|and Fox broadcast fee                     |           | $                               | --                                           |      
|                                          |           |                                 |                                              |      
|Segment profit (loss)                     |           | $                               | 9,091                                        |      
|                                          |           |                                 |                                              |      
|Interest income                           |           | $                               | 249                                          |      
|                                          |           |                                 |                                              |      
|2002                                      |           |                                
|                                          |           |                                
|Net revenues from external customers      |           | $                               | 7,440                                        |      
|                                          |           |                                 |                                              |      
|Amortization of television and film costs |           |                                
|and Fox broadcast fee                     |           | $                               | --                                           |      
|                                          |           |                                 |                                              |      
|Segment profit (loss)                     |           | $                               | 4,580                                        |      
|                                          |           |                                 |                                              |      
|Interest income                           |           | $                               | 381                                          |      
|                                          |           |                                 |                                              |      
|Nine Months Ended                         |           |                                
|September 30,                             |           |                                
|2003                                      |           |                                
|                                          |           |                                
|Net revenues from external customers      |           | $                               | 37,112                                       |      
|                                          |           |                                 |                                              |      
|Amortization of television and film costs |           |                                
|and Fox broadcast fee                     |           | $                               | --                                           |      
|                                          |           |                                 |                                              |      
|Segment profit (loss)                     |           | $                               | 24,950                                       |      
|                                          |           |                                 |                                              |      
|Segment assets                            |           | $                               | 128,948                                      |      
|                                          |           |                                 |                                              |      
|Interest income                           |           | $                               | 820                                          |      
|                                          |           |                                 |                                              |      
|2002                                      |           |                                
|                                          |           |                                
|Net revenues from external customers      |           | $                               | 17,555                                       |      
|                                          |           |                                 |                                              |      
|Amortization of television and film costs |           |                                
|and Fox broadcast fee                     |           | $                               | --                                           |      
|                                          |           |                                 |                                              |      
|Segment profit (loss)                     |           | $                               | 8,799                                        |      
|                                          |           |                                 |                                              |      
|Segment assets                            |           | $                               | 110,940                                      |      
|                                          |           |                                 |                                              |      
|Interest income                           |           | $                               | 1,149                                        |      
|                                          |           |                                 |                                              |      

| | 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
revenue from international sources primarily in Europe, of $3,808 and $7,528 for the
three and nine months ended September 30, 2003, respectively, and $1,272 and $4,017 for
the three and nine months ended September 30, 2002, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-13-

     _________________
|----------------------------

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

| | Critical
Accounting Policies and Estimates
| | ------------------------------------------

| | This
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 at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Management
bases its estimates and assumptions on expected or known trends or events, historical
experience 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
believes the following critical accounting policies, among others, involve the
significant judgments and estimates used in the preparation of its consolidated financial
statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue
Recognition
| | -------------------

| | Merchandise
licensing revenues: Merchandise licensing revenues are recognized
when the underlying royalties from the sales of the related products are earned.
The Company recognizes guaranteed 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 with an appropriate
reserve recorded 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 revenues: Television series initially produced for
networks and first-run syndication are generally licensed to domestic and foreign markets
concurrently. The length of the revenue cycle for episodic television varies depending on
the number of seasons a series remains in active exploitation. Revenues arising from
television license agreements are recognized in the period that the films or episodic
television series are available for telecast.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Production
and adaptation costs reimbursed or charged to the licensor are included in net revenue
and the corresponding costs are included in production service costs in the accompanying
consolidated statements of income.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|-14-
|----

| |  | 
| |  | 



---



| | 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. In the case of musical performance revenues, the revenue is
recognized when the musical recordings are broadcast or performed.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 total revenues to be realized from all media and
markets for such program. 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 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Recently
Issued Accounting Pronouncements
| | -----------------------------------------

| | Costs
Associated with Exit or Disposal Activities -   In June 2002,
Financial Accounting Standards Board (FASB) issued SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities(SFAS No. 146). Such
standard requires costs associated with exit or disposal activities (including
restructurings) to be recognized when the costs are incurred, rather than at a date of
commitment to an exit or disposal plan. SFAS No. 146 nullifies Emerging Issue Task
Force (EITF) Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). Under SFAS No. 146, a liability related to
an exit or disposal activity is not recognized until such liability has actually been
incurred whereas under EITF Issue No. 94-3 a liability was recognized at the time of
a commitment to an exit or disposal plan. The provisions of this standard are effective
for exit or disposal activities initiated after December 31, 2002. The adoption of
this standard by the Company did not have a material effect on its consolidated financial
position or results of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Guarantees
 In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. Such Interpretation elaborates on the disclosures to be made
by a guarantor about its obligations under certain guarantees issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this Interpretation apply to guarantees issued
or modified after December 31, 2002. The disclosure provisions of this
Interpretation are effective for financial statements as of and for the year ending after
December 31, 2002. The adoption of this standard by the Company did not have a
material effect on its consolidated financial position or results of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-15-
|----

| |  | 
| |  | 



---



| | Stock-Based
Compensation  On December 31, 2002, the FASB issued SFAS No. 148, Accounting
for Stock-Based CompensationTransition and Disclosure(SFAS No. 148).
This standard amends SFAS No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition for a voluntary change to the fair value
based method (expense treatment) of accounting for stock-based employee compensation.
This standard also requires prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company adopted the disclosure
requirements of this statement as of December 31, 2002. Should the Company elect to
utilize the fair value based method for its stock-based compensation in the future, it
must adopt the remaining provisions of SFAS No. 148.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Consolidation
of Variable Interest Entities  On January 17, 2003, the FASB issued
Interpretation No. 46, Consolidation of Variable Interest Entities. Such
Interpretation addresses consolidation of entities that are not controllable through
voting interests or in which the equity investors do not bear the residual economic risks
and rewards. These entities have been commonly referred to as special purpose entities.
The Interpretation provides guidance related to identifying variable interest entities
and determining whether such entities should be consolidated. It also provides guidance
related to the initial and subsequent measurement of assets, liabilities and
noncontrolling interests in newly consolidated variable interest entities and requires
disclosures for both the primary beneficiary of a variable interest entity and other
beneficiaries of the entity. Such Interpretation is effective for newly created variable
interest entities beginning February 1, 2003 and for existing variable interest entities
as of the third quarter of 2003. However, in October of 2003, the FASB permitted
companies to defer the third quarter 2003 effective date to December 31, 2003, in whole
or in part, and indicated that it would provide further clarification of this
Interpretation before December 31, 2003. The Company is currently evaluating the provisions of this Interpretation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Derivative
Instruments and Hedging Activities  In April 2003, the FASB issued SFAS No. 149, Amendment
of Statement 133 on Derivative Instruments and Hedging Activities (SFAS No. 149).
SFAS No. 149 amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, except as stated in the statement for hedging relationships
designated after June 30, 2003. The adoption of this standard by the Company did not have
a material effect on its consolidated financial position or results of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity.  SFAS No.
150 requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities.  The financial
instruments affected include mandatory redeemable stock, certain financial instruments
that require or may require the issuer to buy back some of its shares in exchange for
cash or other assets and certain obligations that can be settled with shares of stock.  SFAS
No. 150 is effective for all financial instruments entered into or modified after May 31,
2003, and to all other instruments that exist as of the beginning of the first interim
financial reporting period after June 15, 2003. The Company adopted the provisions of SFAS
No. 150 on July 1, 2003.  The adoption of this standard by the Company did not have a material
effect on its consolidated financial position or results of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-16-
|----

| |  | 
| |  | 



---



| | Three
and nine months ended September 30, 2003 as compared to three and nine months ended
September 30, 2002.
| | -------------------------------------------------------------------------------------------------------------

| | Consolidated
net revenues increased 109%, or $13,235, to $25,334, and 156%, or $42,443, to $69,681 for
the three and nine months ended September 30, 2003, respectively, as compared to the same
periods in 2002. The increase was due to a number of factors. In the Licensing segment,
net revenue increased 75%, or $5,606, to $13,046 and 111%, or $19,557, to $37,112 for the
three and nine months ended September 30, 2003, respectively, as compared to the same
periods in 2002. Licensing and fee revenue, primarily from the Yu-Gi-Oh! and
Teenage Mutant Ninja Turtles properties, increased significantly in the
current periods as compared to the same periods in 2002. Net revenue in the Advertising
Media and Broadcast segment increased 178% or $3,546 to $5,543 and 357%, or $10,763, to
$13,774 for the three and nine months ended September 30, 2003, respectively, as compared
to the same periods in 2002 primarily due to sales of advertising time on the Fox Box
which began broadcast operations in September 2002. Net revenue for the Television and
Film Production/Distribution segment increased 154%, or $4,083, to $6,745 and 182%, or
$12,123, to $18,795 for the three and nine months ended September 30, 2003, respectively,
as compared to the same periods in 2002. In this segment, increased production service
revenue was earned for work performed on the Teenage Mutant
Ninja Turtles, Kirby, and Pokémon television programs
when compared to the same period in 2002. Additionally, revenue for the nine months ended
September 30, 2003 increased from the Pokémon movies and international
broadcast agreements for the Yu-Gi-Oh!, Teenage Mutant Ninja Turtles
 and Pokémon television programs.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Selling,
general and administrative expenses increased 25%, or $1,737, to $8,579 and 47%, or
$7,668, to $23,996 for the three and nine months ended September 30, 2003, respectively,
when compared to the same periods in 2002, primarily due to increased marketing
and advertising costs for the expanded property line-up, home video operations,
payroll and employee benefits resulting from higher staffing levels in advertising sales; the
operation, marketing and promotion relating to the Fox Box and the Companys Fox Box
TV website; all of which commenced significant operations in September 2002. These
 increased payroll and employee benefits costs include bonus accruals which are based on pre-tax
earnings. In addition, the Company incurred additional infrastructure costs to support
the aforementioned new operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Production
service costs increased 687%, or $2,247, to $2,574 and 715%, or $5,752, to $6,556 for the
three and nine months ended September 30, 2003, respectively, as compared to the same
periods in 2002. This increase was attributable to certain television production costs
related to the Teenage Mutant
Ninja Turtles, Kirby, and Pokémon
television programs for which the Company incurs production costs that will be reimbursed. When the
Company expects to be reimbursed, it categorizes them as production service
costs and reflects a corresponding amount in revenue for the amount of the reimbursement.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of September 30, 2003, there was $8,400 of capitalized film production costs relating
primarily to various stages of production on 660 episodes of animated programming.
Amortization of capitalized film costs increased 382%, or $2,007, to $2,533 and 234%, or
$4,460, to $6,368 for the three and nine months ended September 30, 2003, respectively,
as compared to the same periods in 2002, primarily due to increased amortization of programs
broadcast on the Fox
Box and the Yu-Gi-Oh! television programs.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-17-
|----

| |  | 
| |  | 



---



| | Amortization
of the Fox broadcasting fee was $7,167 and $17,836 for the three and nine months ended
September 30, 2003, respectively. The Fox Box commenced operations in September 2002. The
fee payable to Fox is capitalized and amortized each broadcast season based on estimated
advertising revenue. As of September 30, 2003, the Company paid Fox and certain affiliates $15,820 attributed
to the second years broadcast fee, and as of December 31, 2002, the Company paid $19,301 attributed to the first years broadcast fee.
The unamortized portion of these fees of $14,170 and $9,857, are included in Prepaid Fox broadcast fee on the accompanying
consolidated balance sheets as of September 30, 2003 and December 31, 2002, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|i) | revenues
generated from merchandise licensing, home video and music publishing of Fox Box        properties,           and
|-- | --------------------------------------------------------------------------------------------------------------------------

|ii) | production
and acquisition costs associated with the television programs broadcast on the Fox
       Box.
|--- | ---------------------------------------------------------------------------------------------------------

| | The
ability of the Company to further develop its merchandising, home video and music publishing revenue streams was a
significant component of its evaluation to lease the Fox Box programming block.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
income decreased 35%, or $136, to $252 and 29%, or $345, to $835 for the three and nine
months ended September 30, 2003, respectively, as compared to the same periods in 2002,
as a result of the declining interest rate environment, partially offset by higher average cash
balances invested.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
tax expense increased 30%, or $430, to $1,866 and 94%, or $3,037, to $6,278 for the three
and nine months ended September 30, 2003, respectively, as compared to the same periods
in 2002, due to higher pre-tax income. The Companys effective tax rate remained
relatively consistent at approximately 40% for both 2003 and 2002.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the above, the Company had net income for the three and nine months ended
September 30, 2003 of $2,867 and $9,482, respectively, as compared to net income for the
same periods in 2002 of $1,963 and $4,744, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Liquidity
and Capital Resources
| | -------------------------------

| | For
the nine months ended September 30, 2003, the Companys cash and cash equivalents
and short-term investment balances increased by $9,980 to $99,479, primarily as a result
of increased royalty collections on the Yu-Gi-Oh! and Teenage Mutant
Ninja Turtles properties and a decrease in accounts receivable, offset by
contractual payments made for the Fox Box broadcast rights and other film rights and
decreases in media payable.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
flows provided by (used in) operating activities for the nine months ended September 30, 2003 and 2002,
were $8,586 and ($24,217), respectively. Working capital, consisting of current assets
less current liabilities, was $124,284 as of September 30, 2003 and $114,298 as of
December 31, 2002.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
flows used in investing activities for the nine months ended September 30, 2003, and 2002
were ($25,726), and ($2,033), respectively. As of September 30, 2003 and December 31, 2002, the
Company had approximately $35,988 and $10,787, respectively, invested primarily in
government obligations. For the nine months ended September 30, 2003, the Company
purchased property and equipment of $525, which was comprised primarily of leasehold
improvements and computer equipment, as compared to purchases of property and equipment
of $2,274 for the same period in 2002.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-18-
|----

| |  | 
| |  | 



---



| | Cash
flows provided by financing activities for the nine months ended September 30, 2003 and 2002
were $1,832 and $525, respectively. Cash flows from financing activities for the nine
months ended September 30, 2003 and 2002 were generated by proceeds from the exercise of
stock options by the Companys employees.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys license agreement with Fox to program the networks four hour
Saturday morning childrens block which began in September 2002, requires the
Company to pay an annual fee of $25,312. Under the terms of the agreement, through
September 30, 2003, the Company paid Fox and certain affiliates a total of
$41,450, representing the entire first broadcast years fee of $25,630, and a portion of the
second broadcast years fee of $15,820, with the balance of the second years
fee payable in three equal installments of $3,164 due in December 2003, February 2004 and
April 2004. 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 four equal installments in
September, December, February and April. 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 license fee are
paid. As of September 30, 2003, the Company had received a commitment 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
financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. The Company will
incur additional costs to program the four-hour block and to sell the related network
advertising time. These costs will include direct programming costs to acquire, adapt and
deliver programming for broadcast during the weekly four hour block as well as additional
indirect costs of advertising sales, promotion and administration.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
aggregate minimum payment obligations under various operating leases related to certain
office, administrative and production facilities and the Fox Broadcast fee are as
follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Year ending
December 31,       | Leases | Fox
Broadcast Fee | Total
|------------------------------ | ------ | ----------------- | -----
|October 1, - December 31, 2003 |        |                   | $    
|2004                           |        |                   |      
|2005                           |        |                   |      
|2006                           |        |                   |      
|2007                           |        |                   |      
|2008 and thereafter            |        |                   |      
|                               |        |                   |      
|Total                          |        |                   | $    
|                               |        |                   |      

| | The
Company believes that existing cash and short-term investments and anticipated cash to be
generated from future operations will be sufficient to meet our cash needs over the next
twelve months for working capital, capital expenditures and strategic investments.
However, during such period or thereafter, depending on the size and number of the
projects and investments undertaken by the Company, the Company may seek additional
financing alternatives.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-19-
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| |  | 
| |  | 



---



| | Forward-looking
Statements
| | --------------------------

| | 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. Such statements may, for example, express
expectations or projections about future actions that we may take, including
restructuring or strategic initiatives or about developments beyond our control including
changes in domestic or global economic conditions. These statements 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 come to pass.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Factors
that may affect forward-looking statements. For the Company, a wide range of factors
could materially affect future developments and 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;
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Changes
in U.S., global or regional economic conditions, which may affect purchases of
Company-licensed consumer products, the advertising market for broadcast and television
programming and the performance of the Companys theatrical, music and home
entertainment releases;
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Increased
competitive pressures, both domestically and internationally, which may, among other
things, lead to increased expenses in such areas as television programming acquisition
and motion picture production and marketing;
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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;
| | ---------------------------------------------------------------------------------------------------------------------

| | Changing
public and consumer taste, which may among other things, affect the Companys
entertainment, broadcasting and consumer products businesses generally or result in
increases in broadcasting losses or loss of advertising revenue; and
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | International,
political and military developments that may, among other things, result in increases in
broadcasting costs or loss of advertising revenue.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-20-
|----

| |  | 
| |  | 



---



|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
|-------------------------------

| | The
Company has evaluated the effectiveness of the design and operation of its disclosure
controls and procedures under the supervision of and with the participation of
management, including the Chief Executive Officer and Chief Financial Officer, as of the
end of the period covered by this report. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the Companys disclosure
controls and procedures are effective in ensuring that information required to be
disclosed by the Company in the reports it files or submits under the Exchange Act is
included in such reports.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | There
have not been any changes in the Companys internal control over financial reporting
during the fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Companys internal controls over
financial reporting.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-21-
|----

| |  | 
| |  | 



---



|Part II -OTHER
INFORMATION              
|----------------------------------------
|                                        
|Item 6. Exhibits and
Reports on Form 8-K
|                                        

| | (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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)              Reports
on Form 8-K
| | ------------------------------------

| | (1)        The
Registrant filed a Current Report on Form 8-K on August 13, 2003 in connection with                  the
issuance of its press release announcing the results for the quarterly period ended                  June
30, 2003.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2)        The
Registrant filed a Current Report on Form 8-K on November 13, 2003 in connection                  with the issuance of its press release announcing the results for the quarterly period ended
                 September 30, 2003.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-22-



SIGNATURES


Pursuant to the requirements 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.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Dated: November 14, 2003




4KIDS ENTERTAINMENT,
INC.



By: /s/ Alfred R. Kahn



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



By: /s/ Joseph P. Garrity



Joseph P. GarrityExecutive
Vice President and Chief Financial Officer


-23-
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------