|
|

|UNITED STATES 


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

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


For
the quarterly period ended September 30, 2006


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 November 9, 2006, the number of
shares outstanding of the Registrants common stock, par value $.01 per share, was
13,134,368.

4Kids
Entertainment, Inc. and Subsidiaries


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

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

|Item 1. | Financial Statements                                                                                                                                                           |   
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --
|        |                                                                                                                                                                                |   
|        | Consolidated Balance Sheets as of
September 30, 2006
        (Unaudited) and December 31, 2005                                                                                 | 2 
|        |                                                                                                                                                                                |   
|        | Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and 2005 (Unaudited)                                                              | 3 
|        |                                                                                                                                                                                |   
|        | Consolidated Statements of Stockholders' Equity and Comprehensive Income for the nine months
        ended September 30, 2006 (Unaudited) and the year ended December 31, 2005 | 4 
|        |                                                                                                                                                                                |   
|        | Consolidated Statements of Cash Flows for the nine months
        ended September 30, 2006 and 2005 (Unaudited)                                                                | 5 
|        |                                                                                                                                                                                |   
|        | Notes to Consolidated Financial Statements (Unaudited)                                                                                                                         | 6 
|        |                                                                                                                                                                                |   
|Item 2. | Managements Discussion and Analysis of Financial
        Condition and Results of Operations                                                                                  | 17
|        |                                                                                                                                                                                |   
|Item 3. | Quantitative and Qualitative Disclosures about Market
        Risk                                                                                                             | 29
|        |                                                                                                                                                                                |   
|Item 4. | Controls and Procedures                                                                                                                                                        | 29
|        |                                                                                                                                                                                |   

# Part IIOTHER INFORMATION

|Item 1.  | Legal Proceedings | 29
|-------- | ----------------- | --
|         |                   |   
|Item 1A. | Risk Factors      | 29
|         |                   |   
|Item 6.  | Exhibits          | 30

|Signatures |  | 31
|---------- |  | --

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

CONSOLIDATED BALANCE SHEETS
                                                 SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
                                             (In thousands of dollars, except share data)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2006                                                                        | 2005
|--------------------------------------------------------------------------- | ----
|Current assets:                                                            
|Cash and cash equivalents                                                   |     
|Investments                                                                 |     
|                                                                            |     
|                                                                            |     
|Total cash and investments                                                  |     
|                                                                            |     
|                                                                           
|Accounts receivable - net                                                   |     
|Prepaid 4Kids TV broadcast fee, net of accumulated amortization             |     
|of $105,886 and $90,714 in 2006 and 2005, respectively                      |     
|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                                       |     
|Film and television costs - net                                             |     
|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, 14,884,368 and 14,826,643 shares; outstanding 13,134,368 and        |     
|13,076,643 shares in 2006 and 2005, respectively                            |     
|Additional paid-in capital                                                  |     
|Accumulated other comprehensive income                                      |     
|Retained earnings                                                           |     
|                                                                            |     
|                                                                            |     
|Less- cost of 1,750,000 treasury shares in 2006 and 2005                    |     
|                                                                            |     
|                                                                            |     
|                                                                            |     
|Total liabilities and stockholders equity                                  |     
|                                                                            |     
|                                                                            |     

|See notes to consolidated financial statements.
2

4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                                                 THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
                                             (In thousands of dollars, except share data)
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | Three Months EndedSeptember 30, | Nine Months EndedSeptember 30,
|----------------------------------------- | ------------------------------- | ------------------------------
|
|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) provision for income taxes      |                                 |                               
|                                          |                                 |                               
|(Loss) income from continuing operations  |                                 |                               
|                                         
|Loss income 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 INCOME
                                                 NINE MONTHS ENDED SEPTEMBER 30, 2006 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2005
                                             (In thousands of dollars and shares)
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                        |  |        |  |      |  |        
|--------------------------------------- |  | ------ |  | ---- |  | -------
|
|                                        |  |        |  |      |  |        
|BALANCE, DECEMBER 31, 2004              |  | 14,411 |  | $144 |  | $58,068
|Proceeds from exercise of stock options |  | 416    |  | 4    |  | 1,345  
|Tax benefit from exercise of stock      | 
|options                                 |  | --     |  | --   |  | 2,002  
|                                        |  |        |  |      |  |        
|Acquisition of treasury stock, at cost  |  | --     |  | --   |  | --     
|Comprehensive income:                   | 
|                                        |  |        |  |      |  |        
|Net income                              |  | --     |  | --   |  | --     
|                                        |  |        |  |      |  |        
|Translation adjustment                  |  | --     |  | --   |  | --     
|                                        |  |        |  |      |  |        
|Total comprehensive income              |  | --     |  | --   |  | --     
|                                        |  |        |  |      |  |        
|BALANCE, DECEMBER 31, 2005              |  | 14,827 |  | $148 |  | $61,415
|Proceeds from exercise of stock options |  | 57     |  | 1    |  | 681    
|Tax benefit from exercise of stock      | 
|options                                 |  | --     |  | --   |  | 89     
|                                        |  |        |  |      |  |        
|Comprehensive income:                   | 
|                                        |  |        |  |      |  |        
|Net income                              |  | --     |  | --   |  | --     
|                                        |  |        |  |      |  |        
|Translation adjustment                  |  | --     |  | --   |  | --     
|                                        |  |        |  |      |  |        
|Total comprehensive income              |  | --     |  | --   |  | --     
|                                        |  |        |  |      |  |        
|BALANCE, SEPTEMBER 30, 2006             |  | 14,884 |  | $149 |  | $62,185
|                                        |  |        |  |      |  |        

|See notes to consolidated financial statements.

4















4KIDS ENTERTAINMENT,
INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS
OF CASH FLOWS (UNAUDITED)NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (In thousands of dollars)
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                            | 2006 | 2005        
|--------------------------------------------------------------------------- | ---- | ------------
|Cash flows from operating activities:                                       |      |             
|Net income                                                                  |      | $     1,317 
|Adjustments to reconcile net income to net cash                             |     
|provided by (used in) operating activities - continuing operations:         |     
|Depreciation and amortization                                               |      | 779         
|Amortization of television and film costs                                   |      | 4,776       
|Amortization of 4Kids TV broadcast fee                                      |      | 15,172      
|Provision for doubtful accounts                                             |      | 382         
|Deferred income taxes                                                       |      | 803         
|Tax benefit on exercise of stock options                                    |      | --          
|Changes in operating assets and liabilities:                                |     
|Accounts receivable                                                         |      | 7,756       
|Film and television costs                                                   |      | (8,671      
|Prepaid income taxes                                                        |      | (1,823      
|Prepaid 4Kids TV broadcast fee                                              |      | (8,566      
|                                                                            |      |             
|Prepaid expenses and other current assets                                   |      | (3,155      
|Other assets - net                                                          |      | (771        
|Due to licensors                                                            |      | (6,664      
|Accounts payable and accrued expenses                                       |      | 1,450       
|Deferred revenue                                                            |      | (322        
|Deferred rent                                                               |      | (181        
|                                                                            |      |             
|Net cash provided by (used in) operating activities - continuing operations |      | 2,282       
|Net cash used in operating activities - discontinued operations             |      | (687        
|                                                                            |      |             
|Net cash provided by (used in) operating activities                         |      | 1,595       
|                                                                            |      |             
|                                                                           
|Cash flows from investing activities:                                       |     
|Proceeds from maturities of investments                                     |      | 127,607     
|Purchase of investments                                                     |      | (146,824    
|Purchase of property and equipment                                          |      | (508        
|Loss from disposal of property, plant and equipment                         |      | 525         
|                                                                            |      |             
|Net cash used in investing activities                                       |      | (19,200     
|                                                                            |      |             
|Cash flows from financing activities:                                       |     
|Proceeds from exercise of stock options                                     |      | 682         
|Purchase of treasury shares                                                 |      | --          
|Tax benefit on exercise of stock options                                    |      | 89          
|                                                                            |      |             
|Net cash provided by (used in) financing activities                         |      | 771         
|                                                                            |      |             
|Effects of exchange rate changes on cash and cash equivalents               |      | 358         
|                                                                            |      |             
|Net decrease in cash and cash equivalents                                   |      | (16,476     
|                                                                           
|Cash and cash equivalents, beginning of period                              |      | 35,142      
|                                                                            |      |             
|Cash and cash equivalents, end of period                                    |      | $   18,666  
|                                                                            |      |             
|                                                                            |      |             
|                                                                            |      |             
|Supplemental disclosure of cash flow information:                           |     
|Cash paid during period for:                                                |     
|Income Taxes                                                                |      | $        112
|                                                                            |      |             

|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 the Companys businesses are conducted (the
Company), is a diversified entertainment and media company specializing in the
youth oriented market with operations in the following business segments: (i) Licensing,
(ii) Advertising Media and Broadcast, and (iii) Television and Film
Production/Distribution.


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


4Kids Technology, Inc., a
wholly-owned subsidiary, develops ideas and concepts for licensing which integrate new and
existing technologies with traditional game and toy play patterns. 4Sight Licensing
Solutions, Inc. (4Sight Licensing), a wholly-owned subsidiary, is engaged in
the business of licensing properties and product concepts to adults, teens and
tweens. 4Sight Licensing focuses on brand building through licensing.


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). In January 2005,
the Company changed the name of the Saturday morning programming block from Fox
Box to 4Kids TV. The Company provides substantially all programming
content to be broadcast on 4Kids TV. 4Kids Ad Sales, Inc. (4Kids Ad Sales), a
wholly-owned subsidiary, 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. The closing of the media buying business will enable the Company to
further reduce costs and focus on its core businesses. 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.


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


The Companys wholly-owned
subsidiary, 4Kids Entertainment Music, Inc. (4Kids Music), markets and manages
the Companys musical operations. 4Kids Music composes original music for
incorporation into television programming produced by 4Kids Productions. 4Kids
Entertainment Home Video, Inc. (4Kids Home Video), another wholly-owned
subsidiary, distributes home videos associated with television programming produced by
4Kids Productions.


2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES


Basis of
Presentation  The consolidated financial statements, except for the
December 31, 2005 consolidated balance sheet and the consolidated statement of
stockholders equity and comprehensive income for the year ended December 31, 2005,
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 September 30, 2006 and December 31, 2005 and the results of operations
for the three and nine months ended September 30, 2006 and 2005, and stockholders
equity and comprehensive income for the nine months ended September 30, 2006 and the year
ended December 31, 2005, and cash flows for the nine months ended September 30, 2006 and
2005. 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.



6

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 Notes 6 and 10, the consolidated financial
statements have been reclassified to reflect the reporting of this business as a
discontinued operation.


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, 2005, 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. All significant intercompany
accounts and transactions have been eliminated. The December 31, 2005 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.


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
income. Production service costs included in net revenues amounted to $2,875 and $8,301
for the three and nine months ended September 30, 2006, respectively, and $2,093 and
$6,215 for the three and nine months ended September 30, 2005, 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.


Prepaid 4Kids TV Broadcast
Fee  The Company capitalized the broadcast fee paid to Fox and
amortized the amount of such fee over the broadcast season based on estimated advertising
revenue. During the nine months ended September 30, 2006, the Company paid Fox and certain
affiliates $6,808 and $222 attributable to the fourth and fifth years broadcast
fees, respectively, and during calendar year 2005, the Company paid Fox and certain
affiliates $6,768 and $19,255 attributable to the third and fourth years broadcast
fees, respectively. The unamortized portion of these fees of $0 and $6,606, are included
in Prepaid 4Kids TV broadcast fee on the accompanying consolidated balance
sheets as of September 30, 2006 and December 31, 2005, respectively.

7

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.


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
and nine months ended September 30, 2006, was $(181) and $1,895, respectively, which
included translation adjustments of $84 and $578 for the respective periods. Comprehensive
income for the three and nine months ended September 30, 2005, was $1,893 and $4,066,
respectively, which included translation adjustments of $(85) and $(507) for the
respective periods.


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


SFAS No. 123-R is effective for
fiscal years beginning after June 15, 2005. The Company adopted SFAS No. 123-R
effective January 1, 2006, using a modified prospective application. This application
requires the Company to record compensation expense for all awards granted after January
1, 2006 and for the unvested portion of previously granted awards that remain outstanding
as of such date. The Companys adoption of SFAS No. 123-R did not result in the
recording of compensation expense in 2006 with respect to options previously granted,
since all of the Companys outstanding options were fully vested at December 31,
2005. The adoption of this pronouncement did not have a material effect on the
Companys consolidated financial position or results of operations.


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


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

8

Accounting for Uncertainty in
Income Taxes In June 2006, the FASB issued 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 provision 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 will be effective for fiscal periods beginning after December 15,
2006. Earlier application of the interpretation is encouraged if the enterprise has not
yet issued financial statements, including interim financial statements, in the period the
interpretation is adopted. The Company does not expect that the adoption of FIN 48 will a
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 November 15, 2007.  The Company is currently evaluating the adoption of SFAS 157
and its impact on the consolidated financial position and results of operation.








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. For the nine
months ended September 30, 2006, the Company did not grant any stock options and at
January 1, 2006, all of the Companys outstanding options were fully vested and;
therefore, the adoption of this pronouncement did not have a material effect on the
Companys consolidated financial position or results of operations.

9

Stock Options


The following table provides the pro
forma effect on net earnings as if the fair-value-based measurement method had been
applied to all stock-based compensation for the three and nine months ended September 30,
2005:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | Three Months Ended
September 30,
2005 | Nine Months Ended
September 30,
2005
|----------------------------------------- | ------------------------------------- | ------------------------------------
|Net income as reported                    |                                       | $1,978                              
|                                         
|Deduct stock-based employee compensation  |                                      
|expense determined under fair value based |                                      
|method for all awards, net of tax         |                                       | 762                                 
|                                          |                                       |                                     
|Pro forma net income                      |                                       | $1,216                              
|                                          |                                       |                                     
|Net income per share:                     |                                      
|Reported                                  |                                      
|Basic                                     |                                       | $   0.15                            
|                                          |                                       |                                     
|Diluted                                   |                                       | $   0.15                            
|                                          |                                       |                                     
|Pro forma                                 |                                      
|Basic                                     |                                       | $   0.09                            
|                                          |                                       |                                     
|Diluted                                   |                                       | $   0.09                            
|                                          |                                       |                                     

|The Company issued stock option
grants on April 25, 2005 and September 1, 2005 for approximately 651,000 and 125,000
underlying shares, respectively. The options were granted to certain employees, including
officers and members of the Board of Directors, at an exercise price of $20.56 and $17.00,
respectively (the average of the high and low stock price from the previous day of
trading). Each of the stock option grants has a (i) five year life; (ii) is immediately
vested and exercisable with respect to 50 percent of the underlying shares; and (iii)
became vested and exercisable with respect to the remaining 50 percent on December 30,
2005 and December 31, 2005, respectively.


The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option-pricing model. The
weighted average assumptions used for options granted in 2005 included no dividend yield
for the period, expected volatility of approximately 38%, a risk-free interest rate of
approximately 3.76%, and an estimated option duration of 3.6 years for 2005. The weighted
average fair value of options granted in fiscal 2005 is $6.56.


The following table summarizes
activity under our stock option plans for the nine months ended September 30, 2006:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                   | Nine Months Ended September 30, 2006
|---------------------------------- | ------------------------------------
|
|Outstanding at beginning of period |                                     
|Grants                             |                                     
|Exercised                          |                                     
|Forfeited                          |                                     
|                                   |                                     
|Outstanding at end of period       |                                     
|                                   |                                     
|                                   |                                     
|Exercisable at end of period       |                                     
|                                   |                                     

|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 September 30, 2006, we had options outstanding to purchase
an aggregate of 709 shares with an exercise price below the quoted price of our stock,
resulting in an aggregate intrinsic value of $5,720. During the nine months ended
September 30, 2006 and 2005, the aggregate intrinsic value of options exercised under our
stock option plans was $261 and $319, respectively, determined as of the date of exercise.

10

Restricted Stock Awards


Pursuant to its Long-term Incentive
Compensation Plan, 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 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. During the
restriction period, award holders do not have the rights of stockholders and cannot
transfer ownership and nonvested shares 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 Plans as of September 30, 2006 and
changes during the nine months then ended is presented as follows:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  | Number of
Shares | Weighted-Average
Grant Date Fair
Value
|--------------------------------- | ---------------- | --------------------------------------
|Outstanding at January 1, 2006    |                  |                                       
|Granted                           |                  |                                       
|Vested                            |                  |                                       
|Forfeited                         |                  |                                       
|Converted                         |                  |                                       
|                                  |                  |                                       
|Outstanding at September 30, 2006 |                  |                                       
|                                  |                  |                                       

|The restricted stock awards vest
annually from the date of grant over a period of four years. However, vesting can be
accelerated in the event of a change of control of the Company as defined in the Plan. As
of September 30, 2006, there was approximately $2,100 of unrecognized compensation cost
related to restricted stock awards granted under the Plan. That cost is expected to be
recognized over a remaining weighted-average period of 3.6 years. There were no shares
that vested during the three and nine months ended September 30, 2006.


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 $125
and $485 for the three and nine months ended September 30, 2006, respectively, and $132
and $414 for the three and nine months ended September 30, 2005, respectively. The Company
has included $2,635 and $3,120 as deferred revenue on the accompanying consolidated
balance sheets as of September 30, 2006 and December 31, 2005, respectively.


Home Video  At various
dates since May 2002, 4Kids Home Video entered into various agreements with an
unaffiliated third party home video distributor (the Video Distributor)
pursuant to which 4Kids Home Video provides ongoing advertising, marketing and promotional
services with respect to certain home video titles that are owned or controlled by the
Company and which are distributed by the Video Distributor. The Video Distributor has paid
the Company cumulative advances of $3,920 against 4Kids Home Videos share of the
distribution and service fee proceeds to be realized by 4Kids Home Video from such titles,
$75 of which were received by the Company during the nine months ended September 30, 2006.
Pursuant to the above, the Company recognized revenue of $62 and $132 for the three and
nine months ended September 30, 2006, respectively, and $23 and $67 for the three and nine
months ended September 30, 2005, respectively. The Company has included $461 as deferred
revenue on both accompanying consolidated balance sheets as of September 30, 2006 and
December 31, 2005.

11

Other Agreements  In
addition, the Company entered into other agreements for various Properties and advertising
time on 4Kids TV in which the Company has received certain advances and/or minimum
guarantees. As of September 30, 2006 and December 31, 2005, the unearned portion of these
advances and guaranteed payments was $1,879 and $1,716, respectively, and is included in
deferred revenue on the accompanying consolidated balance sheets.


5. STOCKHOLDERS EQUITY
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | Stock Purchases  In November 2005, the Board of Directors
               authorized the Company to purchase up to 1,000,000 shares of the Companys
               common stock from time to time through December 31, 2006 in the open market or
               through negotiated prices. Such purchases are to be made out of the
               Companys surplus. Through November 9, 2006, no purchases relating to this
               1,000,000 share authorization have been made by the Company.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Stock Options Pursuant to its stock option plans, the Company
               granted stock options on April 25, 2005 and September 1, 2005 for approximately
               651,000 and 125,000 underlying shares, respectively. The options were granted to
               certain employees, including officers and members of the Board of Directors, at
               an exercise price of $20.56 and $17.00, respectively (the average of the high
               and low stock price from the previous day of trading). Each of the stock option
               grants (i) have a five year life; (ii) is immediately vested and exercisable
               with respect to 50 percent of the underlying shares; and (iii) became vested and
               exercisable with respect to the remaining 50 percent on December 30, 2005 and
               December 31, 2005, respectively.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Restricted Stock Awards Pursuant to its Long-term Incentive
               Compensation Plan, 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.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. SEVERANCE AND EXIT COSTS



In connection with the termination of
the Companys media buying operations, the Company recorded charges for severance and
termination benefits in the amount of approximately $333 during the nine months ended
September 30, 2006. The charges were attributable to the elimination of 10 positions,
primarily representing sales and related support functions in addition to certain other
management positions. There were no amounts attributable to the scheduled termination of
employees under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, plans whereby employees are required to provide transitional services
through their termination dates.


A summary of the actions taken in
2006 for severance and other exit-costs have been recorded in (loss) income from discontinued
operations and is provided as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  | Amount
|----------------- | ------
|Professional fees |       
|Severance         |       
|                  |       
|Total             |       
|                  |       

The following is a reconciliation of activity with respect to the liabilities for the severance and exit costs:

|                                       | Amount
|-------------------------------------- | ------
|Balance, January 1, 2006               |       
|Severance and related costs recognized |       
|Other                                  |       
|Cash payments                          |       
|                                       |       
|Balance, September 30, 2006            |       
|                                       |       

|The liability for severance and exit
costs will be paid in accordance with the provisions of the severance agreements and
payments are expected to be completed at various times through 2006.


12

7. LEGAL PROCEEDINGS


On June 19, 2006, Summit Media
entered into a Settlement Agreement and Mutual General Release (the Settlement
Agreement) with The Beacon Media Group L.L.C. (Beacon), and various
officers and employees of Beacon, collectively (the Beacon Defendants) to
settle the lawsuit filed by Summit Media in Supreme Court, New York County, against Beacon
and the Beacon Defendants. Under the terms of the Settlement Agreement, Summit Media will
receive $2,000, in regularly scheduled payments through 2010, in exchange for Summit Media
discontinuing the lawsuit. The present value of this settlement amount is included in net
income from discontinued operations, see Note 10. As part of the Settlement Agreement,
Summit has discontinued its media buying business and effective July 1, 2006, no longer
serves as a media buying agency for third parties.


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


The Companys Chairman and Chief
Executive Officer is the founder and Chairman 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 who have lost their lives in the line of duty. The Foundation also
works with law enforcement and firefighting organizations to provide children with
valuable social and life skill programs. The Company contributed approximately $20 and $70
to the foundation for the three and nine months ended September 30, 2006, respectively,
and $30 and $90 to the foundation for the three and nine months ended September 30, 2005,
respectively.


Brian Lacey has been Executive Vice
President of International for the Company since July 2003. Prior to joining the Company,
Mr. Lacey was the President and founder of Lacey Entertainment, a New York-based worldwide
television marketing, production and distribution company (Lacey). Until July
2003 (when the agreement was terminated), Lacey provided consulting services to the
Company under a fee-based agreement pursuant to which the Company agreed to pay Lacey a
percentage of all programming sales placed by Lacey in the international marketplace as
the cash payments for such programming sales were received. During the nine months ended
September 30, 2006, Lacey was paid $341 for all remaining obligations with respect to this
agreement. As of September 30, 2006 and December 31, 2005, the Company has included $0 and
$233, respectively, in accounts payable and accrued expenses on its accompanying
consolidated balance sheets for remaining obligations due to Lacey under the former
agreement.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 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), and which was originally called
               the Fox Box. In January 2005, the Company re-branded the Fox Box as
               4Kids TV. The Company provides substantially all programming content
               to be broadcast on 4Kids TV and retains all of the revenue from network
               advertising sales for the four-hour time period. 4Kids Ad Sales, Inc., a
               wholly-owned subsidiary, 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 September 30, 2006, no amounts remain to be paid for the
2005-2006 broadcast season under the original agreement. The time-buy fee for each of the
2006-2007 and 2007-2008 broadcast seasons will be $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 $5,490 and $15,172 for the three and nine months ended September 30, 2006,
respectively, and $5,104 and $15,662 for the three and nine months ended September 30,
2005, respectively. During the nine months ended September 30, 2006, the Company paid Fox
and certain Fox affiliates $6,808 and $222 attributable to the fourth and fifth
years broadcast fees, respectively, and during calendar year 2005, the Company paid
Fox and certain Fox affiliates $6,768 and $19,255 attributable to the third and fourth
years broadcast fees, respectively. The unamortized portion of these fees of $0 and
$6,606 are included in Prepaid 4Kids TV broadcast fee on the accompanying
consolidated balance sheets as of September 30, 2006 and December 31, 2005, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 September 30, 2006, the minimum guaranteed payment obligations under the 4Kids TV
Broadcast Agreement are as follows:
| | ---------------------------------------------------------------------------------------------------------------------------

|Year ending
December 31, | Amount
|------------------------ | ------
|2006                     |       
|2007                     |       
|2008                     |       
|                         |       
|Total                    |       
|                         |       

| | The
Companys ability to recover the cost of its fee payable to Fox will depend on the
popularity of the television programs the Company broadcasts on 4Kids TV and the general
market demand and pricing of advertising time for Saturday morning childrens
broadcast television. The popularity of such programs impacts 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. DISCONTINUED
OPERATION


In June 2006, the Company announced
that the business of its media buying subsidiary, Summit Media, would be terminated as of
June 30, 2006. The results of operations for Summit Media are reported as a discontinued
operation for the three and nine months ended September 30, 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
September 30, | Nine Months Ended
September 30,
|------------------------------------------ | -------------------------------- | -------------------------------
|
|Net revenues                               |                                  | $ 12                           
|                                           |                                  |                                
|(Loss) income before income taxes          |                                  | (76                            
|(Benefit) provision for income taxes       |                                  | (42                            
|                                           |                                  |                                
|(Loss) income from discontinued operations |                                  | $(34                           
|                                           |                                  |                                

|14

The Company has included
approximately $1,800 in net revenues for the nine months ended September 30, 2006 relating
to the Settlement Agreement, see Note 7.


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

|                                              | September 30,
2006 | December 31,
2005
|--------------------------------------------- | ------------------ | -----------------
|Accounts receivable                           |                    | $     67         
|Prepaid expense and other current assets      |                    | 1,600            
|                                              |                    |                  
|Current assets of discontinued operation      |                    | $1,667           
|                                              |                    |                  
|                                              |                    |                  
|Media payable                                 |                    | $      --        
|Accounts payable and accrued expenses         |                    | 150              
|                                              |                    |                  
|Current liabilities of discontinued operation |                    | $   150          
|                                              |                    |                  

|11. SEGMENT AND RELATED
INFORMATION


The Company applies SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. The Company
has three reportable segments: (i) Licensing; (ii) Advertising, Media and Broadcast; and
(iii) Television and Film Production/Distribution. The Companys reportable segments
are strategic business units, which, while managed separately, work together as a
vertically integrated entertainment company. The Companys management regularly
evaluates the performance of each segment based on its net revenues, profit and loss after
all expenses, including amortized film 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 recorded
inter-segment revenues and the Companys Advertising, Media and Broadcast segment
recorded inter-segment charges related to the estimated acquisition costs of episodic
television series for broadcast. In the opinion of management, such acquisition costs
represent the estimated fair value which would have been incurred in a transaction between
unaffiliated third parties on an arms length basis. All inter-segment transactions have
been eliminated in consolidation.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         | Licensing | Advertising
Media and
Broadcast | TV and Film
Production/
Distribution | Total    
|---------------------------------------- | --------- | ------------------------------- | ------------------------------------ | ---------
|Three Months Ended September 30,         |           |                                 |                                      |          
|2006:                                    |          
|Net revenues  from external customers    |           | $    6,937                      |                                      | $   3,578
|Amortization of television and film cost |           | --                              |                                      | --       
|Amortization of 4Kids TV broadcast fee   |           | --                              |                                      | 5,490    
|Segment profit (loss)                    |           | 2,661                           |                                      | (3,910   
|Interest income                          |           | 1,097                           |                                      | 17       
|                                        
|2005:                                    |          
|Net revenues  from external customers    |           | $    9,149                      |                                      | $   4,004
|Amortization of television and film cost |           | --                              |                                      | --       
|Amortization of 4Kids TV broadcast fee   |           | --                              |                                      | 5,104    
|Segment profit (loss)                    |           | 5,087                           |                                      | (3,290   
|Interest income                          |           | 629                             |                                      | 25       
|                                        
|Nine Months Ended September 30,          |          
|2006:                                    |          
|Net revenues  from external customers    |           | $  23,468                       |                                      | $ 10,615 
|Amortization of television and film cost |           | --                              |                                      | --       
|Amortization of 4Kids TV broadcast fee   |           | --                              |                                      | 15,172   
|Segment profit (loss)                    |           | 8,969                           |                                      | (10,300  
|Interest income                          |           | 2,987                           |                                      | 23       
|Segment assets                           |           | 144,407                         |                                      | 5,408    
|                                        
|2005:                                    |          
|Net revenues  from external customers    |           | $  28,021                       |                                      | $ 11,387 
|Amortization of television and film cost |           | --                              |                                      | --       
|Amortization of 4Kids TV broadcast fee   |           | --                              |                                      | 15,662   
|Segment profit (loss)                    |           | 15,519                          |                                      | (9,996   
|Interest income                          |           | 1,979                           |                                      | 73       
|Segment assets                           |           | 129,992                         |                                      | 20,926   

|15

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 Notes 6 and 10. 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 $3,803 and $8,980
for the three and nine months ended September 30, 2006, respectively, and $3,060 and
$8,209 for the three and nine months ended September 30, 2005, respectively. At September
30, 2006 and 2005, net assets of the Companys London office were $7,602 and $7,050,
respectively.


     _________________


16

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 nine months ended September 30, 2006, reflect a decrease in licensing revenues
from the Teenage Mutant Ninja Turtles, Yu-Gi-Oh! and
American Kennel Club properties, partially offset by increased revenues from
the production of the Viva Piñata and Chaotic properties,
as compared to the same period in 2005.


General


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


The Companys licensing revenues
have historically been derived primarily from the licensing of toy and game concepts. 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 to the
Companys consolidated financial statements. The Companys advertising sales
subsidiary, 4Kids Ad Sales, sells advertising time on 4Kids TV at higher rates in the
fourth quarter due to the increased demand for commercial time by childrens
advertisers during the holiday season. As a result, much of the revenues of 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 has
terminated its operations. In connection with the closing of Summit Media, the media
buying operations have been classified as a discontinued operation. As further discussed
in Notes 6 and 10, 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 more fully described in Note 2 of the Notes to the Companys
consolidated financial statements. Below is a summary of the critical accounting policies,
among others, that management believes involve significant judgments and estimates used in
the preparation of its consolidated financial statements.


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




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


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


17

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


4Kids TV Broadcast Agreement
 The Company broadcasts certain of its Properties on 4Kids TV, the Saturday morning
programming block that the Company leases from Fox. The cost of 4Kids TV has been and will
continue to be capitalized and amortized over each broadcast year based on estimated
advertising revenue. In developing future estimated revenues, the Company has made certain
assumptions with regard to the anticipated popularity of the television series the Company
broadcasts on 4Kids TV and the general market demand and pricing of advertising time for
Saturday morning childrens broadcast television. The popularity of such series
impacts audience levels and the level of the network advertising rates that the Company
can charge. These estimates are based on historical trends, as well as the Companys
subjective judgment of future customer demand and acceptance of its television
programming. Differences may result in the amount and timing of revenue for any period if
actual performance varies from the Companys estimates. See Note 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 the Company 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  Share-Based Payments In December 2004, the
FASB issued SFAS No. 123 (revised 2004), Share-Based Payments
(SFAS No. 123-R). SFAS No. 123-R is a revision of SFAS No. 123,
as amended, Accounting for Stock-Based Compensation, and supersedes Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees. SFAS No.123-R eliminates the alternative to use the intrinsic value
method of accounting that was provided in SFAS No. 123, which generally resulted in
no compensation expense recorded in the financial statements related to the issuance of
equity awards to employees. SFAS No. 123-R requires that the cost resulting from all
share-based payment transactions be recognized in the financial statements. SFAS No.
123-R establishes fair value as the measurement objective in accounting for share-based
payment arrangements and requires all companies to apply a fair-value-based measurement
method generally in accounting for all share-based payment transactions with employees.


18

SFAS No. 123-R is effective for
fiscal years beginning after June 15, 2005. The Company adopted SFAS No. 123-R
effective January 1, 2006, using a modified prospective application. This application
requires the Company to record compensation expense for all awards granted after January
1, 2006 and for the unvested portion of previously granted awards that remain outstanding
as of such date. The Companys adoption of SFAS No. 123-R did not result in the
recording of compensation expense in 2006 with respect to options previously granted,
since all of the Companys outstanding options were fully vested at December 31,
2005. The adoption of this pronouncement did not have a material effect on the
Companys consolidated financial position or results of operations.


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


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


Accounting for Uncertainty in
Income Taxes In June 2006, FASB issued SFAS Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48), an interpretation
of FASB Statement 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 provision 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 will be effective for fiscal periods beginning after December 15,
2006. Earlier application of the interpretation is encouraged if the enterprise has not
yet issued financial statements, including interim financial statements, in the period the
interpretation is adopted. The Company does not expect that the adoption of FIN 48 will a
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 November 15, 2007.  The Company is currently evaluating the adoption of SFAS 157
and its impact on the consolidated financial position and results of operation.

19

Results of Operations


The following table sets forth our
results of operations expressed as a percentage of total net revenues for the three and
nine months ended September 30, 2006 and 2005:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | Three Months Ended
September 30, | Nine months Ended
September 30,
|----------------------------------------- | -------------------------------- | -------------------------------
|
|Net revenues                              |                                  | 100                            
|                                          |                                  |                                
|Selling, general & administrative         |                                  | 53                             
|Production service costs                  |                                  | 18                             
|Amortization of television and film costs |                                  | 10                             
|Amortization of 4Kids TV broadcast fee    |                                  | 31                             
|                                          |                                  |                                
|Total Costs and Expenses                  |                                  | 112                            
|                                          |                                  |                                
|(Loss) income from Operations             |                                  | (12                            
|                                         
|Interest income                           |                                  | 6                              
|                                          |                                  |                                
|(Loss) income before income taxes         |                                  | (6                             
|                                         
|(Benefit) provision for income taxes      |                                  | (5                             
|                                          |                                  |                                
|(Loss) income from continuing operations  |                                  | (1                             
|                                         
|Income from discontinued operations       |                                  | --                             
|                                          |                                  |                                
|Net (loss) income                         |                                  | (1                             
|                                          |                                  |                                

|Three and nine months ended
September 30, 2006 as compared to three and nine months ended September 30, 2005


Continuing Operations


Revenues


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


For the three months
ended September 30, 2006 and 2005
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                            | 2006 | 2005     | $ Change | % Change
|------------------------------------------- | ---- | -------- | -------- | --------
|Licensing                                   |      | $  6,937 |          | $  9,149
|Advertising Media and Broadcast             |      | 3,578    |          | 4,004   
|Television and Film Production/Distribution |      | 7,047    |          | 6,339   
|                                            |      |          |          |         
|Total                                       |      | $17,562  |          | $19,492 
|                                            |      |          |          |         

|For the nine months
ended September 30, 2006 and 2005
|-----------------------------------------------------

|                                            | 2006 | 2005    | $ Change | % Change
|------------------------------------------- | ---- | ------- | -------- | --------
|Licensing                                   |      | $23,468 |          | $28,021 
|Advertising Media and Broadcast             |      | 10,615  |          | 11,387  
|Television and Film Production/Distribution |      | 19,404  |          | 17,692  
|                                            |      |         |          |         
|Total                                       |      | $53,487 |          | $57,100 
|                                            |      |         |          |         

|20

The decrease in consolidated net
revenues for the three months and nine months ended September 30, 2006 as compared to the
same periods in 2005, was due to a number of factors.


In the Licensing segment, decreased
revenues for the three months ended September 30, 2006 were primarily attributable to:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (i) | reduced licensing revenues on the Yu-Gi-Oh!", Teenage Mutant
               Ninja Turtles and Cabbage Patch properties; partially offset
               by
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | increased revenues attributable to the GI Joe property domestically,
               and the Teenage Mutant Ninja Turtles and Winx Club
               properties internationally,
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

and decreased revenue for the nine
months ended September 30, 2006 were primarily attributable to:

| | (i) | reduced licensing revenues on the Teenage Mutant Ninja Turtles,
               Yu-Gi-Oh!", American Kennel Club and Winx
               Club properties domestically; partially offset by
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | increased revenues attributable to the GI Joe property domestically,
               and the Winx Club property internationally.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------

|The Yu-Gi-Oh! property continues to be the largest contributor to the
Companys revenues in this business segment. The Company recorded additional revenues
of approximately $2,800 for the Yu-Gi-Oh! property during the nine months
ended September 30, 2006, resulting from changes in the manner in which sales are
calculated by a licensee for purposes of computing the amount of certain marketing fees
due to the Company from such licensee. In addition, revenues for the Teenage Mutant
Ninja Turtles property, despite lower licensing revenues along with the
Cabbage Patch property, are also amongst the largest contributors in this
segment.




In the Advertising Media and
Broadcasting segment, revenues decreased for the three and nine months ended September 30,
2006, when compared to the same periods in 2005, resulting from lower network advertising
revenues.


In the Television and Film
Production/Distribution segment, the increased revenue for the three and nine months ended
September 30, 2006, when compared to the same periods in 2005 primarily resulted from:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (i) | increased
domestic production service revenue from the Viva           Piñata and
Chaotic television series; and
| | --- | -------------------------------------------------------------------------------------------------------------------

| | (ii) | increased
international broadcast sales of the Yu-Gi-Oh! television series;
partially offset by
| | ---- | -------------------------------------------------------------------------------------------------

| | (iii) | decreased
domestic broadcast sales from the Yu-Gi-Oh! and           Pokémon television
series.
| | ----- | --------------------------------------------------------------------------------------------------

# Selling, General and
Administrative Expenses

Selling, general and administrative
expenses increased 14%, or $1,161, to $9,278 for the three months ended September 30,
2006, when compared to the same period in 2005. The increase was primarily attributable
to:

| | (i) | increased
bad debts, trade shows and international sales expenses;
| | --- | ------------------------------------------------------------------

| | (ii) | increased
compensation costs related to the issuance of restricted stock awards;           and
| | ---- | ----------------------------------------------------------------------------------------------

| | (iii) | increased
various state taxes; partially offset by
| | ----- | --------------------------------------------------

| | (iv) | decreased
professional fees.
| | ---- | ----------------------------

|Selling, general and administrative
expenses increased 13%, or $3,230, to $27,840 for the nine months ended September 30,
2006, when compared to the same period in 2005. The increase was primarily attributable
to:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (i) | severance
expenses for a former officer of the Company and various other           terminated
employees of approximately $1,800;
| | --- | --------------------------------------------------------------------------------------------------------------------------------

| | (ii) | the
write-off of           developmental software totaling approximately $525;
| | ---- | ------------------------------------------------------------------------------

| | (iii) | increased
bad debts,           trade shows and international sales expenses; and
| | ----- | --------------------------------------------------------------------------------

| | (iv) | increased
compensation           costs related to the issuance of restricted stock awards;
partially offset by
| | ---- | --------------------------------------------------------------------------------------------------------------

| | (v) | decreased professional fees.
| | --- | ----------------------------

|21

Production Service and Capitalized Film Costs


For the three months
ended September 30, 2006 and 2005
|----------------------------------------------------------------------------------------------------------

|                                          | 2006 | 2005   | $ Change | % Change
|----------------------------------------- | ---- | ------ | -------- | --------
|Production Service Costs                  |      | $3,225 |          | $2,093  
|Amortization of Television and Film Costs |      | 1,759  |          | 2,144   

# For the nine months
ended September 30, 2006 and 2005

|                                          | 2006 | 2005   | $ Change | % Change
|----------------------------------------- | ---- | ------ | -------- | --------
|Production Service Costs                  |      | $9,256 |          | $6,215  
|Amortization of Television and Film Costs |      | 4,776  |          | 5,989   

|The significant increase in
production service costs during the three and nine months ended September 30, 2006, as
compared to the same periods in 2005, was primarily due to increased production costs for
the work performed on the Viva Piñata and Chaotic
television series, partially offset by decreased costs for the Pokémon,
Kirby and Teenage Mutant Ninja Turtles 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.


The decrease in the amortization of
television and film costs is principally due to a reduction in the realized revenue on the
Teenage Mutant Ninja Turtles, One Piece and Shaman
King television series; partially offset by the increased amortization of the new
GI Joe, Magical Doremi, and Viva Piñata
television series during 2006.


As of September 30, 2006, there were
$16,103 of capitalized film production costs recorded in the Companys consolidated
balance sheet relating primarily to various stages of production on 368 episodes of
animated programming. Based on managements ultimate revenue estimates as of
September 30, 2006, approximately 41% 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 September 30, 2006 and 2005
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                       | 2006 | 2005   | $ Change | % Change
|-------------------------------------- | ---- | ------ | -------- | --------
|Amortization of 4Kids TV Broadcast Fee |      | $5,490 |          | $5,104  

# For the nine months
ended September 30, 2006 and 2005

|                                       | 2006 | 2005    | $ Change | %Change
|-------------------------------------- | ---- | ------- | -------- | -------
|Amortization of 4Kids TV Broadcast Fee |      | $15,172 |          | $15,662

|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 recognized from period to
period will vary based upon:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (i) | the amount of advertising revenue recognized during the period; and
| | --- | -------------------------------------------------------------------

| | (ii) | the amount of advertising revenue already recognized for the broadcast year as a
               percentage of the total amount expected to be recognized for the full broadcast
               year.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Based
on the increased and decreased percentage of advertising revenue recognized by the Company
during the three and nine months ended September 30, 2006, respectively, as compared to
the same periods in 2005 and the percentage of the total advertising revenues already
recognized, the Companys amortization of the 4Kids TV broadcast fee increased $386,
to $5,490, and decreased $490, to $15,172, for the three and nine months ended September
30, 2006, respectively, as compared to same periods in 2005. Through September 30, 2006
and 2005, the Company had amortized 100% of the 4Kids TV broadcast fee for the third and
fourth broadcast years.


22

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

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

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

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


Interest Income


Interest income increased 70%, or
$460, to $1,114 and 47%, or $956, to $3,010 for the three and nine months ended September
30, 2006, as compared to the same periods in 2005, primarily as a result of the increasing
interest rate environment and higher average cash balances invested.


Income Tax (Benefit)
Expense


Income taxes decreased 195%, or
$1,735, to a benefit of $845 from a provision of $890 and 154%, or $3,786 to a benefit of
$1,322 from a provision of $2,464 for the three and nine months ended September 30, 2006,
respectively, as compared to the same periods in 2005, due primarily to decreased income
from continuing operations and a shift in the Companys investment strategy toward
tax-exempt and tax-advantaged securities during 2006.


Net Income


As a result of the above, the Company
had net (loss) income for the three and nine months ended September 30, 2006, of $(265)
and $1,317, respectively, as compared to $1,978 and $4,573 for the same periods in 2005.


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 closing of the media buying business will enable the Company to
further reduce costs and focus on its core businesses. 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 and nine months ended
September 30, 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
September 30, | Nine Months Ended
September 30,
|---------------------------------------------- | -------------------------------- | -------------------------------
|
|Net Revenues                                   |                                  | $ 12                           
|                                               |                                  |                                
|(Loss) income before income taxes              |                                  | (76                            
|(Benefit) provision for income taxes           |                                  | (42                            
|                                               |                                  |                                
|Net (loss) income from discontinued operations |                                  | $(34                           
|                                               |                                  |                                

|Under the terms of the Settlement
Agreement, Summit Media will receive $2,000, in regularly scheduled payments through 2010,
in exchange for Summit Media discontinuing the lawsuit. The Company has included
approximately $1,800 in net revenues for the nine months ended September 30, 2006 relating
to this agreement. In connection with the termination the Companys media buying
operations, the Company recorded charges for severance and termination benefits in the
amount of approximately $333 during the nine months ended September 30, 2006. The charges
were attributable to the elimination of 10 positions, primarily representing sales and
related support functions in addition to certain other management positions. There were no
amounts attributable to the scheduled termination of employees under SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal
Activities, plans
whereby employees are required to provide transitional services through their termination
dates.



23

Liquidity and Capital Resources


Financial Position


Cash and cash equivalents and
short-term investments as of September 30, 2006 and December 31, 2005 were as follows:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          | 2006 | 2005      | $ Change
|------------------------- | ---- | --------- | --------
|Cash and cash equivalents |      | $  18,666 |         
|Investments               |      | 97,600    |         
|                          |      |           |         
|                          |      | $116,266  |         
|                          |      |           |         

|During the nine months ended
September 30, 2006, 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 nine months ended
September 30, 2006 and 2005 were as follows:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Sources (Uses)       | 2006 | 2005      | $ Changes
|-------------------- | ---- | --------- | ---------
|Operating Activities |      | $   1,595 |          
|Investing Activities |      | (19,200   | )        
|Financing Activities |      | 771       |          

|Working capital, consisting of current assets less current
liabilities, was $129,501 as of September 30, 2006, and $129,576 as of December 31, 2005.
The decrease in cash flows used in operating activities is principally due to lower 4Kids
TV broadcast fees paid to Fox, partially offset by decreased cash collections attributable
to fourth quarter accounts receivable for the nine months ended September 30, 2006, as
compared to the same period in 2005.


As of September 30, 2006, the Company
had $97,600 invested in tax-exempt and tax-advantaged auction-rate securities and
short-term government obligations. The 2006 decrease in cash flows from investing
activities is primarily due to the Companys purchase of auction-rate securities as
an investment strategy for its excess cash balances. During 2006, the Company purchased
property and equipment of $508, which was comprised primarily of computer equipment, as
compared to purchases of property and equipment of $593 in 2005. Additionally, the Company
had a write-off of developmental software of approximately $525 during 2006. Funds
required for the purchase of property and equipment in 2006 are expected to be similar to
that of 2005.


The 2006 increase in cash flows from
financing activities was primarily due to the fact that there were no treasury stock
purchases during the 2006 period.


During the nine months ended
September 30, 2006, the Companys cash flows from operations were negatively impacted
by reduced consumer demand for licensed products featuring Properties represented by the
Company.  Due to changing trends in the toy, game and entertainment business and the
difficulty in predicting the length of time a property will be commercially successful,
the Companys revenues, operating results and cash flow from operations may fluctuate
significantly from year to year and present operating results that are not necessarily
indicative of future performance.


Historically, the majority of the
television-based Properties the Company represented were existing episodes of foreign
produced programming that the Company adapted for the United States and other
markets.  The Company is now seeking to increase the number of new animated
television programs that the Company will be producing and which will be owned in whole or
in part by the Company. The cost of producing new programs is substantially more than the
cost of producing adaptations of existing animated programs. Accordingly, the production
costs associated with developing original animated programming will likely result in
increased capitalized film and television costs for the Company.  If a Property
consisting of new animated programs produced by the Company performs at a level less than
the Companys expectations, the Company may have to amortize substantially higher
production costs related to such Property over a shorter period of time. This increased
amortization of the higher production costs of new animated programs produced by the
Company could materially and adversely affect the Companys financial performance.
While the Company expects that the revenues associated with such newly produced programs
will be sufficient to maintain its historical operating margins, there can be no assurance
that such revenues will be realized.


24

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. In January 2005, the Company rebranded the Fox Box to 4Kids
TV. The Company provides substantially all programming content to be broadcast on
4Kids TV, which principally airs on Saturday mornings from 8 am to 12 pm eastern/pacific
time (7 am to 11 am central time) and retains all of the revenue from network advertising
sales for the four-hour time period. 4Kids Ad Sales, Inc., a wholly-owned subsidiary,
manages and accounts for the 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 September 30, 2006, no amounts remain to be paid for the 2005-2006 broadcast season under the
original agreement. The time-buy fee for each of the 2006-2007 and 2007-2008 broadcast
seasons will be $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.


In addition to the time-buy fee paid
to Fox, the Company will incur additional costs to program the four-hour block and sell
the related network advertising time. These costs will 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, 2005. As of September 30, 2006, the Companys
contractual obligations and commitments have not materially changed since December 31,
2005, except for severance and other exit costs associated with discontinued operations of
the Companys media buying entity. Contractual obligations of approximately $125 will
be paid out during the remainder of 2006 in conjunction with this discontinued operation.


Related Party
Transactions


The Companys Chairman and Chief
Executive Officer is the founder and Chairman 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 who have lost their lives in the line of duty. The Foundation also
works with law enforcement and firefighting organizations to provide children with
valuable social and life skill programs. The Company contributed approximately $20 and $70
to the foundation for the three and nine months ended September 30, 2006, respectively,
and $30 and $90 to the foundation for the three and nine months ended September 30, 2005,
respectively.


Brian Lacey has been Executive Vice
President of International for the Company since July 2003. Prior to joining the Company,
Mr. Lacey was the President and founder of Lacey Entertainment, a New York-based worldwide
television marketing, production and distribution company (Lacey). Until July
2003 (when the agreement was terminated), Lacey provided consulting services to the
Company under a fee-based agreement pursuant to which the Company agreed to pay Lacey a
percentage of all programming sales placed by Lacey in the international marketplace as
the cash payments for such programming sales were received. During the nine months ended
September 30, 2006, Lacey was paid $341 for all remaining obligations with respect to this
agreement. As of September 30, 2006 and December 31, 2005, the Company has included $0 and
$233, respectively, in accounts payable and accrued expenses on its accompanying
consolidated balance sheets for remaining obligations due to Lacey under the former
agreement.


25

Forward Looking
Information and Risk Factors That May Affect Future Results


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


The changing entertainment
preferences of consumers could adversely affect our business.


Our business and operating results
depend upon the appeal of our Properties, product concepts and programming to consumers.
Consumers entertainment preferences, as well as industry trends and demands are
continuously changing and are difficult to predict as they vary over time. In addition, as
entertainment properties often have short life cycles, there can be no assurances that:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | (2) | new  Properties,  product  concepts or  programming  we  represent  or produce  will  achieve and  sustain  popularity  in the
         marketplace;
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | a Propertys life cycle will be sufficient to permit us to recover revenues
               in excess of the costs of advance payments, guarantees, development, marketing,
               royalties and other costs relating to such Property; or
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | we will successfully anticipate, identify and react to consumer preferences.
| | --- | ----------------------------------------------------------------------------

|Our failure to accomplish any of
these events could result in reduced overall revenues, which could have a material adverse
effect on our business, financial condition and results of operations. In addition, the
volatility of consumer preferences could cause our revenues and net income to vary
significantly between comparable periods.


Revenues from our Licensing
segment are largely derived from a small number of Properties and are subject to changing
industry trends.


We have historically derived a
substantial portion of our licensing revenues from a small number of Properties which
usually generate revenues only for a limited period of time. For the three and nine months
ended September 30, 2006, the Company derived approximately 56% of its revenues from two
Properties and 79% from three Properties, respectively. In addition, our control over the
timing of the licensing royalty payments we receive is limited and some of these payments
are based on quarterly royalty payments reported by our licensees. Our licensing revenues
are also subject to the changing trends in the toy, game and entertainment industries.
Consequently, our licensing revenues may be subject to dramatic increases and decreases
from particular sources over time. A significant decrease in our licensing revenues could
have a significant adverse effect on our financial condition and results of operations.


Revenues from our licensing
segment are directly impacted by third party sales of licensed products based on our
Properties.


As a merchandising agent, we grant
licenses to third parties to manufacture and sell all types of merchandise based on the
television series, Properties and product concepts we represent. The ability of these
third parties to design, manufacture, and ultimately, market and sell this merchandise
through various channels of retail trade has a direct impact on our revenues. If these
third parties are not successful in obtaining adequate distribution for this merchandise
at retail or if licensed products based on our Properties fail to sell at retail, the
performance of certain Properties could suffer which could have a material adverse effect
on our financial condition and results of operations.


26

Our operating margins could be
adversely impacted by the mix of Properties we represent.


Historically, the majority of the
television-based Properties we represented were existing episodes of foreign programming
that we adapted for the United States and other markets. Our strategic focus has shifted
toward Properties where we are joint copyright owners of the newly produced episodes. The
investment required to produce such original animated programming is substantially in
excess of the historical cost of adapting existing animated programming. Following the
commercial release of a Property, its overall market acceptance and resulting revenues
will directly impact our amortization of the costs incurred to develop such Property. To
the extent a Property performs at a level less than our expectations, the ratio of
amortization expense to revenues realized will increase. This increase will adversely
impact our operating margins and results of operations.


We must continually seek new
Properties from which we can derive revenues.


It is difficult to predict whether a
Property will be successful, and if so, for how long. Because of this, we are constantly
seeking new Properties that are already successful or that we believe are likely to become
successful in the future. If we are unable to identify and acquire the rights to
successful new Properties, our revenues, financial condition and results of operations
could be adversely affected.


Our business is seasonal and
highly dependent on our performance during the holiday season.


A high percentage of our annual
operating results have historically depended on our performance during the holiday season.
Sales of our licensed toy and game concepts are seasonal and most retail sales of these
products occur during the third and fourth fiscal quarters. Also, as a result of the
increased demand for commercial time by childrens advertisers during the holiday
season, a significant portion of the revenues generated by 4Kids Ad Sales occur during the
fourth fiscal quarter. The financial results of 4Kids TV are also affected by how
successful it is in attracting viewers during the holiday season. As a result of the
seasonal nature of our business, we would be significantly and adversely affected by
unfavorable economic conditions and other unforeseen events during the holiday season,
such as a terrorist attack or a military engagement, that negatively affect the retail
environment or consumer buying patterns. In addition, a failure by us to supply
programming to 4Kids TV during the holiday season could have a material adverse effect on
our financial condition and results of operations.



We operate in a highly
competitive marketplace.


     Licensing.    
          Our principal competitors in the Licensing segment are large media companies
          with theatrical distribution and television broadcast distribution (e.g.,
          Disney, Time-Warner, Viacom), toy companies, other licensing companies and
          numerous individuals who act as merchandising agents. There are also many
          independent product development firms with which we compete. Many of these
          companies have substantially greater resources than we do and represent
          properties which have been commercially successful for longer periods than our
          Properties. We believe that it would be relatively easy for a potential
          competitor to enter into this market in light of the relatively small investment
          required to commence operations as a merchandising agent. However, the ultimate
          success of a new entrant in the field would depend on its access to toy and
          other manufacturers, access to distribution of television based properties,
          access to properties to be licensed, retail market acceptance of properties and
          its know-how in the negotiation and subsequent administration of licenses.


Advertising Media and
Broadcast. Our Advertising Media and Broadcast segment also operates in a highly
competitive marketplace against companies with substantially greater resources and
distribution networks than we have. Our ability to derive advertising revenue from the
sale of commercial time on 4Kids TV depends, in substantial part, on the popularity of the
television shows that we broadcast on 4Kids TV. We also face significant competition from
other television broadcasters and cable networks, including competition from a successful
television program that we previously produced (i.e., Pokémon), which
is broadcast on Saturday mornings on a competing network.


Television and Film
Production/Distribution. Our Television and Film Production/Distribution segment
competes with all forms of entertainment directed at children. There are a significant
number of companies that produce and/or broadcast television programming and distribute
theatrical motion pictures and home videos for the childrens audience. We also
compete with these companies to obtain creative talent to write adapt, score, provide
voice-overs and produce the television programs and theatrical motion pictures marketed by
the Company and its subsidiaries.


27

Our broadcasting costs may
increase or our advertising revenues may decrease due to events beyond our control.


The success of our Advertising Media
and Broadcastsegment is largely dependant on the amount of advertising revenues
generated from sales of network advertising on 4Kids TV. Recently, there has been
increased scrutiny of food advertising directed at children as a result of childhood
obesity concerns. In response to these concerns, several significant food advertisers have
reduced or eliminated advertising of food products directed toward children resulting in a
reduction in the advertising dollars spent in the childrens advertising marketplace.
In addition, international, political and military developments may result in increases in
broadcasting costs or loss of advertising revenue due to, among other things, the
preemption of 4Kids TV programming.


Our future success is
dependent on certain key employees.


The success of our business depends
to a significant extent upon the skills, experience and efforts of a number of senior
management personnel and other key employees. In many instances, we have employment
agreements in place as a method of retaining the services of these key employees. The loss
of the services of any of the senior management personnel and other key employees could
have a material adverse effect on our business, results of operations or financial
condition.


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


We rely on a combination of
copyright, trademark, patent and other proprietary rights laws to protect the intellectual
property rights that we own or license. It is possible that third parties may challenge
our rights to such intellectual property. In addition, there is a risk of third parties
infringing upon our or our licensors intellectual property rights and producing
counterfeit products. These events may result in lost revenue as well as litigation, which
may be expensive and time-consuming, even if a favorable outcome is obtained. There can be
no assurance that there are adequate remedies for any infringement. Any such failure to
successfully protect our intellectual property rights may have a material adverse effect
on our competitive position.


We may be negatively affected by
adverse general economic and other conditions.


Conditions in the domestic and global
economies are extremely unpredictable and our business has been and in the future may be,
impacted by changes in such conditions. Softening global economies, stock market
uncertainty and wavering consumer confidence caused by the threat or occurrence of
terrorist attacks, war or other factors generally affecting economic conditions may
adversely affect our business, financial condition and results of operations.


We must be able to respond to
rapidly changing technology occurring within our industry.


Our success will depend, in part, on
our ability to anticipate and adapt to numerous changes in our industry resulting from
technological developments such as the internet, broadband distribution of entertainment
content and the adoption of digital television standards. These new distribution
technologies may diminish the size of the audience watching broadcast television and
require us to fundamentally change the way we market and distribute our Properties. For
example, digital technology is likely to accelerate the convergence of broadcast,
telecommunications, internet and other media and could result in material changes in the
regulations, intellectual property usage and technical platforms on which our business
relies. These changes could significantly decrease our revenues or require us to incur
significant capital expenditures.


Potential labor disputes may lead
to increased costs or disrupt the operation of our business.


The success of our business is
dependant on our employees who are involved with our domestic and international
operations. Any labor dispute may adversely affect one or more of our business segments
through increased costs of operating such segment or disruption of the operations of such
segment which could adversely affect our results of operations.


Readers are cautioned that other
factors discussed in this report, although not listed here, also could materially affect
our future earnings.

28

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 third quarter of 2006,
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


Information regarding risk factors is
set forth under the heading Forward Looking Information and Risk Factors That May
Affect Future Results appearing at the end of Part I  Item 2:
Managements Discussion and Analysis of Financial Condition and Results of
Operations of this Quarterly Report on Form 10-Q. 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, 2005.


29
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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.

|30



SIGNATURES


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

4KIDS ENTERTAINMENT,
INC. Dated: November 9, 2006

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 Officer,Principal Accounting Officer

|31
|--