|
|

|UNITED STATES 


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

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


For
the quarterly period ended June 30, 2004


OR

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



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



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



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



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





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

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

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



At August 9, 2004, the number of
shares outstanding of the Registrants common stock, par value $.01 per share, was
13,679,143.

4Kids
Entertainment, Inc. and Subsidiaries


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

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

|Item 1.                   | Financial Statements                                                                                              |   
|------------------------- | ----------------------------------------------------------------------------------------------------------------- | --
|                          |                                                                                                                   |   
|                          | Consolidated Balance Sheets as of June 30, 2004
           (Unaudited) and December 31, 2003                      | 2 
|                          |                                                                                                                   |   
|                          | Consolidated Statements of Income for the three and six   months
        ended June 30, 2004 and 2003 (Unaudited) | 3 
|                          |                                                                                                                   |   
|                          | Consolidated Statements of Cash Flows for the six   months
        ended June 30, 2004 and 2003 (Unaudited)       | 4 
|                          |                                                                                                                   |   
|                          | Notes to Consolidated Financial Statements (Unaudited)                                                            | 5 
|                          |                                                                                                                   |   
|Item 2.                   | Managements Discussion and Analysis of Financial
           Condition and Results of Operations                  | 13
|                          |                                                                                                                   |   
|Item 3.                   | Quantitative and Qualitative Disclosures about Market
        Risk                                                | 20
|                          |                                                                                                                   |   
|Item 4.                   | Controls and Procedures                                                                                           | 20
|                          |                                                                                                                   |   
|Part IIOTHER INFORMATION |                                                                                                                   |   
|                          |                                                                                                                   |   
|Item 2.                   | Changes in Securities and Use of Proceeds                                                                         | 21
|                         
|Item 4.                   | Submission of Matters to a Vote of Security Holders                                                               | 21
|                         
|Item 6.                   | Exhibits and Reports on Form 8-K                                                                                  | 22

|Signatures |  | 23
|---------- |  | --

|
|

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

CONSOLIDATED BALANCE SHEETS
                                                 JUNE 30, 2004 AND DECEMBER 31, 2003
                                             (In thousands of dollars, except share data)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2004                                                                                                                          | 2003
|----------------------------------------------------------------------------------------------------------------------------- | ----
|CURRENT ASSETS:                                                                                                               |     
|Cash and cash equivalents                                                                                                     |     
|Investments                                                                                                                   |     
|                                                                                                                              |     
|Total cash and investments                                                                                                    |     
|                                                                                                                             
|Accounts receivable - net                                                                                                     |     
|Prepaid Fox broadcast fee, net of accumulated amortization                                                                    |     
|of $47,152 and $36,447 in 2004 and 2003, respectively                                                                         |     
|Prepaid income taxes                                                                                                          |     
|Prepaid expenses and other current assets                                                                                     |     
|Deferred income taxes                                                                                                         |     
|                                                                                                                              |     
|Total current assets                                                                                                          |     
|                                                                                                                             
|PROPERTY AND EQUIPMENT - NET                                                                                                  |     
|                                                                                                                             
|OTHER ASSETS:                                                                                                                 |     
|Accounts receivable - noncurrent, net                                                                                         |     
|Investment in equity securities                                                                                               |     
|Film and television costs - net                                                                                               |     
|Deferred income taxes - noncurrent                                                                                            |     
|Other assets - net                                                                                                            |     
|                                                                                                                              |     
|TOTAL ASSETS                                                                                                                  |     
|                                                                                                                              |     
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                          |     
|CURRENT LIABILITIES:                                                                                                          |     
|Due to licensors                                                                                                              |     
|Media payable                                                                                                                 |     
|Accounts payable and accrued expenses                                                                                         |     
|Deferred revenue                                                                                                              |     
|Deferred income taxes                                                                                                         |     
|                                                                                                                              |     
|Total current liabilities                                                                                                     |     
|                                                                                                                             
|DEFERRED RENT                                                                                                                 |     
|                                                                                                                              |     
|Total liabilities                                                                                                             |     
|                                                                                                                              |     
|COMMITMENTS AND CONTINGENCIES  (Note 3)                                                                                       |     
|STOCKHOLDERS' EQUITY                                                                                                          |     
|Preferred stock, $.01 par value - authorized, 3,000,000 shares; none issued                                                   |     
|Common stock, $.01 par value - authorized, 40,000,000 shares;                                                                 |     
|issued, 14,079,143 and 13,965,343 shares; outstanding, 13,679,143 and        13,965,343 shares in 2004 and 2003, respectively |     
|Additional paid-in capital                                                                                                    |     
|Accumulated other comprehensive income                                                                                        |     
|Retained earnings                                                                                                             |     
|                                                                                                                              |     
|                                                                                                                              |     
|Less- cost of 400,000 treasury shares                                                                                         |     
|                                                                                                                              |     
|                                                                                                                              |     
|                                                                                                                              |     
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                    |     
|                                                                                                                              |     

|See notes to consolidated financial statements.
2

4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
                                            THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003

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

|                                              | Three Months Ended
June 30, | Six Months Ended
June 30,
|--------------------------------------------- | --------------------------- | -------------------------
|
|NET REVENUES                                  |                             |                          
|                                              |                             |                          
|COSTS AND EXPENSES:                           |                             |                          
|Selling, general and administrative           |                             |                          
|Production service costs                      |                             |                          
|Amortization of television and film costs and |                             |                          
|Fox broadcast fee                             |                             |                          
|                                              |                             |                          
|Total costs and expenses                      |                             |                          
|                                              |                             |                          
|INCOME FROM OPERATIONS                        |                             |                          
|INTEREST INCOME                               |                             |                          
|                                              |                             |                          
|INCOME BEFORE INCOME TAXES                    |                             |                          
|INCOME TAXES                                  |                             |                          
|                                              |                             |                          
|NET INCOME                                    |                             |                          
|                                              |                             |                          
|PER SHARE AMOUNTS:                            |                             |                          
|Basic earnings per common share               |                             |                          
|                                              |                             |                          
|Diluted earnings per common share             |                             |                          
|                                              |                             |                          
|Weighted average common shares                |                             |                          
|outstanding - basic                           |                             |                          
|                                              |                             |                          
|Weighted average common shares                |                             |                          
|outstanding - diluted                         |                             |                          
|                                              |                             |                          

|See notes to consolidated financial statements.
3

4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                                                 SIX MONTHS ENDED JUNE 30, 2004 AND 2003
                                             (In thousands of dollars)
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                | 2004 | 2003
|--------------------------------------------------------------- | ---- | ----
|CASH FLOWS FROM OPERATING ACTIVITIES:                           |      |     
|Net income                                                      |      |     
|Adjustments to reconcile net income to net cash                 |      |     
|provided by operating activities:                               |      |     
|Depreciation and amortization                                   |      |     
|Amortization of television and film costs and Fox broadcast fee |      |     
|Provision for doubtful accounts                                 |      |     
|Deferred income taxes                                           |      |     
|Tax benefit on exercise of stock options                        |      |     
|Changes in operating assets and liabilities:                    |      |     
|Accounts receivable                                             |      |     
|Film and television costs                                       |      |     
|Prepaid income taxes                                            |      |     
|Prepaid Fox broadcast fee                                       |      |     
|Prepaid expenses and other current assets                       |      |     
|Other assets - net                                              |      |     
|Due to licensors                                                |      |     
|Media payable                                                   |      |     
|Accounts payable and accrued expenses                           |      |     
|Income taxes payable                                            |      |     
|Deferred revenue                                                |      |     
|Deferred rent                                                   |      |     
|                                                                |      |     
|Net cash provided by operating activities                       |      |     
|                                                                |      |     
|CASH FLOWS FROM INVESTING ACTIVITIES:                           |      |     
|Proceeds from maturities of investments                         |      |     
|Purchase of investments                                         |      |     
|Purchase of property and equipment                              |      |     
|                                                                |      |     
|Net cash used in investing activities                           |      |     
|                                                                |      |     
|CASH FLOWS FROM FINANCING ACTIVITIES:                           |      |     
|Proceeds from exercise of stock options                         |      |     
|Purchase of treasury shares                                     |      |     
|                                                                |      |     
|Net cash used in financing activities                           |      |     
|                                                                |      |     
|EFFECTS OF EXCHANGE RATE CHANGES ON CASH                        |      |     
|AND CASH EQUIVALENTS                                            |      |     
|                                                                |      |     
|NET DECREASE IN CASH AND CASH EQUIVALENTS                       |      |     
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                  |      |     
|                                                                |      |     
|                                                                |      |     
|CASH AND CASH EQUIVALENTS, END OF PERIOD                        |      |     
|                                                                |      |     
|                                                                |      |     
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:               |      |     
|CASH PAID DURING THE PERIOD FOR:                                |      |     
|Income Taxes                                                    |      |     
|                                                                |      |     
|                                                                |      |     

|See notes to consolidated financial statements.
4

4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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


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


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


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


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


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


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


4Kids Entertainment Music, Inc.
(4Kids Music), a wholly-owned subsidiary, markets and administers the musical
operations for the Company on certain existing and newly created music associated with its
television programming. 4Kids Entertainment Home Video, Inc. (4Kids Home
Video), a wholly-owned subsidiary, 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, 2003 consolidated balance sheet, are unaudited. In the opinion of management,
the accompanying consolidated financial statements contain all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the financial position
of the Company as of June 30, 2004 and December 31, 2003 and the results of operations for
the three and six months ended June 30, 2004 and 2003 and cash flows for the six months
ended June 30, 2004 and 2003. 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.

5

These consolidated financial
statements should be read in conjunction with the Companys audited consolidated
financial statements and notes thereto, for the year ended December 31, 2003, which are
included in the Companys Annual Report on Form 10-K with respect to such period
filed with the Securities and Exchange Commission on March 15, 2004. All significant
intercompany accounts and transactions have been eliminated. The December 31, 2003
consolidated balance sheet amounts are derived from the Companys audited
consolidated financial statements.


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


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


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


Production and adaptation costs
charged to the licensor are included in net revenues and the corresponding costs are
included in production service costs in the accompanying consolidated statements of
income.


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


Music revenues:
Revenues from music sales, net of a reserve for returns, are recognized on the date units
are shipped by the Companys distributor to wholesalers/retailers 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 Fox Broadcast
Fee  The Company has capitalized the broadcast fee paid to Fox and
amortized the amount over the broadcast season based on estimated advertising revenue.
During the six months ended June 30, 2004, the Company has paid Fox and certain affiliates
$6,934 and $12,656 attributable to the second and third years broadcast fees, respectively, and during calendar year
2003, the Company had paid Fox and certain affiliates $6,328 and $19,506 attributable to
the first and second years broadcast fees, respectively. The unamortized portion of
these fees of $17,573 and $8,688 are included in Prepaid Fox broadcast fee on
the accompanying consolidated balance sheets as of June 30, 2004 and December 31, 2003,
respectively.


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




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





6

Translation of Foreign Currency
In accordance with SFAS No. 130, Reporting Comprehensive
Income (SFAS No. 130), 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. Comprehensive income for the three and six months ended June 30, 2004 was
$1,953 and $5,308, respectively, which included translation adjustments of ($90) and $98
for the respective periods. Comprehensive income for the three and six months ended June
30, 2003 was $3,720 and $6,653, respectively, which included translation adjustments of
$75 and $38 for the respective periods


Stock-Based
Compensation  SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to record compensation
cost for stock-based compensation plans at fair value. The Company has chosen to account
for stock-based compensation awards to employees under APB No. 25, Accounting for
Stock Issued to Employees, and its interpretation, FASB Interpretation No.
(FIN) 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25.


In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure(SFAS No. 148).Among other things, SFAS No. 148 requires the
disclosure in interim reports of compensation expense calculated according to SFAS No. 123
for those awards of stock-based employee compensation that were outstanding and accounted
for under the intrinsic value method of APB No. 25. The following table illustrates the
effect on net income and earnings per share as if the fair value based method under SFAS
No. 123 had been applied to all outstanding and unvested awards in each period.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | Three Months Ended
June 30, | Six Months Ended
June 30,
|----------------------------------------- | --------------------------- | -------------------------
|
|Net income as reported                    |                             |                          
|Deduct stock-based employee compensation  |                             |                          
|expense determined under fair value based |                             |                          
|method for all awards, net of tax         |                             |                          
|                                          |                             |                          
|Pro forma net income (loss)               |                             |                          
|                                          |                             |                          
|Net income (loss) per share:              |                             |                          
|Reported                                  |                             |                          
|Basic                                     |                             |                          
|                                          |                             |                          
|Diluted                                   |                             |                          
|                                          |                             |                          
|Pro forma                                 |                             |                          
|Basic                                     |                             |                          
|                                          |                             |                          
|Diluted                                   |                             |                          
|                                          |                             |                          

|The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option-pricing model. The
weighted average assumptions used for options granted in 2004 and 2003 included no
dividend yield for the periods, expected volatility of approximately 58% and 60% for 2004
and 2003, respectively, a risk-free interest rate of approximately 2.06% and 1.92% for
2004 and 2003, respectively, and an option duration of 3.7 and 3.5 years for 2004 and
2003, respectively.


Recently Issued Accounting
Pronouncements  Consolidation of Variable Interest Entities
 In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest
Entities. In December 2003, the FASB issued FIN No. 46 (Revised) (FIN
46-R) to address certain implementation issues. This interpretation clarifies the
application of Accounting Research Bulletin (ARB) No. 51, Consolidated
Financial Statements for companies that have interests in entities that are Variable
Interest Entities (VIE) as defined under FIN 46. According to this
interpretation, if a company has an interest in a VIE and

7

is at risk for a majority of the
VIEs losses or receives a majority of the VIEs expected gains it shall
consolidate the VIE. FIN 46-R also requires additional disclosures by primary
beneficiaries and other significant variable interest holders. For entities acquired or
created before February 1, 2003, this interpretation was effective no later than the end
of the first interim or reporting period ended June 30, 2004, except for those VIEs
that are considered to be special purpose entities, for which the effective date was no
later than the end of the first interim period or reporting period ending after December
15, 2003. The adoption of the provisions of this interpretation by the Company did not
have a material effect on its consolidated financial position or results of operations.


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


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


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

|a. |  | Litigation  DSI Toys. During 2003, the Companys subsidiary,
          Summit Media served as the media buying agency for DSI Toys, Inc.
          (DSI). On October 17, 2003, DSI filed a voluntary petition under
          Chapter 7 of the Bankruptcy Law in the United States Bankruptcy Court for the
          Southern District of Texas. In January 2004, the Trustee for the bankruptcy
          estate of DSI (the Trustee) sent a letter to Summit Media alleging
          that DSI made payments to Summit Media totaling $1,159 (the Amount)
          during the ninety (90) day period prior to DSIs bankruptcy filing and
          asserting that such payments constituted avoidable preference payments. The
          Trustee formally demanded that Summit Media repay the Amount to the Trustee. The Trustee filed suit against Summit
          Media on May 6, 2004 to seek to recover the Amount.  The
          Company believes it has meritorious defenses to this claim. The Amount paid to
          Summit Media was not a payment with respect to an antecedent debt, but rather
          payment by DSI to Summit Media for certain DSI advertising in advance of the
          broadcast of such DSI advertising. The Company intends to vigorously defend its
          position.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 will, individually or in
the aggregate, have a material adverse effect on the Companys consolidated financial
position or results of its operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b. |  | Deferred Revenue  Music Publishing  In July 2002, 4Kids Music
               granted a right to receive a 50% interest in the Companys net share of the
               music revenues from currently existing music produced by the Company for its
               television programs (excluding Pokémon)(Current Music Assets)
               to an unaffiliated third party in an arms length transaction for $3,000.
               Further, the Company 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 each of June
               2003 and 2004 and will receive $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 that the Company has delivered all of
the Future Music Assets required under the contract, any portion of the $5,000 that
remains deferred and not recognized, will be recognized as revenue. Pursuant to the
above, the Company recognized revenue of $143 and $295 for the three and six months ended
June 30, 2004, respectively, and $175 and $279 for the three and six months ended June 30,
2003, respectively. The Company has included $3,501 and $3,046 as deferred revenue on the
accompanying consolidated balance sheets as of June 30, 2004 and December 31, 2003,
respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8
|-

| | Home
Video  On various dates since May 2002, 4Kids Home Video, has entered into
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 in the U.S. and Canada by the
Video Distributor. The Video Distributor has paid the Company advances of $3,670 ($370 during the six
months ended June 30, 2004) against
4Kids Home Videos share of the distribution and service fee proceeds to be realized
by 4Kids Home Video from such titles. Pursuant to the above agreements, the Company
recognized revenue of $72 and $183 for the three and six months ended June 30, 2004,
respectively, and $252 and $587 for the three and six months ended June 30, 2003,
respectively. The Company has included $587 and $400 as deferred revenue on the
accompanying consolidated balance sheets as of June 30, 2004 and December 31, 2003,
respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
Agreements  In addition, the Company has entered into other agreements for various
properties and advertising time on the Fox Box in which the Company has received certain
advances and/or minimum guarantees. Accordingly, as of June 30, 2004 and December 31, 2003
the unearned portion of these advances and guaranteed payments were $3,550 and $4,624,
respectively, and are included in deferred revenue on the accompanying consolidated
balance sheets.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Under
the terms of the Agreement, Licensee was required to pay a minimum royalty for the period
from January 1, 2001 to December 31, 2003. Since all of the conditions under the Agreement
were met and the full amount of the minimum guaranteed royalties were payable by the
Licensee, the Company earned $7,500 over the period of the Agreement. For the three and
six months ended June 30, 2003, the Company earned royalties relating to the Agreement of
$0 and $2,500, respectively. During 2003, the Agreement was amended extending the term to
December 31, 2006.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|d. |  | Fox Broadcast Agreement  In January 2002, the Company entered into
          a multi-year agreement with Fox to lease the Fox Box. The Company is providing
          all programming content for the Fox Box and commenced doing so with the
          September 2002 broadcast year. The agreement has an initial term of four
          broadcast years, with the Company having the option to extend the term for up to
          two additional broadcast years. 4Kids will pay a fee of $25,312 for each
          broadcast year during the initial term of the agreement.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
agreement provided for 50% of the fee for the first broadcast season to be paid within ten
days of the execution of the short form agreement in February 2002, with the balance of
the fee for the first broadcast season to be paid in four equal installments in September
2002, December 2002, February 2003 and April 2003. The fee for each subsequent broadcast
year is payable 50% in the June preceding the beginning of the broadcast year (which
begins in September) with the balance of the fee for the broadcast year payable in four
equal installments in September, December, February and April. All payments required to be
made on or prior to August 10, 2004 have been made. Additionally, the agreement requires
the Company to establish a $25,000 letter of credit for the benefit of Fox, which letter
of credit may be reduced by the Company as installments of the final years fee are
paid. As of June 30, 2004, the Company had received a commitment from a bank for the
letter of credit, but the letter of credit had not been issued pending completion of the
long form agreement with Fox. Upon the issuance of the letter of credit, the Company will
grant a security interest in its cash balances to the issuing bank to secure the amount of
such letter of credit and will appropriately disclose these amounts as restricted cash in
its consolidated financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
cost of the Fox Box is capitalized and amortized over each broadcast season based on
estimated advertising revenue for the related broadcast season. The Company recorded
amortization expense of $5,560 and $10,705 for the three and six months ended June 30,
2004, respectively, and $5,659 and $10,669 for the three and six months ended June 30,
2003, respectively. During 2004, the Company has paid Fox and certain affiliates $6,934 and $12,656,
attributable to the second and third years broadcast fees, respectively, and during calendar year 2003, the Company paid
$6,328 and $19,506 attributable to the first and second years broadcast fee,
respectively. The unamortized portion of these fees of $17,573 and $8,688 are included in
Prepaid Fox broadcast fee on the accompanying consolidated balance sheets as
of June 30, 2004 and December 31, 2003, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|9
|-

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

| | As
of June 30, 2004, the minimum guaranteed payment obligations under the Fox broadcast
agreement are as follows:
| | -----------------------------------------------------------------------------------------------------------------

|Year ending
December 31, | Amount
|------------------------ | ------
|2004                     |       
|2005                     |       
|2006                     |       
|                         |       
|Total                    |       
|                         |       

| | The
Companys ability to recover the cost of its fee payable to Fox will depend on the
popularity of the television programs the Company broadcasts on the Fox Box and the
general market demand and pricing of advertising time for Saturday morning childrens
broadcast television. The popularity of such programs impacts audience levels and the
level of the network advertising rates that the Company can charge. Additionally, the
success of merchandise licensing programs and international broadcast licenses and home
video sales based on such television programs broadcast on the Fox Box is dependent on
consumer acceptance of the properties. If the Company estimates that it will be unable to
generate sufficient future revenue from advertising sales, home video sales and
merchandising licensing at levels to cover the cost of its contractual obligation to Fox,
the Company would record a charge to earnings to reflect an expected loss on the Fox
agreement in the period in which the deficiency or factors affecting the recoverability of
the fee payable become known. The Company will be required to make certain assumptions and
estimates about future events such as advertising rates and audience viewing levels in
evaluating its ability to recover the cost of the Fox fee. Such estimates and assumptions
are subject to market forces and factors beyond the control of the Company and are
inherently subject to change.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | There
can be no assurance that the Company will be able to recover the full cost of the Fox fee
and in the event it cannot, it would record the resulting charge to earnings to reflect an
expected loss on the Fox fee, which could be significant.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|e. |  | 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, geographic restrictions, duration, property
               and exploitation condition and results of operations.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|f. |  | Stock Purchases  On November 25, 2003, the Company announced that
          its Board of Directors had authorized the Company to purchase up to 750,000
          shares of its common stock in the open market or through negotiated prices from
          time-to-time through December 31, 2004. Such purchases are to be made out of the
          Companys surplus. As of June 30, 2004, the Company had purchased 400,000
          shares at an average price of $22.49 per share under the authorization.
          Subsequent to June 30, 2004, no additional shares were purchased by the Company.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10

4. SEGMENT AND RELATED
INFORMATION


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


The accounting policies of the
segments are the same as those described in the summary of significant accounting
policies. 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 June 30,           |           |                                 |                                      |        
|2004:                                 |           |                                
|Net revenues  from external customers |           |                                 | $                                    | 9,667  
|Amortization of television            |           |                                
|and film costs and Fox                |           |                                
|broadcast fee                         |           |                                 |                                      | --     
|Segment profit (loss)                 |           |                                 |                                      | 5,870  
|Interest income                       |           |                                 |                                      | 288    
|                                     
|2003:                                 |           |                                
|Net revenues  from external customers |           |                                 | $                                    | 12,805 
|Amortization of television            |           |                                
|and film costs and Fox                |           |                                
|broadcast fee                         |           |                                 |                                      | --     
|Segment profit (loss)                 |           |                                 |                                      | 8,335  
|Interest income                       |           |                                 |                                      | 254    
|                                     
|Six Months Ended June 30,             |           |                                
|2004:                                 |           |                                
|Net revenues  from external customers |           |                                 | $                                    | 21,022 
|Amortization of television            |           |                                
|and film costs and Fox                |           |                                
|broadcast fee                         |           |                                 |                                      | --     
|Segment profit (loss)                 |           |                                 |                                      | 12,490 
|Segment assets                        |           |                                 |                                      | 148,126
|Interest income                       |           |                                 |                                      | 568    
|                                     
|2003:                                 |           |                                
|Net revenues  from external customers |           |                                 | $                                    | 24,066 
|Amortization of television            |           |                                
|and film costs and Fox                |           |                                
|broadcast fee                         |           |                                 |                                      | --     
|Segment profit (loss)                 |           |                                 |                                      | 15,859 
|Segment assets                        |           |                                 |                                      | 118,904
|Interest income                       |           |                                 |                                      | 531    

|11

Additionally, through the
Companys London office and network of international subagents, which allow it to
license its properties throughout the world, the Company recognized net revenue from
international sources primarily in Europe, of $2,617 and $5,064 for the three and six
months ended June 30, 2004, respectively, and $1,028 and $3,720 for the three and six
months ended June 30, 2003, respectively.


**************

12

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



General


The Company receives revenues from a
number of sources, principally the Licensing, Advertising Media and Broadcast and Television
and Film Production/Distribution reportable segments. The Company typically derives a substantial portion of
its licensing revenues from a small number of properties, which properties usually
generate revenues only for a limited period of time. Because the Companys licensing
revenues are highly subject to the changing trends in the toy, game and entertainment
business, the Companys licensing revenues from year to year from particular sources are subject to
dramatic increases and decreases. It is not possible to precisely anticipate the length of
time a property will be commercially successful, if at all. Popularity of properties can
vary from months to years. As a result, the Companys revenues and net income may
fluctuate significantly between comparable periods. The Companys licensing revenues
have historically been derived primarily from the license of toy and game concepts. Thus,
a substantial portion of the Companys revenues and net income are subject to the
seasonal variations of the toy and game industry and the decisions made by third parties
regarding the timing of the release of licensed products and the questions of such licensed product to be released.
  Typically, a majority of toy orders are
shipped in the third and fourth calendar quarters. In addition, Summit Media provides media buying services to a significant number of toy and video game
companies which place a substantial portion of their overall annual advertising in the
fourth quarter. The Company recognizes revenue from the sale of advertising time related
to its lease of the Fox Saturday morning television block as more fully described in Note
2 to the Companys consolidated financial statements. In view of the increased demand
for commercial time on the Fox Box by childrens advertisers for the holiday season,
the Companys advertising sales subsidiary sells advertising time at higher rates in
the fourth quarter generally resulting in higher advertising revenues for the fourth
quarter. As a result, much of Summit Medias and 4Kids Ad Sales revenues are earned in the fourth
quarter when the majority of toy and video game advertising occurs. In the Companys
usual experience for many of the reasons stated above, the Companys revenues during
the second half of the year have generally been greater than during the first half of the
year. The Companys revenues in the most recent fiscal years have been heavily
influenced by popularity trends of Yu-Gi-Oh!", Pokémon and
Teenage Mutant Ninja Turtles properties and advertising revenue derived from
the sale of commercial time on the Fox Box which is typically sold with a guaranteed
audience delivery. Further, revenue fluctuations result from guarantee and minimum royalty
payments occurring throughout the year, some of which are recognized as revenue upon the
execution and delivery of license agreements.


Critical Accounting
Policies


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


Our 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.


Revenue Recognition


The Company has revenue recognition
policies for its various operating segments, which are appropriate to the circumstances of
each business. See Note 2 of the Notes to the Companys consolidated financial
statements for a discussion of these revenue recognition policies.


The Company records reductions to
revenues for estimated future returns of merchandise, primarily home video products. These
estimates are based on trends and projections of customer demand for and acceptance of
various products. Differences may result in the amount and timing of the Companys
revenue for any period if actual performance varies from these estimates. In addition, the
Company records a reduction to advertising revenue for any under-delivered audience
guarantees with regard to advertising time sold on the Fox Box.

13

Film and Television Costs


Film and television costs
-   In accordance with Statement of Position No. 00-2,
Accounting by Producers or Distributors of Films (SOP
00-2), managements judgment is required, as it relates to total revenues to be
received and costs to be incurred throughout the life of each program or its license
period, to determine the amortization of capitalized film and television programming costs
associated with revenues earned and any fair value adjustments.



Film and television programming costs
are amortized in the consolidated statements of income in the direct proportion that
revenues currently recognized bears to managements estimate of total future revenues
to be received throughout the life of each motion picture or television program. Estimates
of revenues are reviewed and reassessed periodically on a title-by-title basis.


Fox Broadcast Fee


Fox Broadcast Agreement 
The Company leases the Saturday morning programming block known as the Fox Box from Fox.
The cost of the Fox Box has been and will be capitalized and amortized over the broadcast
season 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 programs the Company broadcasts on the Fox Box and the general market demand
and pricing of advertising time for Saturday morning childrens broadcast television.
The popularity of such programs impacts audience levels and the level of the network
advertising rates that the Company can charge. These estimates are based on historical
trends, as well as the Companys subjective judgment of future customer demand and
acceptance of its television programming. Differences may result in the amount and timing
of revenue for any period if actual performance varies from the Companys estimates.
See Note 3 of the Notes to the Companys consolidated financial statements for a
detailed discussion of the Fox broadcast agreement.


Recently Issued
Accounting Pronouncements


Recently Issued Accounting
Pronouncements  Consolidation of Variable Interest Entities  On
January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest
Entities. In December 2003, the FASB issued FIN No. 46 (Revised) (FIN
46-R) to address certain implementation issues. This interpretation clarifies the
application of Accounting Research Bulletin (ARB) No. 51, Consolidated
Financial Statements for companies that have interests in entities that are Variable
Interest Entities (VIE) as defined under FIN 46. According to this
interpretation, if a company has an interest in a VIE and is at risk for a majority of the
VIEs losses or receives a majority of the VIEs expected gains it shall
consolidate the VIE. FIN 46-R also requires additional disclosures by primary
beneficiaries and other significant variable interest holders. For entities acquired or
created before February 1, 2003, this interpretation was effective no later than the end
of the first interim or reporting period ended June 30, 2004, except for those VIEs
that are considered to be special purpose entities, for which the effective date was no
later than the end of the first interim period or reporting period ending after December
15, 2003. The adoption of the provisions of this interpretation by the Company did not
have a material effect on its consolidated financial position or results of operations.


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


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

14

Results of Operations



The following  table sets forth our results of operations  expressed as a percentage of total net revenues for the three and six months
ended June 30, 2004 and 2003.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     | Three Months Ended
June 30, | Six Months Ended
June 30,
|------------------------------------ | --------------------------- | -------------------------
|
|Net Revenues                         |                             |                          
|                                     |                             |                          
|Selling, general & administrative    |                             |                          
|Production service costs             |                             |                          
|Amortization of television           |                             |                          
|and film costs and Fox broadcast fee |                             |                          
|                                     |                             |                          
|Total Costs and Expenses             |                             |                          
|                                     |                             |                          
|Income from Operations               |                             |                          
|Interest income                      |                             |                          
|                                     |                             |                          
|Income before income taxes           |                             |                          
|Income taxes                         |                             |                          
|                                     |                             |                          
|Net Income                           |                             |                          
|                                     |                             |                          

|Three and six months ended June
30, 2004 as compared to three and six months ended June 30, 2003


Revenues


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


For the three months ended June 30, 2004 and 2003
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                            | 2004 | 2003 | $ Change | % Change
|------------------------------------------- | ---- | ---- | -------- | --------
|Licensing                                   |      |      | $        | 9,667   
|Advertising Media & Broadcast               |      |      |          | 4,365   
|Television and Film Production/Distribution |      |      |          | 8,065   
|                                            |      |      |          |         
|Total                                       |      |      | $        | 22,097  

For the six months ended June 30, 2004 and 2003

|                                            | 2004 | 2003 | $ Change | % Change
|------------------------------------------- | ---- | ---- | -------- | --------
|Licensing                                   |      |      | $        | 21,022  
|Advertising Media & Broadcast               |      |      |          | 9,093   
|Television and Film Production/Distribution |      |      |          | 14,449  
|                                            |      |      |          |         
|Total                                       |      |      | $        | 44,564  

|The changes in
consolidated net revenues for the three and six months ended June 30, 2004, respectively,
were due to a number of factors. In the Licensing segment,revenue for the
Teenage Mutant Ninja Turtles, Cabbage Patch Kids, American
Kennel Club and The Dog properties, increased significantly in 2004 as
compared to 2003, but were offset by decreased revenue from particularly strong shipments of cards on the
Yu-Gi-Oh! property during the second quarter of 2003 and the minimum guaranteed royalties recognized on the master toy license on the
Pokémon property in the first quarter of 2003. Yu-Gi-Oh! continues to be the largest
contributor in this segment. In the
Advertising Media and Broadcast segment, the increasein net revenues was primarily
due to sales of advertising time on the Fox Box and on the Companys Foxbox.tv
websites and home videos. In the Television and Film Production/Distribution segment,
increased production service revenue was earned for work performed on the Teenage
Mutant Ninja Turtles television programs and the Yu-Gi-Oh! movie in
2004, compared to 2003. Additionally, revenue for the three and six months ended June 30,
2004 in this segment, increased primarily from home video and international broadcast
agreements for the Yu-Gi-Oh! and Teenage Mutant Ninja Turtles
television programs.


15

Selling, General and
Administrative Expenses


Selling, general and administrative
expenses increased 3%, or $250 to $8,424 and 10%, or $1,521 to $16,938 for the three and
six months ended June 30, 2004, respectively, when compared to the same periods in 2003,
primarily due to increased production and selling expenses associated with the
Companys international television broadcast operation, which were partially offset
by a reduction in advertising and promotional costs that the Company incurred in 2003 to
support the launch of several new programs that premiered on the Fox Box.


Production Service and
Capitalized Film Costs


Production service and capitalized
film costs were as follows:


For the three months ended June 30, 2004 and 2003
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | 2004 | 2003 | $ Change | % Change
|----------------------------------------- | ---- | ---- | -------- | --------
|Production Service Costs                  |      |      | $        | 3,038   
|Amortization of Television and Film Costs |      |      |          | 1,995   

For the six months ended June 30, 2004 and 2003

|                                          | 2004 | 2003 | $ Change | % Change
|----------------------------------------- | ---- | ---- | -------- | --------
|Production Service Costs                  |      |      | $        | 5,001   
|Amortization of Television and Film Costs |      |      |          | 3,844   

|The increase in production service costs
during 2004 was primarily attributable to certain television production costs related to
the Teenage Mutant Ninja Turtles television program and the
Yu-Gi-Oh! movie, scheduled to be released on August 13, 2004, for which the Company incurs production costs that are billed
in part to the property owners and/or movie studios. When the Company is entitled to be
paid for 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.


As of June 30, 2004, there was $9,193
of capitalized film production costs in the Companys consolidated balance sheets
relating primarily to various stages of production on 337 episodes of animated
programming. The increase in amortization of capitalized film costs during 2004 was the
result of an increase in the amount of capitalized television and film costs subject to amortization in 2004, substantially offset
by the write-offs of various episodes of television programs during 2003. Based on managements ultimate revenue
estimates as of June 30, 2004, approximately 64% of the total completed and unamortized
film and television costs are expected to be amortized during 2004, and over 85% of the
total completed and unamortized film and television costs are expected to be amortized
during the next three years.


Fox Broadcast Fee


Amortization of the Fox broadcasting
fee decreased 2%, or $99 to $5,560 and increased 0%, or $35 to $10,705 for the three and
six months ended June 30, 2004, respectively, as compared to the same periods in 2003. The
increase or decrease is a result of advertising revenue earned during the period based on
estimated advertising for the applicable broadcast season. The annual fee paid to Fox and
certain affiliates is capitalized and amortized during each broadcast year. During the
first six months of 2004, the Company had paid Fox and certain affiliates $6,934 and $12,656,
attributable to the second and third years broadcast fees, respectively, and during calendar year 2003, the Company had paid
$6,328 and $19,506 attributable to the first and second years broadcast fees,
respectively. The unamortized portion of these fees of $17,573 and $8,688, are included in
Prepaid Fox broadcast fee on the Companys consolidated balance sheets as
of June 30, 2004 and December 31, 2003, respectively.


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

|i) |  | revenues generated from merchandise licensing, international broadcasting rights
               licensing, home videos and music publishing of Fox Box properties, and
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|16

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


Interest Income


Interest income increased 13%, or $34
to $293 and decreased 1%, or $5 to $578 for the three and six months ended June 30, 2004,
respectively, as compared to the same periods in 2003, resulting primarily from fluctuations in the average cash
balances invested during the respective periods.


Income Tax Expense


Income tax expense decreased 45%, or
$1,102 to $1,330 and 22%, or $968 to $3,444 for the three and six months ended June 30,
2004, respectively, as compared to the same periods in 2003, due to lower pre-tax income.
The Companys effective tax rate remained relatively consistent at approximately 40%
for both 2004 and 2003.


Net Income


As a result of the above, the Company
had net income for the three and six months ended June 30, 2004 of $2,043 and $5,210,
respectively, as compared to net income for the same periods in 2003 of $3,645 and $6,615.


Liquidity and Capital
Resources


Financial Position


Cash and cash equivalents and
short-term investments as of June 30, 2004 and December 31, 2003 were as follows:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          | 2004 | 2003 | $ Change
|------------------------- | ---- | ---- | --------
|Cash and cash equivalents |      |      | $       
|Investments               |      |      |         
|                          |      |      |         
|                          |      |      |         
|                          |      |      | $       
|                          |      |      |         

|During the six months ended June 30, 2004, the Company's cash and cash  equivalents  and short-term  investment  balances  decreased by
$2,239 to $117,340,  primarily as a result of cash payments  incurred for  licensing  the Fox Box and repurchases of common stock made under the Company's
stock repurchase program,  substantially offset by collecting  seasonally high fourth quarter accounts  receivable,  and increases in accounts payable and
accrued expenses.





Working capital, consisting of
current assets less current liabilities, was $129,615 as of June 30, 2004 and $137,929 as
of December 31, 2003.






Sources and Uses of Cash


Cash flows for the six months ended June 30, 2004 and 2003 were as follows:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Sources              | 2004 | 2003 | $ Change
|-------------------- | ---- | ---- | --------
|Operating activities |      |      | $       
|Investing activities |      |      |         
|Financing activities |      |      |         

|As of June 30, 2004, the Company had
$28,899 invested primarily in short-term government obligations. During 2004, the Company
purchased property and equipment of $530, which was comprised primarily of computer and
television production equipment and leasehold improvements, as compared to purchases of
property and equipment of $405 for the first six months of 2003. Purchases of property and equipment in 2004 are
expected to be comparable to that of 2003.

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Cash flows from financing activities
were generated by proceeds from the exercise of stock options by the Companys
employees. On November 25, 2003, the Company announced that its Board of Directors had
authorized the Company to purchase up to 750,000 shares of its common stock in the open
market or through negotiated prices from time-to-time through December 31, 2004. Such
purchases are to be made out of the Companys surplus. As of June 30, 2004, the
Company had purchased 400,000 shares at an average price of $22.49 per share under the
authorization. Subsequent to June 30, 2004, no additional shares were purchased by the
Company.


During 2004, the Companys
improvement in its cash flow from operations was directly the result of strong consumer
demand for a small number of its licensed properties.  While the Company strives to
further diversify its revenue streams, management remains cognizant of changing trends in
the toy, game and entertainment business and the difficulty in predicting the length of
time a property will be commercially successful.  As a result, the Companys
revenues, operating results and cash flow from operations may fluctuate significantly from
period to period and present operating results are not necessarily indicative of future
performance.


Fox Broadcast Agreement


The Companys license agreement
with Fox to program the networks four hour Saturday morning childrens block
commenced in September 2002, requiring the Company to pay annual fees of $25,312 through
2006. Under the terms of the agreement, during the first six months of 2004, the Company paid Fox and certain
affiliates a total of $6,934 and $12,656 attributable to the second and third years
broadcast fees, respectively, with four additional payments for the third broadcast season
of $3,164 each due in September and December 2004, and February and April 2005. Fees for each subsequent broadcast year are
payable 50% in the June preceding the beginning of the broadcast year (which begins in
September) with the balance of the fee for the broadcast year payable in four equal
installments in September, December, February and April. Additionally, the Agreement
requires the Company to establish a $25,000 Letter of Credit for the benefit of Fox, which
Letter of Credit may be reduced by the Company as installments of the final years
license fee are paid. As of June 30, 2004, the Company had received a commitment for
the letter of credit, but the letter of credit had not been issued pending completion of
the long form agreement with Fox. Upon the issuance of the letter of credit, the Company
will grant a security interest in its cash balances to the issuing bank to secure the
amount of such letter of credit and will appropriately disclose these amounts as
restricted cash in its financial statements. The agreement further provides that, at the
Companys option, up to $10,300 of each years fee may be paid by delivering
shares of the Companys common stock. Further, the Company will incur additional
costs to program the four hour block and to sell the related network advertising time.
These costs will include direct programming costs to acquire, adapt and deliver
programming for broadcast during the weekly four hour block as well as additional indirect
costs of advertising sales, promotion and administration.



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, 2003.  As of June 30, 2004, the Companys contractual
obligations and commitments, except for the Fox Broadcast Agreement detailed above, have not materially changed from December 31, 2003.




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.


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


The Companys business and
operating results ultimately depend upon the appeal of our properties, product concepts
and programming to consumers. A decline in the popularity of our existing properties or
the failure of new properties and product concepts to achieve and sustain market
acceptance could result in reduced overall revenues, which could have a

18

material adverse
effect on our business, financial condition and results of operations. Consumer
preferences with respect to entertainment are continuously changing and are difficult to
predict and can vary from months to years. Entertainment properties often have short life
cycles. There can be no assurances that:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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


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


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


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


Sales of our licensed toy and game
concepts are seasonal, with a majority of retail sales occurring during the third and
fourth calendar quarters. The revenues of Summit Media, which provides media services to a
significant number of toy and video game companies, and 4Kids Ad Sales, which sells
advertising time for the Fox Box, are also seasonal, with a significant portion of the
revenue typically generated during the fourth quarter when the demand for and pricing of
commercial time for holiday season childrens advertising is at its highest. In addition, a
failure by us to supply programming on Fox Box which attracts viewers during the holiday
season could have a material adverse effect on our financial condition and results of
operations.


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


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


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


We may be negatively
affected by adverse general economic conditions.


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


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Other factors may affect
our performance.


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


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


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



International, political and military
developments that may, among other things, result in increases in broadcasting costs or
loss of advertising revenue due to pre-emptions of the Fox Box.


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


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


Item 3. Quantitative and
Qualitative Disclosures About Market Risk


Foreign Currency Exchange
Rate Fluctuations


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


Item 4. Controls and
Procedures


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


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


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Part II -OTHER
INFORMATION


Item 2. Changes in
Securities and Use of Proceeds


     (e)    
          Purchases of Equity Securities by the Issuer and Affiliated Purchasers


ISSUER PURCHASES OF
EQUITY SECURITIES
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Period During 2004 | Total Number of
Shares Purchased | Average Price
Paid Per Share | Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs | Maximum Number
of Shares that May Yet Be
Purchased Under the
Plans or Programs. (1)
|------------------ | -------------------------------- | ---------------------------- | -------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------
|Jan. 1 - Jan. 31   |                                  |                              |                                                                                  | -                                                                                  
|                  
|Feb. 1 - Feb. 29   |                                  |                              |                                                                                  | -                                                                                  
|                  
|March 1 - March 31 |                                  |                              |                                                                                  | 10,000                                                                             
|                  
|April 1 - April 30 |                                  |                              |                                                                                  | 140,000                                                                            
|                  
|May 1 - May 31     |                                  |                              |                                                                                  | 109,500                                                                            
|                  
|June 1 - June 30   |                                  |                              |                                                                                  | 140,500                                                                            
|                  
|Total              |                                  |                              |                                                                                  | 400,000                                                                            
|                  

|(1)    
          On November 25, 2003, the Company announced that its Board of Directors had
          authorized the Company to purchase up to 750,000 shares of its common stock in
          the open market or through negotiated prices from time-to-time through December
          31, 2004. Such purchases are to be made out of the Companys surplus.

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



The Annual Meeting of Shareholders of
the Company was held on May 27, 2004. The matters voted upon, including the number or
votes cast for, against or withheld, as well as the number of abstentions and broker
non-votes, as to each such matter were as follows:


Proposal 1: All
six of managements nominees for directors as listed in the Companys 2004 proxy
statement were elected with the number of votes cast for each nominee as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                   | Shares Voted
"FOR" | Shares Voted
"AGAINST" | Shares
"ABSTAINING" | Broker
Non-Votes | Votes
Withheld
|------------------ | ------------------ | ---------------------- | ------------------- | ---------------- | --------------
|Richard Block      |                    |                        |                     | 12,396,915       |               
|                  
|Jay Emmett         |                    |                        |                     | 12,494,311       |               
|                  
|Joseph P. Garrity  |                    |                        |                     | 12,807,564       |               
|                  
|Michael Goldstein  |                    |                        |                     | 12,188,349       |               
|                  
|Steven M. Grossman |                    |                        |                     | 12,521,335       |               
|                  
|Alfred R. Kahn     |                    |                        |                     | 12,998,173       |               
|                  

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Proposal 2: The
proposal to appoint Deloitte & Touche LLP as independent auditors to examine the
Companys financial statements for the fiscal year ending December 31, 2004 was
ratified by the following vote:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Shares Voted
"FOR" | Shares Voted
"AGAINST" | Shares
"ABSTAINING" | Broker
Non-Votes | Votes
Withheld
|------------------ | ---------------------- | ------------------- | ---------------- | --------------
|                   | 5,715,580              |                     |                  | 2,918,536     
|                  

|Proposal 3: The
proposal to approve the 4Kids Entertainment, Inc. 2004 Stock Option Plan, which authorizes
the issuance of options to purchase up to 600,000 shares of the Companys common
stock, was ratified by the following vote:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Shares Voted
"FOR" | Shares Voted
"AGAINST" | Shares
"ABSTAINING" | Broker
Non-Votes | Votes
Withheld
|------------------ | ---------------------- | ------------------- | ---------------- | --------------
|                   | 12,290,137             |                     |                  | 823,689       
|                  

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

(a) Exhibits

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

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

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

(b)   Exhibits Reports on Form 8-K

| | (1) | The Registrant filed a Current Report on Form 8-K on May 10, 2004 in
               connection with the issuance of its press release announcing the financial
               results for the three months ended March 31, 2004.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The Registrant filed a Current Report on Form 8-K on May 28, 2004 in
               connection with the issuance of its press release announcing the
               results of the Registrant's Annual Meeting of Shareholders, held on May 27, 2004.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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: August 9, 2004

By: /s/ Alfred R. Kahn

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

By: /s/ Joseph P. Garrity

Joseph P. GarrityExecutive
Vice President, Treasurer, Principle Financial Officer,Principle Accounting Officer andDirector

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