|
|

|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 March 31, 2007


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 a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.   (Check One):
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Large accelerated filer                
Accelerated filerX                Non-accelerated filer
| | -----------------------------------------------------------------------------------------------

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





At May 10, 2007, the number of
shares outstanding of the Registrants common stock, par value $.01 per share, was
13,183,718.

4Kids
Entertainment, Inc. and Subsidiaries


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

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

|Item 1. | Financial Statements                                                                                                                                                      |   
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --
|        |                                                                                                                                                                           |   
|        | Consolidated Balance Sheets as of
March 31, 2007
        (Unaudited) and December 31, 2006                                                                                | 2 
|        |                                                                                                                                                                           |   
|        | Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2007 and 2006                                                                      | 3 
|        |                                                                                                                                                                           |   
|        | Consolidated Statements of Stockholders' Equity and Comprehensive Loss for the three months
        ended March 31, 2007 (Unaudited) and the year ended December 31, 2006 | 4 
|        |                                                                                                                                                                           |   
|        | Consolidated Statements of Cash Flows (Unaudited) for the three months
        ended March 31, 2007 and 2006                                                              | 5 
|        |                                                                                                                                                                           |   
|        | Notes to Consolidated Financial Statements (Unaudited)                                                                                                                    | 6 
|        |                                                                                                                                                                           |   
|Item 2. | Managements Discussion and Analysis of Financial
        Condition and Results of Operations                                                                             | 18
|        |                                                                                                                                                                           |   
|Item 3. | Quantitative and Qualitative Disclosures about Market
        Risk                                                                                                        | 25
|        |                                                                                                                                                                           |   
|Item 4. | Controls and Procedures                                                                                                                                                   | 25
|        |                                                                                                                                                                           |   

# Part IIOTHER INFORMATION

|Item 1.  | Legal Proceedings | 25
|-------- | ----------------- | --
|         |                   |   
|Item 1A. | Risk Factors      | 25
|         |                   |   
|Item 6.  | Exhibits          | 26

|Signatures |  | 27
|---------- |  | --

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

CONSOLIDATED BALANCE SHEETS
                                                 March 31, 2007 AND DECEMBER 31, 2006
                                             (In thousands of dollars, except share data)
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2007                                                                        | 2006       
|--------------------------------------------------------------------------- | -----------
|Current assets:                                                             | (Unaudited)
|Cash and cash equivalents                                                   |            
|Investments                                                                 |            
|                                                                            |            
|Total cash, cash equivalents and investments                                |            
|                                                                           
|Accounts receivable - net                                                   |            
|Prepaid income taxes                                                        |            
|Prepaid expenses and other current assets                                   |            
|Current assets from discontinued operations                                 |            
|Deferred income taxes                                                       |            
|                                                                            |            
|Total current assets                                                        |            
|                                                                           
|Property and equipment - net                                                |            
|                                                                           
|Other assets:                                                               |            
|Accounts receivable - noncurrent, net                                       |            
|Investment in unconsolidated affiliate                                      |            
|Film and television costs - net                                             |            
|Non-current assets from discontinued operations                             |            
|Deferred income taxes - noncurrent                                          |            
|Other assets - net                                                          |            
|                                                                            |            
|Total assets                                                                |            
|                                                                            |            
|Liabilities and stockholders' equity                                        |            
|                                                                           
|Current liabilities:                                                        |            
|Due to licensors                                                            |            
|Accounts payable and accrued expenses                                       |            
|Current liabilities from discontinued operations                            |            
|Deferred revenue                                                            |            
|                                                                            |            
|Total current liabilities                                                   |            
|                                                                           
|Deferred rent                                                               |            
|                                                                            |            
|Total liabilities                                                           |            
|                                                                            |            
|Commitments and contingencies (Note 9)                                      |            
|Stockholders' equity                                                        |            
|Preferred stock, $.01 par value - authorized, 3,000,000 shares; none issued |            
|Common stock, $.01 par value - authorized, 40,000,000 shares;               |            
|issued, 14,933,718 and 14,933,218 shares; outstanding 13,183,718 and        |            
|13,183,218 shares in 2007 and 2006, respectively                            |            
|Additional paid-in capital                                                  |            
|Accumulated other comprehensive income                                      |            
|Retained earnings                                                           |            
|                                                                            |            
|                                                                            |            
|Less- cost of 1,750,000 treasury shares in 2007 and 2006                    |            
|                                                                            |            
|                                                                            |            
|                                                                            |            
|Total liabilities and stockholders' equity                                  |            
|                                                                            |            

|See notes to consolidated financial statements.
2

4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                                                 THREE  MONTHS ENDED MARCH 31, 2007 AND 2006
                                             (In thousands of dollars, except share data)
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                  | Three Months Ended
March 31,
|----------------------------------------------------------------- | ----------------------------
|
|Net revenues                                                      |                             
|                                                                  |                             
|Costs and expenses:                                               |                             
|Selling, general and administrative                               |                             
|Production service costs                                          |                             
|Amortization of television and film costs                         |                             
|Amortization of 4Kids TV broadcast fee                            |                             
|                                                                  |                             
|Total costs and expenses                                          |                             
|                                                                  |                             
|(Loss) income from operations                                     |                             
|                                                                 
|Interest income                                                   |                             
|                                                                  |                             
|(Loss) income before income taxes                                 |                             
|                                                                 
|(Benefit from) provision for income taxes                         |                             
|                                                                 
|Loss from unconsolidated operations - net of a tax benefit of $42 |                             
|                                                                  |                             
|(Loss) income from continuing operations                          |                             
|                                                                 
|Loss from discontinued operations                                 |                             
|                                                                  |                             
|Net (loss) income                                                 |                             
|                                                                  |                             
|Per share amounts:                                                |                             
|Basic (loss) earnings per common share                            |                             
|Continuing operations                                             |                             
|Discontinued operations                                           |                             
|                                                                  |                             
|Basic (loss) earnings per common share                            |                             
|                                                                  |                             
|Diluted (loss) earnings per common share                          |                             
|Continuing operations                                             |                             
|Discontinued operations                                           |                             
|                                                                  |                             
|Diluted (loss) 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 STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS THREE MONTHS ENDED MARCH 31, 2007 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2006 (In thousands of dollars and shares)
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                        |  |        |  |      |  |        
|--------------------------------------- |  | ------ |  | ---- |  | -------
|
|                                        |  |        |  |      |  |        
|BALANCE, DECEMBER 31, 2005              |  | 14,826 |  | $148 |  | $61,415
|Proceeds from exercise of stock options |  | 107    |  | 1    |  | 1,256  
|Tax benefit from exercise of stock      | 
|options                                 |  | --     |  | --   |  | 188    
|                                        |  |        |  |      |  |        
|Comprehensive loss:                     | 
|                                        |  |        |  |      |  |        
|Net loss                                |  | --     |  | --   |  | --     
|                                        |  |        |  |      |  |        
|Translation adjustment                  |  | --     |  | --   |  | --     
|                                        |  |        |  |      |  |        
|Total comprehensive loss                |  | --     |  | --   |  | --     
|                                        |  |        |  |      |  |        
|BALANCE, DECEMBER 31, 2006              |  | 14,933 |  | $149 |  | $62,859
|Proceeds from exercise of stock options |  | 1      |  | --   |  | 6      
|                                        |  |        |  |      |  |        
|Comprehensive loss:                     | 
|                                        |  |        |  |      |  |        
|Net loss                                |  | --     |  | --   |  | --     
|                                        |  |        |  |      |  |        
|Translation adjustment                  |  | --     |  | --   |  | --     
|                                        |  |        |  |      |  |        
|Total comprehensive loss                |  | --     |  | --   |  | --     
|                                        |  |        |  |      |  |        
|BALANCE, MARCH 31, 2007                 |  | 14,934 |  | $149 |  | $62,865
|                                        |  |        |  |      |  |        

|See notes to consolidated financial
statements.


4



4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                                                 THREE MONTHS ENDED MARCH 31, 2007 AND 2006
                                             (In thousands of dollars)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                    | 2007 | 2006       
|------------------------------------------------------------------- | ---- | -----------
|Cash flows from operating activities:                               |      |            
|Net (loss) income                                                   |      | $    (205  
|Adjustments to reconcile net (loss) income to net cash              |     
|provided by (used in) operating activities - continuing operations: |     
|Depreciation and amortization                                       |      | 236        
|Amortization of television and film costs                           |      | 1,687      
|Amortization of 4Kids TV broadcast fee                              |      | 4,419      
|(Recovery of) provision for doubtful accounts                       |      | (23        
|Deferred income taxes                                               |      | 264        
|Loss on investment in unconsolidated affiliate                      |      | 93         
|Changes in operating assets and liabilities:                        |     
|Accounts receivable                                                 |      | 6,036      
|Film and television costs                                           |      | (2,166     
|Prepaid income taxes                                                |      | (701       
|Prepaid 4Kids TV broadcast fee                                      |      | (4,419     
|Prepaid expenses and other current assets                           |      | (1,234     
|Other assets - net                                                  |      | (1,720     
|Due to licensors                                                    |      | 1,288      
|Accounts payable and accrued expenses                               |      | (1,438     
|Deferred revenue                                                    |      | (1,051     
|Deferred rent                                                       |      | (67        
|                                                                    |      |            
|Net cash provided by operating activities - continuing operations   |      | 999        
|Net cash provided by operating activities - discontinued operations |      | 7          
|                                                                    |      |            
|Net cash provided by operating activities                           |      | 1,006      
|                                                                   
|Cash flows from investing activities:                               |     
|Proceeds from maturities of investments                             |      | 24,320     
|Purchase of investments                                             |      | (25,730    
|Purchase of property and equipment                                  |      | (217       
|Purchase of investment in unconsolidated affiliate                  |      | (132       
|                                                                    |      |            
|Net cash used in investing activities                               |      | (1,759     
|                                                                    |      |            
|Cash flows from financing activities:                               |     
|Proceeds from exercise of stock options                             |      | 6          
|Tax benefit on exercise of stock options                            |      | --         
|                                                                    |      |            
|Net cash provided by financing activities                           |      | 6          
|                                                                    |      |            
|Effects of exchange rate changes on cash and cash equivalents       |      | 22         
|                                                                    |      |            
|Net decrease in cash and cash equivalents                           |      | (725       
|                                                                   
|Cash and cash equivalents, beginning of period                      |      | 18,066     
|                                                                    |      |            
|Cash and cash equivalents, end of period                            |      | $ 17,341   
|                                                                    |      |            
|Supplemental disclosure of cash flow information:                   |     
|Cash paid during period for:                                        |     
|Income Taxes                                                        |      | $        --
|                                                                    |      |            

|See notes to consolidated financial
statements.


5



4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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


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


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


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


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


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


Trading Card and Game
Distribution Through its wholly-owned subsidiary, 4Kids Digital
Games, Inc., (4Kids Digital), the Company owns 53% of TC Digital Games LLC, a
Delaware limited liability company (TC Digital), that will produce, market and
distribute the Chaotic trading card game. On December 11, 2006, 4Kids Digital
and Chaotic USA Digital Games LLC (CUSA LLC), a wholly owned subsidiary of
Chaotic USA Entertainment Group, Inc. (CUSA) entered into the TC Digital
operating agreement (TCD Agreement) which contains terms and conditions
governing the operations of TC Digital. Under the TCD Agreement, 4Kids Digital and CUSA
are each entitled to elect two managers to TC Digitals Management Committee with
4Kids Digital having the right to break any dead-locks.


Through its wholly-owned subsidiary,
4Kids Websites, Inc., the Company owns 50% of TC Websites LLC, a Delaware limited
liability company (TC Websites), that will own and operate
www.chaoticgame.com, the companion website for the Chaotic trading card game.
4Kids Websites purchased its 50% membership interest in TC Websites from CUSA on December
11, 2006. Under the terms of TC Websites operating agreement (TCW
Agreement), 4Kids Websites

6

and CUSA are each entitled to elect
two managers to TC Websites Management Committee, with 4Kids Websites having the
right to break any dead-lock relating to advertising and marketing issues and CUSA having
the right to break any dead-lock relating to operational matters. Due to the fact that the
Company does not have final decision making power on operational matters, the equity
method of accounting is applied.


TC Digital and TC Websites are the
exclusive licensees of certain patents covering the uploading of coded trading cards to a
website where online game play and community activities occur. The Company believes that
its ownership interests in TC Digital and TC Websites represent a potentially significant
addition to its business strategy. These two businesses should enable the Company to offer
traditional trading card game play with an online digital play experience. In addition, it
is anticipated that TC Digital and TC Websites will diversify their product lines and will
ultimately distribute and sell, and create websites for, other trading card games.


Certain of the Companys
executive officers have interests in CUSA, CUSA LLC and certain other entities in which TC
Digital and TC Websites have engaged in transactions since their formation. Information
regarding these relationships can be found in Note 8 of the Notes to the Companys
consolidated financial statements.


2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES


Basis of
Presentation  The consolidated financial statements, except for the
December 31, 2006 consolidated balance sheet and the consolidated statement of
stockholders equity and comprehensive loss for the year ended December 31, 2006, are
unaudited. In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the financial position of
the Company as of March 31, 2007 and December 31, 2006 and the results of operations for
the three months ended March 31, 2007 and 2006, and stockholders equity and
comprehensive loss for the three months ended March 31, 2007 and the year ended December
31, 2006, and cash flows for the three months ended March 31, 2007 and 2006. Because of
the inherent seasonality and changing trends of the toy, game, entertainment and
advertising industries, operating results for the Company on a quarterly basis may not be
indicative of operating results for the full year.


In connection with the termination of
the operations of Summit Media, the media buying operations has been classified as a
discontinued operation. As further discussed in Note 12 of the Notes to the Companys
consolidated financial statements, the consolidated financial statements have been
reclassified to reflect the reporting of this business as a discontinued operation.


Effective January 1, 2007, the
Company adopted the provisions of Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes(FIN
48). FIN 48 prescribes the financial statement recognition and measurement criteria
for a tax position taken or expected to be taken in a tax return. FIN 48 also requires
additional disclosures related to uncertain income tax positions. See Note 5, Income
Taxes, for further information.


The 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, 2006, which are included in
the Companys Annual Report on Form 10-K with respect to such period that has
been filed with the Securities and Exchange Commission (the SEC). All
significant intercompany accounts and transactions have been eliminated. The December 31,
2006 consolidated balance sheet amounts are derived from the Companys audited
consolidated financial statements.


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


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

7

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


Production and adaptation costs
charged to the licensor are included in net revenues and the corresponding costs are
included in production service costs in the accompanying consolidated statements of
operations. Production service costs included in net revenues amounted to $1,717 and $2,433
for the three months ended March 31, 2007 and 2006, respectively.


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


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


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


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



 
Translation of Foreign Currency In
accordance with Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income, the Company classifies items of other comprehensive
income by their nature in the financial statements and displays the accumulated balance of
other comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the consolidated balance sheet. The assets and
liabilities of the Companys foreign subsidiary, 4Kids International, have been
recorded in their local currency and translated to U.S. dollars using period-end exchange
rates. Income and expense items have been translated at the average rate of exchange
prevailing during the period. Any adjustment resulting from translating the financial
statements of the foreign subsidiary is reflected as other comprehensive
income, net of related tax. Comprehensive (loss) income for the three months ended
March 31, 2007 and 2006, was $(172) and $1,622, respectively, which included translation
adjustments of $33 and $74 for the respective periods.


Recently Issued Accounting
Pronouncements Accounting for Uncertainty in Income Taxes In
June 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), an interpretation of SFAS No. 109 Accounting for
Income Taxes(SFAS No. 109). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in
accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and
measurement attribute for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
the derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. The adoption of FIN 48 is effective for the period
beginning January 1, 2007. The adoption of this interpretation did not have a
material effect on the Companys consolidated financial position or results of
operations.


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

8

In September 2006, the SEC
issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements
(SAB No. 108). This bulletin expresses the SECs views regarding the
process of quantifying financial statement misstatements. The interpretations in this
bulletin were issued to address diversity in practice in quantifying financial statement
misstatements and the potential under current practice for the build up of improper
amounts on the balance sheet. The Company adopted the provisions of SAB No. 108
as of December 31, 2006. The adoption had no impact on the Companys
consolidated financial position and results of operations.


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


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


3. STOCK-BASED EMPLOYEE
COMPENSATION


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


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


The following table summarizes
activity under our stock option plans for the three months ended March 31, 2007:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                   | Shares
(In thousands) | Weighted
Average
Exercise
Price | Remaining
Contractual
Life
(in years) | Aggregate
Intrinsic
Value
|---------------------------------- | --------------------- | ------------------------------- | ------------------------------------- | -------------------------
|Outstanding at beginning of period |                       |                                 |                                       | 2,281                    
|Grants                             |                       |                                 |                                       | --                       
|Exercised                          |                       |                                 |                                       | (1                       
|Forfeited                          |                       |                                 |                                       | (350                     
|                                   |                       |                                 |                                       |                          
|Outstanding at end of period       |                       |                                 |                                       | 1,930                    
|                                   |                       |                                 |                                       |                          
|Exercisable at end of period       |                       |                                 |                                       | 1,930                    
|                                   |                       |                                 |                                       |                          

|9

The aggregate intrinsic value is
calculated as the difference between the exercise price of the underlying awards and the
quoted price of our common stock for those awards that have an exercise price currently
below the closing price. As of March 31, 2007, we had options outstanding to purchase an
aggregate of 659 shares with an exercise price below the quoted price of our stock,
resulting in an aggregate intrinsic value of $7,082. During the three months ended March
31, 2007 and 2006, the aggregate intrinsic value of options exercised under our stock
option plans was $4 and $9, respectively, determined as of the date of exercise.


Restricted Stock Awards


Pursuant to its long-term incentive
compensation plans, the Company granted restricted stock awards on May 23, 2006 and June
15, 2006 for approximately 145,000 and 4,000 shares, respectively. The restricted stock
awards were granted to certain employees, including officers and members of the Board of
Directors, at a grant price of $16.52 and $15.78, respectively (the average of the high
and low stock price from the previous day of trading). The restricted stock awards vest
annually from the date of grant over a period of four years with accelerated vesting upon
a change of control of the Company (as defined in the applicable plan). During the
restriction period, award holders do not have the rights of stockholders and cannot
transfer ownership. Additionally, nonvested shares of award holders are subject to
forfeiture. These awards are forfeited and revert to the Company in the event of
employment termination, except in the case of death, disability, retirement or other
specified events.


A summary of restricted stock award
activity under the Companys long-term incentive compensation plans as of March 31,
2007 and changes during the three months then ended is presented as follows:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               | Number of
Shares | Weighted-Average
Grant Date Fair Value
|------------------------------ | ---------------- | --------------------------------------
|Outstanding at January 1, 2007 |                  |                                       
|                               |                  |                                       
|Granted                        |                  |                                       
|Vested                         |                  |                                       
|Forfeited                      |                  |                                       
|                               |                  |                                       
|Converted                      |                  |                                       
|                               |                  |                                       
|Outstanding at March 31, 2007  |                  |                                       
|                               |                  |                                       

|As of March 31, 2007, there was
approximately $1,782 of unrecognized compensation cost related to restricted stock awards
granted under the Companys long-term incentive compensation plans. The cost is
expected to be recognized over a remaining weighted-average period of 3.15 years. There
were no shares of restricted stock that vested during the three months ended March 31,
2007.


Availability for Future Issuance
As of March 31, 2007, (i) options to purchase 679 shares of the Companys
common stock were available for future issuance under the Companys stock option
plans and (ii) options to purchase a maximum of 652 shares of the Companys common
stock were available for future issuance under the Companys long-term incentive
compensation plans, reduced by 4 shares for each share of restricted stock awarded in the
future under such plans.


4. DEFERRED REVENUE


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


The Company has deferred all amounts
received under the contract, and recognizes revenue as the Current Music Assets and Future
Music Assets generate revenue over the contract term. Notwithstanding the foregoing, as of
the date the Company has delivered all of the Future Music Assets required under the
contract, any portion of the $5,000 that remains deferred and not recognized, will be
recognized as revenue. Pursuant to the above, the Company recognized revenues of $74
and $189 for the three months ended March 31, 2007 and 2006, respectively. The Company has
included $2,381 and $2,455 as deferred revenue on the accompanying consolidated balance
sheets as of March 31, 2007 and December 31, 2006, respectively.


10

Home Video  At various
dates since May 2002, 4Kids Home Video entered into various agreements with an
unaffiliated third party home video distributor (the Video Distributor)
pursuant to which 4Kids Home Video provides ongoing advertising, marketing and promotional
services with respect to certain home video titles that are owned or controlled by the
Company and which are distributed by the Video Distributor. The Video Distributor has paid
the Company cumulative advances of $4,119 against 4Kids Home Videos share of the
distribution and service fee proceeds to be realized by 4Kids Home Video from such titles.
Pursuant to the above, the Company recognized revenue of $36 and $26 for the three months
ended March 31, 2007 and 2006, respectively. The Company has included $505 and $541 as
deferred revenue on the accompanying consolidated balance sheets as of March 31, 2007 and
December 31, 2006, respectively.


Other Agreements  In
addition, the Company entered into other agreements for various Properties and advertising
time on 4Kids TV in which the Company has received certain advances and/or minimum
guarantees. As of March 31, 2007 and December 31, 2006, the unearned portion of these
advances and guaranteed payments was $1,077 and $2,018, respectively, and is included in
deferred revenue on the accompanying consolidated balance sheets.


5. INCOME TAXES


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

|         | Three Months
Ended March 31,
|-------- | ----------------------------
|
|Current  |                             
|Deferred |                             
|         |                             
|Total    |                             
|         |                             

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


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


6. STOCKHOLDERS
EQUITY


Restricted Stock Awards
Pursuant to its long-term incentive compensation plans, the Company granted restricted
stock awards on May 23, 2006 and June 15, 2006 for approximately 145,000 and 4,000
underlying shares, respectively. The restricted stock was granted to certain employees,
including officers and members of the Board of Directors, at a grant price of $16.52 and
$15.78, respectively (the average of the high and low stock price from the previous day of
trading). The restricted stock awards vest annually from the date of grant over a period
of four years.


7. LEGAL PROCEEDINGS


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


8. RELATED PARTY


National Law Enforcement and
Firefighters Childrens Foundation  The Companys Chairman and Chief
Executive Officer is the founder and President of The National Law Enforcement and
Firefighters Childrens Foundation (the Foundation). The Foundation is a
not-for-profit organization dedicated to helping the children of law enforcement and
firefighting personnel and working with law enforcement and firefighting organizations to
provide all children with valuable social and life skill programs. During the three months
ended March 31, 2007 and 2006, the Company contributed to the Foundation, approximately
$30 for each of the respective periods.

11

Chaotic USA Entertainment Group,
Inc. (CUSA)  On December 11, 2006, 4Kids Digital and Chaotic USA
Digital Games LLC (CUSA LLC), a wholly owned subsidiary of CUSA, entered into
the TCD Agreement with respect to the operation of TC Digital as a joint venture, with
4Kids Digital owning 53% of TC Digitals membership interests and CUSA LLC owning 47%
of TC Digitals membership interests. TC Digital is treated as a consolidated
subsidiary of the Company as a result of its majority ownership in TC Digital and its
right to break any dead-locks within the TC Digital Management Committee. Bryan Gannon
(Gannon), President and Chief Executive Officer of CUSA and John Milito
(Milito), Executive Vice President and Chief Operating Officer of CUSA, each
own an interest of approximately 32% in CUSA. Additionally, on December 11, 2006, Gannon
and Milito became officers of TC Digital.


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

| |  | Employment Agreements On December 11, 2006, TC Digital entered into
employment agreements through December 31, 2009, with Bryan Gannon, to serve as its
President and Chief Executive Officer and John Milito, to serve as its Executive Vice
President. Under the terms of the employment agreements, each of Gannon and Milito will
receive an annual base salary of $350 with a one-time signing bonus of $125 and is
eligible to receive additional bonuses at the sole discretion of TC Digitals
Management Committee, on which they serve. Gannon and Milito will each receive a minimum
bonus of $100 and $200 in 2007 and 2008, respectively, if TC Digital attains 60% of the
projected revenues for those years approved by TC Digitals Management Committee.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Chaotic Property Representation Agreement On December 11, 2006, 4Kids
Licensing, CUSA and Apex Marketing, Inc. (Apex), a corporation in which Gannon
holds 60% of the outstanding capital stock and Milito owns 39% of the outstanding capital
stock, entered into an amended and restated Chaotic property representation agreement
(CPRA) replacing the original Chaotic property representation agreement
entered into by the parties in April 2005. Under the terms of the CPRA, 4Kids Licensing is
granted exclusive television broadcast and production, merchandising licensing, and home
video rights to the Chaotic Property worldwide in perpetuity, subject to
certain limited exceptions. Under the terms of the CPRA, all Chaotic related
income less approved merchandising and other expenses shall be distributed 50% to the
Company and 50% to CUSA and Apex, excluding trading card royalties which are distributed
53% to 4Kids Digital and 47% to CUSA LLC. Additionally, all approved production expenses
for television episodes based on the Chaotic property are allocated 50% to
4Kids Licensing and 50% to CUSA and Apex. As of March 31, 2007, there were approximately
$3,364 of production expenses and $102 of merchandising expenses owed to 4Kids Licensing
by CUSA and Apex collectively.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Patent License Agreements On December 11, 2006, TC Digital and TC Websites
each entered into an agreement (the Patent License Agreements) with
Cornerstone Patent Technologies, LLC (Cornerstone), a limited liability
company, in which Gannon and Milito both hold a 25% membership interest. Pursuant to the
Patent License Agreements, TC Digital and TC Websites obtained exclusive licenses (subject
to certain exceptions) to use certain patent rights in connection with Chaotic
and other trading card games which are uploaded to websites owned and operated by the
combined entities. Additionally, each of TC Digital and TC Websites will pay Cornerstone a
royalty of 1.5% of the Manufacturers Suggested Retail Price (MSRP) for trading
cards sold. As of March 31, 2007 no cards had been sold.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | TCD Agreement  Under the terms of the TCD Agreement entered into by 4Kids
Digital and CUSA LLC, TC Digital is obligated to pay the following fees and/or royalties
to: (i) 4Kids Digital equal to 3% of TC Digitals gross revenues up to $350 per year
for management services performed; (ii) 4Kids Digital and CUSA equal to 3% of net sales of
each pack of trading cards sold; and (iii) Dracco Company Ltd. equal to (x) 10% of the net
sales of Chaotic trading cards and (y) an additional 1% of net sales of
Chaotic trading cards above $50 million during a calendar year. 4Kids Digital
is required under the terms of the TCD Agreement and the related loan and line of credit
agreements to provide loans to TC Digital from time to time in an aggregate amount equal
to $8,000 with a maturity date of December 31, 2010 and an interest rate of 12%. Any
transaction resulting in the sale of more than 50% of TC Digitals membership
interests or in the sale of all or substantially all of TC Digitals assets occurring
while there is no debt owed from TC Digital to 4Kids Digital under the loan and line of
credit or occurring prior to August 31, 2009 requires the consent of members of TC Digital
holding two-thirds of its membership interests (as opposed to a majority of its membership
interests). As of March 31, 2007, no royalties had been paid under this agreement.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

| |  | Chaotic Merchandise License Agreement On December 11, 2006, 4Kids Licensing,
CUSA and TC Digital entered into a merchandise licensing agreement pursuant to which 4Kids
Licensing and CUSA granted TC Digital exclusive rights to manufacture, produce and license
Chaotic trading cards and related accessories through December 31, 2016. Under
the terms of the agreement, TC Digital is obligated to pay a royalty on trading cards and
all related accessories equal to (i) 4% of net sales to 4Kids Licensing while any amounts
are outstanding to 4Kids Digital under the loan agreement or line of credit agreement or
(ii) 8% of net sales of such cards and accessories, 53% of which will be paid to 4Kids
Licensing and 47% of which will be paid to CUSA. As of March 31, 2007, no royalties had
been paid under this agreement.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | Website Agreement  On December 11, 2006, TC Digital and TC Websites entered
into a website agreement pursuant to which TC Websites agrees to operate and maintain the
website through December 31, 2031 which will upload codes relating to the
Chaotic trading card game and store the corresponding information. In
consideration for the services provided, TC Digital will pay TC Websites a fee of 1.5% of
net sales of Chaotic trading cards. As of March 31, 2007, no royalties had
been paid under this agreement.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | In
March 2006, the multi-year agreement was extended for two broadcast years through the
2007-2008 broadcast season. As of March 31, 2007, no amounts remain to be paid for the
2006-2007 broadcast season under the amended agreement. The time-buy fee for each of the
2006-2007 and 2007-2008 broadcast seasons is $20,000 as compared to the $25,312 paid for
each broadcast year during the initial term of the multi-year agreement. The fee is
payable in quarterly installments of $5,000 each year beginning in October 2006. The
extended agreement also provides Fox with the option to further extend the agreement
through the 2008-2009 broadcast season under the same terms and conditions by providing
notice to the Company no later than August 31, 2007.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
costs of 4Kids TV is capitalized and amortized over each broadcast year based on estimated
advertising revenue for the related broadcast year. The Company recorded amortization
expenses of $4,419 and $4,808 for the three months ended March 31, 2007 and 2006,
respectively. During the three months ended March 31, 2007, the Company paid Fox and
certain Fox affiliates $5,044 attributable to the fifth years broadcast fees, and
during calendar year 2006, the Company paid Fox and certain Fox affiliates $7,058 and
$5,491 attributable to the fourth and fifth years broadcast fees, respectively. All
fees paid to Fox and certain Fox affiliates for the fourth and fifth years broadcast
seasons were completely amortized as of March 31, 2007 and December 31, 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13
|--

| | In
addition to the time-buy fee paid to Fox, the Company incurs additional costs to program
the four-hour block and sell the related network advertising time. These costs include
direct programming costs to acquire, adapt and deliver programming for the broadcast
during the weekly four-hour block as well as additional indirect expenses of advertising
sales, promotion and administration.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|Year ending
December 31, | Amount 
|------------------------ | -------
|2007                     | $15,000
|2008                     | 15,000 
|                         |        
|                         |        
|Total                    | $30,000
|                         |        
|                         |        

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

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

|10. MINORITY INTEREST


On December 11, 2006, 4Kids Digital
and CUSA LLC entered into the TCD Agreement. 4Kids Digital holds 53% of the membership
interests of TC Digital. Pursuant to the provisions of the TCD Agreement, 4Kids Digital
and CUSA LLC are each entitled to elect two managers to TC Digitals Management
Committee with 4Kids Digital having the right to break any dead-lock.



Minority interest of membership units in TC Digital represents the minority members  proportionate  share of the equity in
the entity.  Income is allocated to the membership  units minority  interest based on the ownership  percentage  throughout
the year.  As of  March 31,  2007,  the minority  member held 47% of the common  units of the entity.   For the three months
ended March 31, 2007,  4Kids  Digital  absorbed the entire loss  associated  with the  operations  of TC Digital,  as noted
below.  Future  profits of TC Digital will not be allocated to the minority  member until such time that 4Kids  Digital has
recouped all losses  incurred to date from the  operations of TC Digital.  The following  table  summarizes  the membership
units minority interest loss:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                      | Three
Months Ended March 31,
2007
|--------------------------------------------------------------------- | ---------------------------------
|TC Digital net loss before common units minority interest             |                                  
|Minority interest percentage                                          |                                  
|                                                                      |                                  
|Minority interest loss allocation                                     |                                  
|Less: Minority interest allocation related to discontinued operations |                                  
|                                                                      |                                  
|Total allocation of minority interest loss to continuing operations   |                                  
|Less: minority member capital contribution                            |                                  
|                                                                      |                                  
|Loss in excess of minority interest absorbed by 4Kids Digital         |                                  
|                                                                      |                                  

|14

11. INVESTMENT IN
UNCONSOLIDATED AFFILIATE


On December 11, 2006, 4Kids Websites
purchased a 50% membership interest in TC Websites from CUSA for approximately $3,200.
4Kids Websites uses the equity method to account for the investment in an unconsolidated
affiliate where it does not have control, but has significant influence. Under the terms
of the TCW Agreement, 4Kids Websites and CUSA are each entitled to elect two managers to
TC Websites Management Committee, with 4Kids Websites having the right to break any
dead-lock relating to branding issues and CUSA having the right to break any dead-lock
relating to operational matters. Generally, the investment in unconsolidated affiliate on
the Companys consolidated balance sheets equals the Companys proportionate
share of equity reported by the unconsolidated affiliate. The investment is assessed for
possible impairment when events indicate that the fair value of the investment may be
below the Companys carrying value. As of March 31, 2007, the Company recorded $51
($93 less a tax benefit of $42) of equity losses related to the investment, which was
included in the determination of net loss.
The following is a summary of the financial information for the Companys unconsolidated affiliate, TC Websites:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         | March 31, 2007
|------------------------ | --------------
|                         |               
|                         |               
|Total assets             |               
|                         |               
|Total  liabilities       |               
|                         |               
|
|                         |               
|                        
|                         |               
|Net revenues             |               
|                         |               
|Loss before income taxes |               
|                         |               
|Net loss                 |               

|12. DISCONTINUED
OPERATION


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


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

|                                      | Three Months Ended
March 31,
|------------------------------------- | ----------------------------
|
|Net revenues                          |                             
|                                      |                             
|Loss before income taxes              |                             
|Benefit from income taxes             |                             
|                                      |                             
|Net loss from discontinued operations |                             
|                                      |                             

|Under the terms of the Settlement
Agreement entered into by Summit Media with The Beacon Media Group LLC
(Beacon), Sheldon Hirsch, Tom Horner and Paul Caldera (the Beacon
Defendants) on June 19, 2006, relating to the lawsuit filed by Summit Media in
Supreme Court, New York County against Beacon and the Beacon Defendants, Summit Media will
receive $2,000, in regularly scheduled payments through 2010, in exchange for Summit
Medias discontinuation of the lawsuit. The Company has included approximately $1,800
in net revenues for the year ended December 31, 2006, relating to this agreement. As of
March 31, 2007, the Company had received $200 of the scheduled payments related to the
lawsuit.


15

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

|                                                 | March 31,
2007 | December 31,
2006
|------------------------------------------------ | -------------- | -----------------
|Accounts receivable                              |                | $       5        
|Prepaid expense and other current assets         |                | 300              
|                                                 |                |                  
|Current assets from discontinued operations      |                | $   305          
|                                                 |                |                  
|Accounts receivable - non-current                |                | $1,351           
|                                                 |                |                  
|Non-current assets from discontinued operations  |                | $1,351           
|                                                 |                |                  
|                                                 |                |                  
|Media payable                                    |                | $       1        
|Accounts payable and accrued expenses            |                | 23               
|                                                 |                |                  
|Current liabilities from discontinued operations |                | $     24         
|                                                 |                |                  
|                                                 |                |                  

|13. SEGMENT AND RELATED
INFORMATION


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


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

|                                      | Licensing | Advertising
Media and
Broadcast | TV and Film
Production/
Distribution | Trading Card
and Game
Distribution | Total
|------------------------------------- | --------- | ------------------------------- | ------------------------------------ | ---------------------------------- | -----
|                                      |           |                                 |                                      |                                    |      
|Net revenues  from external customers |           | $  7,930                        |                                      | $ 3,415                            |      
|Amortization of television            |          
|and film costs                        |           | --                              |                                      | --                                 |      
|Amortization of 4Kids TV              |          
|broadcast fee                         |           | --                              |                                      | 4,419                              |      
|Segment profit (loss)                 |           | 4,218                           |                                      | (3,840                             | )    
|Interest income                       |           | 1,033                           |                                      | 18                                 |      
|Segment assets                        |           | 137,998                         |                                      | 5,920                              |      
|                                      |           |                                
|                                     
|Net revenues from external customers  |           | $  9,507                        |                                      | $ 3,608                            |      
|Amortization of television            |          
|and film costs                        |           | --                              |                                      | --                                 |      
|Amortization of 4Kids TV              |          
|broadcast fee                         |           | --                              |                                      | 4,808                              |      
|Segment profit (loss)                 |           | 5,282                           |                                      | (3,040                             | )    
|Interest income                       |           | 882                             |                                      | 5                                  |      
|Segment assets                        |           | 151,083                         |                                      | 10,426                             |      

|16

Net revenues from external customers
and segment profit from discontinued operations have been excluded from the Advertising,
Media and Broadcast segment and are disclosed in Note 12. Conversely, discontinued
operations relating to segment assets have been included in segment reporting.


Additionally, through the
Companys London office and network of international subagents, which allow it to
license its Properties throughout the world, the Company recognized net merchandise
licensing revenues from international sources, primarily in Europe, of $2,471 and $2,717
for the three months ended March 31, 2007 and 2006, respectively. As of March 31, 2007 and
2006, net assets of the Companys London office were $7,387 and $7,154, respectively.


     ***************
17

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


Overview


The Companys operating results
for the three months ended March 31, 2007 reflect an overall decrease in production
service revenue, domestic broadcast sales and licensing revenues from the Properties as
compared to the three months ended March 31, 2006. The decrease in production service
revenue is primarily attributable to the decline in the production of the
Pokémon, Teenage Mutant Ninja Turtles and One
Piece television series, partially offset by increased production service revenue on
the Chaotic television series. The decrease in the licensing segment resulted
primarily from reduced revenue on the Yu-Gi-Oh! Property worldwide and an
overall reduction in licensing internationally. The results for the three months ended
March 31, 2007 were also negatively impacted by increased selling, general and
administrative expenses associated with the operations of the business, including the
newly formed Trading Card and Game Distribution segment, partially offset by decreased
production service costs related to television and film costs.


General


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


The Companys licensing revenues
have historically been derived primarily from the licensing of toy and game concepts. As a
result, a substantial portion of the Companys revenues and net income are subject to
the seasonal variations of the toy and game industry. Typically, a majority of toy orders
are shipped in the third and fourth calendar quarters resulting in increased royalties
earned by the Company during such calendar quarters. The Company recognizes revenue from
the sale of advertising time on 4Kids TV as more fully described in Note 2 of the
Companys consolidated financial statements. The Companys advertising sales
subsidiary, 4Kids Ad Sales, sells advertising time on 4Kids TV at higher rates in the
fourth quarter due to the increased demand for commercial time by childrens
advertisers during the holiday season. As a result, much of the revenues of 4Kids Ad Sales
are earned in the fourth quarter when the majority of toy and video game advertising
occurs. As a result of the foregoing, the Company has historically experienced greater
revenues during the second half of the year than during the first half of the year.


The Companys media buying
subsidiary, Summit Media, which previously provided print and broadcast media planning and
buying services for clients principally in the childrens toy and game business,
terminated its operations effective June 30, 2006. In connection with the closing of
Summit Media, the media buying operations have been classified as a discontinued
operation. As further discussed in Note 12 of the Companys consolidated financial
statements, the consolidated financial statements have been reclassified to accommodate
the reporting of this business as a discontinued operation.


Critical Accounting
Policies


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


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


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


18

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


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


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


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


4Kids TV Broadcast Agreement
 The Company broadcasts certain of its Properties on 4Kids TV, the Saturday morning
programming block that the Company leases from Fox. The cost of 4Kids TV has been and will
continue to be capitalized and amortized over each broadcast year based on estimated
advertising revenue. In developing future estimated revenues, the Company has made certain
assumptions with regard to the anticipated popularity of the television series that the
Company broadcasts on 4Kids TV and the general market demand and pricing of advertising
time for Saturday morning childrens broadcast television. The popularity of such
series impacts audience levels and the level of the network advertising rates that the
Company can charge. These estimates are based on historical trends, as well as the
Companys subjective judgment of future customer demand and acceptance of its
television programming. Differences may result in the amount and timing of revenue for any
period if actual performance varies from the Companys estimates. See Note 9 of the
Notes to the Companys consolidated financial statements for additional information.


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


Recently Issued Accounting
Pronouncements Accounting for Uncertainty in Income Taxes In
June 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), an interpretation of SFAS No. 109 Accounting for
Income Taxes(SFAS No. 109). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in
accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and
measurement attribute for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
the derecognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. The adoption of FIN 48 is effective for the period
beginning January  1, 2007. The adoption of this interpretation did not have a
material effect on the Companys consolidated financial position or results of
operations.


19

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


In September 2006, the SEC
issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements
(SAB No. 108). This bulletin expresses the SECs views regarding the
process of quantifying financial statement misstatements. The interpretations in this
bulletin were issued to address diversity in practice in quantifying financial statement
misstatements and the potential under current practice for the build up of improper
amounts on the balance sheet. The Company adopted the provisions of SAB No. 108
as of December 31, 2006. The adoption had no impact on the Companys
consolidated financial position and results of operations.


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


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


Results of Operations


The following table sets forth our
results of operations expressed as a percentage of total net revenues for the three months
ended March 31, 2007 and 2006:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | Three Months Ended
March 31,
|----------------------------------------- | ----------------------------
|
|Net revenues                              |                             
|                                          |                             
|Selling, general & administrative         |                             
|Production service costs                  |                             
|Amortization of television and film costs |                             
|Amortization of 4Kids TV broadcast fee    |                             
|                                          |                             
|Total costs and expenses                  |                             
|                                          |                             
|(Loss) income from operations             |                             
|Interest income                           |                             
|                                          |                             
|(Loss) income before income taxes         |                             
|(Benefit from) provision for income taxes |                             
|Loss from unconsolidated operations       |                             
|                                          |                             
|(Loss) income from continuing operations  |                             
|                                         
|Loss from discontinued operations         |                             
|                                          |                             
|Net (loss) income                         |                             
|                                          |                             

|20

Three months ended March 31, 2007
as compared to three months ended March 31, 2006.


Continuing Operations


Revenues


Revenues by reportable segment and
for the Company as a whole were as follows:


For the three months
ended March 31, 2007 and 2006
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                            | 2007 | 2006     | $ Change | % Change
|------------------------------------------- | ---- | -------- | -------- | --------
|Licensing                                   |      | $  7,930 |          | $  9,507
|Advertising Media and Broadcast             |      | 3,415    |          | 3,608   
|Television and Film Production/Distribution |      | 3,586    |          | 6,138   
|                                            |      |          |          |         
|Trading Card and Game Distribution          |      | --       |          | --      
|                                            |      |          |          |         
|Total                                       |      | $14,931  |          | $19,253 
|                                            |      |          |          |         

|The decrease in consolidated net
revenues for the three months ended March 31, 2007 as compared to the same period in 2006,
was due to a number of factors.


In the Licensing segment, decreased
revenues for the three months ended March 31, 2007 were primarily attributable to:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (i) | reduced licensing revenues on the Yu-Gi-Oh! Property worldwide and
                    the Teenage Mutant Ninja Turtles, Winx Club and
                    Pokémon Properties internationally; partially offset by
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | increased revenues attributable to the Nintendo, Teenage
                    Mutant Ninja Turtles and Cabbage Patch Properties
                    domestically.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The Cabbage Patch,
Yu-Gi-Oh! and Teenage Mutant Ninja Turtles Properties continue to
be the largest contributors to the Companys revenues in this business segment.


In the Advertising Media and
Broadcast segment, decreased revenues for the three months ended March 31, 2007 as
compared to the same period in 2006, resulted from reduced revenues from the sale of
network advertising time on 4Kids TV caused by an overall decrease in the 4Kids TV
ratings.


In the Television and Film
Production/Distribution segment, the decreased revenue for the three months ended March
31, 2007, when compared to the same period in 2006 primarily resulted from:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (i) | decreased domestic production service revenue from the
                    Pokémon, Teenage Mutant Ninja Turtles and
                    One Piece television series; and
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | decreased domestic broadcast sales from the Pokémon
                    television series; partially offset by
| | ---- | ----------------------------------------------------------------------------------------------------------------

| | (iii) | increased domestic production service revenue from the Chaotic
                    television series.
| | ----- | -------------------------------------------------------------------------------------------------------

|Selling, General and
Administrative Expenses


Selling, general and administrative
expenses increased 8%, or $686, to $8,963 for the three months ended March 31, 2007, when
compared to the same period 2006. The increase was primarily due to the following:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (i) | increased advertising and promotional expense of $277;
| | --- | ------------------------------------------------------

| | (ii) | increased
          compensation costs resulting from the issuance of restricted stock awards of
          $137;
| | ---- | ----------------------------------------------------------------------------------------------------------------

| | (iii) | increased trade shows expenses of $130;
| | ----- | ---------------------------------------

| | (iv) | increased rent expense
          of $124; and
| | ---- | ---------------------------------------------

| | (v) | increased website expense of $101; partially offset by
| | --- | ------------------------------------------------------

| | (vi) | decreased bonus expense of $281.
| | ---- | --------------------------------

|21

Production Service and
Capitalized Film Costs


Production service and capitalized
film costs were as follows:


For the three months
ended March 31, 2007 and 2006
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | 2007 | 2006   | $ Change | % Change
|----------------------------------------- | ---- | ------ | -------- | --------
|Production Service Costs                  |      | $1,780 |          | $2,876  
|Amortization of Television and Film Costs |      | 1,687  |          | 1,646   
|                                          |      |        |          |         

|The decrease in production service
costs during the three months ended March 31, 2007, as compared to the same period in
2006, was primarily due to decreased production costs for the Pokémon,
One Piece and Teenage Mutant Ninja Turtles television series,
partially offset by increased production costs for the work performed on the
Chaotic television series. When the Company is entitled to be paid for such
production costs, the Company categorizes them as production service costs and reflects a
corresponding amount in revenue for the amount billed back to the property owners.


Amortization of television and film
costs remained consistent for the three months ended March 31, 2007 when
compared to the same period in 2006.


As of March 31, 2007, there were
$15,306 of capitalized film production costs recorded in the Companys consolidated
balance sheet relating primarily to various stages of production on 282 episodes of
animated programming. Based on managements ultimate revenue estimates as of March
31, 2007, approximately 51% of the total completed and unamortized film and
television costs are expected to be amortized during the next year, and over 90% of
the total completed and unamortized film and television costs are expected to be amortized
during the next three years.





4Kids TV Broadcast Fee


For the three months
ended March 31, 2007 and 2006
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                       | 2007 | 2006   | $ Change | % Change
|-------------------------------------- | ---- | ------ | -------- | --------
|Amortization of 4Kids TV Broadcast Fee |      | $4,419 |          | $4,808  

|As a result of the broadcast year
(ending each year in September) being different than the Companys fiscal year
(ending each year in December), the amount of the amortization of the broadcast fee
recognized from period to period will vary based upon: (i) the amount of advertising
revenue recognized during the period; and (ii) the amount of advertising revenue already
recognized for the broadcast year as a percentage of the total amount expected to be
recognized for the full broadcast year. The Companys amortization of the 4Kids TV
broadcast fee decreased by $389, to $4,419 in 2007 from $4,808 in 2006, in conjunction with
the decreased fee for the 2006-2007 broadcast season, as well as lower advertising
revenues recognized by the Company for the three months ended March 31, 2007 as compared
to the same period in 2006.


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

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

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

|The ability of the Company to further
develop its merchandising and, to a lesser extent, home video and music publishing revenue
streams were significant components of its evaluation process which resulted in the
initial decision to lease the 4Kids TV Saturday morning programming block and to extend
the lease through the 2007-2008 broadcast season.


Interest Income


Interest income increased 23%, or
$200, to $1,087 for the three months ended March 31, 2007, as compared to the same period
in 2006, primarily as a result of the increasing interest rate environment and higher
average cash balances invested.


Income Tax (Benefit)
Expense


The  Company  recorded a benefit  from  income  taxes of $677 for the three  months  ended  March 31, 2007 as compared to a
provision  for income  taxes of $905 for the same  period in 2006.  The  Companys  effective  tax rate was a benefit  from
income taxes of 81% for 2007 and provision for income taxes of 36% for 2006.


22

Net (Loss) Income


As a result of the above, the Company
had a net loss for the three months ended March 31, 2007, of $205 compared to net income
of $1,548, for the same period in 2006.


Discontinued Operations


Effective June 30, 2006, the
Companys wholly-owned subsidiary, The Summit Media Group, Inc. (Summit
Media), which previously provided print and broadcast media planning and buying
services for clients principally in the childrens toy and game business, terminated
its operations. The Company has reallocated capital previously devoted to Summit Media to
other business initiatives. As a consequence of the termination of its operations, Summit
Media no longer serves as a media buying agency for third parties.


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


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

|                                      | Three Months Ended
March 31,
|------------------------------------- | ----------------------------
|
|Net revenues                          |                             
|                                      |                             
|Loss before income taxes              |                             
|Benefit from income taxes             |                             
|                                      |                             
|Net loss from discontinued operations |                             
|                                      |                             

|Liquidity and Capital
Resources


Financial Position


Cash and cash equivalents and
short-term investments as of March 31, 2007 and December 31, 2006 were as follows:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          | 2007 | 2006      | $ Change
|------------------------- | ---- | --------- | --------
|Cash and cash equivalents |      | $  17,341 |         
|Investments               |      | 94,320    |         
|                          |      |           |         
|                          |      | $111,661  |         
|                          |      |           |         

|During the three months ended March
31, 2007, the Companys cash and cash equivalents and short-term investment balances
remained consistent, primarily as a result of an increase in investment income and cash
collections of seasonally high fourth quarter accounts receivable, substantially offset by
payments made to licensors, Fox and certain affiliates for the 4Kids TV broadcast
agreement.


Sources and Uses of Cash


Cash flows for the three months ended
March 31, 2007 and 2006 were as follows:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Sources (Uses)       | 2007 | 2006    | $ Changes
|-------------------- | ---- | ------- | ---------
|Operating Activities |      | $ 1,006 |          
|                     |      |         |          
|Investing Activities |      | (1,759  | )        
|Financing Activities |      | 6       |          
|                     |      |         |          

|Working capital, consisting of
current assets less current liabilities, was $121,599 as of March 31, 2007, and $123,906
as of December 31, 2006. The decrease in cash flows used in operating activities is
principally due to the timing of the payment of 4Kids TV broadcast fees paid to Fox,
advances related to the production of the Chaotic television series and lower
net income.



23

As of March 31, 2007, the Company had
$94,320 invested in tax-exempt and tax-advantaged auction-rate securities and short-term
government obligations. The decrease in cash flows from investing activities is primarily
due to the fact that the Companys new investment strategy to purchase auction-rate
securities with its excess cash balances was implemented for the first time in the
beginning of 2006. In 2007, the Company continues to follow this investment strategy.


During the three months ended March
31, 2007, the Companys cash flow from operations was impacted by consumer demand for
a limited number of its licensed Properties.  While the Company strives to further
diversify its revenue streams, management remains cognizant of changing trends in the toy,
game and entertainment business and the difficulty in predicting the length of time a
Property will be commercially successful.  As a result, the Companys revenues,
operating results and cash flow from operations may fluctuate significantly from period to
period and present operating results are not necessarily indicative of future performance.


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


4Kids TV Broadcast
Agreement


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


In March 2006, the multi-year
agreement was extended for two broadcast years through the 2007-2008 broadcast season. As
of March 31, 2007, no amounts remain to be paid for the 2006-2007 broadcast season under
the amended agreement. The time-buy fee for each of the 2006-2007 and 2007-2008 broadcast
seasons is $20,000 as compared to the $25,312 paid for each broadcast year during the
initial term of the multi-year agreement. The fee is payable in quarterly installments of
$5,000 each year beginning in October 2006. The extended agreement also provides Fox with
the option to further extend the agreement through the 2008-2009 broadcast season under
the same terms and conditions by providing notice to the Company no later than August 31,
2007.


The costs of 4Kids TV is capitalized
and amortized over each broadcast year based on estimated advertising revenue for the
related broadcast year. The Company recorded amortization expenses of $4,419 and $4,808
for the three months ended March 31, 2007 and 2006, respectively. During the three months
ended March 31, 2007, the Company paid Fox and certain Fox affiliates $5,044 attributable
to the fifth years broadcast fees, and during calendar year 2006, the Company paid
Fox and certain Fox affiliates $7,058 and $5,491 attributable to the fourth and fifth
years broadcast fees, respectively. All fees paid to Fox and certain Fox affiliates
for the fourth and fifth years broadcast seasons were completely amortized as of
March 31, 2007 and December 31, 2006.


In addition to the time-buy fee paid
to Fox, the Company incurs additional costs to program the four-hour block and sell the
related network advertising time. These costs include direct programming costs to acquire,
adapt and deliver programming for the broadcast during the weekly four-hour block as well
as additional indirect expenses of advertising sales, promotion and administration.


Contractual Commitments


The Companys contractual
obligations and commitments are detailed in the Companys Annual Report on Form 10-K
for the year ended December 31, 2006. As of March 31, 2007, the Companys contractual
obligations and commitments have not materially changed since December 31, 2006.


24

Forward Looking
Information and Risk Factors That May Affect Future Results


This Quarterly Report on Form 10-Q,
including the section titled Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations contains forward-looking statements
that relate to future events or our future financial performance. We may also make written
and oral forward-looking statements in our Securities and Exchange Commission
(SEC) filings and otherwise. We have tried, where possible, to identify such
statements by using words such as believe, expect,
intend, estimate, anticipate, will,
project, plan and similar expressions in connection with any
discussion of future operating or financial performance. Any forward-looking statements
are and will be based upon our then-current expectations, estimates and assumptions
regarding future events and are applicable only as of the dates of such statements. By
their nature, forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those anticipated in any forward-looking
statements. Such risks and uncertainties include those described in this Quarterly Report
on Form 10-Q and in Item 1A. Risk Factors of our Annual Report on Form 10-K
for the year ended December 31, 2006 filed with the SEC, as well as other factors. We
undertake no obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.


Item 3. Quantitative and
Qualitative Disclosures About Market Risk


Foreign Currency
Exchange Rate Fluctuations


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


Item 4. Controls and
Procedures


Evaluation of Disclosure
Controls and Procedures


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


Changes in Internal
Control over Financial Reporting


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


Part II -OTHER
INFORMATION


Item 1. Legal Proceedings


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


Item 1A. Risk Factors


There have been no material changes
from the risk factors previously disclosed in our Annual Report on Form 10-K for the year
ended December 31, 2006.
25

Item 6. Exhibits


(a) Exhibits
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|26



SIGNATURES


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

4KIDS ENTERTAINMENT,
INC. Dated: May 10, 2007

By:  /s/ Alfred R. Kahn

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

By:  /s/ Bruce R. Foster

Bruce R. Foster      Executive
Vice President, Treasurer, Chief Financial Officerand Principal Accounting Officer

|27
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