|
|

|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 June 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 August 12, 2003, the number of
shares outstanding of the Registrants common stock, par value $.01 per share, was
13,198,633.

4Kids
Entertainment, Inc. and Subsidiaries


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

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

|Item 1.                   | Financial Statements                                                                                               |   
|------------------------- | ------------------------------------------------------------------------------------------------------------------ | --
|                          |                                                                                                                    |   
|                          | Consolidated Balance Sheets as of June 30, 2003
           (Unaudited) and December 31, 2002                       | 2 
|                          |                                                                                                                    |   
|                          | Consolidated Statements of Income for the three and six    months
        ended June 30, 2003 and 2002 (Unaudited) | 3 
|                          |                                                                                                                    |   
|                          | Consolidated Statements of Cash Flows for the six    months
        ended June 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                                                 | 20
|                          |                                                                                                                    |   
|Item 4.                   | Controls and Procedures                                                                                            | 20
|                          |                                                                                                                    |   
|Part IIOTHER INFORMATION |                                                                                                                    |   
|                          |                                                                                                                    |   
|Item 4.                   | Submission of Matters to a Vote of Security Holders                                                                | 21
|                          |                                                                                                                    |   
|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)
|--------------------------------------------

|                                                                | June 30,
2003 | December 31,
2002
|--------------------------------------------------------------- | ------------- | -----------------
|
|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, 13,159,633 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 | Six 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 FLOW (UNAUDITED)
|------------------------------------------------

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

|                                                                | Six 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                           |                 
|                                                                |                 
|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 produce original music
compositions for use with its television and film production activities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-5-
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| |  | 
| |  | 



---



| | 4Kids
Entertainment Music, Inc., 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., 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 June 30, 2003 and December 31, 2002 and the
results of operations for the three and six months ended June 30, 2003 and 2002 and cash
flows for the six months ended June 30, 2003 and 2002. Because of the seasonality and
changing trends of the toy and game, entertainment and advertising industries, operating
results of 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:  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 period that the films or episodic television series are available for telecast.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-6-
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| |  | 
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---



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

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

| | Stock-Based
Compensation  On December 31, 2002, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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-
|---

| |  | 
| |  | 



---



| | 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 six months ended June 30, 2003 and 2002.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | Three Months Ended | Six 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 a dividend yield of 0% for both years,
 expected  volatility of approximately  55.3% and 47.9% for 2003 and 2002,  respectively,
 and a risk-free interest rate of approximately 1.4% and 2.2% for 2003 and 2002, respectively,
based on expected lives of the options of 4.1 years for both years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Recently
Issued Accounting Pronouncements Costs
Associated with Exit or Disposal Activities -   In June 2002,
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 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 with annual periods ending after
December 15, 2002. The adoption of this standard did not have a material effect on
its consolidated financial position or results of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-8-
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| |  | 
| |  | 



---



| | 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. The Company does not expect that the adoption of this
standard during the third quarter of 2003 will have a material effect on its consolidated financial position or results of operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 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.  Early adoption of SFAS No. 150 is
not permitted. The adoption of this standard 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 property 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.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-9-
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| |  | 
| |  | 



---



| | b. | Deferred
Revenue  Music Publishing  In July 2002, 4Kids Music           granted a
right to receive a 50% interest in the Companys net share of the           music
revenues from currently existing music produced by the Company for its
          television programs (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 $175 and $279 for the three and six months ended June
30, 2003 and has included $3,157 as deferred revenue in the accompanying consolidated
balance sheets as of June 30, 2003 and $2,686 as of December 31, 2002.   
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 $252 and $587 for the three and six months ended June 30,
2003 and has included $587 as deferred revenue on the accompanying consolidated balance
sheets as of December 31, 2002. As of June 30, 2003, the advance paid to the Company was fully amortized.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 June 30, 2003 and 2002, the unearned portion of these advances and
guaranteed payments received was $2,894 and $1,452, respectively, and $2,894 is included as
deferred revenue on the accompanying consolidated balance sheets as of June 30, 2003 and
$703 as of December 31, 2002.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 six months ended June 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.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-10-
|----

| |  | 
| |  | 



---



| | 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 June 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 June 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. As of June 30, 2003, the Company has paid Fox and certain affiliates
a total of $38,286, representing the entire first year fee and a portion of the second
year fee of which $20,113 was amortized. The remaining $18,173, representing the
unamortized portion of the first broadcast seasons fee paid of $5,517, and the
first installment paid on the second broadcast season of $12,656 is
included in Prepaid Fox broadcast fee on the accompanying consolidated
balance sheets as of June 30, 2003.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|-11-
|----

| |  | 
| |  | 



---



| |  | 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        |           |                                
|June 30:                  |           |                                
|2003                      |           |                                 |                                              |        
|Net revenues from         |           |                                 |                                              |        
|external customers        |           |                                 | $                                            | 12,805 
|                          |           |                                 |                                              |        
|Amortization of           |           |                                
|television and film costs |           |                                
|and Fox broadcast fee     |           |                                 | $                                            | --     
|                          |           |                                 |                                              |        
|Segment profit (loss)     |           |                                 | $                                            | 8,335  
|                          |           |                                 |                                              |        
|Interest income           |           |                                 | $                                            | 254    
|                          |           |                                 |                                              |        
|2002                      |           |                                 |                                              |        
|Net revenues from         |           |                                
|external customers        |           |                                 | $                                            | 5,518  
|                          |           |                                 |                                              |        
|Amortization of           |           |                                
|television and film costs |           |                                 | $                                            | --     
|                          |           |                                 |                                              |        
|Segment profit (loss)     |           |                                 | $                                            | 2,096  
|                          |           |                                 |                                              |        
|Interest income           |           |                                 | $                                            | 306    
|                          |           |                                 |                                              |        
|Six Months Ended          |           |                                
|June 30:                  |           |                                
|2003                      |           |                                 |                                              |        
|Net revenues from         |           |                                
|external customers        |           |                                 | $                                            | 24,066 
|                          |           |                                 |                                              |        
|Amortization of           |           |                                
|television and film costs |           |                                
|and Fox broadcast fee     |           |                                 | $                                            | --     
|                          |           |                                 |                                              |        
|Segment profit (loss)     |           |                                 | $                                            | 15,859 
|                          |           |                                 |                                              |        
|Segment assets            |           |                                 | $                                            | 118,904
|                          |           |                                 |                                              |        
|Interest income           |           |                                 | $                                            | 571    
|                          |           |                                 |                                              |        
|2002                      |           |                                 |                                              |        
|Net revenues from         |           |                                
|external customers        |           |                                 | $                                            | 10,115 
|                          |           |                                 |                                              |        
|Amortization of           |           |                                
|television and film costs |           |                                 | $                                            | --     
|                          |           |                                 |                                              |        
|Segment profit (loss)     |           |                                 | $                                            | 3,511  
|                          |           |                                 |                                              |        
|Segment assets            |           |                                 | $                                            | 126,073
|                          |           |                                 |                                              |        
|Interest income           |           |                                 | $                                            | 767    
|                          |           |                                 |                                              |        

|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 $3,720 and $2,745 for the six
months ended June 30, 2003 and 2002, respectively, and $1,028 and $1,646 for
the three months ended June 30, 2003 and 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 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:  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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-14-
|----

| |  | 
| |  | 



---



| | 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 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,
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 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 with annual periods ending after
December 15, 2002. The adoption of this standard did not have a material effect on
its consolidated financial position or results of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-15-
|----

| |  | 
| |  | 



---



| | 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. The Company does not expect that the adoption of this
standard during the third quarter of 2003 will have a material effect on its consolidated financial position or results of operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 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.  Early adoption of SFAS No. 150 is
not permitted. The adoption of this standard did not have a
material effect on its consolidated financial position or results of operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-16-
|----

| |  | 
| |  | 



---



| | Three
and six months ended June 30, 2003 as compared to three and six months ended June 30, 2002.
| | -------------------------------------------------------------------------------------------------

| | Consolidated
net revenues increased 186%, or $15,191, to $23,369, and 193%, or $29,208, to $44,347 for
the three and six months ended June 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 132%, or $7,287, to $12,805 and 138%, or $13,951, to $24,066 for
the three and six months ended June 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
period as compared to the same periods in 2002. Net revenue in the Advertising Media and
Broadcast segment increased 542%, or $3,468, to $4,108 and 727%, or $7,236, to $8,231 for the
three and six months ended June 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 220%, or $4,436, to $6,456 and 199%, or $8,021, to
$12,050 for the three and six months ended June 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 Kirby and Teenage Mutant Ninja Turtles television
programs when compared to the same period in 2002.  Additionally, license revenue for the six months ended June 30, 2003
increased from the Pokémon movies and international broadcast agreements for the Yu-Gi-Oh, Cubix,
and Pokémontelevision programs.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Selling,
general and administrative expenses increased 63%, or $3,156, to $8,174 and
63%, or $5,931, to $15,417, for the three and six months ended June 30, 2003,
respectively, as compared to the same periods in 2002, primarily due to increased
advertising, payroll and benefits resulting from higher staffing levels in advertising
sales, the operation of the Fox Box network and the Companys Fox Box TV website,
all of which commenced significant operations in the third quarter of 2002. Along with
these increased payroll and benefits costs are 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 462%, or $1,635, to $1,989 and 735%, or $3,505, to $3,982 for the
three and six months ended June 30, 2003, respectively, as compared to the same periods
in 2002. This increase was attributable to certain television production costs related to
the Kirby and Teenage Mutant Ninja Turtles television programs
for which the Company is reimbursed. When the Company is reimbursed for production costs,
it categorizes them as production service costs and reflects a corresponding amount in
revenue for the amount of the reimbursement.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
June 30, 2003, there were $7,415 of capitalized film production costs
relating primarily to various stages of production on 647 episodes of animated
programming. Amortization of capitalized film costs increased by $567, or 49%, to $1,729
and $2,453, or 177%, to $3,835 for the three and six months ended June 30, 2003,
respectively, as compared to the same periods in 2002, primarily due to increased amortization of Fox Box programming and the
Yu-Gi-Oh! television
program.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amortization
of the Fox broadcasting fee was $5,659 and $10,669 for the three and six months ended
June 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 June 30, 2003, the Company had paid Fox and certain affiliates
a total amount of $38,286, representing the entire first years broadcast fee, and a
portion of the second years broadcast fee of which $20,113 was amortized as of June
30, 2003. The remaining $18,173, representing the unamortized portion of the first
broadcast seasons fee paid of $5,517, and the first installment paid on the second
broadcast season of $12,656, is included in Prepaid Fox broadcast fee on the
accompanying consolidated balance sheets as of June 30, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-17-
|----

| |  | 
| |  | 



---



| | 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,           and
| | -------------------------------------------------------------------------------------------------------------

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

| | The
ability of the Company to access and develop these multiple revenue streams was a
critical component of its evaluation to lease the Fox Box programming block.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
income decreased $56, or 18%, to $259 and $209, or 26%, to $583 for the three and six
months ended June 30, 2003, respectively, as compared to the same periods in 2002, as a
result of the declining interest rate environment.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
tax expense increased $1,700, or 232%, to $2,432 and $2,607, or 144%, to $4,412 for the three
and six months ended June 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 six months ended June
30, 2003 of $3,645 and $6,615, respectively, as compared to net income for the same
periods in 2002 of $1,227 and $2,781, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | For
the six months ended June 30, 2003, the Companys cash and cash equivalents and
short-term investment balances increased by $465 to $89,964, 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 from operating activities for the six months ended June 30, 2003 and 2002, were
$576 and ($21,369), respectively. Working capital, consisting of current assets less
current liabilities, was $122,128 as of June 30, 2003 and $114,298 as of December 31,
2002.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
flows from investing activities for the six months ended June 30, 2003 and 2002 were
($16,848), and ($11,760), respectively. As of June 30, 2003 and December 31, 2002, the Company had
approximately $27,230 and $10,787, respectively, invested primarily in government obligations. For the six months
ended June 30, 2003, the Company purchased property and equipment of $405, which was
comprised primarily of leasehold improvements and computer equipment, as compared to
purchases of property and equipment of $1,109 for the same period in 2002.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
flows from financing activities for the six months ended June 30, 2003 and 2002 were $256
and $397, respectively. Cash flows from financing activities for the six months ended
June 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, for the six months
ended June 30, 2003, the Company paid Fox and certain affiliates a total of $18,985,
representing the remainder of the first broadcast years fee, and the first payment
of $12,656 for the second broadcast years fee, with the balance of the second years
fee payable in four equal installments of $3,164 due in September 2003, 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 June 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | 
| |  | 



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| | 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 expenses 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
|--------------------------- | ------ | ----------------- | -----
|July 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.



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

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| |  | 



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|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.



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

|-20-
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| |  | 
| |  | 



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|Part II - OTHER
INFORMATION

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





The
Annual Meeting of  Shareholders  of the Company was held on May 23, 2003. The matters
voted upon,  including the number or votes cast for, against or withheld, as well as the
number of abstentions and brokernonvotes, as to each such matter were as follows:





Proposal
1:     All six of managements  nominees for directors as listed in the proxy
statement were elected with the number of votes cast for each nominee as follows:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                   | Shares Voted
FOR | Shares Voted
AGAINST | Shares
ABSTAINING | Broker Non
Votes | Votes
Withheld
|------------------ | ------------------ | ---------------------- | ------------------- | ----------------- | --------------
|                  
|Richard Block      | 12,611,387         |                       |                    |                  | 49,903        
|                  
|Jay Emmett         | 12,589,712         |                       |                    |                  | 71,578        
|                  
|Joseph P. Garrity  | 12,609,229         |                       |                    |                  | 52,061        
|                  
|Michael Goldstein  | 12,609,136         |                       |                    |                  | 52,154        
|                  
|Steven M. Grossman | 12,607,996         |                       |                    |                  | 53,294        
|                  
|Alfred R. Kahn     | 12,468,803         |                       |                    |                  | 192,487       

|Proposal 2:     The proposal to appoint  Deloitte & Touche LLP as  independent  auditors to examine the  Companys  financial
statements for the fiscal year ending December 31, 2003. was ratified by the following vote:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Shares Voted
FOR | Shares Voted
AGAINST | Shares
ABSTAINING | Broker Non
Votes | Votes
Withheld
|------------------ | ---------------------- | ------------------- | ----------------- | --------------
|                  
|12,485,101         | 169,609                |                    |                  | 6,580         

|Proposal 3:      The proposal to approve the 4Kids  Entertainment,  Inc. 2003 Stock Option Plan, which authorizes the issuance
of options to purchase up to 600,000 shares of the Companys common stock, was ratified by the following vote:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Shares Voted
FOR | Shares Voted
AGAINST | Shares
ABSTAINING | Broker Non
Votes | Votes
Withheld
|------------------ | ---------------------- | ------------------- | ----------------- | --------------
|                  
|10,540,862         | 1,329,889              |                    |                  | 790,539       

|-21-
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| |  | 
| |  | 



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# Item 6. Exhibits and
Reports on Form 8-K

(a) Exhibits

| |  | 
| |  | 

| | 10.1 | Amendment and Restatement, dated January 1, 2002, to the Employment Agreement between 4Kids Entertainment Licensing, Inc. and Alfred R. Kahn.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | 10.2 | Employment
Agreement, dated January 1, 2002, between 4Kids Entertainment Licensing, Inc. and Joseph P. Garrity.
| | ---- | ---------------------------------------------------------------------------------------------------------------

| | 10.3 | Employment
Agreement, dated January 1, 2002, between 4Kids Productions, Inc. and Norman Grossfeld.
| | ---- | --------------------------------------------------------------------------------------------------

| | 10.4 | Employment
Agreement, dated January 1, 2002, between 4Kids Entertainment Licensing, Inc. and Samuel R. Newborn.
| | ---- | ---------------------------------------------------------------------------------------------------------------

| | 10.5 | Amendment,
dated as of June 16, 2003, to the Employment Agreement between 4Kids Productions, Inc.
and Norman Grossfeld.
| | ---- | -----------------------------------------------------------------------------------------------------------------------

| | 10.6 | Amendment,
dated as of June 16, 2003, to the Employment Agreement between 4Kids Entertainment Licensing, Inc. and Samuel
R. Newborn.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------

| | 10.7 | Amendment,
dated as of June 19, 2003, to the Employment Agreement between 4Kids Entertainment Licensing, Inc. and Joseph
P. Garrity.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------

| | 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) Report on Form 8-K

| |  | The Registrant
 filed a Current Report on Form 8-K on May 15, 2003 in connection  with the issuance of
its press release  announcing the results for the quarterly period ended March 31, 2003.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | 
| |  | 



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|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: August 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-
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| |  | 
| |  | 



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