**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**







**FORM
      10-K**





**(Mark
      One)**


T
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934****For
                the Fiscal Year Ended December 31, 2007**£
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF
                1934**





**For
      the transition period from ____________ to ____________**





**Commission
      File Number 0-28104**





**JAKKS
      PACIFIC, INC.**


**(Exact  name
      of registrant as specified in its charter)**





**Delaware**
            **95-4527222****(State
                or other jurisdiction of**
            **(I.R.S.
                Employer****incorporation
                or organization)**
            **Identification
                No.)**





**22619
                Pacific Coast Highway****Malibu,
                California**
            **90265****(Address
                of principal executive offices)**
            **(Zip
                Code)**





**Registrant’s
      telephone number, including area code: (310) 456-7799**





**Securities
      registered pursuant to Section 12(b) of the Exchange Act:**





**Title
                of each class**
            **Name
                of each exchange**
              **on
                which registered****Common
                Stock, $.001 par value per share**
            **Nasdaq
                Global Select**





**Securities
      registered pursuant to Section 12(g) of the Exchange Act:**





**Title
      of Class**





**Common
      Stock, $.001 par value per share**





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.  Yes £ No T





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15 of the Act.  Yes £ No T





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 T No £





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. £





Indicate
      by a check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check
      one):





T Large
      Accelerated
      Filer £ Accelerated
      Filer £ Non-Accelerated
      Filer





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).  Yes £ No T





The
      aggregate market value of the voting and non-voting common equity (the only
      such
      common equity being Common Stock, $.001 par value per share) held by
      non-affiliates of the registrant (computed by reference to the closing sale
      price of the Common Stock on February 28, 2008 of $27.83) is
      $768,963,995.





The
      number of shares outstanding of the registrant’s Common Stock, $.001 par value
      (being the only class of its common stock), is 28,624,262 (as of February 28,
      2008).





**Documents
      Incorporated by Reference**





None.









**JAKKS
      PACIFIC, INC.**





**INDEX
      TO ANNUAL REPORT ON FORM 10-K**




**For
      the Fiscal Year ended December 31, 2007**





**Items
      in Form 10-K**





**Page****PART
                I**Item
                1.
            Business
            4Item
                1A.
            Risk
                Factors
            12Item
                1B.
            Unresolved
                Staff Comments
            NoneItem
                2.
            Properties
            19Item
                3.
            Legal
                Proceedings
            19Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            None**PART
                II**Item
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            23Item
                6.
            Selected
                Financial Data
            25Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            26Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            35Item
                8.
            Financial
                Statements and Supplementary Data
            37Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            NoneItem
                9A.
            Controls
                and Procedures
            64Item
                9B.
            Other
                Information
            None**PART
                III**Item
                10.
            Directors,
                Executive Officers and Corporate Governance
            66Item
                11.
            Executive
                Compensation
            68Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            81Item
                13.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            83Item
                14.
            Principal
                Accountant Fees and Services
            83**PART
                IV**Item
                15.
            Exhibits
                and Financial Statement Schedules
            85Signatures
            
            87Certifications
            
            90





**DISCLOSURE
      REGARDING FORWARD-LOOKING STATEMENTS**





This
      report includes “forward-looking statements” within the meaning of Section 27A
      of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
      of
      1934. For example, statements included in this report regarding our financial
      position, business strategy and other plans and objectives for future
      operations, and assumptions and predictions about future product demand, supply,
      manufacturing, costs, marketing and pricing factors are all forward-looking
      statements. When we use words like “intend,” “anticipate,” “believe,”
“estimate,” “plan” or “expect,” we are making forward-looking statements. We
      believe that the assumptions and expectations reflected in such forward-looking
      statements are reasonable, based on information available to us on the date
      hereof, but we cannot assure you that these assumptions and expectations will
      prove to have been correct or that we will take any action that we may presently
      be planning. We have disclosed certain important factors that could cause our
      actual results to differ materially from our current expectations elsewhere
      in
      this report. You should understand that forward-looking statements made in
      this
      report are necessarily qualified by these factors. We are not undertaking to
      publicly update or revise any forward-looking statement if we obtain new
      information or upon the occurrence of future events or otherwise.




3




**PART
      I**





**Item
      1.** ***Business***





In
      this
      report, “JAKKS,” the “Company,” “we,” “us” and “our” refer to JAKKS Pacific,
      Inc. and its subsidiaries.





**Company
      Overview**





We
      are a
      leading multi-line, multi-brand toy company that designs, produces, markets
      and
      distributes toys and related products, writing instruments and related products,
      pet toys, consumables and related products, electronics and related products,
      and other consumer products. We focus our business on acquiring or licensing
      well-recognized trademarks and brand names, most with long product histories
      (“evergreen brands”). We seek to acquire these evergreen brands because we
      believe they are less subject to market fads or trends. We also develop
      proprietary products marketed under our own trademarks and brand
      names.  Our products are typically lower-priced toys and accessories,
      and include:





**Traditional
      Toys**





•
            Action
                figures and accessories, including licensed characters, principally
                based
                on*World
                Wrestling Entertainment*®
                (“WWE”), The Chronicles of Narnia: Prince CaspianTM and*Pokemon*®
                franchises;  •
            Toy vehicles, including *Road
              Champs*®,*RC
              Racers*TM**and*MXS*®  toy
              vehicles and accessories, as well as those based on Nascar®;





•
            Electronics
                products, including*Plug
                It In & Play TV Games*TM,*EyeClopsTM Bionic Eye*products,
                and*Laser
                Challenge*®,
                as well as others based on Disney® and Discovery Kids® brands;





•
            Role-play,
                dress-up and novelty products featuring entertainment and consumer
                products properties such as *Dirt Devil*®, *Subway*®,
                *Pizza Hut*® and *McDonalds*® pretend play products,*Disney
                Princess®*,*Hannah
                Montana*TM,*Barbie*®
                and*Dora
                the Explorer®*playsets for girls and*Black
                & Decker®*and*Pirates
                of the Caribbean*TM
                playsets for boys;





•
            Infant
                and pre-school toys and plush toys featuring*Care
                Bears*®,*Barney*®,
                *The Wiggles*®, *Curious George*®, and slumber
                bags;





•
            Dolls
                including large, fashion and mini dolls and related accessories based
                on*Cabbage
                Patch Kids*®,*Hannah
                Montana*,*The
                Cheetah Girls*TM,*Puppy
                in My Pocket and Friends*TM,*Hairspray*TM
                the movie and*Disney
                Princess*®dolls
                and private label fashion dolls for other
                retailers;





•
            Seasonal
                and outdoor toys and leisure products, including*Go
                Fly A Kite*®,*Air
                Creations*®,
                and other kites,*Funnoodle*®
                pool toys,*The
                Storm*®
                water guns and*Fly
                Wheels*®*XPV*®**and*Flight*TM
                vehicles; and





•
            Junior
                sports and toy paintball products, including*Gaksplat*®and*The
                Storm*.




Prior
      to
      2007, we had accounted for seasonal and outdoor products as a separate category.
      During 2007, we restructured our internal operations and have consolidated
      this
      product group within the Traditional category. These products share key
      characteristics, including common management, distribution and marketing
      strategies. We have restated our prior segment reporting to reflect this
      change.





**Craft,
      Activity and Writing Products**





•
            Craft,
                activity and stationery products, including*Flying
                Colors*®
                activity sets, compounds, playsets and lunch boxes based on
                *Nickelodeon*®, *Dora the Explorer, Pokémon, The Littlest
                Petshop*® and others, and*Color
                Workshop*®
                craft products such as*Blopens*®,*Vivid
                Velvet*®,
                and*Pentech*®writing instruments, stationery and activity products, and non-licensed
                brands including *Girl Gourmet*TM and *The Spa
                Factory*TM.





**Pet
      Products**





•
            Pet
                products, including toys, consumables, beds, clothing and accessories,
                with licenses used in conjunction with these products, including*American
                Kennel Club*®,*The
                Cat Fanciers’ Association*TM,
                *Arm & Hammer*® and *The Humane Society of the United
                States*® brands, as well as entertainment properties, including
                *Disney* and *Snoop Dogg*®, and private label brands
                including *Totally My
                Pet*TM.


4


We
      continually review the marketplace to identify and evaluate evergreen brands
      that we believe have the potential for significant growth. We endeavor to
      generate growth within these brands by:





•
            creating
                innovative products under established brand names;





•
            focusing
                our marketing efforts to enhance consumer recognition and retailer
                interest;





•
            linking
                them with our evergreen portfolio of brands;





•
            adding
                new items to the branded product lines that we expect will enjoy
                greater
                popularity; and





•
            adding
                simple innovation and technology to make them more appealing to today’s
                kids.





In
      addition to developing our proprietary brands and marks, licensing popular
      brands enables us to use these high-profile marks at a lower cost than we would
      incur if we purchased these marks or developed comparable marks on our own.
      By
      licensing marks, we have access to a far greater range of marks than would
      be
      available for purchase. We also license technology produced by unaffiliated
      inventors and product developers to improve the design and functionality of
      our
      products.





We
      have
      obtained an exclusive worldwide license for our joint venture with THQ Inc.
      (“THQ”), which develops, publishes and distributes video games based on *WWE* characters and themes. Since the joint venture’s first title release in 1999, it
      has released 35 new titles. We have recognized approximately $93.3 million
      in
      profit from the joint venture through December 31, 2007. We and the joint
      venture are named as defendants in lawsuits commenced by WWE, pursuant to which
      WWE is seeking treble, punitive and other damages (including disgorgement of
      profits) in an undisclosed amount and a declaration that the video game license
      with the joint venture and an amendment to our toy licenses with WWE are void
      and unenforceable (see “Legal Proceedings”).





We
      sell
      our products through our in-house sales staff and independent sales
      representatives to toy and mass-market retail chain stores, department stores,
      office supply stores, drug and grocery store chains, club stores, toy specialty
      stores and wholesalers. Our three largest customers are Wal-Mart, Target and
      Toys ‘R’ Us, which account for approximately 19.3%, 14.5% and 14.1%,
      respectively, of our net sales in 2007. No other customer accounted for more
      than 10.0% of our net sales in 2007.





**Our
      Growth Strategy**





The
      execution of our growth strategy has resulted in increased revenues and
      earnings. In 2006 and 2007, we generated net sales of $765.4 million and $857.1
      million, respectively, and net income of $72.4 million and $89.0 million,
      respectively. Approximately 24.3% and 1.4% of our increased net sales in 2006
      and 2007, respectively, were attributable to our acquisitions since 2005. Key
      elements of our growth strategy include:





• ***Expand
      Core Products.*** We
      manage our existing and new brands through strong product development
      initiatives, including introducing new products, modifying existing products
      and
      extending existing product lines to maximize their longevity. Our marketing
      teams and product designers strive to develop new products or product lines
      to
      offer added technological, aesthetic and functional improvements to our
      extensive portfolio. We use multiple methods including real-scan technology,
      articulated joints and a flexible rubberized coating to enhance the life-like
      feel of our action toys, and expanded to classic characters and special
      techniques such as vinyl figures. These innovations appeal to collectors and/or
      produce higher quality and better likenesses of the representative
      characters.




• ***Enter
      New Product Categories.*** We
      use our extensive experience in the toy and other consumer product industries
      to
      evaluate products and licenses in new product categories and to develop
      additional product lines. We began marketing licensed classic video games for
      simple plug-in use with television sets and expanded into several related
      categories through the licensing of this category from our current licensors,
      such MTV Networks which owns *Nickelodeon* .





• ***Pursue
      Strategic Acquisitions.*** We
      intend to supplement our internal growth with selected strategic acquisitions.
      Most recently, in June 2005, we acquired the assets of Pet Pal Corp. which
      expanded our offerings and distribution into pet toy, treats and related
      products, and in February 2006, we acquired the business of Creative Designs
      International, Ltd., a leading manufacturer of girls’ dress-up and role-play
      toys.  We will continue focusing our acquisition strategy on
      businesses or brands that have compatible product lines and offer valuable
      trademarks or brands.





• ***Acquire
      Additional Character and Product Licenses.*** We
      have acquired the rights to use many familiar corporate, trade and brand names
      and logos from third parties that we use with our primary trademarks and brands.
      Currently, among others, we have license agreements with *WWE* , *Nickelodeon* , *Disney* ®,
      and *Warner
      Bros* ®,
      as
      well as with the licensors of the many popular licensed children’s characters
      previously mentioned, among others. We intend to continue to pursue new licenses
      from these entertainment and media companies and other licensors. We also intend
      to continue to purchase additional inventions and product concepts through
      our
      existing network of product developers.


5




• ***Expand
      International Sales.*** We
      believe that foreign markets, especially Europe, Australia, Canada, Latin
      America and Asia, offer us significant growth opportunities. In 2007, our sales
      generated outside the United States were approximately $126.1 million, or 14.7%
      of total net sales. We intend to continue to expand our international sales
      by
      capitalizing on our experience and our relationships with foreign distributors
      and retailers. We expect these initiatives to continue to contribute to our
      international growth in 2008.





• ***Capitalize
      On Our Operating Efficiencies.*** We
      believe that our current infrastructure and operating model can accommodate
      significant growth without a proportionate increase in our operating and
      administrative expenses, thereby increasing our operating margins.





The
      execution of our growth strategy, however, is subject to several risks and
      uncertainties and we cannot assure you that we will continue to experience
      growth in, or maintain our present level of, net sales (see “Risk Factors,”
beginning on page 12). For example, our growth strategy will place additional
      demands on our management, operational capacity and financial resources and
      systems. The increased demand on management may necessitate our recruitment
      and
      retention of additional qualified management personnel. We cannot assure you
      that we will be able to recruit and retain qualified personnel or expand and
      manage our operations effectively and profitably. To effectively manage future
      growth, we must continue to expand our operational, financial and management
      information systems and to train, motivate and manage our work force. There
      can
      be no assurance that our operational, financial and management information
      systems will be adequate to support our future operations. Failure to expand
      our
      operational, financial and management information systems or to train, motivate
      or manage employees could have a material adverse effect on our business,
      financial condition and results of operations.





Moreover,
      implementation of our growth strategy is subject to risks beyond our control,
      including competition, market acceptance of new products, changes in economic
      conditions, our ability to obtain or renew licenses on commercially reasonable
      terms and our ability to finance increased levels of accounts receivable and
      inventory necessary to support our sales growth, if any.





Furthermore,
      we cannot assure you that we can identify attractive acquisition candidates
      or
      negotiate acceptable acquisition terms, and our failure to do so may adversely
      affect our results of operations and our ability to sustain growth.





Finally,
      our acquisition strategy involves a number of risks, each of which could
      adversely affect our operating results, including difficulties in integrating
      acquired businesses or product lines, assimilating new facilities and personnel
      and harmonizing diverse business strategies and methods of operation; diversion
      of management attention from operation of our existing business; loss of key
      personnel from acquired companies; and failure of an acquired business to
      achieve targeted financial results.





**Recent
      Acquisitions**




In
      February 2006, we acquired substantially all of the assets of Creative Designs
      International, Ltd. and a related Hong Kong company, Arbor Toys Company Limited
      (collectively, “Creative Designs”). The total initial consideration of $111.1
      million consisted of cash paid at closing in the amount of $101.7 million,
      the
      issuance of 150,000 shares of our common stock valued at approximately $3.3
      million and the assumption of liabilities in the amount of $6.1 million, and
      resulted in the recording of goodwill in the amount of $53.6 million. Goodwill
      represents anticipated synergies to be gained via the combination of Creative
      Designs with us.  In addition, we agreed to pay an earn-out of up to
      an aggregate of $20.0 million in cash over the three calendar years following
      the acquisition based on the achievement of certain financial performance
      criteria, which will be recorded as goodwill when and if earned. For the years
      ended December 31, 2006 and 2007, $6.9 million and $6.7 million, respectively,
      of the earn-out was earned and recorded as goodwill.  Creative Designs
      is a leading designer and producer of dress-up and role-play toys. This
      acquisition expands our product offerings in the girls role-play and dress-up
      area and brings new product development and marketing talent to us. Our results
      of operations have included Creative Designs from the date of
      acquisition.





**Industry
      Overview**





According
      to Toy Industry Association, Inc., the leading toy industry trade group, the
      United States is the world’s largest toy market, followed by Japan and Western
      Europe. Total retail sales of toys, excluding video games, in the United States,
      were approximately $22.1 billion in 2007. We believe the two largest United
      States toy companies, Mattel and Hasbro, collectively hold a dominant share
      of
      the domestic non-video toy market. In addition, hundreds of smaller companies
      compete in the design and development of new toys, the procurement of character
      and product licenses, and the improvement and expansion of previously introduced
      products and product lines. In the United States video game segment, total
      retail sales of video game software were approximately $17.9 billion in
      2007.


6





Over
      the
      past few years, the toy industry has experienced substantial consolidation
      among
      both toy companies and toy retailers. We believe that the ongoing consolidation
      of toy companies provides us with increased growth opportunities due to
      retailers’ desire to not be entirely dependent on a few dominant toy companies.
      Retailer concentration also enables us to ship products, manage account
      relationships and track retail sales more effectively and
      efficiently.





**Products**





We
      focus
      our business on acquiring or licensing well-recognized trademarks or brand
      names, and we seek to acquire evergreen brands which are less subject to market
      fads or trends. Generally, our license agreements for products and concepts
      call
      for royalties ranging from 1% to 14% of net sales, and some may require minimum
      guarantees and advances. Our principal products include:





**Traditional
      Toys**





***Electronics
      Products***





Our
      electronic products category includes our *Plug
      It In & Play TV Games, EyeClop* *s*TM Bionic
      Eye ** products ** and *Laser
      Challenge*® product
      lines. Our current *Plug
      It In & Play*  *TV
      Games* titles
      include licenses from *Namco* ®, *Disney* , *Marvel* ®
and *Nickelodeon* ,
      and
      feature such games as *SpongeBob
      SquarePants* ®, *Dora
      the Explorer* , *Disney
      Princess*® , *Ms.
      Pac-Man* ®
and *Pac-Man* ®.





We
      regularly release new *Plug
      It In & Play*  *TV
      Games* titles
      for the pre-school and leisure gamer segments including *Wheel
      of Fortune* ®, *Deal
      or No Deal®, Jeopardy®,*  *Sesame
      Street* ®
and *Thomas
      the Tank* TM.





***Wheels
      Division Products***





•
            *Toy
                and activity vehicles*





Our
      toy
      vehicle line includes toy and activity vehicles and other toys. We also produce
      radio controlled vehicles. Our toy vehicle line is comprised of an assortment
      of
      rugged die-cast and plastic vehicles that range in size from four-and
      three-quarter inch to big-wheeled seventeen inch vehicles. The breadth of the
      line is extensive, with themes ranging from emergency, fire, farm and
      construction, to racing and jungle adventure.





•
            *Road
                Champs*® *die-cast collectible and toy
                vehicles*





The *Road
      Champs* product
      line consists of highly detailed, die-cast replicas of new and classic cars,
      trucks, motorcycles, emergency vehicles and service vehicles, primarily in
      1/43
      scale (including police cars, fire trucks and ambulances), buses and aircraft.
      Through licenses, we produce replicas of well-known vehicles including those
      from *Ford* ®, *Chevrolet* ®
and *Porsche* ®.
      We
      believe that these licenses increase the perceived value of the products and
      enhance their marketability.





•
            *Extreme
                sports die-cast collectibles and toy vehicles and action
                figures*





Our
      extreme sports offerings include our *MXS* line of
      motorcycles with riders, off-road vehicles, personal watercraft, surfboards
      and
      skateboards, which are sold individually and with playsets and
      accessories.





***Action
      Figures and Accessories***





We
      have
      an extensive toy license with the WWE pursuant to which we have the right,
      until
      December 31, 2009, to develop and market a full line of toy products based
      on
      the popular *WWE* professional wrestlers. These wrestlers perform throughout the year at live
      events that attract large crowds, many of which are broadcast on free and cable
      television, including pay-per-view specials. We launched this product line
      in
      1996 with various series of 6 inch articulated action figures that have movable
      body parts. We continually expand and enhance this product line by using
      technology in the development and in the products themselves. The 6 inch figures
      currently make up a substantial portion of our overall *WWE* line,
      which has since grown to include many other new products including playsets.
      Our
      strategy has been to release new figures and accessories frequently and to
      offer
      many exclusive programs to our retail partners to keep the line fresh and
      relevant to WWE’s television programming, and to retain the interest of the
      consumers.





We
      also
      develop, manufacture and distribute other action figures and action figure
      accessories including those based on the animated series *Pokemon* ,
      and the
      Disney feature film The Chronicles of Narnia: Prince Caspian.


7


***Role-play
      and Dress-up Products***





Our
      line
      of role-play and dress-up products features entertainment and consumer products
      properties such as *Disney
      Princess* , *Hannah
      Montana* and *Dora
      the Explorer* for
      girls and *Black
      & Decker* and *Pirates
      of the Caribbean* for
      boys. These products generated a significant amount of sales in 2007, and we
      expect that level of sales to continue in 2008.








***Infant
      and Pre-school Toys***





Our
      pre-school toys include plush and electronic toys based on *Care
      Bears, The Wiggles, Barney* licenses
      and more, some branded under *Child
      Guidance* ® ** and
      others under *Play
      Along*®. In
      2007,
      we also introduced new pre-school foam play products called *Gorilla
      Blocks* TM.





•
            *Slumber
                bags*





Our
      line
      of children’s indoor slumber bags features *Dora
      the Explorer* , *SpongeBob
      SquarePants* and *Pokémon*brands ,
      in
      addition to our own proprietary designs.





***Dolls***





Dolls
      include large, fashion and mini dolls and related accessories based on *Cabbage
      Patch Kids* ®, *Hannah
      Montana* , *The
      Cheetah Girls* , *Puppy
      in My Pocket and Friends* , *Hairspray* the
      movie and *Disney
      Princess* dolls
      and private label fashion dolls for other retailers and sold to Disney Stores
      and Disney Parks and Resorts.





***Seasonal/
      Outdoor Products***





We
      have a
      wide range of seasonal toys and outdoor and leisure products. Our *Go
      Fly A Kite* product
      line includes youth and adult kites and a wide array of decorative flags,
      windsocks, and windwheels. Our *Funnoodle* pool
      toys include the basic Funnoodle pool floats and a variety of other pool toys.
      Our *The
      Storm* product
      line includes water guns, gliders and sport balls. Another outdoor product
      is
      our *Fly
      Wheels XPV* and *Flight* ,
      extensions of our original *Fly
      Wheels* vehicle
      line.





***Junior
      Sports Products***





Our
      junior sports products include *Gaksplat* ,
      toy
      paintball products and *The
      Storm,* which
      include a variety of mini sport balls and activity products.





**Craft,
      Activity and Writing Products**





We
      market
      products into the toy activity category which contain a broad range of
      activities, such as make and paint your own characters, jewelry making, art
      studios, posters, puzzles and other projects. These activities, which feature
      popular characters, such as Nickelodeon’s *Dora
      the Explorer* ,
      among
      others, have immediate visual appeal and brand recognition. Our product lines
      also include stationery, back-to-school and office pens, pencils, markers,
      notebooks and craft products such as *Blopens* and *Vivid
      Velvet* activities. These products are primarily marketed under our *Flying
      Colors* and *Pentech* brands,
      in addition to various private label and other brands.





**Pet
      Products**





We
      entered the Pet Products category with our acquisition of Pet Pal, whose
      products include pet toys, treats, beds, clothes and related pet products.
      These
      products are marketed under JAKKS PetsTM and licenses include *American
      Kennel Club* , *The
      Cat Fanciers’ Association* , *Bratz* ®, *Disney* and *Marvel* ,
      as well
      as numerous other entertainment and consumer product properties.





**World
      Wrestling Entertainment Video Games**





In
      June
      1998, we formed a joint venture with THQ, a developer, publisher and distributor
      of interactive entertainment software for the leading hardware game platforms
      in
      the home video game market. The joint venture entered into a license agreement
      with the WWE under which it acquired the exclusive worldwide right to publish *WWE* video
      games on all hardware platforms. The term of the license agreement expires
      on
      December 31, 2009, and the joint venture has a right to renew the license for
      an
      additional five years provided that there is an absence of a material
      breach of the license agreement and that certain royalty minimums are met.
      Those
      minimums have been met. We and the joint venture are named as defendants in
      lawsuits commenced by WWE, pursuant to which WWE is claiming that there have
      been material breaches with respect to the video game license and is seeking
      treble, punitive and other damages (including disgorgement of profits) in an
      undisclosed amount and a declaration that the video game license with the joint
      venture and an extension of our toy licenses with WWE are void and unenforceable
      (see “Legal Proceedings”).


8





The
      games
      are designed, developed, manufactured and distributed by or through THQ. THQ
      arranges for the manufacture of the CD-ROMs and game cartridges used in the
      various video game platforms under non-exclusive licenses with Sony, Nintendo
      and Microsoft. No other licenses are required for the manufacture of the
      personal computer titles.




The
      joint
      venture agreement provides for us to have received guaranteed preferred returns
      through June 30, 2006 at varying rates of the joint venture’s net sales
      depending on the cumulative unit sales and platform of each particular game.
      The
      preferred return was subject to change after June 30, 2006 and was to be
      set for the distribution period beginning July 1, 2006 and ending
      December 31, 2009 (the “Next Distribution Period”). The agreement provides
      that the parties will negotiate in good faith and agree to the preferred return
      not less than 180 days prior to the start of the Next Distribution Period.
      It further provides that if the parties are unable to agree on a preferred
      return, the preferred return will be determined by arbitration. Since the
      parties have not reached an agreement with respect to the preferred return
      for
      the Next Distribution Period, the preferred return for the Next distribution
      Period is to be determined through arbitration.   The preferred
      return is accrued in the quarter in which the licensed games are sold and the
      preferred return is earned.  Based on the same rates as set forth
      under the original joint venture agreement, an estimated receivable of $35.3
      million has been accrued for the eighteen months ended December 31, 2007,
      pending the resolution of this outstanding issue.





The
      joint
      venture currently publishes titles for the Sony, Nintendo and Microsoft
      consoles, Sony® and Nintendo® hand-held platforms, mobile/wireless and personal
      computers. It will also publish titles for new hardware platforms when, and
      as
      they are introduced to the market and have established a sufficient installed
      base to support new software. These titles are marketed to our existing
      customers as well as to game, electronics and other specialty stores, such
      as
      Electronics Boutique and Best Buy.





The
      following table presents our results with the joint venture since its
      inception:





****
            
            **New
                Game Titles**
            
            **Profit
                from******
            
            **Console**
              **Platforms**
            
            **Hand-**
              **held**
              **Platforms**
            
            **video**
              **game
                joint**
              **venture
                (1)******
            
            
            
            **(In
                millions)**1999
            
            
            1
            
            
            1
            
            $
            3.62000
            
            
            4
            
            
            1
            
            
            15.92001
            
            
            1
            
            
            2
            
            
            6.72002
            
            
            3
            
            
            1
            
            
            8.02003
            
            
            5
            
            
            —
            
            
            7.42004
            
            
            2
            
            
            1
            
            
            7.92005
            
            
            3
            
            
            1
            
            
            9.42006
            
            
            2
            
            
            1
            
            
            13.22007
            
            
            4
            
            
            2
            
            
            21.2










(1)
            Profit
                from the video game joint venture reflects our preferred return on
                joint
                venture revenue less certain costs incurred directly by us and payments
                made by us to THQ for their share of the profit on*Plug
                It In & Play*TV
                Games based on*WWE*content.





Wrestling
      video games have demonstrated consistent popularity. We believe that the success
      of *WWE* titles
      is
      dependent on the graphic look and feel of the software, the depth and variation
      of game play and the popularity of *WWE.* We
      believe that as a franchise property, *WWE* titles
      have brand recognition and sustainable consumer appeal, which may allow the
      joint venture to use titles over an extended period of time through the release
      of sequels and extensions and to re-release such products at different price
      points in the future.





**Sales,
      Marketing and Distribution**





We
      sell
      all of our products through our own in-house sales staff and independent sales
      representatives to toy and mass-market retail chain stores, department stores,
      office supply stores, drug and grocery store chains, club stores, toy specialty
      stores and wholesalers. Our three largest customers are Wal-Mart, Target and
      Toys ‘R’ Us, which accounted for approximately 58.7% of our net sales in 2006
      and 47.9% of our net sales in 2007. With the addition of the *Pet
      Pal* ®
product
      line, we began to distribute pet products to key pet supply retailers Petco
      and
      Petsmart in addition to many other pet retailers and our existing customers.
      Except for purchase orders relating to products on order, we do not have written
      agreements with our customers. Instead, we generally sell products to our
      customers pursuant to letters of credit or, in some cases, on open account
      with
      payment terms typically varying from 30 to 90 days. From time to time, we allow
      our customers credits against future purchases from us in order to facilitate
      their retail markdown and sales of slow-moving inventory. We also sell our
      products through e-commerce sites, including Toysrus.com and
      Amazon.com.


9




We
      contract the manufacture of most of our products to unaffiliated manufacturers
      located in The People’s Republic of China (“China”). We sell the finished
      products on a letter of credit basis or on open account to our customers, many
      of whom take title to the goods in Hong Kong or China. These methods allow
      us to
      reduce certain operating costs and working capital requirements. A portion
      of
      our sales originate in the United States, so we hold certain inventory in our
      warehouse and fulfillment facilities. To date, a significant portion of all
      of
      our sales has been to domestic customers. We intend to continue expanding
      distribution of our products into foreign territories and, accordingly, we
      have:





•
            engaged
                representatives to oversee sales in certain territories,





•
            engaged
                distributors in certain territories,





•
            established
                direct relationships with retailers in certain territories, and





•
            expanded
                in-house resources dedicated to product development and marketing
                of our
                lines internally.





Outside
      of the United States, we currently sell our products primarily in Europe,
      Australia, Canada, Latin America and Asia. Sales of our products abroad
      accounted for approximately $99.1 million, or 12.9% of our net sales, in 2006
      and approximately $126.1 million, or 14.7% of our net sales, in 2007. We believe
      that foreign markets present an attractive opportunity, and we plan to intensify
      our marketing efforts and further expand our distribution channels
      abroad.





We
      establish reserves for sales allowances, including promotional allowances and
      allowances for anticipated defective product returns, at the time of shipment.
      The reserves are determined as a percentage of net sales based upon either
      historical experience or on estimates or programs agreed upon by our customers
      and us.





We
      obtain, directly, or through our sales representatives, orders for our products
      from our customers and arrange for the manufacture of these products as
      discussed below. Cancellations generally are made in writing, and we take
      appropriate steps to notify our manufacturers of these cancellations. We may
      incur costs or other losses as a result of cancellations.





We
      maintain a full-time sales and marketing staff, many of whom make on-site visits
      to customers for the purpose of showing product and soliciting orders for
      products. We also retain a number of independent sales representatives to sell
      and promote our products, both domestically and internationally. Together with
      retailers, we occasionally test the consumer acceptance of new products in
      selected markets before committing resources to large-scale
      production.





We
      publicize and advertise our products in trade and consumer magazines and other
      publications, market our products at international, national and regional toy,
      stationery and other specialty trade shows, conventions and exhibitions and
      carry on cooperative advertising programs with toy and mass market retailers
      and
      other customers which include the use of print and television ads and in-store
      displays. We also produce and broadcast television commercials for several
      of
      our product lines, including our *WWE* action
      figure line, *Disney* large
      role playsets, *Plug
      It In & Play*  *TV
      Games* , *Puppy
      in My Pocket and Friends, EyeClops, Hannah Montana* and *Cabbage
      Patch Kids* .
      We may
      also advertise some of our other products on television, if we expect that
      the
      resulting increase in our net sales will justify the relatively high cost of
      television advertising.





**Product
      Development**





Each
      of
      our product lines has an in-house manager responsible for product development.
      The in-house manager identifies and evaluates inventor products and concepts
      and
      other opportunities to enhance or expand existing product lines or to enter
      new
      product categories. In addition, we create proprietary products to fully exploit
      our concept and character licenses. Although we do have the capability to create
      and develop products from inception to production, we generally use
      third-parties to provide a portion of the sculpting, sample making, illustration
      and package design required for our products in order to accommodate our
      increasing product innovations and introductions. Typically, the development
      process takes from three to nine months from concept to production and shipment
      to our customers.





We
      employ
      a staff of designers for all of our product lines. We occasionally acquire
      our
      other product concepts from unaffiliated third parties. If we accept and develop
      a third party’s concept for new toys, we generally pay a royalty on the toys
      developed from this concept that are sold, and may, on an individual basis,
      guarantee a minimum royalty. In addition, we engage third party developers
      to
      program our line of *Plug
      it in & Play TV Games* .
      Royalties payable to inventors and developers generally range from 1% to 2.5%
      of
      the wholesale sales price for each unit of a product sold by us. We believe
      that
      utilizing experienced third-party inventors gives us access to a wide range
      of
      development talent. We currently work with numerous toy inventors and designers
      for the development of new products and the enhancement of existing
      products.


10


Safety
      testing of our products is done at the manufacturers’ facilities by quality
      control personnel employed by us or by independent third-party contractors
      engaged by us. Safety testing is designed to meet or exceed regulations imposed
      by federal and state, as well as applicable international governmental
      authorities, our retail partners, licensors and the Toy Industry Association.
      We
      also closely monitor quality assurance procedures for our products for safety
      purposes. In addition, independent laboratories engaged by some of our larger
      customers and licensors test certain of our products.





**Manufacturing
      and Supplies**





Most
      of
      our products are currently produced by overseas third-party manufacturers,
      which
      we choose on the basis of quality, reliability and price. Consistent with
      industry practice, the use of third-party manufacturers enables us to avoid
      incurring fixed manufacturing costs, while maximizing flexibility, capacity
      and
      production technology. Substantially all of the manufacturing services performed
      overseas for us are paid for on open account with the manufacturers. To date,
      we
      have not experienced any material delays in the delivery of our products;
      however, delivery schedules are subject to various factors beyond our control,
      and any delays in the future could adversely affect our sales. Currently, we
      have ongoing relationships with over eighty different manufacturers. We believe
      that alternative sources of supply are available to us, although we cannot
      be
      assured that we can obtain adequate supplies of manufactured
      products.





Although
      we do not conduct the day-to-day manufacturing of our products, we are
      extensively involved in the design of the product prototype and production
      tools, dies and molds for our products and we seek to ensure quality control
      by
      actively reviewing the production process and testing the products produced
      by
      our manufacturers. We employ quality control inspectors who rotate among our
      manufacturers’ factories to monitor the production of substantially all of our
      products.





The
      principal raw materials used in the production and sale of our toy products
      are
      plastics, zinc alloy, plush, printed fabrics, paper products and electronic
      components, all of which are currently available at reasonable prices from
      a
      variety of sources. Although we do not manufacture our products, we own the
      tools, dies and molds used in the manufacturing process, and these are
      transferable among manufacturers if we choose to employ alternative
      manufacturers. Tools, dies and molds represent a substantial portion of our
      property and equipment with a net book value of $12.6 million in 2006 and $14.4
      million in 2007. Substantially all of these assets are located in
      China.





**Trademarks
      and Copyrights**





Most
      of
      our products are produced and sold under trademarks owned by or licensed to
      us.
      We typically register our properties, and seek protection under the trademark,
      copyright and patent laws of the United States and other countries where our
      products are produced or sold. These intellectual property rights can be
      significant assets. Accordingly, while we believe we are sufficiently protected,
      the loss of some of these rights could have an adverse effect on our business,
      financial condition and results of operations.





**Competition**





Competition
      in the toy industry is intense. Globally, certain of our competitors have
      greater financial resources, larger sales and marketing and product development
      departments, stronger name recognition, longer operating histories and benefit
      from greater economies of scale. These factors, among others, may enable our
      competitors to market their products at lower prices or on terms more
      advantageous to customers than those we could offer for our competitive
      products. Competition often extends to the procurement of entertainment and
      product licenses, as well as to the marketing and distribution of products
      and
      the obtaining of adequate shelf space. Competition may result in price
      reductions, reduced gross margins and loss of market share, any of which could
      have a material adverse effect on our business, financial condition and results
      of operations. In each of our product lines we compete against one or both
      of
      the toy industry’s two dominant companies, Mattel and Hasbro. In addition, we
      compete in our *Flying
      Colors* and *Pentech* product
      categories, with Mega Brands (Rose Art® ), Hasbro (Play-Doh®) and Binney &
Smith (Crayola®), and in our toy vehicle lines, with RC2. We also compete with
      numerous smaller domestic and foreign toy manufacturers, importers and marketers
      in each of our product categories. Our joint venture’s principal competitors in
      the video game market are Electronic Arts and Activision.





**Seasonality
      and Backlog**





In
      2007,
      approximately 70.4% of our net sales were made in the third and fourth quarters.
      Generally, the first quarter is the period of lowest shipments and sales in
      our
      business and the toy industry generally and therefore the least profitable
      due
      to various fixed costs. Seasonality factors may cause our operating results
      to
      fluctuate significantly from quarter to quarter. However, our writing instrument
      and activity products generally are counter-seasonal to the traditional toy
      industry seasonality due to the higher volume generally shipped for
      back-to-school beginning in the second quarter. In addition, our seasonal
      products are primarily sold in the spring and summer seasons. Our results of
      operations may also fluctuate as a result of factors such as the timing of
      new
      products (and related expenses) introduced by us or our competitors, the
      advertising activities of our competitors, delivery schedules set by our
      customers and the emergence of new market entrants. We believe, however, that
      the low retail price of most of our products may be less subject to seasonal
      fluctuations than higher priced toy products.


11




We
      ship
      products in accordance with delivery schedules specified by our customers,
      which
      usually request delivery of their products within three to six months of the
      date of their orders for orders shipped FOB China or Hong Kong and within three
      days on orders shipped domestically. Because customer orders may be canceled
      at
      any time without penalty, our backlog may not accurately indicate sales for
      any
      future period.





**Government
      and Industry Regulation**





Our
      products are subject to the provisions of the Consumer Product Safety Act
      (“CPSA”), the Federal Hazardous Substances Act (“FHSA”), the Flammable Fabrics
      Act (“FFA”) and the regulations promulgated thereunder. The CPSA and the FHSA
      enable the Consumer Products Safety Commission (“CPSC”) to exclude from the
      market consumer products that fail to comply with applicable product safety
      regulations or otherwise create a substantial risk of injury, and articles
      that
      contain excessive amounts of a banned hazardous substance. The FFA enables
      the
      CPSC to regulate and enforce flammability standards for fabrics used in consumer
      products. The CPSC may also require the repurchase by the manufacturer of
      articles. Similar laws exist in some states and cities and in various
      international markets. We maintain a quality control program designed to ensure
      compliance with all applicable laws.





**Employees**





As
      of
      February 28, 2008, we employed 598 persons, all of whom are full-time employees,
      including three executive officers. We employed 419 people in the United States,
      154 people in Hong Kong and 25 people in China. We believe that we have good
      relationships with our employees. None of our employees are represented by
      a
      union.





**Environmental
      Issues**





We
      are
      subject to legal and financial obligations under environmental, health and
      safety laws in the United States and in other jurisdictions where we operate.
      We
      are not currently aware of any material environmental liabilities associated
      with any of our operations.





**Available
      Information**





We
      make
      available free of charge on or through our Internet website,
      www.jakkspacific.com, our annual report on Form 10-K, quarterly reports on
      Form
      10-Q, current reports on Form 8-K, and amendments to these reports filed or
      furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
      of
      1934 as soon as reasonably practicable after we electronically file such
      material with, or furnish it to, the SEC.





**Our
      Corporate Information**





We
      were
      formed as a Delaware corporation in 1995. Our principal executive offices are
      located at 22619 Pacific Coast Highway, Malibu, California 90265. Our telephone
      number is (310) 456-7799 and our Internet Website address is
      www.jakkspacific.com. The contents of our website are not incorporated in or
      deemed to be a part of this Annual Report or Form 10-K.





**Item
      1A.** ***Risk
      Factors***





From
      time
      to time, including in this Annual Report on Form 10-K, we publish
      forward-looking statements, as disclosed in our Disclosure Regarding
      Forward-Looking Statements, beginning immediately following the Table of
      Contents of this Annual Report. We note that 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 of the risks and
      uncertainties that may arise and that may be detailed from time to time in
      our
      public announcements and our filings with the Securities and Exchange
      Commission, such as on Forms 8-K, 10-Q and 10-K. We undertake no obligation
      to
      make any revisions to the forward-looking statements contained in this Annual
      Report on Form 10-K to reflect events or circumstances occurring after the
      date
      of the filing of this report.





***The
      outcome of litigation in which we have been named as a defendant is
      unpredictable and a materially adverse decision in any such matter could have
      a
      material adverse affect on our financial position and results of
      operations.***





We
      are
      defendants in litigation matters, as described under “Legal Proceedings” in our
      periodic reports filed pursuant to the Securities Exchange Act of 1934,
      including the lawsuit commenced by WWE and the purported securities class action
      and derivative action claims stemming from the WWE lawsuit (see “Legal
      Proceedings”). These claims may divert financial and management resources that
      would otherwise be used to benefit our operations. Although we believe that
      we
      have meritorious defenses to the claims made in each and all of the litigation
      matters to which we have been named a party, and intend to contest each lawsuit
      vigorously, no assurances can be given that the results of these matters will
      be
      favorable to us. A materially adverse resolution of any of these lawsuits could
      have a material adverse effect on our financial position and results of
      operations.


12




***Our
      inability to redesign, restyle and extend our existing core products and product
      lines as consumer preferences evolve, and to develop, introduce and gain
      customer acceptance of new products and product lines, may materially and
      adversely impact our business, financial condition and results of
      operations.***





Our
      business and operating results depend largely upon the appeal of our products.
      Our continued success in the toy industry will depend on our ability to
      redesign, restyle and extend our existing core products and product lines as
      consumer preferences evolve, and to develop, introduce and gain customer
      acceptance of new products and product lines. Several trends in recent years
      have presented challenges for the toy industry, including:





•
            *The
                phenomenon of children outgrowing toys at younger ages, particularly
                in
                favor of interactive and high technology
                products;*





•
            *Increasing
                use of technology;*





•
            *Shorter
                life cycles for individual products;
                and*





•
            *Higher
                consumer expectations for product quality, functionality and
                value.*





We
      cannot
      assure you that:





•
            *our
                current products will continue to be popular with
                consumers;*





•
            *the
                product lines or products that we introduce will achieve any significant
                degree of market acceptance;
                or*





•
            *the
                life cycles of our products will be sufficient to permit us to recover
                licensing, design, manufacturing, marketing and other costs associated
                with those products.*





Our
      failure to achieve any or all of the foregoing benchmarks may cause the
      infrastructure of our operations to fail, thereby adversely affecting our
      business, financial condition and results of operations.





***The
      failure of our character-related and theme-related products to become and/or
      remain popular with children may materially and adversely impact our business,
      financial condition and results of operations.***





The
      success of many of our character-related and theme-related products depends
      on
      the popularity of characters in movies, television programs, live wrestling
      exhibitions, auto racing events and other media. We cannot assure you
      that:





•
            *media
                associated with our character-related and theme-related product lines
                will
                be released at the times we expect or will be
                successful;*





•
            *the
                success of media associated with our existing character-related and
                theme-related product lines will result in substantial promotional
                value
                to our products;*





•
            *we
                will be successful in renewing licenses upon expiration on terms
                that are
                favorable to us; or*





•
            *we
                will be successful in obtaining licenses to produce new character-related
                and theme-related products in the
                future.*





Our
      failure to achieve any or all of the foregoing benchmarks may cause the
      infrastructure of our operations to fail, thereby adversely affecting our
      business, financial condition and results of operations.





***There
      are risks associated with our license agreements.***





•
            *Our
                current licenses require us to pay minimum
                royalties*





Sales
      of
      products under trademarks or trade or brand names licensed from others account
      for substantially all of our net sales. Product licenses allow us to capitalize
      on characters, designs, concepts and inventions owned by others or developed
      by
      toy inventors and designers. Our license agreements generally require us to
      make
      specified minimum royalty payments, even if we fail to sell a sufficient number
      of units to cover these amounts. In addition, under certain of our license
      agreements, if we fail to achieve certain prescribed sales targets, we may
      be
      unable to retain or renew these licenses.


13




•
            *Some
                of our licenses are restricted as to
                use*





Under
      the
      majority of our license agreements the licensors have the right to review and
      approve our use of their licensed products, designs or materials before we
      may
      make any sales. If a licensor refuses to permit our use of any licensed property
      in the way we propose, or if their review process is delayed, our development
      or
      sale of new products could be impeded.





•
            *New
                licenses are difficult and expensive to
                obtain*





Our
      continued success will depend substantially on our ability to obtain additional
      licenses. Intensive competition exists for desirable licenses in our industry.
      We cannot assure you that we will be able to secure or renew significant
      licenses on terms acceptable to us. In addition, as we add licenses, the need
      to
      fund additional royalty advances and guaranteed minimum royalty payments may
      strain our cash resources.





•
            *A
                limited number of licensors account for a large portion of our net
                sales*





We
      derive
      a significant portion of our net sales from a limited number of licensors.
      If
      one or more of these licensors were to terminate or fail to renew our license
      or
      not grant us new licenses, our business, financial condition and results of
      operations could be adversely affected.





***The
      toy industry is highly competitive and our inability to compete effectively
      may
      materially and adversely impact our business, financial condition and results
      of
      operations.***





The
      toy
      industry is highly competitive. Globally, certain of our competitors have
      financial and strategic advantages over us, including:





•
            *greater
                financial resources;*





•
            *larger
                sales, marketing and product development
                departments;*





•
            *stronger
                name recognition;*





•
            *longer
                operating histories; and*





•
            *greater
                economies of scale.*





In
      addition, the toy industry has no significant barriers to entry. Competition
      is
      based primarily on the ability to design and develop new toys, to procure
      licenses for popular characters and trademarks and to successfully market
      products. Many of our competitors offer similar products or alternatives to
      our
      products. Our competitors have obtained and are likely to continue to obtain
      licenses that overlap our licenses with respect to products, geographic areas
      and markets. We cannot assure you that we will be able to obtain adequate shelf
      space in retail stores to support our existing products or to expand our
      products and product lines or that we will be able to continue to compete
      effectively against current and future competitors.




***An
      adverse outcome in the litigation commenced against us and against our video
      game joint venture with THQ by WWE, or a decline in the popularity of WWE,
      could
      adversely impact our interest in that  joint
      venture.***




The
      joint
      venture with THQ depends entirely on a single license, which gives the venture
      exclusive worldwide rights to produce and market video games based on World
      Wrestling Entertainment characters and themes. An adverse outcome against us,
      THQ or the joint venture in the lawsuit commenced by WWE, or an adverse outcome
      against THQ or the joint venture in the lawsuit commenced by WWE against THQ
      and
      the joint venture (see the first Risk Factor, above, and “Legal Proceedings”),
      would adversely impact our rights under the joint venture’s single license,
      which would adversely affect the joint venture’s and our business, financial
      condition and results of operation.




Furthermore,
      the popularity of professional wrestling, in general, and World Wrestling
      Entertainment, in particular, is subject to changing consumer tastes and
      demands. The relative popularity of professional wrestling has fluctuated
      significantly in recent years. A decline in the popularity of World Wrestling
      Entertainment could adversely affect the joint venture’s and our business,
      financial condition and results of operations.




14


***The
      termination of THQ’s manufacturing licenses and the inability of the joint
      venture to otherwise obtain these licenses from other manufacturers would
      materially adversely affect the joint venture’s and our business, financial
      condition and results of operations.***





The
      joint
      venture relies on hardware manufacturers and THQ’s non-exclusive licenses with
      them for the right to publish titles for their platforms and for the manufacture
      of the joint venture’s titles. If THQ’s manufacturing licenses were to terminate
      and the joint venture could not otherwise obtain these licenses from other
      manufacturers, the joint venture would be unable to publish additional titles
      for these manufacturers’ platforms, which would materially adversely affect the
      joint venture’s and our business, financial condition and results of
      operations.





***The
      failure of the joint venture or THQ to perform as anticipated could have a
      material adverse affect on our financial position and results of
      operations.***





The
      joint
      venture’s failure to timely develop titles for new platforms that achieve
      significant market acceptance, to maintain net sales that are commensurate
      with
      product development costs or to maintain compatibility between its personal
      computer CD-ROM titles and the related hardware and operating systems would
      adversely affect the joint venture’s and our business, financial condition and
      results of operations.





Furthermore,
      THQ controls day-to-day operations of the joint venture and all of its product
      development and production operations. Accordingly, the joint venture relies
      exclusively on THQ to manage these operations effectively. THQ’s failure to
      effectively manage the joint venture would have a material adverse effect on
      the
      joint venture’s and our business and results of operations. We are also
      dependent upon THQ’s ability to manage cash flows of the joint venture. If THQ
      is required to retain cash for operations, or because of statutory or
      contractual restrictions, we may not receive cash payments for our share of
      profits, on a timely basis, or at all.




***The
      amount of preferred return that we now receive from the joint venture is subject
      to change, which could adversely affect our results of
      operations.***




The
      joint
      venture agreement provides for us to have received guaranteed preferred returns
      through June 30, 2006 at varying rates of the joint venture’s net sales
      depending on the cumulative unit sales and platform of each particular game.
      The
      preferred return was subject to change after June 30, 2006 and was to be
      set for the distribution period beginning July 1, 2006 and ending
      December 31, 2009 (the “Next Distribution Period”). The agreement provides
      that the parties will negotiate in good faith and agree to the preferred return
      not less than 180 days prior to the start of the Next Distribution Period.
      It further provides that if the parties are unable to agree on a preferred
      return, the preferred return will be determined by arbitration. Since the
      parties have not reached an agreement with respect to the preferred return
      for
      the Next Distribution Period, the preferred return for the Next Distribution
      Period is to be determined through arbitration.  The preferred return
      is accrued in the quarter in which the licensed games are sold and the preferred
      return is earned.  Based on the same rates as set forth under the
      original joint venture agreement, an estimated receivable of $35.3 million
      has
      been accrued for the eighteen months ending December 31, 2007, pending the
      resolution of this outstanding issue.




Any
      adverse change to the preferred return for the next distribution period as
      well
      as the ongoing performance of the joint venture may result in our experiencing
      reduced net income, which would adversely affect our results of
      operations.





***We
      may not be able to sustain or manage our rapid growth, which may prevent us
      from
      continuing to increase our net revenues.***





We
      have
      experienced rapid growth in our product lines resulting in higher net sales
      over
      the last six years, which was achieved through acquisitions of businesses,
      products and licenses. For example, revenues associated with companies we
      acquired since 2005 were approximately $185.6 million and $11.8 million, in
      2006
      and 2007, respectively, representing 24.3% and 1.4% of our total revenues for
      those periods. As a result, comparing our period-to-period operating results
      may
      not be meaningful and results of operations from prior periods may not be
      indicative of future results. We cannot assure you that we will continue to
      experience growth in, or maintain our present level of, net sales.





Our
      growth strategy calls for us to continuously develop and diversify our toy
      business by acquiring other companies, entering into additional license
      agreements, refining our product lines and expanding into international markets,
      which will place additional demands on our management, operational capacity
      and
      financial resources and systems. The increased demand on management may
      necessitate our recruitment and retention of qualified management personnel.
      We
      cannot assure you that we will be able to recruit and retain qualified personnel
      or expand and manage our operations effectively and profitably. To effectively
      manage future growth, we must continue to expand our operational, financial
      and
      management information systems and to train, motivate and manage our work force.
      There can be no assurance that our operational, financial and management
      information systems will be adequate to support our future operations. Failure
      to expand our operational, financial and management information systems or
      to
      train, motivate or manage employees could have a material adverse effect on
      our
      business, financial condition and results of operations.


15




In
      addition, implementation of our growth strategy is subject to risks beyond
      our
      control, including competition, market acceptance of new products, changes
      in
      economic conditions, our ability to obtain or renew licenses on commercially
      reasonable terms and our ability to finance increased levels of accounts
      receivable and inventory necessary to support our sales growth, if any.
      Accordingly, we cannot assure you that our growth strategy will continue to
      be
      implemented successfully.





***If
      we are unable to acquire and integrate companies and new product lines
      successfully, we will be unable to implement a significant component of our
      growth strategy.***





Our
      growth strategy depends in part upon our ability to acquire companies and new
      product lines. Revenues associated with our acquisitions since 2005 represented
      approximately 24.3% and 1.4% of our total revenues in 2006 and 2007,
      respectively. Future acquisitions will succeed only if we can effectively assess
      characteristics of potential target companies and product lines, such
      as:





•
            *attractiveness
                of products;*





•
            *suitability
                of distribution channels;*





•
            *management
                ability;*





•
            *financial
                condition and results of operations;
                and*





•
            *the
                degree to which acquired operations can be integrated with our
                operations.*





We
      cannot
      assure you that we can identify attractive acquisition candidates or negotiate
      acceptable acquisition terms, and our failure to do so may adversely affect
      our
      results of operations and our ability to sustain growth. Our acquisition
      strategy involves a number of risks, each of which could adversely affect our
      operating results, including:





•
            *difficulties
                in integrating acquired businesses or product lines, assimilating
                new
                facilities and personnel and harmonizing diverse business strategies
                and
                methods of operation;*





•
            *diversion
                of management attention from operation of our existing
                business;*





•
            *loss
                of key personnel from acquired companies;
                and*





•
            *failure
                of an acquired business to achieve targeted financial
                results.*





***A
      limited number of customers account for a large portion of our net sales, so
      that if one or more of our major customers were to experience difficulties
      in
      fulfilling their obligations to us, cease doing business with us, significantly
      reduce the amount of their purchases from us or return substantial amounts
      of
      our products, it could have a material adverse effect on our business, financial
      condition and results of operations.***





Our
      three
      largest customers accounted for 47.9% of our net sales in 2007. Except for
      outstanding purchase orders for specific products, we do not have written
      contracts with or commitments from any of our customers. A substantial reduction
      in or termination of orders from any of our largest customers could adversely
      affect our business, financial condition and results of operations. In addition,
      pressure by large customers seeking price reductions, financial incentives,
      changes in other terms of sale or for us to bear the risks and the cost of
      carrying inventory also could adversely affect our business, financial condition
      and results of operations. If one or more of our major customers were to
      experience difficulties in fulfilling their obligations to us, cease doing
      business with us, significantly reduce the amount of their purchases from us
      or
      return substantial amounts of our products, it could have a material adverse
      effect on our business, financial condition and results of operations. In
      addition, the bankruptcy or other lack of success of one or more of our
      significant retailers could negatively impact our revenues and bad debt
      expense.





***We
      depend on our key personnel and any loss or interruption of either of their
      services could adversely affect our business, financial condition and results
      of
      operations.***





Our
      success is largely dependent upon the experience and continued services of
      Jack
      Friedman, our Chairman and Chief Executive Officer, and Stephen G. Berman,
      our
      President and Chief Operating Officer. We cannot assure you that we would be
      able to find an appropriate replacement for Mr. Friedman or Mr. Berman if the
      need should arise, and any loss or interruption of Mr. Friedman’s or Mr.
      Berman’s services could adversely affect our business, financial condition and
      results of operations.


16




***We
      depend on third-party manufacturers, and if our relationship with any of them
      is
      harmed or if they independently encounter difficulties in their manufacturing
      processes, we could experience product defects, production delays, cost overruns
      or the inability to fulfill orders on a timely basis, any of which could
      adversely affect our business, financial condition and results of
      operations.***





We
      depend
      on many third-party manufacturers who develop, provide and use the tools, dies
      and molds that we own to manufacture our products. However, we have limited
      control over the manufacturing processes themselves. As a result, any
      difficulties encountered by the third-party manufacturers that result in product
      defects, production delays, cost overruns or the inability to fulfill orders
      on
      a timely basis could adversely affect our business, financial condition and
      results of operations.





We
      do not
      have long-term contracts with our third-party manufacturers. Although we believe
      we could secure other third-party manufacturers to produce our products, our
      operations would be adversely affected if we lost our relationship with any
      of
      our current suppliers or if our current suppliers’ operations or sea or air
      transportation with our overseas manufacturers were disrupted or terminated
      even
      for a relatively short period of time. Our tools, dies and molds are located
      at
      the facilities of our third-party manufacturers.





Although
      we do not purchase the raw materials used to manufacture our products, we are
      potentially subject to variations in the prices we pay our third-party
      manufacturers for products, depending on what they pay for their raw
      materials.





***We
      have substantial sales and manufacturing operations outside of the United States
      subjecting us to risks common to international
      operations.***





We
      sell
      products and operate facilities in numerous countries outside the United States.
      For the year ended December 31, 2007 sales to our international customers
      comprised approximately 14.7% of our net sales. We expect our sales to
      international customers to account for a greater portion of our revenues in
      future fiscal periods. Additionally, we utilize third-party manufacturers
      located principally in China which are subject to the risks normally associated
      with international operations, including:





•
            *currency
                conversion risks and currency
                fluctuations;*





•
            *limitations,
                including taxes, on the repatriation of
                earnings;*





•
            *political
                instability, civil unrest and economic
                instability;*





•
            *greater
                difficulty enforcing intellectual property rights and weaker laws
                protecting such rights;*





•
            *complications
                in complying with laws in varying jurisdictions and changes in
                governmental policies;*





•
            *greater
                difficulty and expenses associated with recovering from natural
                disasters;*





•
            *transportation
                delays and interruptions;*





•
            *the
                potential imposition of tariffs;
                and*





•
            *the
                pricing of intercompany transactions may be challenged by taxing
                authorities in both Hong Kong and the United States, with potential
                increases in income taxes.*





Our
      reliance on external sources of manufacturing can be shifted, over a period
      of
      time, to alternative sources of supply, should such changes be necessary.
      However, if we were prevented from obtaining products or components for a
      material portion of our product line due to medical, political, labor or other
      factors beyond our control, our operations would be disrupted while alternative
      sources of products were secured. Also, the imposition of trade sanctions by
      the
      United States against a class of products imported by us from, or the loss
      of
“normal trade relations” status by China, could significantly increase our cost
      of products imported from that nation. Because of the importance of our
      international sales and international sourcing of manufacturing to our business,
      our financial condition and results of operations could be significantly and
      adversely affected if any of the risks described above were to
      occur.




17


***Our
      business is subject to extensive government regulation and any violation by
      us
      of such regulations could result in product liability claims, loss of sales,
      diversion of resources, damage to our reputation, increased warranty costs
      or
      removal of our products from the market, and we cannot assure you that our
      product liability insurance for the foregoing will be
      sufficient.***





Our
      business is subject to various laws, including the Federal Hazardous Substances
      Act, the Consumer Product Safety Act, the Flammable Fabrics Act and the rules
      and regulations promulgated under these acts. These statutes are administered
      by
      the CPSC, which has the authority to remove from the market products that are
      found to be defective and present a substantial hazard or risk of serious injury
      or death. The CPSC can require a manufacturer to recall, repair or replace
      these
      products under certain circumstances. We cannot assure you that defects in
      our
      products will not be alleged or found. Any such allegations or findings could
      result in:





•
            *product
                liability claims;*





•
            *loss
                of sales;*





•
            *diversion
                of resources;*





•
            *damage
                to our reputation;*





•
            *increased
                warranty costs; and*





•
            *removal
                of our products from the
                market.*





Any
      of
      these results may adversely affect our business, financial condition and results
      of operations. There can be no assurance that our product liability insurance
      will be sufficient to avoid or limit our loss in the event of an adverse outcome
      of any product liability claim.





***We
      depend on our proprietary rights and our inability to safeguard and maintain
      the
      same, or claims of third parties that we have violated their intellectual
      property rights, could have a material adverse effect on our business, financial
      condition and results of operations.***





We
      rely
      on trademark, copyright and trade secret protection, nondisclosure agreements
      and licensing arrangements to establish, protect and enforce our proprietary
      rights in our products. The laws of certain foreign countries may not protect
      intellectual property rights to the same extent or in the same manner as the
      laws of the United States. We cannot assure you that we or our licensors will
      be
      able to successfully safeguard and maintain our proprietary rights. Further,
      certain parties have commenced legal proceedings or made claims against us
      based
      on our alleged patent infringement, misappropriation of trade secrets or other
      violations of their intellectual property rights. We cannot assure you that
      other parties will not assert intellectual property claims against us in the
      future. These claims could divert our attention from operating our business
      or
      result in unanticipated legal and other costs, which could adversely affect
      our
      business, financial condition and results of operations.





***Market
      conditions and other third-party conduct could negatively impact our margins
      and
      implementation of other business initiatives.***





Economic
      conditions, such as rising fuel prices and decreased consumer confidence, may
      adversely impact our margins. In addition, general economic conditions were
      significantly and negatively affected by the September 11th terrorist attacks
      and could be similarly affected by any future attacks. Such a weakened economic
      and business climate, as well as consumer uncertainty created by such a climate,
      could adversely affect our sales and profitability. Other conditions, such
      as
      the unavailability of electronics components, may impede our ability to
      manufacture, source and ship new and continuing products on a timely basis.
      Significant and sustained increases in the price of oil could adversely impact
      the cost of the raw materials used in the manufacture of our products, such
      as
      plastic.





***We
      may not have the funds necessary to purchase our outstanding convertible senior
      notes upon a fundamental change or other purchase date, as required by the
      indenture governing the notes.***





On
      June
      15, 2010, June 15, 2013 and June 15, 2018, holders of our convertible senior
      notes may require us to purchase their notes, which repurchase may be made
      for
      cash. In addition, holders may also require us to purchase their notes for
      cash
      upon the occurrence of certain fundamental changes in our board composition
      or
      ownership structure, if we liquidate or dissolve under certain circumstances
      or
      if our common stock ceases being quoted on an established over-the-counter
      trading market in the United States. If we do not have, or have access to,
      sufficient funds to repurchase the notes, then we could be forced into
      bankruptcy. In fact, we expect that we would require third-party financing,
      but
      we cannot assure you that we would be able to obtain that financing on favorable
      terms or at all.


18




***We
      have a material amount of goodwill which, if it becomes impaired, would result
      in a reduction in our net income.***





Goodwill
      is the amount by which the cost of an acquisition accounted for using the
      purchase method exceeds the fair value of the net assets we acquire. Current
      accounting standards require that goodwill no longer be amortized but instead
      be
      periodically evaluated for impairment based on the fair value of the reporting
      unit. As of December 31, 2007, we have not had any impairment of Goodwill,
      which
      is reviewed on a quarterly basis and formally evaluated on an annual
      basis.





At
      December 31, 2007, approximately $353.3 million, or 36.0%, of our total assets
      represented goodwill. Declines in our profitability may impact the fair value
      of
      our reporting units, which could result in a write-down of our goodwill.
      Reductions in our net income caused by the write-down of goodwill would
      adversely affect our results of operations.





**Item
      2.** ***Properties***





The
      following is a listing of the principal leased offices maintained by us as
      of
      February 22, 2008:


**Property**
              
              **Location**
              
              ******Approximate**
                **Square
                  Feet**
              
              ******Lease
                  Expiration**
                **Date***Domestic*Corporate
                  Office
              
              
              Malibu,
                  California
              
              
              29,500
              
              
              February
                  28, 2015Design
                  Center
              
              
              Malibu,
                  California
              
              
              16,800
              
              
              August,
                  31, 2008Distribution
                  Center
              
              
              City of Industry, California
              
              
              800,000
              
              
              January 31, 2013JDC East
              
              
              St.
                  Clair, Michigan
              
              
              69,000
              
              
              January
                  31, 2013Play
                  Along U.S.
              
              
              Deerfield
                  Beach, Florida
              
              
              21,000
              
              
              February
                  28, 2009Creative
                  Designs
              
              
              Trevose,
                  Pennsylvania
              
              
              14,700
              
              
              June
                  30, 2009Sales
                  Office / Showroom
              
              
              New
                  York, New York
              
              
              11,500
              
              
              April
                  30, 2012Sales
                  Offices
              
              
              Bentonville,
                  Arkansas
              
              
              4,400
              
              
              November 30, 2008Colchester,
                  CT
              
              
              2,400
              
              
              May
                  31, 2008Palatine,
                  Illinois
              
              
              2,100
              
              
              Month-to
                  Month*International*JAKKS
                  / Play Along Hong Kong
              
              
              Kowloon,
                  Hong Kong
              
              
              36,600
              
              
              March
                  31, 2009Arbor
                  Toys Hong Kong
              
              
              Kowloon,
                  Hong Kong
              
              
              23,100
              
              
              June
                  30, 2009Production Inspection Office
              
              
              Shanghai,
                  China
              
              
              1,700
              
              
              April
                  30, 2008Shenzhen
                  Office
              
              
              Shenzhen,
                  China
              
              
              2,900
              
              
              June
                  30, 2008





**Item
      3.** ***Legal
      Proceedings***





On
      October 19, 2004, we were named as defendants in a lawsuit commenced by WWE
      in
      the U.S. District Court for the Southern District of New York concerning our
      toy
      licenses with WWE and the video game license between WWE and the joint venture
      company operated by THQ and us, encaptioned World Wrestling Entertainment,
      Inc.
      v. JAKKS Pacific, Inc., et al., 1:04-CV-08223-KMK (the “WWE Action”). The
      complaint also named as defendants THQ, the joint venture, certain of our
      foreign subsidiaries, Jack Friedman (our Chairman and Chief Executive Officer),
      Stephen Berman (our Executive Vice President and Chief Operating Officer,
      President and Secretary and a member of our Board of Directors), Joel Bennett
      (our Chief Financial Officer), Stanley Shenker and Associates, Inc., Bell
      Licensing, LLC, Stanley Shenker and James Bell.




WWE
      sought treble, punitive and other damages (including disgorgement of profits)
      in
      an undisclosed amount and a declaration that the video game license with the
      joint venture, which is scheduled to expire in 2009 (subject to joint venture’s
      right to extend that license for an additional five years), and an amendment
      to
      our toy licenses with WWE, which are scheduled to expire in 2009, are void
      and
      unenforceable. This action alleged violations by the defendants of the Racketeer
      Influenced and Corrupt Organization Act (“RICO”) and the anti-bribery provisions
      of the Robinson-Patman Act, and various claims under state law.





On
      February 16, 2005, we filed a motion to dismiss the WWE Action. On March 30,
      2005, the day before WWE’s opposition to our motion was due, WWE filed an
      Amended Complaint seeking, among other things, to add the Chief Executive
      Officer of THQ as a defendant and to add a claim under the Sherman Act. The
      Court allowed the filing of the Amended Complaint and ordered a two-stage
      resolution of the viability of the Complaint, with motions to dismiss the
      federal jurisdiction claims based on certain threshold issues to proceed and
      all
      other matters to be deferred for consideration if the Complaint survived
      scrutiny with respect to the threshold issues. The Court also stayed discovery
      pending the determination of the motions to dismiss.





The
      motions to dismiss the Amended Complaint based on these threshold issues were
      fully briefed and argued and, on March 31, 2006, the Court granted the part
      of
      our motion seeking dismissal of the Robinson-Patman Act and Sherman Act claims
      and denied the part of our motion seeking to dismiss the RICO claims on the
      basis of the threshold issue that was briefed (the “March 31
      Order”).


19


On
      April 7, 2006, we sought certification to appeal from the portion of the March
      31 Order denying our motion to dismiss the RICO claim on the one ground that
      was
      briefed. Shortly thereafter, WWE filed a motion for reargument with respect
      to
      the portion of the March 31 Order that dismissed the Sherman Act claim and,
      alternatively, sought judgment with respect to the Sherman Act claim so that
      it
      could pursue an immediate appeal. At a court conference on April 26, 2006 the
      Court deferred the requests for judgment and for certification and set up
      briefing schedules with respect to our motion to dismiss the RICO claim on
      grounds that were not the subject of the first round of briefing, and our motion
      to dismiss the action based on the release contained in a January 15, 2004
      Settlement Agreement and General Release between WWE and the Company (the
“Release”). The Court also established a briefing schedule for WWE’s motion for
      reargument of the dismissal of the Sherman Act claim. These motions were argued
      and submitted in September 2006. Discovery remained stayed.





On
      November 30, 2007, the Court indicated that the WWE Action would be dismissed.
      On December 21, 2007 the Court dismissed the WWE Action with prejudice (the
      "December 2007 Order") based on (1) the failure to plead RICO injury; (2) the
      bar of the RICO statute of limitations; (3) the denial of WWE’s motion for
      reconsideration of the Sherman Act claim; and (4) the lack of subject matter
      jurisdiction with respect to the pendent state law claims. Thereafter, WWE
      filed
      an appeal to the Second Circuit Court of Appeals. We filed a motion for
      reconsideration of the part of the December 2007 Order that stated that the
      Release did not bar the WWE Action. That motion has been fully briefed and
      submitted to the Court. We also filed a cross-appeal based on the Court's
      earlier order denying our request to dismiss based on the lack of a cognizable
      enterprise and based on the December 2007 Order's statement with respect to
      the
      Release. A scheduling order was issued by the Second Circuit with respect to
      the
      Appeal. Thereafter, WWE moved to dismiss our cross-appeal. That motion is in
      the
      process of being briefed. We moved for a declaration that the Appeal was stayed
      by virtue of the motion for reconsideration. That motion is in the process
      of
      briefing.





In
      November 2004, several purported class action lawsuits were filed in the United
      States District Court for the Southern District of New York: (1) Garcia v.
      JAKKS
      Pacific, Inc. et al., Civil Action No. 04-8807 (filed on November 5, 2004),
      (2)
      Jonco Investors, LLC v. JAKKS Pacific, Inc. et al., Civil Action No. 04-9021
      (filed on November 16, 2004), (3) Kahn v. JAKKS Pacific, Inc. et al., Civil
      Action No. 04-8910 (filed on November 10, 2004), (4) Quantum Equities L.L.C.
      v.
      JAKKS Pacific, Inc. et al., Civil Action No. 04-8877 (filed on November 9,
      2004), and (5) Irvine v. JAKKS Pacific, Inc. et al., Civil Action No. 04-9078
      (filed on November 16, 2004) (the “Class Actions”). The complaints in the Class
      Actions alleged that defendants issued positive statements concerning increasing
      sales of our WWE licensed products which were false and misleading because
      the
      WWE licenses had allegedly been obtained through a pattern of commercial
      bribery, our relationship with the WWE was being negatively impacted by the
      WWE’s contentions and there was an increased risk that the WWE would either seek
      modification or nullification of the licensing agreements with us. Plaintiffs
      also alleged that we misleadingly failed to disclose the alleged fact that
      the
      WWE licenses were obtained through an unlawful bribery scheme. The plaintiffs
      in
      the Class Actions were described as purchasers of our common stock, who
      purchased from as early as October 26, 1999 to as late as October 19, 2004.
      The
      Class Actions sought compensatory and other damages in an undisclosed amount,
      alleging violations of Section 10(b) of the Securities Exchange Act of 1934
      (the
“Exchange Act”) and Rule 10b-5 promulgated thereunder by each of the defendants
      (namely the Company and Messrs. Friedman, Berman and Bennett), and violations
      of
      Section 20(a) of the Exchange Act by Messrs. Friedman, Berman and Bennett.
      On
      January 25, 2005, the Court consolidated the Class Actions under the caption
      In
      re JAKKS Pacific, Inc. Shareholders Class Action Litigation, Civil Action No.
      04-8807. On May 11, 2005, the Court appointed co-lead counsels and provided
      until July 11, 2005 for an amended complaint to be filed; and a briefing
      schedule thereafter with respect to a motion to dismiss. The motion to dismiss
      was fully briefed and argument occurred on November 30, 2006. The motion was
      granted in January 2008 to the extent that the Class Actions were dismissed
      without prejudice to plaintiffs’ right to seek leave to file an amended
      complaint based on statements that the WWE licenses were obtained from the
      WWE
      as a result of the long-term relationship with WWE. A motion seeking leave
      to
      file an amended complaint was filed on February 25, 2008.




We
      believe that the claims in the WWE Action and the Class Actions are without
      merit and we intend to defend vigorously against them. However, because these
      Actions are in their preliminary stages or are on appeal, we cannot assure
      you
      as to the outcome of the Actions, nor can we estimate the range of our potential
      losses.




On
      December 2, 2004, a shareholder derivative action was filed in the Southern
      District of New York by Freeport Partner, LLC against us, nominally, and against
      Messrs. Friedman, Berman and Bennett, Freeport Partners v. Friedman, et al.,
      Civil Action No. 04-9441 (the “Derivative Action”). The Derivative Action seeks
      to hold the individual defendants liable for damages allegedly caused to us
      by
      their actions and in particular to hold them liable on a contribution theory
      with respect to any liability we incur in connection with the Class Actions.
      On
      or about February 10, 2005, a second shareholder derivative action was filed
      in
      the Southern District of New York by David Oppenheim against us, nominally,
      and
      against Messrs. Friedman, Berman, Bennett, Blatte, Glick, Miller and Skala,
      Civil Action 05-2046 (the “Second Derivative Action”). The Second Derivative
      Action seeks to hold the individual defendants liable for damages allegedly
      caused to us by their actions as a result of alleged breaches of their fiduciary
      duties. On or about March 16, 2005, a third shareholder derivative action was
      filed. It is captioned Warr v. Friedman, Berman, Bennett, Blatte, Glick, Miller,
      Skala, and JAKKS (as a nominal defendant), and it was filed in the Superior
      Court of California, Los Angeles County (the “Third Derivative Action”). The
      Third Derivative Action seeks to hold the individual defendants liable for
      (1)
      damages allegedly caused to us by their alleged breaches of fiduciary duty,
      abuse of control, gross mismanagement, waste of corporate assets and unjust
      enrichment; and (2) restitution to us of profits, benefits and other
      compensation obtained by them. Stays/and or extensions of time to answer are
      in
      place with respect to the derivative actions.


20




On
      March
      1, 2005, we delivered a Notice of Breach of Settlement Agreement and Demand
      for
      Indemnification to WWE (the “Notification”). The Notification asserted that
      WWE’s filing of the WWE Action violated a Covenant Not to Sue contained in a
      January 15, 2004 Settlement Agreement and General Release (“General Release”)
      entered into between WWE and us and, therefore, that we were demanding
      indemnification, pursuant to the Indemnification provision contained in the
      General Release, for all losses that the WWE’s actions have caused or will cause
      to us and our officers, including but not limited to any losses sustained by
      us
      in connection with the Class Actions. On March 4, 2005, in a letter from its
      outside counsel, WWE asserted that the General Release does not cover the claims
      in the WWE Action.




On
      March
      30, 2006, WWE’s counsel wrote a letter alleging breaches by the joint venture of
      the video game agreement relating to the manner of distribution and the payment
      of royalties to WWE with respect to sales of the WWE video games in Japan.
      WWE
      has demanded that the alleged breaches be cured within the time periods provided
      in the video game license, while reserving all of its rights, including its
      alleged right of termination of the video game license.




On
      April
      28, 2006 the joint venture responded, asserting, among other things, that WWE
      had acquiesced in the manner of distribution in Japan and the payment of
      royalties with respect to such sales and, in addition, had separately released
      the joint venture from any claims with respect to such matter, including the
      payment of royalties with respect to such sales, and that there is therefore
      no
      basis for an allegation of a breach of the license agreement. While the joint
      venture does not believe that WWE has a valid claim, it tendered a protective
      “cure” of the alleged breaches with a full reservation of rights. WWE “rejected”
that cure and reserved its rights.




On
      October 12, 2006, WWE commenced a lawsuit in Connecticut state court against
      THQ
      and THQ/JAKKS Pacific LLC (the “LLC”), involving a claim set forth above
      concerning allegedly improper sales of WWE video games in Japan and other
      countries in Asia (the “Connecticut Action”). The lawsuit seeks, among other
      things, a declaration that WWE is entitled to terminate the video game license
      and monetary damages and raised Connecticut Unfair Trade Practices Act (“CUTPA”)
      and contract claims against THQ and the LLC. A motion to strike the CUTPA claim
      was denied in May 2007.




In
      March
      2007, WWE filed a motion seeking leave to amend its complaint in the Connecticut
      Action to add the principal part of the state law claims present in the WWE
      Action to the Connecticut Action. That motion further sought, inter alia, to
      add
      our Company and Messrs. Friedman, Berman and Bennett (the “Individual
      Defendants”) as defendants in the Connecticut Action. The motion was argued on
      May 8, 2007 and was granted from the bench, subject to a decision that the
      schedule was suspended and no discovery matters would be addressed until
      pleading motions were resolved. In June 2007, our Company and the Individual
      Defendants moved for a stay of the Connecticut Action, *inter
      alia* ,
      based
      on the pendency of the WWE Action. On July 30, 2007, in light of the
      pending motion to dismiss in the WWE Action, the Court ordered a 120-day stay
      of
      the Connecticut Action (the "Stay"). In November 2007 we moved for a
      continuation of the Stay. WWE served discovery and sought leave to file an
      amended complaint alleging the state law claims from the WWE Action. Thereafter
      we moved for a conference and a stay of discovery. A conference was held on
      January 14, 2008 at which WWE was allowed to amend its complaint to assert
      the
      state law claims set forth in the WWE Action and a briefing schedule was
      established with respect to a combined motion to strike and a motion for summary
      judgment (the "Dispositive Motion"). The Court subsequently denied the motion
      for a protective order except to the extent that we are to submit a response
      to
      the discovery requests at the end of March 2008. Also, the Court granted
      permission for WWE to submit a proposed case management order. WWE did so in
      February 2008 and it provided for a trial on or after October 2009. On February
      22, 2008, we submitted a response in which we requested that no case management
      order be adopted prior to the determination of the Dispositive Motion because
      it
      would moot such a case management order but that if a case management order
      is
      to be adopted it should provide for a trial, if the matter is not fully
      dismissed, not before June 2010.





We
      believe that the claims in the Connecticut Action are without merit and we
      intend to defend vigorously against them. However, because this action is in
      its
      preliminary stage, we cannot assure you as to the outcome of the action, nor
      can
      we estimate the range of our potential losses. THQ and the LLC have stated
      that
      they believe the claims in the Connecticut Action prior to the additional claims
      in the amended complaint are without merit and intend to defend themselves
      vigorously. However, because this action is in its preliminary stage, we cannot
      assure you as to the outcome, nor can we estimate the range of our potential
      losses, if any.





21




Our
      agreement with THQ provides for payment of a preferred return to us in
      connection with our joint venture. The preferred return is subject to change
      after June 30, 2006 and is to be set for the distribution period beginning
      July
      1, 2006 and ending December 31, 2009 (the “Next Distribution Period”). The
      agreement provides that the parties will negotiate in good faith and agree
      to
      the preferred return not less than 180 days prior to the start of the Next
      Distribution Period. It further provides that if the parties are unable to
      agree
      on a preferred return, the preferred return will be determined by arbitration.
      The parties have not reached an agreement with respect to the preferred return
      for the Next Distribution Period and the preferred return is to be determined
      through arbitration. On April 30, 2007, THQ filed an action in the Superior
      Court, Los Angeles County, to compel arbitration and to appoint an arbitrator
      pursuant to the relevant provisions of the agreement. An order was issued that
      identified five potential arbitrators. The parties did not agree on an
      arbitrator. JAKKS served notices of disqualification on four of the potential
      arbitrators; THQ objected; the Court struck the disqualification notices and
      appointed an arbitrator, who was then stricken by JAKKS. JAKKS appealed the
      Court’s order with respect to the disclosure and disqualification process and
      the appellate court took the appeal and stayed the proceedings. The Court
      rendered a decision on the matter on February 28, 2008 which decision affirmed
      the lower court's decision ruling that disclosure was not required until after
      the arbitrator was nominated to serve by the Court.


We
      are a party to, and certain of our property is the subject of, various other
      pending claims and legal proceedings that routinely arise in the ordinary course
      of our business, but we do not believe that any of these claims or proceedings
      will have a material effect on our business, financial condition or results
      of
      operations.


22





**PART
      II**





**Item
      5.** ***Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
      of Equity Securities***





**Market
      Information**





Our
      common stock is traded on the Nasdaq Global Select exchange under the symbol
      “JAKK.” The following table sets forth, for the periods indicated, the range of
      high and low sales prices for our common stock on this exchange.





**Price
                Range of**
              **Common
                Stock****High**
            
            **Low****2006:**First
                quarter
            
            $
            27.10
            
            $
            19.23Second
                quarter
            
            
            28.50
            
            
            17.06Third
                quarter
            
            
            20.24
            
            
            15.26Fourth
                quarter
            
            
            23.38
            
            
            17.17**2007:**First
                quarter
            
            
            25.96
            
            
            19.31Second
                quarter
            
            
            28.93
            
            
            23.58Third
                quarter
            
            
            31.42
            
            
            18.19Fourth
                quarter
            
            
            28.48
            
            
            23.12





**Performance
      Graph**





The
      graph
      and tables below display the relative performance of our common stock, the
      Russell 2000 Price Index (the “Russell 2000”) and a peer group index, by
      comparing the cumulative total stockholder return (which assumes reinvestment
      of
      dividends, if any) on an assumed $100 investment in our common stock, the
      Russell 2000 and the peer group index over the period from January 1, 2003
      to December 31, 2007.





In
      accordance with recently enacted regulations implemented by the Securities
      and
      Exchange Commission, we retained the services of an expert compensation
      consultant.  In the performance of its services, such consultant used
      a peer group index for its analysis of our compensation policies.   We
      believe that these companies represent a cross-section of publicly-traded
      companies with product lines and businesses similar to our own throughout the
      comparison period and, accordingly, we are using the same peer group for
      purposes of the performance graph. Our peer group index includes the following
      companies: *Activision,
      Inc., Electronic Arts, Inc., EMak Worldwide, Inc., Hasbro, Inc., Leapfrog
      Enterprises, Inc., Marvel Enterprises, Inc., Mattel, Inc., Russ Berrie and
      Company, Inc., RC2 Corp., Take-Two Interactive, Inc. and THQ
      Inc.*





23


The
      historical performance data presented below may not be indicative of the future
      performance of our common stock, any reference index or any component company
      in
      a reference index.





Performance graph





**Annual
      Return Percentage**





**December 31,**
              **2003**
            
            **December 31,**
              **2004**
            
            **December 31,**
              **2005**
            
            **December 31,**
              **2006**
            
            **December 31,**
              **2007**JAKKS
                Pacific
            
            
            (2.37
            )%
            
            68.15
            %
            
            (5.29
            )%
            
            4.30
            %
            
            8.10
            %Peer
                Group
            
            
            48.65
            
            
            14.65
            
            
            (10.08
            )
            
            18.18
            
            
            8.93Russell
                2000
            
            
            47.25
            
            
            18.33
            
            
            4.56
            
            
            18.35
            
            
            (1.55
            )





**Indexed
      Returns**


**January 1,**
                  **2003**
                
                **December 31,**
                  **2003**
                
                **December 31,**
                  **2004**
                
                **December 31,**
                  **2005**
                
                **********December 31,**
                  **2006******
                
                **December 31,**
                  **2007**JAKKS
                    Pacific
                
                $
                100.00
                
                $
                97.63
                
                $
                164.16
                
                $
                155.49
                
                $
                162.17
                
                $
                175.31Peer
                    Group
                
                
                100.00
                
                
                148.65
                
                
                170.44
                
                
                153.26
                
                
                181.13
                
                
                197.31Russell
                    2000
                
                
                100.00
                
                
                147.25
                
                
                174.25
                
                
                185.20
                
                
                215.62
                
                
                212.29





**Security
      Holders**





To
      the
      best of our knowledge, as of February 27, 2008, there were 179 holders of record
      of our common stock. We believe there are numerous beneficial owners of our
      common stock whose shares are held in “street name.”





**Dividends**





We
      have
      never paid any cash dividends on our common stock. We currently intend to retain
      our future earnings, if any, to finance the growth and development of our
      business and/or buy back in the market some of our outstanding common stock,
      but
      may consider implementing a plan to pay cash dividends on our common stock
      in
      the future.





**Equity
      Compensation Plan Information**





The
      table
      below sets forth the following information as of the year ended December 31,
      2007 for (i) all compensation plans previously approved by our stockholders
      and
      (ii) all compensation plans not previously approved by our stockholders, if
      any:


24





(a)
      the
      number of securities to be issued upon the exercise of outstanding options,
      warrants and rights;





(b)
      the
      weighted-average exercise price of such outstanding options, warrants and
      rights; and





(c)
      other
      than securities to be issued upon the exercise of such outstanding options,
      warrants and rights, the number of securities remaining available for future
      issuance under the plans.





**Plan
                Category**
            
            **Number of**
              **Securities to**
              **be Issued**
              **upon**
              **Exercise of**
              **Outstanding**
              **Options,**
              **Warrants**
              **and Rights**
              **(a)**
            
            **Weighted-**
              **Average Exercise**
              **Price of**
              **Outstanding**
              **Options,**
              **Warrants and**
              **Rights**
              **(b)**
            
            **Number of Securities**
              **Remaining Available for**
              **Future Issuance Under**
              **Equity Compensation**
              **Plans (Excluding**
              **Securities Reflected in**
              **Column (a)) (c)**Equity
                compensation plans approved by security holders
            
            
            836,178
            
            $
            17.27
            
            
            807,876Equity
                compensation plans not approved by security holders
            
            
            100,000
            
            
            11.35
            
            
            —Total
            
            
            936,178
            
            $
            16.63
            
            
            807,876





Equity
      compensation plans approved by our stockholders consists of the 2002 Stock
      Award
      and Incentive Plan. Equity compensation plans not approved by our security
      holders consist of a fully-vested warrant issued by us in 2003 (and expiring
      in
      2013) in connection with license costs relating to our video game joint
      venture.





**Item
      6.** ***Selected
      Financial Data***





You
      should read the financial data set forth below in conjunction with “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations” and
      our consolidated financial statements and the related notes (included in Item
      8).





**Years
                Ended December 31,****2003**
            
            **2004**
            
            **2005**
            
            **2006**
            
            **2007****(In
                thousands, except per share data)****Consolidated
                Statement of Income Data:**Net
                sales
            
            $
            315,776
            
            $
            574,266
            
            $
            661,536
            
            $
            765,386
            
            $
            857,085Cost
                of sales
            
            
            189,334
            
            
            348,259
            
            
            394,829
            
            
            470,592
            
            
            533,435Gross
                profit
            
            
            126,442
            
            
            226,007
            
            
            266,707
            
            
            294,794
            
            
            323,650Selling,
                general and administrative expenses
            
            
            113,053
            
            
            172,282
            
            
            178,722
            
            
            202,482
            
            
            216,652Acquisition
                shut-down and product recall costs
            
            
            2,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —Income
                from operations
            
            
            11,389
            
            
            53,725
            
            
            87,985
            
            
            92,312
            
            
            106,998Profit
                from video game joint venture
            
            
            7,351
            
            
            7,865
            
            
            9,414
            
            
            13,226
            
            
            21,180Other
                expense
            
            
            —
            
            
            —
            
            
            (1,401
            )
            
            —
            
            
            —Interest
                income
            
            
            1,131
            
            
            2,052
            
            
            5,183
            
            
            4,930
            
            
            6,819Interest
                expense
            
            
            (2,536
            )
            
            (4,550
            )
            
            (4,544
            )
            
            (4,533
            )
            
            (5,456
            )Income
                before provision for income taxes
            
            
            17,335
            
            
            59,092
            
            
            96,637
            
            
            105,935
            
            
            129,541Provision
                for income taxes
            
            
            1,440
            
            
            15,533
            
            
            33,144
            
            
            33,560
            
            
            40,550Net
                income
            
            $
            15,895
            
            $
            43,559
            
            $
            63,493
            
            $
            72,375
            
            $
            88,991Basic
                earnings per share
            
            $
            0.66
            
            $
            1.69
            
            $
            2.37
            
            $
            2.66
            
            $
            3.22Basic
                weighted average shares outstanding
            
            
            24,262
            
            
            25,797
            
            
            26,738
            
            
            27,227
            
            
            27,665Diluted
                earnings per share
            
            $
            0.66
            
            $
            1.49
            
            $
            2.06
            
            $
            2.30
            
            $
            2.77Diluted
                weighted average shares and equivalents outstanding
            
            
            27,426
            
            
            31,406
            
            
            32,193
            
            
            32,714
            
            
            33,149





In
      February 2006, we acquired Creative Designs.  Also, effective January
      1, 2006, we implemented SFAS 123R, which requires the expensing of share-based
      compensation.





In
      June
      2005, we acquired the *Pet
      Pal* line of
      products.


25





In
      June
      2004, we acquired Play Along.





**At
                December 31,****2003**
            
            **2004**
            
            **2005**
            
            **2006**
            
            **2007****(In
                thousands)****Consolidated
                Balance Sheet Data:**Cash
                and cash equivalents
            
            $
            118,182
            
            $
            176,544
            
            $
            240,238
            
            $
            184,489
            
            $
            241,250Working
                capital
            
            
            232,601
            
            
            229,543
            
            
            301,454
            
            
            280,363
            
            
            355,678Total
                assets
            
            
            529,997
            
            
            696,762
            
            
            753,955
            
            
            881,894
            
            
            982,688Long-term
                debt, net of current portion
            
            
            98,042
            
            
            98,000
            
            
            98,000
            
            
            98,000
            
            
            98,000Total
                stockholders’ equity
            
            
            377,900
            
            
            451,485
            
            
            524,651
            
            
            609,288
            
            
            690,997





**Item
      7.** ***Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations***





*The
      following Management’s Discussion and Analysis of Financial Condition and
      Results of Operations contains forward-looking statements that involve risks
      and
      uncertainties. Our actual results could differ materially from those anticipated
      in these forward-looking statements as a result of various factors. You should
      read this section in conjunction with our consolidated financial statements
      and
      the related notes (included in Item 8).*





**Critical
      Accounting Policies**





The
      accompanying consolidated financial statements and supplementary information
      were prepared in accordance with accounting principles generally accepted in
      the
      United States of America. Significant accounting policies are discussed in
      Note
      2 to the Consolidated Financial Statements, Item 8. Inherent in the application
      of many of these accounting policies is the need for management to make
      estimates and judgments in the determination of certain revenues, expenses,
      assets and liabilities. As such, materially different financial results can
      occur as circumstances change and additional information becomes known. The
      policies with the greatest potential effect on our results of operations and
      financial position include:





***Allowance
      for Doubtful Accounts.*** Our allowance
      for doubtful accounts is based on management’s assessment of the business
      environment, customers’ financial condition, historical collection experience,
      accounts receivable aging, customer disputes and the collectibility of specific
      customer accounts. If there were a deterioration of a major customer’s
      creditworthiness, or actual defaults were higher than our historical experience,
      our estimates of the recoverability of amounts due to us could be overstated,
      which could have an adverse impact on our operating results. The allowance
      for
      doubtful accounts is also affected by the time at which uncollectible accounts
      receivable balances are actually written off.





Major
      customers’ accounts are monitored on an ongoing basis; more in depth reviews are
      performed based on changes in customer’s financial condition and/or the level of
      credit being extended. When a significant event occurs, such as a bankruptcy
      filing by a specific customer, and on a quarterly basis, the allowance is
      reviewed for adequacy and the balance or accrual rate is adjusted to reflect
      current risk prospects.





***Revenue
      Recognition.*** Our
      revenue recognition policy is to ****** recognize
      revenue when persuasive evidence of an arrangement exists, title transfer has
      occurred (product shipment), the price is fixed or readily determinable, and
      collectibility is probable. We recognize revenue in accordance with Staff
      Accounting Bulletin No. 104, “Revenue Recognition.” Sales are recorded net
      of sales returns and discounts, which are estimated at the time of shipment
      based upon historical data. JAKKS routinely enters into arrangements with its
      customers to provide sales incentives, support customer promotions, and provide
      allowances for returns and defective merchandise. Such programs are based
      primarily on customer purchases, customer performance of specified promotional
      activities, and other specified factors such as sales to consumers. Accruals
      for
      these programs are recorded as sales adjustments that reduce gross revenue
      in
      the period the related revenue is recognized. Accruals for these programs are
      recorded as sales adjustments that reduce gross revenue in the period the
      related revenue is recognized .





***Goodwill
      and other indefinite-lived intangible assets.***   In
      accordance with Statement of Financial Accounting Standards (“SFAS”) 142, *Goodwill
      and Other Intangible Assets,* goodwill
      and indefinite-lived intangible assets are not amortized, but are tested for
      impairment at least annually at the reporting unit level.





Factors
      we consider important which could trigger an impairment review include the
      following:


·
            significant
                underperformance relative to expected historical or projected future
                operating results;


·
            significant
                changes in the manner of our use of the acquired assets or the strategy
                for our overall business; and


·
            significant
                negative industry or economic
                trends.


26


Due
      to
      the subjective nature of the impairment analysis significant changes in the
      assumptions used to develop the estimate could materially affect the conclusion
      regarding the future cash flows necessary to support the valuation of long-lived
      assets, including goodwill. The valuation of goodwill involves a high degree
      of
      judgment and consists of a comparison of the fair value of a reporting unit
      with
      its book value. Based on the assumptions underlying the valuation, impairment
      is
      determined by estimating the fair value of a reporting unit and comparing that
      value to the reporting unit’s book value. If the implied fair value is more than
      the book value of the reporting unit, an impairment loss is not indicated.
      If
      impairment exists, the fair value of the reporting unit is allocated to all
      of
      its assets and liabilities excluding goodwill, with the excess amount
      representing the fair value of goodwill. An impairment loss is measured as
      the
      amount by which the book value of the reporting unit’s goodwill exceeds the
      estimated fair value of that goodwill.





SFAS
      No. 142 requires that goodwill be allocated to various reporting units,
      which are either at the operating segment level or one reporting level below
      the
      operating segment, for purposes of evaluating whether goodwill is impaired.
      For
      2007, JAKKS' reporting units are: Traditional Toys, Craft and Writing, and
      Pet
      products. Goodwill is allocated within JAKKS' reporting units based on an
      allocation of brand-specific goodwill to the reporting units selling those
      brands. As of October 1, 2007, JAKKS performed the annual impairment test
      required by SFAS No. 142 and determined that its goodwill was not impaired.
      There were no events or circumstances that indicated the impairment test should
      be performed again at December 31, 2007.





To
      determine the fair value of our reporting units, we generally use a present
      value technique (discounted cash flow) corroborated by market multiples when
      available and as appropriate. The factor most sensitive to change with respect
      to our discounted cash flow analyses is the estimated future cash flows of
      each
      reporting unit which is, in turn, sensitive to our estimates of future revenue
      growth and margins for these businesses. If actual revenue growth and/or margins
      are lower than our expectations, the impairment test results could differ.
      We
      applied what we believe to be the most appropriate and consistent valuation
      methodology for each of the reporting units. If we had established different
      reporting units or utilized different valuation methodologies, the impairment
      test results could differ.





Goodwill
      and intangible assets amounted to $397.6 million as of December 31,
      2007.





***Reserve
      for Inventory Obsolescence*** .  We
      value our inventory at the lower of cost or market. Based upon a consideration
      of quantities on hand, actual and projected sales volume, anticipated product
      selling prices and product lines planned to be discontinued, slow-moving and
      obsolete inventory is written down to its net realizable value.





Failure
      to accurately predict and respond to consumer demand could result in the Company
      under producing popular items or overproducing less popular items. Furthermore,
      s ignificant
      changes in demand for our products would impact management’s estimates in
      establishing our inventory provision.





Management
      estimates are monitored on a quarterly basis and a further adjustment to reduce
      inventory to its net realizable value is recorded, as an increase to cost of
      sales, when deemed necessary under the lower of cost or market standard.




***Income
      Allocation for Income Taxes.*** Our
      income tax provision and related income tax assets and liabilities are based
      on
      actual income as allocated to the various tax jurisdictions based upon our
      transfer pricing study, US and foreign statutory income tax rates, and tax
      regulations and planning opportunities in the various jurisdictions in which
      the
      Company operates.  Significant judgment is required in interpreting
      tax regulations in the US and foreign jurisdictions, and in evaluating worldwide
      uncertain tax positions.  Actual results could differ materiality from
      those judgments, and changes in judgments could materially affect our
      consolidated financial statements.





***Income
      taxes and interest and penalties related to income tax
      payable.*** We
      do not
      file a consolidated return with our foreign subsidiaries.  We file
      federal and state returns and our foreign subsidiaries each file Hong Kong
      returns, as applicable.  Deferred taxes are provided on a liability
      method whereby deferred tax assets are recognized as deductible temporary
      differences and operating loss and tax credit carry-forwards and deferred tax
      liabilities are recognized for taxable temporary
      differences.  Temporary differences are the differences between the
      reported amounts of assets and liabilities and their tax
      basis.  Deferred tax assets are reduced by a valuation allowance when,
      in the opinion of management, it is more likely than not that some portion
      or
      all of the deferred tax assets will not be realized.  Deferred tax
      assets and liabilities are adjusted for the effects of changes in tax laws
      and
      rates on the date of enactment.




As
      of
      January 1, 2007, we adopted the provisions of FASB Interpretation No. 48 (“FIN
      48”), *Accounting
      for Uncertainty in Income Taxes* ,
      which
      prescribes a recognition threshold and measurement process for recording in
      the
      financial statements uncertain tax positions taken or expected to be taken
      in a
      tax return.  As of the date of adoption, tax benefits that are subject
      to challenge by tax authorities are analyzed and accounted for in the income
      tax
      provision.  The cumulative effect of the potential liability for
      unrecognized tax benefits prior to the adoption of FIN 48, along with the
      associated interest and penalties, are recognized as a reduction in the January
      1, 2007 balance of retained earnings.




We
      accrue
      a tax reserve for additional income taxes and interest, which may become payable
      in future years as a result of audit adjustments by tax
      authorities.  The reserve is based on management’s assessment of all
      relevant information, and is periodically reviewed and adjusted as circumstances
      warrant.  As of December 31, 2007, our income tax reserves are
      approximately $20.3 million and relate to the potential income tax audit
      adjustments, primarily in the areas of income allocation and transfer
      pricing.


27




We
      recognize current period interest expense and the reversal of previously
      recognized interest expense that has been determined to not be assessable due
      to
      the expiration of the related audit period or other compelling factors on the
      income tax liability for unrecognized tax benefits as interest expense, and
      penalties and penalty reversals related to the income taxes payable as
      other expense in our consolidated statements of operations.




***Share-Based
      Compensation*** .
      We
      grant restricted stock and options to purchase our common stock to our employees
      (including officers) and non-employee directors under our 2002 Stock Award
      and
      Incentive Plan (the “Plan”), which incorporated the shares remaining under our
      Third Amended and Restated 1995 Stock Option Plan. The benefits provided under
      the Plan are share-based payments subject to the provisions of revised Statement
      of Financial Accounting Standards No. 123 (Revised) (SFAS 123R), *Share-Based
      Payment* .
      Effective January 1, 2006, we began to use the fair value method to apply the
      provisions of SFAS 123R. We estimate the value of share-based awards on the
      date
      of grant using the Black-Scholes option-pricing model. The determination of
      the
      fair value of share-based payment awards on the date of grant using an
      option-pricing model is affected by our stock price, as well as assumptions
      regarding a number of complex and subjective variables. These variables include
      our expected stock price volatility over the term of the awards, actual and
      projected employee stock option exercise behaviors, cancellations, terminations,
      risk-free interest rates and expected dividends.





**Recent
      Developments**





In
      February 2006, we acquired substantially all of the assets of Creative Designs
      International, Ltd. and a related Hong Kong company, Arbor Toys Company Limited
      (collectively, “Creative Designs”). The total initial purchase price of $111.1
      million consisted of $101.7 million in cash, 150,000 shares of our common stock
      at a value of approximately $3.3 million and the assumption of liabilities
      in
      the amount of $6.1 million. In addition, we agreed to pay an earn-out of up
      to
      an aggregate amount of $20.0 million in cash over the three calendar years
      following the acquisition based on the achievement of certain financial
      performance criteria, which will be recorded as goodwill when and if earned.
      For
      the years ended December 31, 2006 and 2007, $6.9 million and $6.7 million,
      respectively, of the earn-out was earned and recorded as
      goodwill.  Creative Designs is a leading designer and producer of
      dress-up and role-play toys and was included in our results of operations from
      the date of acquisition.





**Results
      of Operations**





The
      following table sets forth, for the periods indicated, certain statement of
      operations data as a percentage of net sales.





**Years
                Ended December 31,****2003**
            
            **2004**
            
            **2005**
            
            **2006**
            
            **2007**Net
                Sales
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of
                Sales
            
            
            60.0
            
            
            60.6
            
            
            59.7
            
            
            61.5
            
            
            62.2Gross
                profit
            
            
            40.0
            
            
            39.4
            
            
            40.3
            
            
            38.5
            
            
            37.8Selling,
                general and administrative expenses
            
            
            35.8
            
            
            30.0
            
            
            27.0
            
            
            26.5
            
            
            25.3Acquisition
                shut-down and product recall costs
            
            
            0.6
            
            
            —
            
            
            —
            
            
            —
            
            
            —Income
                from operations
            
            
            3.6
            
            
            9.4
            
            
            13.3
            
            
            12.0
            
            
            12.5Profit
                from video game joint venture
            
            
            2.3
            
            
            1.4
            
            
            1.4
            
            
            1.7
            
            
            2.5Other
                expense
            
            
            —
            
            
            —
            
            
            (0.2
            )
            
            —
            
            
            —Interest
                income
            
            
            0.4
            
            
            0.4
            
            
            0.8
            
            
            0.6
            
            
            0.7Interest
                expense
            
            
            (0.8
            )
            
            (0.8
            )
            
            (0.7
            )
            
            (0.6
            )
            
            (0.6
            )Income
                before income taxes
            
            
            5.5
            
            
            10.4
            
            
            14.6
            
            
            13.7
            
            
            15.1Provision
                for income taxes
            
            
            0.5
            
            
            2.7
            
            
            5.0
            
            
            4.4
            
            
            4.7Net
                income
            
            
            5.0
            %
            
            7.7
            %
            
            9.6
            %
            
            9.3
            %
            
            10.4
            %


28


The
      following unaudited table summarizes, for the periods indicated, certain income
      statement data by segment (in thousands).




**Years
                Ended December 31,****2005**
            
            **2006**
            
            **2007****Net
                Sales**Traditional
                Toys
            
            $
            589,715
            
            $
            692,498
            
            $
            792,998Craft/Activity/Writing
                Products
            
            
            62,058
            
            
            52,834
            
            
            39,632Pet
                Products
            
            
            9,763
            
            
            20,054
            
            
            24,455661,536
            
            
            765,386
            
            
            857,085**Cost
                of Sales**Traditional
                Toys
            
            
            348,626
            
            
            429,411
            
            
            490,279Craft/Activity/Writing
                Products
            
            
            39,928
            
            
            29,044
            
            
            26,970Pet
                Products
            
            
            6,275
            
            
            12,137
            
            
            16,186394,829
            
            
            470,592
            
            
            533,435**Gross
                Margin**Traditional
                Toys
            
            
            241,089
            
            
            263,087
            
            
            302,719Craft/Activity/Writing
                Products
            
            
            22,130
            
            
            23,790
            
            
            12,662Pet
                Products
            
            
            3,488
            
            
            7,917
            
            
            8,269$
            266,707
            
            $
            294,794
            
            $
            323,650





***Comparison
      of the Years Ended December 31, 2007 and 2006***




Net
      Sales




*Traditional
      Toys* .  Net
      sales of our Traditional Toys segment were $793.0 million in 2007, compared
      to
      $692.5 million in 2006, representing an increase of $100.5 million, or
      14.5%.  The increase in net sales was primarily due to impact of sales
      related to our Creative Designs line of products for the full twelve months
      ended December 31, 2007, as compared to only a part of the twelve months ended
      December 31, 2006 (as a result of the February 2006 acquisition of Creative
      Designs), which had incremental sales of $17.4 million, and increases in sales
      of WWE and Pokemon action figures and accessories, role-play and dress-up toys,
      Bio Bytes TM, Eye ClopsTM Bionic Eye, Child Guidance pre-school toys, Hannah
      Montana dolls and accessories, In My Pocket  toys, Cheetah Girls toys,
      Sweet Secrets toys, Funnoodle pool toys and our Fly Wheels XPV® toys, offset in
      part by decreases in sales of Dragonball Z ® action figures, JAKKS TM dolls, Plug
      It In & Play TV Games, wheels products, Telestory ®, Vmigo ®, Sky Dancers ®,
      Doodle Bears ® Dragon Flyz TM, Trolls TM, Care Bears®, Cabbage Patch Kids®,
      Speedstacks ®, Snugglers TM, RC Flight toys and our Go Fly A Kite® and junior
      sports products.




*Craft/Activity/Writing
      Products* .  Net
      Sales of our Craft/Activity/Writing Products were $39.6 million in 2007,
      compared to $52.8 million in 2006, representing a decrease of $13.2 million,
      or
      25.0%.  The decrease in net sales was primarily due to decreases in
      sales of our Flying Colors and Vivid Velvet activities products and our Pentech
      and Color Workshop writing instruments and related products.




*Pet
      Products* .  Net
      Sales of our Pet Pal line of products were $24.5 million in 2007, compared
      to
      $20.1 million in 2006, representing an increase of $4.4 million, or
      21.9%.  The increase is attributable to the expanding line of products
      and expanding distribution.




Cost
      of Sales




*Traditional
      Toys* .  Cost
      of sales of our Traditional Toys segment was $490.3 million, or 61.8% of related
      net sales, in 2007, compared to $429.4 million, or 62.0% of related net sales,
      in 2006, representing an increase of $60.9 million, or 14.2%.  The
      increase primarily consisted of an increase in product costs of $41.1 million,
      which is in line with the higher volume of sales.  Product costs as a
      percentage of sales decreased primarily due to the mix of the product sold
      with
      lower product cost.  Furthermore, royalty expense for our Traditional
      Toys segment increased by $16.9 million and as a percentage of net sales due
      to
      changes in the product mix to more products with higher royalty rates from
      products with lower royalty rates or proprietary products with no royalty
      rates.  Additionally, certain royalty advances and guarantees were
      written off for licensed product whose sell-off period had expired or was
      projected to not recoup the advances through future sales or meet its
      contractual minimum guaranty.  Our depreciation of molds and tools
      increased by $2.9 million due to the depreciation of new products being sold
      in
      this segment.


29


*Craft/Activity/Writing
      Products* .  Cost
      of sales of our Craft/Activity/Writing Products segment was $27.0 million,
      or
      68.1% of related net sales, in 2007, compared to $29.0 million, or 55.0% of
      related net sales, in 2006, representing a decrease of $2.0 million, or
      6.9%.  The decrease consisted of a decrease in product costs of $2.2
      million, which is in line with the lower volume of sales.  Product
      costs as a percentage of net sales increased primarily due to the mix of the
      product sold and sell-off of closeout
      product.     Royalty expense increased by $0.3 million
      and as a percentage of net sales due to changes in the product mix to more
      products with higher royalty rates from products with lower royalty rates or
      proprietary products with no royalty rates. Additionally, certain royalty
      advances and guarantees were written off for licensed product whose sell-off
      period had expired or was projected to not recoup the advances through future
      sales or meet its contractual minimum guaranty.  Our depreciation of
      molds and tools decreased by $0.2 million due to lower level of product in
      this
      segment requiring molds and tools.




*Pet
      Products* .  Cost
      of sales of our Pet Pal line of products was $16.2 million, or 66.2% of related
      net sales, in 2007, compared to $12.1 million, or 60.5% of related net sales,
      in
      2006, representing an increase of $4.1 million, or 33.9%.  The
      increase primarily consisted of an increase in product costs of $3.5 million,
      which is in line with the higher volume of sales.  Product costs as a
      percentage of net sales increased primarily due to the mix of the product
      sold.  Royalty expense increased by $0.4 million, which was in line
      with the higher volume of sales.  Additionally, our depreciation of
      molds and tools was comparable year-over-year.




Selling,
      General and Administrative Expenses




Selling,
      general and administrative expenses were $216.7 million in 2007 and $202.5
      million in 2006, constituting 25.3% and 26.5% of net sales,
      respectively.  The overall increase of $14.2 million in such costs was
      primarily due to increases in general and administrative expenses ($16.8
      million), the incremental overhead related to a full quarter impact of
      operations of Creative Designs ($1.5 million) for the three months ended March
      31, 2007 (as compared to a partial quarter of operations for the three months
      ended March 31, 2006 as a result of the February 2006 acquisition thereof),
      product development ($2.2 million) and stock based compensation ($2.6 million),
      offset in part by decreases in other selling expenses ($7.0
      million),  and amortization expense related to intangible assets other
      than goodwill ($1.9 million).  The increase in general and
      administrative expenses is primarily due to an increase in salary and payroll
      taxes ($5.8 million) to support our growing business which includes a lower
      allocation of JAKKS’ overhead to the video game joint venture ($1.2 million),
      bonus expense ($10.6 million) based on a stronger EPS growth in 2007
      compared to 2006, donations expense (2.1 million), rent expense ($1.1 million)
      and travel and entertainment expense ($0.8 million), offset in part by decreases
      in other expenses as a result of the reversal of FIN 48 penalties related to
      income taxes payable ($0.6 million) and the buyout of our New York showroom
      lease ($1.3 million) and legal and other professional fees ($1.4
      million).  The
      decrease in direct selling expenses is primarily due to a decrease in
      advertising and promotional expenses of $10.9 million in 2007 in support of
      several of our product lines, offset in part by an increase in sales commissions
      ($1.2 million) and other direct selling expenses ($2.7 million).  From
      time to time, we may increase or decrease our advertising efforts, if we deem
      it
      appropriate for particular products.




Profit
      from Video Game Joint Venture




Profit
      from our video game joint venture in 2007 increased to $21.1 million, as
      compared to $13.2 million in 2006, due to the strong performance of the new
      Smackdown vs. Raw 2007 game and stronger sales of existing titles in 2007
      compared to 2006. Furthermore, we devoted and allocated $1.2 million less of
      JAKKS’ overhead to the video game joint venture.  The amount of the
      preferred return we will receive from the joint venture after June 30, 2006
      became subject to change (see “Risk Factors”, *infra* ,
      and
      Note 4 of the Notes to Consolidated Financial Statements, *supra* ).




Interest
      Income




Interest
      income in 2007 was $6.8 million, as compared to $4.9 million in
      2006.  The increase is due to higher average cash balances and higher
      interest rates during 2007 compared to 2006.




Interest
      Expense




Interest
      expense was $5.5 million and $4.5 million for 2007 and 2006, respectively.
      The
      increase is due to net interest accrued pursuant to our January 1, 2007 adoption
      of the provisions of FIN 48. Interest expense of $4.5 million related to our
      convertible senior notes payable were comparable in 2007 and 2006.




Provision
      for Income Taxes




Provision
      for income taxes includes federal, state and foreign income taxes at effective
      tax rates of 31.7% in 2006, and 31.3% in 2007, benefiting from a flat 17.5%
      tax
      rate on the Company’s income arising in, or derived from, Hong Kong for each of
      2006 and 2007.  The effective rate in 2007 reflects the recognition of
      certain discrete income tax adjustments recognized in the quarter ended
      September 30, 2007.  These adjustments included the reconciliation of
      the 2006 income tax provision to the actual income tax liability as reflected
      in
      the Company’s income tax return, and the reduction in income tax expense due to
      the recognition of a previously recorded potential income tax liability for
      uncertain tax positions that are no longer subject to audit due to the closure
      of the audit period.  These discrete items resulted in approximately a
      2.1% reduction in the effective income tax rate for the twelve months ended
      December 31, 2007.   As of December 31, 2007, the Company had net
      deferred tax assets of approximately $7.3 million for which an allowance of
      $0.9
      million has been provided since, in the opinion of management, realization
      of
      the future benefit is uncertain.


30





***Comparison
      of the Years Ended December 31, 2006 and 2005***




Net
      Sales




*Traditional
      Toys* .  Net
      sales of our Traditional Toys segment were $692.5 million in 2006, compared
      to
      $589.7 million in 2005, representing an increase of $102.8 million or
      17.4%.  The increase in net sales was primarily due to the addition of
      the Creative Designs line of products, which we acquired in February 2006,
      with
      sales of $181.1 million and increases in sales of WWE actions figures and
      accessories, Doodle Bear, Speed Stacks, Snugglers, Dragonflyz, Trolls, Fly
      Wheels XPV and Flight toys and our Funnoodle pool toys, offset in part by
      decreases in sales of Plug It In & Play TV Games, wheels products, dolls,
      Sky Dancers, Care Bears, Cabbage Patch Kids, Go Fly A Kite and junior sports
      products.




*Craft/Activity/Writing
      Products* .  Net
      Sales of our Craft/Activity/Writing Products were $52.8 million in 2006,
      compared to $62.0 million in 2005, representing a decrease of $9.2 million
      or
      14.8%.  The decrease in net sales was primarily due to decreases in
      sales of our Flying Colors activities and our Pentech and Color Workshop writing
      instruments and related products, offset in part by an increase in sales of
      our
      Creepy Crawlers® activity sets.




*Pet
      Products* .  Net
      Sales of our Pet Pal line of products, which we acquired in June 2005, were
      $20.1 million in 2006, compared to $9.8 million in 2005, representing an
      increase of $10.3 million or 105.1%.  The increase is attributable to
      the growth in sales of this new line of products through our existing
      distribution channels and having sales for the entire year in 2006.




Cost
      of Sales




*Traditional
      Toys* .  Cost
      of sales of our Traditional Toys segment was $429.4 million in 2006, compared
      to
      $348.6 million in 2005, representing an increase of $80.8 million or
      23.2%.  The increase primarily consisted of an increase in product
      costs of $74.5 million, which is in line with the higher volume of
      sales.  Furthermore, royalty expense for our Traditional Toys segment
      decreased by $1.5 million and as a percentage of net sales due to changes in
      the
      product mix to more products with lower royalty rates or proprietary products
      with no royalty rates, from products with higher royalty
      rates.  Product costs as a percentage of sales increased due to the
      mix of the product sold and sell-through of closeout product.  Our
      depreciation of molds and tools increased by $7.9 million due to new products
      being sold in this segment.




*Craft/Activity/Writing
      Products* .  Cost
      of sales of our Craft/Activity/Writing Products was $29.0 million in 2006,
      compared to $39.9 million in 2005, representing a decrease of $10.9 million
      or
      27.3%.  The decrease primarily consisted of decreases in product costs
      of $8.6 million and royalty expense of $2.2 million, which were in line with
      the
      lower volume of sales.  Additionally, our depreciation of molds and
      tools was comparable year-over-year.




*Pet
      Products* .  Cost
      of sales of our Pet Pal line of products, which we acquired in June 2005, was
      $12.1 million in 2006, compared to $6.3 million in 2005, representing an
      increase of $5.8 million or 92.1%.  The increase primarily consisted
      of increases in product costs of $4.8 million and royalty expense of $0.8
      million, which were in line with the higher volume of
      sales.  Additionally, our depreciation of molds and tools increased by
      $0.3 million.




Selling,
      General and Administrative Expenses




Selling,
      general and administrative expenses were $202.5 million in 2006 and $178.7
      million in 2005, constituting 26.5% and 27.0% of net sales,
      respectively.  The overall increase of $23.8 million in such costs was
      primarily due to the addition of overhead related to the operations of Creative
      Designs ($20.3 million), increases in product development ($2.7 million),
      amortization expense related to intangible assets other than goodwill ($7.4
      million) and stock-based compensation ($3.1 million), offset in part by a
      decrease in other selling expenses ($12.0 million).  Increased grants
      of restricted stock awards to our non-employee directors and the increase in
      the
      price of our common stock in 2006 compared to 2005 resulted in stock-based
      compensation expense of $6.5 million in 2006, compared to $3.4 million in
      2005.  The decrease in direct selling expenses is primarily due to
      efficiencies gained by closing two third-party warehouses, and decreases in
      sales commission expense of $1.9 million and advertising and promotional
      expenses of $6.4 million in 2006 in support of several of our product
      lines.  From time to time, we may increase or decrease our advertising
      efforts, if we deem it appropriate for particular products.




Profit
      from Video Game Joint Venture





Profit
      from our video game joint venture in 2006 increased to $13.2 million, as
      compared to $9.4 million in 2005, due to the strong performance of the three
      new
      games released and stronger sales of existing titles in 2006, offset by the
      reduction of $0.1 million to THQ for their share of profit on our sales of
      WWE
      themed Plug It In & Play TV Games compared to 2005, in which period four new
      games were released and $0.8 million was earned by THQ for the WWE themed Plug
      It In & Play TV Games. The amount of the preferred return we will receive
      from the joint venture after June 30, 2006 is subject to change (see “Risk
      Factors” and “World Wrestling Entertainment Video Games”).


31





Other
      Expense





Other
      expense in 2005 of $1.4 million related to the write-off of an investment in
      a
      Chinese joint venture.  There was no such expense in
      2006.




Interest
      Income





Interest
      income in 2006 was $4.9 million, as compared to $5.2 million in
      2005.  This decrease is due to lower average cash balances in 2006 as
      a result of our acquisition of Creative Designs, offset in part by higher
      interest rates during 2006 compared to 2005.




Interest
      Expense





Interest
      expense in 2006 of $4.5 million related to the convertible senior notes payable
      was comparable to 2005.




Provision
      for Income Taxes





Provision
      for income taxes included federal, state and foreign income taxes at effective
      tax rates of 34.3% in 2005 and 31.7% in 2006, benefiting from a flat 17.5%
      Hong
      Kong Corporation Tax on our income arising in, or derived from, Hong Kong for
      each of 2005 and 2006. The decrease in the effective tax rate in 2006 is due
      to
      the effect, in 2005, of a one-time repatriation of undistributed earnings from
      our international subsidiaries, which created additional taxes in 2005 on 15%
      of
      the dividends received. As of December 31, 2006, we had net deferred tax assets
      of approximately $8.2 million for which an allowance of $0.9 million has been
      provided since, in the opinion of management, realization of this portion of
      the
      future benefit is uncertain.





**Quarterly
      Fluctuations and Seasonality**





We
      have
      experienced significant quarterly fluctuations in operating results and
      anticipate these fluctuations in the future. The operating results for any
      quarter are not necessarily indicative of results for any future period. Our
      first quarter is typically expected to be the least profitable as a result
      of
      lower net sales but substantially similar fixed operating expenses. This is
      consistent with the performance of many companies in the toy
      industry.





The
      following table presents our unaudited quarterly results for the years
      indicated. The seasonality of our business is reflected in this quarterly
      presentation.





********
              
              **2006** ****
              
              **** **2007** ********
              
              **First** ****
              
              **** **Second** ****
              
              **** **Third** ****
              
              **** **Fourth** ****
              
              **** **First** **** ****
              
              **Second** **** ****
              
              **Third** **** ****
              
              **Fourth** ******** ****
              
              **Quarter** ****
              
              **** **Quarter** ****
              
              **** **Quarter** ****
              
              **** **Quarter** ****
              
              **** **Quarter** **** ****
              
              **Quarter** **** ****
              
              **Quarter** **** ****
              
              **Quarter** ****Net
                  sales
              
              $
              107,244
              
              $
              124,041
              
              $
              295,789
              
              $
              238,312
              
              $
              124,062
              
              $
              129,547
              
              $
              318,391
              
              $
              285,085As
                  a % of full year
              
              
              14.0
              %
              
              16.2
              %
              
              38.7
              %
              
              31.1
              %
              
              14.5
              %
              
              15.1
              %
              
              37.1
              %
              
              33.3
              %Gross
                  Profit
              
              
              44,163
              
              
              49,280
              
              
              112,883
              
              
              88,468
              
              
              45,508
              
              
              45,295
              
              
              124,050
              
              
              108,797As
                  a % of full year
              
              
              15.0
              %
              
              16.7
              %
              
              38.3
              %
              
              30.0
              %
              
              14.1
              %
              
              14.0
              %
              
              38.3
              %
              
              33.6
              %As
                  a % of net sales
              
              
              41.2
              %
              
              39.7
              %
              
              38.2
              %
              
              37.1
              %
              
              36.7
              %
              
              35.0
              %
              
              39.0
              %
              
              38.2
              %Income
                  (loss) from operations
              
              
              2,244
              
              
              8,963
              
              
              58,204
              
              
              22,901
              
              
              3,324
              
              
              6,488
              
              
              65,057
              
              
              32,129As
                  a % of full year
              
              
              2.4
              %
              
              9.7
              %
              
              63.1
              %
              
              24.8
              %
              
              3.1
              %
              
              6.1
              %
              
              60.8
              %
              
              30.0
              %As
                  a % of net sales
              
              
              2.1
              %
              
              7.2
              %
              
              19.7
              %
              
              9.6
              %
              
              2.7
              %
              
              5.0
              %
              
              20.4
              %
              
              11.3
              %Income
                  before income taxes and minority interest
              
              
              3,283
              
              
              9,135
              
              
              57,855
              
              
              35,662
              
              
              4,762
              
              
              7,403
              
              
              67,087
              
              
              50,289As
                  a % of net sales
              
              
              3.1
              %
              
              7.4
              %
              
              19.6
              %
              
              15.0
              %
              
              3.8
              %
              
              5.7
              %
              
              21.1
              %
              
              17.6
              %Net
                  income
              
              
              2,331
              
              
              6,361
              
              
              40,499
              
              
              23,184
              
              
              3,238
              
              
              5,034
              
              
              47,318
              
              
              33,401As
                  a % of net sales
              
              
              2.2
              %
              
              5.1
              %
              
              13.7
              %
              
              9.7
              %
              
              2.6
              %
              
              3.9
              %
              
              14.9
              %
              
              11.7
              %Diluted
                  earnings per share
              
              $
              0.09
              
              $
              0.22
              
              $
              1.26
              
              $
              0.73
              
              $
              0.12
              
              $
              0.17
              
              $
              1.45
              
              $
              1.03Weighted
                  average shares and equivalents outstanding
              
              
              32,617
              
              
              32,790
              
              
              32,736
              
              
              32,803
              
              
              27,985
              
              
              33,133
              
              
              33,145
              
              
              33,251





During
      the fourth quarter of 2005, we recorded a non-cash charge, which impacted net
      income, of $3.6 million for restricted stock, and we repatriated $105.5 million
      from our Hong Kong subsidiaries which resulted in incremental income tax expense
      of $5.4 million and reduced net income.





During
      2007, we recorded net interest expense of $0.9 million related to FIN
      48.





32


***Recent
      Accounting Standards***




In
      June
      2006, the Financial Accounting Standards Board issued FASB Interpretation No.
      48
      (“FIN 48”), *Accounting
      for Uncertainty in Income Taxes* ,
      which
      prescribes a recognition threshold and measurement process for recording in
      the
      financial statements uncertain tax positions taken or expected to be taken
      in a
      tax return.  Under FIN 48, the tax benefit of uncertain tax positions
      may be recognized only if it is more likely than not that the tax position
      will
      be sustained, based solely on its technical merits presuming the tax authority
      has full knowledge of all relevant information.  Additionally, FIN 48
      provides guidance on the de-recognition, classification, and accounting in
      interim periods and disclosure requirements for uncertain tax
      positions.  In the first quarter of 2007, we adopted FIN 48 which
      resulted in the recognition of an increased current and non-current income
      tax
      payable for unrecognized tax benefits of $15.6 million.  We have also
      recognized an additional liability of $2.5 million for penalties and $2.8
      million for interest on the income tax liability.  These increases to
      the liabilities resulted in a reduction of $19.1 million to the January 1,
      2007
      balance of retained earnings, net of related tax benefits.  Current
      interest on income tax liabilities is recognized as interest expense and
      penalties on income tax liabilities are recognized as other expense in the
      consolidated statement of income.  During the year ended December 31,
      2007, we accrued an additional $0.9 million of net interest
      expense.





In
      December 2007, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standard No. 141 (Revised) (“FAS 141(R)”), *Business
      Combinations* .
      The
      provisions of this statement are effective for business combinations for which
      the acquisition date is on or after the beginning of the first annual reporting
      period beginning after December 15, 2008. Earlier application is not permitted.
      FAS141(R) replaces FAS 141 and provides new guidance for valuing assets and
      liabilities acquired in a business combination. We will adopt FAS141(R) in
      calendar year 2009.





In
      September 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standard No. 157 (“FAS 157”) *Fair
      Value Measurements* .
      This
      standard provides new definitions for fair value and establishes a framework
      for
      measuring fair value in financial statements. FAS 157 becomes effective for
      us
      as of January 1, 2008. We anticipate that the effect of the adoption of FAS
      157
      will be immaterial to our financial statements.





**Liquidity
      and Capital Resources**





As
      of
      December 31, 2007, we had working capital of $355.7 million, as compared to
      $280.4 million as of December 31, 2006. This increase was primarily attributable
      to our operating activities, offset in part by the disbursement of earn-out
      payments related to our Play Along, Creative Designs and Pet Pal
      acquisitions.





Operating
      activities provided net cash of $87.7 million in the year ended December 31,
      2007, as compared to $63.7 million in 2006. Net cash was provided primarily
      by
      net income of $90.0 million and non-cash charges and changes in working capital.
      Accounts receivable turnover as measured by days sales outstanding in accounts
      receivable for the three months ended December 31, 2007 decreased from
      approximately 58 days as of December 31, 2006 to approximately 55 days as of
      December 31, 2007 primarily due to the larger volume of sales for the quarter
      ended December 31, 2007 compared to the volume of sales for the quarter ended
      December 31, 2006. Other than open purchase orders, issued in the normal course
      of business, we have no obligations to purchase finished goods from our
      manufacturers. As of December 31, 2007, we had cash and cash equivalents of
      $241.3 million.





Our
      investing activities used cash of $33.7 million in the year ended December
      31,
      2007, as compared to $121.9 million in 2006, consisting primarily of cash paid
      for the Creative Designs earn-out of $6.7 million, the Play Along earn-out
      of
      $6.7 million, the Pet Pal earn-out of $2.0 million and the purchase of office
      furniture and equipment and molds and tooling of $18.1 million used in the
      manufacture of our products and other assets. In 2006, our investing activities
      consisted primarily of cash paid for the purchase of net assets in the Creative
      Designs acquisition of $101.7 million, the Play Along earn-out of $6.7 million,
      the Pet Pal earn-out of $1.5 million and the purchase of office furniture and
      equipment and molds and tooling of $11.2 million used in the manufacture of
      our
      products and other assets.  As part of our strategy to develop and
      market new products, we have entered into various character and product licenses
      with royalties generally ranging from 1% to 14% payable on net sales of such
      products. As of December 31, 2007, these agreements required future aggregate
      minimum guarantees of $38.2 million, exclusive of $26.2 million in advances
      already paid.  Of this $38.2 million future minimum guarantee, $21.3
      is due over the next twelve months.  We do not have any significant
      capital expenditure commitments as of December 31, 2007.





Our
      financing activities provided net cash of $2.8 million in the year ended
      December 31, 2007, as compared to $3.1 million in 2006. In 2007, cash was
      primarily provided from the exercise of stock options and the tax benefit from
      stock options exercised. In 2006, cash was primarily provided from the exercise
      of stock options and the tax benefit from stock options exercised.





33


The
      following is a summary of our significant contractual cash obligations for
      the
      periods indicated that existed as of December 31, 2007 and is based on
      information appearing in the notes to the consolidated financial statements
      (in
      thousands):





**2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **2012**
            
            **Thereafter**
            
            **Total**Long-term
                debt
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            98,000
            
            $
            98,000Operating
                leases
            
            
            9,662
            
            
            6,796
            
            
            5,736
            
            
            5,779
            
            
            5,451
            
            
            4,034
            
            
            37,458Minimum
                guaranteed license/royalty
              payments
            
            
            21,260
            
            
            10,224
            
            
            5,001
            
            
            1,175
            
            
            500
            
            
            —
            
            
            38,160Employment
                contracts
            
            
            5,919
            
            
            3,789
            
            
            2,280
            
            
            —
            
            
            —
            
            
            —
            
            
            11,988Total
                contractual cash obligations
            
            $
            36,841
            
            $
            20,809
            
            $
            13,017
            
            $
            6,954
            
            $
            5,951
            
            $
            102,034
            
            $
            185,606





The
      above
      table excludes any potential uncertain income tax liabilities that may become
      payable upon examination of the Company’s income tax returns by taxing
      authorities. Such amounts and periods of payment cannot be reliably estimated.
      See Note 12 to the financial statements for further explanation of the Company’s
      uncertain tax positions. The above table also excludes our contractual
      obligation with one of our executives regarding his retirement plan. Such
      amounts and periods of payment cannot be reliably estimated. See Note 15 to
      the
      financial statements for further explanation of the Company’s retirement plan
      commitment.





In
      February 2008, our Board of Directors authorized us to repurchase up to $30.0
      million of our common stock. To date, no shares have been repurchased by
      us.





In
      October 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into
      law. The Act created a one-time incentive for U.S. corporations to repatriate
      undistributed earnings from their international subsidiaries by providing an
      85%
      dividends-received deduction for certain international earnings. The deduction
      was available to corporations during the tax year that included October 2004,
      or
      in the immediately subsequent tax year. In the fourth quarter of 2005, our
      Board
      of Directors approved a plan to repatriate $105.5 million in foreign earnings,
      which was completed in December 2005. The federal and state income tax expense
      related to this repatriation was approximately $5.4 million.





In
      October 2004, we were named as a defendant in a lawsuit commenced by WWE (the
      “WWE Action”). The complaint also named as defendants, among others, the joint
      venture with THQ Inc., certain of our foreign subsidiaries and our three
      executive officers. The complaint was dismissed and an appeal has been filed
      with respect to the Judgment dismissing the WWE Action. In November 2004,
      several purported class action lawsuits were filed in the United States District
      Court for the Southern District of New York, alleging damages associated with
      the facts alleged in the WWE Action. In January 2008, the complaint was
      dismissed without prejudice to seeking leave to file an amended complaint.
      Such
      leave was sought in February 2008. Three shareholder derivative actions have
      also been filed against us, nominally, and against certain of our Board members
      (the “Derivative Actions”). The Derivative Actions seek to hold the individual
      defendants liable for damages allegedly caused to our Company by their actions,
      and, in one of the Derivative Actions, seeks restitution to our Company of
      profits, benefits and other compensation obtained by them.  In October
      2006, WWE commenced a lawsuit against THQ and the joint venture concerning
      allegedly improper sales of WWE video games in Japan and other countries in
      Asia, seeking among other things, a declaration that WWE is entitled to
      terminate its video games license with the joint venture and monetary damages
      (the “Connecticut Action”). In spring 2007, WWE amended the complaint in the
      Connecticut Action to allege the matters set forth in the WWE Action.
      Thereafter, WWE amended the complaint in the Connecticut Action to allege state
      claim laws that had been alleged in the WWE Action. WWE submitted a proposed
      case management order in February 2008 and it provided for a trial on or after
      October 2009. On February 22, 2008, we submitted a response in which we
      requested that no case management order be adopted prior to the determination
      of
      the motion to strike and for summary judgment because it would moot such a
      case
      management order but that if a case management order is to be adopted it should
      provide for a trial, if the matter is not fully dismissed, not before June
      2010. See
      “Legal Proceedings.”





In
      June
      2005, we purchased substantially all of the operating assets and assumed certain
      liabilities relating to the Pet Pal line of pet products, including toys, treats
      and related pet products. The total initial purchase price of $10.6 million
      was
      paid in cash. In addition, we agreed to pay an earn-out of up to an aggregate
      amount of $25.0 million in cash over the three years ending June 30, 2008
      following the acquisition based on the achievement of certain financial
      performance criteria, which will be recorded as goodwill when and if
      earned.  During the years ended December 31, 2006 and 2007, $1.5
      million and $2.0 million, respectively, of the earn-out was earned and recorded
      as goodwill.  Goodwill of $4.6 million arose from this transaction,
      which represents the excess of the purchase price over the fair value of assets
      acquired less liabilities assumed. This acquisition expands our product
      offerings and distribution channels. Our results of operations have included
      Pet
      Pal from the date of acquisition.





In
      February 2006, we acquired substantially all of the assets of Creative Designs.
      The total initial purchase price of $111.1 million consisted of $101.7 million
      in cash, 150,000 shares of our common stock at a value of approximately $3.3
      million and the assumption of liabilities in the amount of $6.1 million. In
      addition, we agreed to pay an earn-out of up to an aggregate amount of $20.0
      million in cash over the three calendar years following the acquisition based
      on
      the achievement of certain financial performance criteria, which will be
      recorded as goodwill when and if earned. For the years ended December 31, 2006
      and 2007, $6.9 million and $6.7 respectively, of the earn-out was earned and
      recorded as goodwill.  Creative Designs is a leading designer and
      producer of dress-up and role-play toys and is included in our results of
      operations from the date of acquisition.


34


In
      June
      2003, we sold an aggregate of $98.0 million of 4.625% Convertible Senior Notes
      due June 15, 2023. The notes may be converted into shares of our common stock
      at
      an initial conversion price of $20.00 per share, or 50 shares per note, subject
      to certain circumstances. The notes may be converted in each quarter subsequent
      to any quarter in which the closing price of our common stock is at or above
      a
      prescribed price for at least 20 trading days in the last 30 trading day period
      of the quarter.  The prescribed price for the conversion trigger is
      $24.00 through June 30, 2010, and increases nominally each quarter
      thereafter.  Cash interest is payable at an annual rate of 4.625% of
      the principal amount at issuance, from the issue date to June 15, 2010, payable
      on June 15 and December 15 of each year, commencing on December 15, 2003. After
      June 15, 2010, interest will accrue at the same rate on the outstanding notes
      until maturity. At maturity, we will redeem the notes at their accreted
      principal amount, which will be equal to $1,811.95 (181.195%) per $1,000
      principal amount at issuance, unless redeemed or converted
      earlier.  The notes were not convertible as of December 31, 2007, but
      are convertible in the first quarter of 2008.





We
      may
      redeem the notes at our option in whole or in part beginning on June 15, 2010,
      at 100% of their accreted principal amount plus accrued and unpaid interest,
      if
      any, payable in cash. Holders of the notes may also require us to repurchase
      all
      or part of their notes on June 15, 2010, for cash, at a repurchase price of
      100%
      of the principal amount per note plus accrued and unpaid interest, if any.
      Holders of the notes may also require us to repurchase all or part of their
      notes on June 15, 2013 and June 15, 2018 at a repurchase price of 100% of the
      accreted principal amount per note plus accrued and unpaid interest, if any.
      Any
      repurchases at June 15, 2013 and June 15, 2018 may be paid in cash, in shares
      of
      common stock or a combination of cash and shares of common stock.





We
      believe that our cash flows from operations and cash and cash equivalents will
      be sufficient to meet our working capital and capital expenditure requirements
      and provide us with adequate liquidity to meet our anticipated operating needs
      for at least the next 12 months. Although operating activities are expected
      to
      provide cash, to the extent we grow significantly in the future, our operating
      and investing activities may use cash and, consequently, this growth may require
      us to obtain additional sources of financing. There can be no assurance that
      any
      necessary additional financing will be available to us on commercially
      reasonable terms, if at all. We intend to finance our long-term liquidity
      requirements out of net cash provided by operations and net cash and cash
      equivalents.  As of December 31, 2007, we do not have any off-balance
      sheet arrangements.





**Exchange
      Rates**





Sales
      from our United States and Hong Kong operations are denominated in U.S. dollars
      and our manufacturing costs are denominated in either U.S. or Hong Kong dollars.
      Operations and operating expenses of all of our operations are denominated
      in
      local currency, thereby creating exposure to changes in exchange rates. Changes
      in the Hong Kong dollar/U.S. dollar exchange rate may positively or negatively
      affect our operating results. The exchange rate of the Hong Kong dollar to
      the
      U.S. dollar has been fixed by the Hong Kong government since 1983 at HK$7.80
      to
      US$1.00 and, accordingly, has not represented a currency exchange risk to the
      U.S. dollar. We cannot assure you that the exchange rate between the United
      States and Hong Kong currencies will continue to be fixed or that exchange
      rate
      fluctuations between the United States and Hong Kong currencies will not have
      a
      material adverse effect on our business, financial condition or results of
      operations.





**Item
      7A.** ***Quantitative
      and Qualitative Disclosures About Market Risk***





Market
      risk represents the risk of loss that may impact our financial position, results
      of operations or cash flows due to adverse changes in financial and commodity
      market prices and rates. We are exposed to market risk in the areas of changes
      in United States and international borrowing rates and changes in foreign
      currency exchange rates. In addition, we are exposed to market risk in certain
      geographic areas that have experienced or remain vulnerable to an economic
      downturn, such as China. We purchase substantially all of our inventory from
      companies in China, and, therefore, we are subject to the risk that such
      suppliers will be unable to provide inventory at competitive prices. While
      we
      believe that, if such an event were to occur we would be able to find
      alternative sources of inventory at competitive prices, we cannot assure you
      that we would be able to do so. These exposures are directly related to our
      normal operating and funding activities. To date, we have not used derivative
      instruments or engaged in hedging activities to minimize our market
      risk.





**Interest
      Rate Risk**





In
      June
      2003, we issued convertible senior notes payable of $98.0 million with a fixed
      interest rate of 4.625% per annum, which remain outstanding as of December
      31,
      2007. Accordingly, we are not generally subject to any direct risk of loss
      arising from changes in interest rates.


35


**Foreign
      Currency Risk**





We
      have
      wholly-owned subsidiaries in Hong Kong and China. Sales are made by these
      operations on FOB China or Hong Kong terms and are denominated in U.S. dollars.
      However, purchases of inventory and Hong Kong operating expenses are typically
      denominated in Hong Kong dollars and local operating expenses in China are
      denominated in local currency, thereby creating exposure to changes in exchange
      rates. Changes in the Chinese Yuan or Hong Kong dollar/U.S. dollar exchange
      rates may positively or negatively affect our gross margins, operating income
      and retained earnings.  A gain in Hong Kong dollars gave rise to the
      other comprehensive loss in the balance sheet at December 31, 2007. The exchange
      rate of the Hong Kong dollar to the U.S. dollar has been fixed by the Hong
      Kong
      government since 1983 at HK$7.80 to US$1.00 and, accordingly, has not
      represented a currency exchange risk to the U.S. dollar. We do not believe
      that
      near-term changes in these exchange rates, if any, will result in a material
      effect on our future earnings, fair values or cash flows, and therefore, we
      have
      chosen not to enter into foreign currency hedging transactions. We cannot assure
      you that this approach will be successful, especially in the event of a
      significant and sudden change in the value of the Hong Kong dollar or Chinese
      Yuan.


36




**Item
      8.** ***Consolidated
      Financial Statements and Supplementary Data***





**Report
      of Independent Registered Public Accounting Firm**





The
      Board
      of Directors and Stockholders


JAKKS
      Pacific, Inc.


Malibu,
      California





We
      have
      audited the accompanying consolidated balance sheets of JAKKS Pacific, Inc.
      (the
“Company”) as of December 31, 2007 and 2006 and the related consolidated
      statements of income, other comprehensive income, stockholders’ equity and cash
      flows for the years then ended. These financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. An audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements. An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of JAKKS Pacific, Inc. as of December
      31, 2007 and 2006, and the results of its operations and its cash flows for
      the
      years then ended, in conformity with accounting principles generally accepted
      in
      the United States of America.





As
      more
      fully described in Note 2 to the consolidated financial statements, effective
      January 1, 2007, the Company adopted the provisions of FASB Interpretation
      No.
      48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
      Statement No. 109,” and effective January 1, 2006, the Company adopted the
      provisions of Statement of Financial Accounting Standards No. 123(R),
“Share-Based Payment.”





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), JAKKS Pacific, Inc.’s internal control over
      financial reporting as of December 31, 2007, based on criteria established
      in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
      and our report dated February 28, 2008 expressed an unqualified opinion
      thereon.


/s/
                  BDO Seidman, LLPBDO
                  Seidman, LLPLos
                  Angeles, CaliforniaFebruary
                  28, 2008


37


REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





The
      Board
      of Directors and Stockholders


JAKKS
      Pacific, Inc. and Subsidiaries





We
      have
      audited the accompanying consolidated statements of income, other comprehensive
      income, stockholders’ equity, and cash flows and the financial statement
      schedule of JAKKS Pacific, Inc. and Subsidiaries (Company) for the year ended
      December 31, 2005.  These financial statements are the responsibility
      of the Company’s management.  Our responsibility is to express an
      opinion on these financial statements based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States).  Those standards require
      that we plan and perform the audit to obtain reasonable assurance about whether
      the financial statements are free of material misstatement.  An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements.  An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall financial statement
      presentation.  We believe that our audit provides a reasonable basis
      for our opinion.





In
      our
      opinion, the consolidated financial statements and schedule referred to above
      present fairly, in all material respects, the results of operations and cash
      flows of JAKKS Pacific, Inc. and Subsidiaries for the year ended December 31,
      2005 in conformity with accounting principles generally accepted in the United
      States of America.


/s/
                  PKF


PKF


Certified
      Public Accountants


A
      Professional Corporation


Los
      Angeles, California


February
      13, 2006


38





**JAKKS
      PACIFIC, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**





**December 31,****2006**
            
            **2007****(In thousands, except****share data)****Assets****Current
                assets**Cashand
                cashequivalents
            
            $
            184,489
            
            $
            241,250Marketable
                securities
            
            
            210
            
            
            218Accounts
                receivable, net of allowance for uncollectible accounts of $1,206
                and
                $1,354, respectively
            
            
            153,116
            
            
            174,451Inventory
            
            
            76,788
            
            
            75,486Deferred
                income taxes
            
            
            10,592
            
            
            12,945Prepaid
                expenses and other
            
            
            26,543
            
            
            21,733Total
                current assets
            
            
            451,738
            
            
            526,083**Property
                and equipment**Office
                furniture and equipment
            
            
            8,299
            
            
            9,961Molds
                and tooling
            
            
            36,600
            
            
            44,333Leasehold
                improvements
            
            
            4,882
            
            
            5,186Total
            
            
            49,781
            
            
            59,480Less
                accumulated depreciation and amortization
            
            
            32,898
            
            
            38,073Property
                and equipment, net
            
            
            16,883
            
            
            21,407Intangibles
                and other, net
            
            
            40,833
            
            
            26,200Investment
                in video game joint venture
            
            
            14,873
            
            
            36,090Goodwill,
                net
            
            
            337,999
            
            
            353,340Trademarks,
                net
            
            
            19,568
            
            
            19,568Total
                assets
            
            $
            881,894
            
            $
            982,688**Liabilities
                and Stockholders’ Equity****Current
                liabilities**Accounts
                payable
            
            $
            65,574
            
            $
            52,287Accrued
                expenses
            
            
            54,664
            
            
            70,085Reserve
                for sales returns and allowances
            
            
            32,589
            
            
            26,036Income
                taxes payable
            
            
            18,548
            
            
            21,997Total
                current liabilities
            
            
            171,375
            
            
            170,405Convertible
                senior notes
            
            
            98,000
            
            
            98,000Other
                liabilities
            
            
            854
            
            
            6,432Income
                taxes payable
            
            
            —
            
            
            11,294Deferred
                income taxes
            
            
            2,377
            
            
            5,560Total
                liabilities
            
            
            272,606
            
            
            291,691Commitments
                and contingencies**Stockholders’
                equity**Preferred
                shares, $.001 par value; 5,000,000 shares authorized; nil
                outstanding
            
            
            —
            
            
            —Common
                stock, $.001 par value; 100,000,000 shares authorized;
                27,776,947  and 28,275,116 shares issued and outstanding,
                respectively
            
            
            28
            
            
            28Additional
                paid-in capital
            
            
            300,255
            
            
            312,127Retained
                earnings
            
            
            312,432
            
            
            382,288Accumulated
                other comprehensive loss
            
            
            (3,427
            )
            
            (3,446
            )Total
                stockholders’ equity
            
            
            609,288
            
            
            690,997Total
                liabilities and stockholders’ equity
            
            $
            881,894
            
            $
            982,688





*See
      notes to consolidated financial statements.*


39





**JAKKS
      PACIFIC, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF INCOME**





**Years Ended December 31,****2005**
            
            **2006**
            
            **2007****(In thousands, except per share amounts)**Net
                sales
            
            $
            661,536
            
            $
            765,386
            
            $
            857,085Cost
                of sales
            
            
            394,829
            
            
            470,592
            
            
            533,435Gross
                profit
            
            
            266,707
            
            
            294,794
            
            
            323,650Selling,
                general and administrative expenses
            
            
            178,722
            
            
            202,482
            
            
            216,652Income
                from operations
            
            
            87,985
            
            
            92,312
            
            
            106,998Profit
                from video game joint venture
            
            
            9,414
            
            
            13,226
            
            
            21,180Other
                expense
            
            
            (1,401
            )
            
            —
            
            
            —Interest
                income
            
            
            5,183
            
            
            4,930
            
            
            6,819Interest
                expense
            
            
            (4,544
            )
            
            (4,533
            )
            
            (5,456
            )Income
                before provision for income taxes
            
            
            96,637
            
            
            105,935
            
            
            129,541Provision
                for income taxes
            
            
            33,144
            
            
            33,560
            
            
            40,550Net
                income
            
            $
            63,493
            
            $
            72,375
            
            $
            88,991Basic
                earnings per share
            
            $
            2.37
            
            $
            2.66
            
            $
            3.22Basic
                weighted number of shares
            
            
            26,738
            
            
            27,227
            
            
            27,665Diluted
                earnings per share
            
            $
            2.06
            
            $
            2.30
            
            $
            2.77Diluted
                weighted number of shares
            
            
            32,193
            
            
            32,714
            
            
            33,149





*See
      notes to consolidated financial statements.*


40





**JAKKS
      PACIFIC, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OTHER COMPREHENSIVE INCOME**





**Years Ended December 31,****2005**
            
            **2006**
            
            **2007****(In thousands)**Other
                comprehensive income:Net
                income
            
            $
            63,493
            
            $
            72,375
            
            $
            88,991Foreign
                currency translation adjustment
            
            
            (1,042
            )
            
            (638
            )
            
            (19
            )Other
                comprehensive income
            
            $
            62,451
            
            $
            71,737
            
            $
            88,972





*See
      notes to consolidated financial statements.*


41





**JAKKS
      PACIFIC, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY**


**YEARS
      ENDED DECEMBER 31, 2005, 2006 AND 2007**


**(In
      thousands)**





**Common Stock**
            
            
            
            
            
            **Accumulated****Additional**
            
            
            
            **Other**
            
            **Total****Number**
            
            
            
            **Paid-in**
            
            **Retained**
            
            **Comprehensive**
            
            **Stockholders’****of Shares**
            
            **Amount**
            
            **Capital**
            
            **Earnings**
            
            **Loss**
            
            **Equity**Balance,
                December 31, 2004
            
            
            26,234
            
            $
            26
            
            $
            276,642
            
            $
            176,564
            
            $
            (1,747
            )
            $
            451,485Exercise
                of options
            
            
            567
            
            
            1
            
            
            4,872
            
            
            —
            
            
            —
            
            
            4,873Stock
                option income tax benefit
            
            
            —
            
            
            —
            
            
            4,119
            
            
            —
            
            
            —
            
            
            4,119Restricted
                stock grants
            
            
            245
            
            
            —
            
            
            5,130
            
            
            —
            
            
            —
            
            
            5,130Compensation
                for vested stock options
            
            
            —
            
            
            —
            
            
            (1,706
            )
            
            —
            
            
            —
            
            
            (1,706
            )Retirement
                of common stock
            
            
            (101
            )
            
            —
            
            
            (1,701
            )
            
            —
            
            
            —
            
            
            (1,701
            )Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            63,493
            
            
            —
            
            
            63,493Foreign
                currency translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,042
            )
            
            (1,042
            )Balance,
                December 31, 2005
            
            
            26,945
            
            
            27
            
            
            287,356
            
            
            240,057
            
            
            (2,789
            )
            
            524,651Exercise
                of options
            
            
            333
            
            
            —
            
            
            4,382
            
            
            —
            
            
            —
            
            
            4,382Stock
                option income tax benefit
            
            
            —
            
            
            —
            
            
            1,509
            
            
            —
            
            
            —
            
            
            1,509Restricted
                stock grants
            
            
            473
            
            
            1
            
            
            4,579
            
            
            —
            
            
            —
            
            
            4,580Compensation
                for vested stock options
            
            
            —
            
            
            —
            
            
            1,902
            
            
            —
            
            
            —
            
            
            1,902Retirement
                of common stock
            
            
            (124
            )
            
            —
            
            
            (2,798
            )
            
            —
            
            
            —
            
            
            (2,798
            )Issuance
                of common stock for Creative Designs
            
            
            150
            
            
            —
            
            
            3,325
            
            
            —
            
            
            —
            
            
            3,325Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            72,375
            
            
            —
            
            
            72,375Foreign
                currency translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (638
            )
            
            (638
            )Balance,
                December 31, 2006
            
            
            27,777
            
            
            28
            
            
            300,255
            
            
            312,432
            
            
            (3,427
            )
            
            609,288Adoption
                of FIN 48
            
            
            —
            
            
            —
            
            
            —
            
            
            (19,135
            )
            
            —
            
            
            (19,135
            )Exercise
                of options
            
            
            391
            
            
            —
            
            
            6,470
            
            
            —
            
            
            —
            
            
            6,470Stock
                option income tax benefit
            
            
            —
            
            
            —
            
            
            1,053
            
            
            —
            
            
            —
            
            
            1,053Restricted
                stock grants
            
            
            323
            
            
            —
            
            
            8,082
            
            
            —
            
            
            —
            
            
            8,082Compensation
                for vested stock options
            
            
            —
            
            
            —
            
            
            972
            
            
            —
            
            
            —
            
            
            972Retirement
                of common stock
            
            
            (191
            )
            
            —
            
            
            (4,675
            )
            
            —
            
            
            —
            
            
            (4,675
            )Retirement
                of Restricted Stock
            
            
            (25
            )
            
            —
            
            
            (30
            )
            
            —
            
            
            —
            
            
            (30
            )Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            88,991
            
            
            —
            
            
            88,991Foreign
                currency translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            
            
            
            (19
            )
            
            (19
            )Balance,
                December 31, 2007
            
            
            28,275
            
            $
            28
            
            $
            312,127
            
            $
            382,288
            
            $
            (3,446
            )
            $
            690,997





*See
      notes to consolidated financial statements.*


42





**JAKKS
      PACIFIC, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**Years Ended December 31,****2005**
            
            **2006**
            
            **2007****(In thousands)****Cash
                flows from operating activities**Net
                income
            
            $
            63,493
            
            $
            72,375
            
            $
            88,991Adjustments
                to reconcile net income to net cash provided by operating
                activitiesDepreciation
                and amortization
            
            
            15,527
            
            
            26,166
            
            
            26,663Share-based
                compensation expense
            
            
            3,424
            
            
            6,482
            
            
            9,054Profit
                from video game joint venture
            
            
            (548
            )
            
            (5,147
            )
            
            (21,856
            )Loss
                on disposal of property and equipment
            
            
            104
            
            
            48
            
            
            1,781Write-off
                of investment in Chinese Joint Venture
            
            
            1,401
            
            
            —
            
            
            —Changes
                in operating assets and liabilities Accounts
                receivable
            
            
            16,697
            
            
            (52,885
            )
            
            (21,334
            )Inventory
            
            
            (13,272
            )
            
            (8,352
            )
            
            1,329Prepaid
                expenses and other
            
            
            1,088
            
            
            (8,293
            )
            
            4,817Accounts
                payable
            
            
            (9,437
            )
            
            12,608
            
            
            (13,061
            )Accrued
                expenses
            
            
            (1,915
            )
            
            1,882
            
            
            14,493Income
                taxes payable
            
            
            (2,936
            )
            
            14,756
            
            
            (891
            )Reserve
                for sales returns and allowances
            
            
            1,732
            
            
            5,253
            
            
            (6,489
            )Other
                liabilities
            
            
            995
            
            
            (140
            )
            
            1,519Deferred
                income taxes
            
            
            (5,292
            )
            
            (1,043
            )
            
            2,644Total
                adjustments
            
            
            7,568
            
            
            (8,665
            )
            
            (1,331
            )Net
                cash provided by operating activities
            
            
            71,061
            
            
            63,710
            
            
            87,660**Cash
                flows from investing activities**Purchases
                of property and equipment
            
            
            (8,270
            )
            
            (11,204
            )
            
            (18,116
            )Change
                in other assets
            
            
            (123
            )
            
            46
            
            
            (6
            )Sale
                (Purchases) of deposits
            
            
            241
            
            
            (701
            )
            
            17Cash
                paid for net assets
            
            
            (20,362
            )
            
            (109,845
            )
            
            (15,605
            )Net
                (purchases) sales of marketable securities
            
            
            19,047
            
            
            (210
            )
            
            (7
            )Net
                cash used by investing activities
            
            
            (9,467
            )
            
            (121,914
            )
            
            (33,717
            )**Cash
                flows from financing activities**Proceeds
                from stock options exercised (net of cash-less exercises of $1.7
                million,
                $2.8 million and $4.7 million in 2005, 2006 and 2007,
                respectively)
            
            
            3,173
            
            
            1,584
            
            
            1,765Tax
                benefit from stock options exercised
            
            
            —
            
            
            1,509
            
            
            1,053Net
                cash provided by financing activities
            
            
            3,173
            
            
            3,093
            
            
            2,818Impact
                of foreign currency translation
            
            
            (1,073
            )
            
            (638
            )
            
            —Net
                increase (decrease) in cash and cash equivalents
            
            
            63,694
            
            
            (55,749
            )
            
            56,761Cash
                and cash equivalents, beginning of year
            
            
            176,544
            
            
            240,238
            
            
            184,489Cash
                and cash equivalents, end of year
            
            $
            240,238
            
            $
            184,489
            
            $
            241,250Cash
                paid during the period for:Interest
            
            $
            4,533
            
            $
            4,533
            
            $
            4,533Income
                taxes
            
            $
            41,284
            
            $
            19,496
            
            $
            32,198





See
      Notes
      5 and 18 for additional supplemental information to consolidated statements
      of
      cash flows.





*See
      notes to consolidated financial statements.*


43





**JAKKS
      PACIFIC, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2007**





**Note
      1—Principal Industry**





JAKKS
      Pacific, Inc. (the “Company”) is engaged in the development, production and
      marketing of consumer products, including toys and related products, stationery
      and writing instruments and pet toys and related products, some of which are
      based on highly-recognized entertainment properties and character licenses.
      The
      Company commenced its primary business operations in July 1995 through the
      purchase of substantially all of the assets of a Hong Kong toy company. The
      Company markets its product lines domestically and internationally.





The
      Company was incorporated under the laws of the State of Delaware in January
      1995.





**Note
      2—Summary of Significant Accounting Policies**





***Principles
      of consolidation***





The
      consolidated financial statements include accounts of the Company and its
      wholly-owned subsidiaries. In consolidation, all significant inter-company
      balances and transactions are eliminated.





***Cash
      and cash equivalents***





The
      Company considers all highly liquid assets, having an original maturity of
      less
      than three months, to be cash equivalents. The Company maintains its cash in
      bank deposits which, at times, may exceed federally insured limits. The Company
      has not experienced any losses in such accounts. The Company believes it is
      not
      exposed to any significant credit risk of cash and cash
      equivalents.





***Use
      of estimates***





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities, disclosure of contingent assets and liabilities at the dates of
      the
      financial statements, and the reported amounts of revenue and expenses during
      the reporting periods. Actual future results could differ from those
      estimates.





***Revenue
      recognition***





Revenue
      is recognized upon the shipment of goods to customers or their agents, depending
      on terms, provided that there are no uncertainties regarding customer
      acceptance, the sales price is fixed or determinable, and collectibility is
      reasonably assured and not contingent upon resale.





Generally,
      the Company does not allow for product returns. The Company provides a
      negotiated allowance for breakage or defects to its customers, which is recorded
      when the related revenue is recognized. However, the Company does make
      occasional exceptions to this policy and consequently accrues a return allowance
      in gross sales based on historic return amounts and management
      estimates.





The
      Company also will occasionally grant credits to facilitate markdowns and sales
      of slow moving merchandise. These credits are recorded as a reduction of gross
      sales at the time of occurrence. The Company’s reserve for sales returns and
      allowances decreased by $6.6 million from $32.6 million as of December 31,
      2006
      to $26.0 million as of December 31, 2007.


44


***Inventory***





Inventory,
      which includes the ex-factory cost of goods, capitalized warehouse costs and
      in-bound freight and duty, is valued at the lower of cost (first-in, first-out)
      or market, net of inventory obsolescence reserve, and consists of the following
      (in thousands):





**December 31,****2006**
            
            **2007**Raw
                materials
            
            $
            3,845
            
            $
            1,694Finished
                goods
            
            
            72,943
            
            
            73,792$
            76,788
            
            $
            75,486





***Fair
      value of financial instruments***





The
      Company’s cash and cash equivalents, marketable securities, accounts receivable,
      accounts payable and accrued expenses represent financial instruments. The
      carrying value of these financial instruments is a reasonable approximation
      of
      fair value. The fair value of the $98.0 million of convertible senior notes
      payable at December 31, 2006 and 2007 was approximately $127.4 million and
      $137.7 million, respectively, based on the most recent quoted market
      price.





***Property
      and equipment***





Property
      and equipment are stated at cost and are being depreciated using the
      straight-line method over their estimated useful lives as follows:





Office
                equipment
            5
                yearsAutomobiles
            5
                yearsFurniture
                and fixtures
            5
                -
                7 yearsMolds
                and tooling
            2
                -
                4 yearsLeasehold
                improvements
            Shorter
                of length of lease or 10 years





For
      the
      years ended December 31, 2005, 2006, and 2007, the Company’s aggregate
      depreciation expense related to property and equipment was $6.3 million, $8.5
      million and $11.4 million, respectively.





***Advertising***





Production
      costs of commercials and programming are charged to operations in the year
      during which the production is first aired. The costs of other advertising,
      promotion and marketing programs are charged to operations in the year incurred.
      Advertising expense for the three years in the period ended December 31, 2007,
      was approximately $38.8 million, $36.7 million and $22.3 million,
      respectively.





The
      Company also participates in cooperative advertising arrangements with some
      customers, whereby it allows a discount from invoiced product amounts in
      exchange for customer purchased advertising that features the Company’s
      products. Typically, these discounts range from 1% to 6% of gross sales, and
      are
      generally based on product purchases or on specific advertising campaigns.
      Such
      amounts are accrued when the related revenue is recognized or when the
      advertising campaign is initiated. These cooperative advertising arrangements
      are accounted for as direct selling expenses.





***Income
      taxes***





The
      Company does not file a consolidated return with its foreign subsidiaries.
      The
      Company files federal and state returns and its foreign subsidiaries each file
      Hong Kong returns, as applicable. Deferred taxes are provided on a liability
      method whereby deferred tax assets are recognized as deductible temporary
      differences and operating loss and tax credit carry-forwards and deferred tax
      liabilities are recognized for taxable temporary differences. Temporary
      differences are the differences between the reported amounts of assets and
      liabilities and their tax basis. Deferred tax assets are reduced by a valuation
      allowance when, in the opinion of management, it is more likely than not that
      some portion or all of the deferred tax assets will not be realized. Deferred
      tax assets and liabilities are adjusted for the effects of changes in tax laws
      and rates on the date of enactment.




***Translation
      of foreign currencies***





Assets
      and liabilities denominated in Hong Kong dollars are translated into United
      States dollars at the rate of exchange ruling at the balance sheet date.
      Transactions during the period are translated at the rates ruling at the dates
      of the transactions.





45




Profits
      and losses resulting from the above translation policy are recognized in the
      statements of other comprehensive income.





***Accounting
      for the impairment of long-lived assets***





Long-lived
      assets with finite lives, which include property and equipment and intangible
      assets other than goodwill, are evaluated at least annually for impairment
      when
      events or changes in circumstances indicate that the carrying amount of the
      assets may not be recoverable through the estimated undiscounted future cash
      flows from the use of these assets. When any such impairment exists, the related
      assets will be written down to fair value.  Finite-lived intangible
      assets consist primarily of product technology rights, acquired backlog,
      customer relationships, product lines and license agreements. These intangible
      assets are amortized over the estimated economic lives of the related assets.
      Accumulated amortization as of December 31, 2006 and 2007 was $48.5 million
      and
      $63.1 million, respectively.





***Goodwill
      and other indefinite-lived intangible assets***





In
      accordance with Statement of Financial Accounting Standards (“SFAS”) 142, *Goodwill
      and Other Intangible Assets,* goodwill
      and indefinite-lived intangible assets are not amortized, but are tested for
      impairment at least annually at the reporting unit level. Losses in value are
      recorded when and as material impairment has occurred in the underlying assets
      or when the benefits of the identified intangible assets are realized. As of
      December 31, 2007, there was no impairment to the underlying value of goodwill
      or indefinite-lived intangible assets other than
      goodwill.  Indefinite-lived intangible assets other than goodwill
      consist of trademarks.





The
      carrying value of goodwill and trademarks are based on cost which is subject
      to
      management’s current assessment of fair value. Management evaluates fair value
      recoverability using both objective and subjective factors. Objective factors
      include management’s best estimates of projected future earnings and cash flows
      and analysis of recent sales and earnings trends. Subjective factors include
      competitive analysis and the Company’s strategic focus.





***Share-based
      Compensation***





In
      December 2004, the FASB issued SFAS 123 (Revised), *Share-Based
      Payment* ,
      (“SFAS
      123R”) which amends SFAS 123, *Accounting
      for Stock Based Compensation,* and
      SFAS
      95, *Statement
      of Cash Flows* .  SFAS
      123R requires companies to measure all employee stock-based compensation awards
      using a fair value method and record such expense in its consolidated financial
      statements, and requires additional accounting and disclosure related to the
      income tax and cash flow effects resulting from share-based payment
      arrangements.  SFAS 123R was effective for the Company beginning as of
      January 1, 2006, and the Company recorded $1.9 million and $1.0 million of
      stock
      option expense in 2006 and 2007, respectively, and $4.6 million and $8.1 million
      of restricted stock expense, respectively, in 2006 and 2007. See Note 16 for
      further details relating to share based compensation.





***Earnings
      per share***





The
      following table is a reconciliation of the weighted-average shares used in
      the
      computation of basic and diluted earnings per share (“EPS”) for the periods
      presented (in thousands, except per share data):





**2005****Weighted****Average****Income**
            
            **Shares**
            
            **Per
                Share**Basic
                EPSIncome
                available to common stockholders
            
            $
            63,493
            
            
            26,738
            
            $
            2.37Effect
                of dilutive securitiesAssumed
                conversion of convertible senior notes
            
            
            2,978
            
            
            4,900Options
                and warrants
            
            
            —
            
            
            555Diluted
                EPSIncome
                available to common stockholders plus assumed exercises and
                conversion
            
            $
            66,471
            
            
            32,193
            
            $
            2.06


46





**2006****Weighted****Average****Income**
            
            **Shares**
            
            **Per
                Share**Basic
                EPSIncome
                available to common stockholders
            
            $
            72,375
            
            
            27,227
            
            $
            2.66Effect
                of dilutive securitiesAssumed
                conversion of convertible senior notes
            
            
            2,946
            
            
            4,900Options
                and warrants
            
            
            —
            
            
            362Unvested
                restricted stock grants
            
            
            —
            
            
            225Diluted
                EPSIncome
                available to common stockholders plus assumed exercises and
                conversion
            
            $
            75,321
            
            
            32,714
            
            $
            2.30




**2007****Weighted****Average****Income**
            
            **Shares**
            
            **Per
                Share**Basic
                EPSIncome
                available to common stockholders
            
            $
            88,991
            
            
            27,665
            
            $
            3.22Effect
                of dilutive securitiesAssumed
                conversion of convertible senior notes
            
            
            2,946
            
            
            4,900Options
                and warrants
            
            
            —
            
            
            328Unvested
                restricted stock grants
            
            
            —
            
            
            256Diluted
                EPSIncome
                available to common stockholders plus assumed exercises and
                conversion
            
            $
            91,937
            
            
            33,149
            
            $
            2.77




Basic
      earnings per share has been computed using the weighted average number of common
      shares outstanding. Diluted earnings per share has been computed using the
      weighted average number of common shares and common share equivalents
      outstanding (which consist of warrants, options, restricted stock and
      convertible debt to the extent they are dilutive).  Potentially
      dilutive stock options of 487,506, 406,612 and nil for the years ended December
      31, 2005, 2006 and 2007, respectively, were not included in the computation
      of
      diluted earnings per share as the average market price of the Company’s common
      stock did not exceed the weighted average exercise price of such options and
      to
      have included them would have been anti-dilutive. Potentially dilutive
      restricted stock of 13,907 for the year ended December 31, 2007 was not included
      in the computation of diluted earnings per share as the average market price
      of
      the Company’s common stock did not exceed the weighted average exercise price of
      such restricted stock and to have included them would have been
      anti-dilutive.





***Recent
      Accounting Standards***





In
      June
      2006, the Financial Accounting Standards Board issued FASB Interpretation No.
      48
      (“FIN 48”), *Accounting
      for Uncertainty in Income Taxes,* which
      prescribes a recognition threshold and measurement process for recording in
      the
      financial statements uncertain tax positions taken or expected to be taken
      in a
      tax return.  Under FIN 48, the tax benefit of uncertain tax positions
      may be recognized only if it is more likely than not that the tax position
      will
      be sustained, based solely on its technical merits presuming the tax authority
      has full knowledge of all relevant information.  Additionally, FIN 48
      provides guidance on the de-recognition, classification, and accounting in
      interim periods and disclosure requirements for uncertain tax
      positions.  In the first quarter of 2007, the Company adopted FIN 48
      which resulted in the recognition of an increased current and non-current income
      tax payable for unrecognized tax benefits of $15.6 million.  The
      Company has also recognized an additional liability of $2.5 million for
      penalties and $2.8 million for interest on the income tax
      liability.  These increases to the liabilities resulted in a reduction
      of $19.1 million to the January 1, 2007 balance of retained earnings, net of
      related tax benefits.  Current interest on income tax liabilities is
      recognized as interest expense and penalties on income tax liabilities are
      recognized as other expense in the consolidated statement of
      income.  During the year ended December 31, 2007, the Company accrued
      an additional $0.9 million of net interest expense.





In
      December 2007, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standard No. 141 (Revised) (“FAS141(R)”), *Business
      Combinations* .
      The
      provisions of this statement are effective for business combinations for which
      the acquisition date is on or after the beginning of the first annual reporting
      period beginning after December 15, 2008. Earlier application is not permitted.
      FAS141(R) replaces FAS 141 and provides new guidance for valuing assets and
      liabilities acquired in a business combination. The Company will adopt FAS141(R)
      in calendar year 2009.





47




In
      September 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standard No. 157 (“FAS 157”) *Fair
      Value Measurements* .
      This
      standard provides new definitions for fair value and establishes a framework
      for
      measuring fair value in financial statements. FAS 157 becomes effective for
      the
      Company as of January 1, 2008. The Company anticipates that the effect of the
      adoption of FAS 157 will be immaterial to its financial statements.





***Reclassifications***





Certain
      reclassifications have been made to prior year balances in order to conform
      to
      the current year presentation.





**Note
      3—Business Segments, Geographic Data, Sales by Product Group, and Major
      Customers**





The
      Company is a worldwide producer and marketer of children’s toys and related
      products, principally engaged in the design, development, production, marketing
      and distribution of traditional toys, including boys’ action figures, vehicles
      and playsets, dolls, craft and activity products, writing instruments,
      compounds, girls’ toys, plush, construction toys, and infant and preschool toys,
      as well as pet treats, toys and related pet products.





The
      Company’s reportable segments are Traditional Toys, Craft/Activity/Writing
      Products, and Pet Products, each of which include worldwide
      sales.  Traditional Toys include boys’ action figures, vehicles and
      playsets, plush products, role-play, electronic toys, swimming pool toys, kites,
      remote control flying vehicles, squirt guns, and related
      products.  Craft/Activity/Writing Products include pens, pencils,
      stationery and drawing, painting and other craft related products.  
Pet Products include pet treats, toys and related pet products. Prior to 2007,
      the Company had accounted for seasonal and outdoor products as a separate
      reporting unit. During 2007, the Company restructured its internal operations
      and consolidated the former seasonal/outdoor reporting unit into the Traditional
      reporting unit. These products share key characteristics, including common
      management, distribution, and marketing strategies. Prior segment reporting
      units have been restated to reflect this change.





Segment
      performance is measured at the operating income level. All sales are made to
      external customers, and general corporate expenses have been attributed to
      the
      various segments based on sales volumes. Segment assets are comprised of
      accounts receivable and inventories, net of applicable reserves and allowances,
      goodwill and other assets.





Results
      are not necessarily those that would be achieved were each segment an
      unaffiliated business enterprise. Information by segment and a reconciliation
      to
      reported amounts for the three years in the period ended December 31, 2007
      are
      as follows (in thousands):





**Years Ended December 31,****2005**
            
            **2006**
            
            **2007****Net
                Sales**Traditional
                Toys
            
            $
            589,715
            
            $
            692,498
            
            $
            792,998Craft/Activity/Writing
                Products
            
            
            62,058
            
            
            52,834
            
            
            39,632Pet
                Products
            
            
            9,763
            
            
            20,054
            
            
            24,455$
            661,536
            
            $
            765,386
            
            $
            857,085





**Years Ended December 31,****2005**
            
            **2006**
            
            **2007****Operating
                Income**Traditional
                Toys
            
            $
            78,433
            
            $
            83,521
            
            $
            100,227Craft/Activity/Writing
                Products
            
            
            8,254
            
            
            6,372
            
            
            4,079Pet
                Products
            
            
            1,298
            
            
            2,419
            
            
            2,692$
            87,985
            
            $
            92,312
            
            $
            106,998





**Years Ended December 31,****2005**
            
            **2006**
            
            **2007****Depreciation
                and Amortization Expense**Traditional
                Toys
            
            $
            14,430
            
            $
            24,780
            
            $
            25,339Craft/Activity/Writing
                Products
            
            
            1,085
            
            
            995
            
            
            829Pet
                Products
            
            
            12
            
            
            391
            
            
            495$
            15,527
            
            $
            26,166
            
            $
            26,663




48




**December 31,****2006**
            
            **2007****Assets**Traditional
                Toys
            
            $
            743,946
            
            $
            840,848Craft/Activity/Writing
                Products
            
            
            119,883
            
            
            115,034Pet
                Products
            
            
            18,065
            
            
            26,806$
            881,894
            
            $
            982,688





The
      following tables present information about the Company by geographic area as
      of
      and for the three years ended December 31, 2007 (in thousands):





**December 31,****2006**
            
            **2007****Long-lived
                Assets**United
                States
            
            $
            13,451
            
            $
            19,372Hong
                Kong
            
            
            3,432
            
            
            2,035$
            16,883
            
            $
            21,407





**Years Ended December 31,****2005**
            
            **2006**
            
            **2007****Net
                Sales by Geographic Area**United
                States
            
            $
            562,396
            
            $
            666,294
            
            $
            730,971Europe
            
            
            38,620
            
            
            30,169
            
            
            37,585Canada
            
            
            20,589
            
            
            27,067
            
            
            29,155Hong
                Kong
            
            
            24,388
            
            
            17,500
            
            
            30,175Other
            
            
            15,543
            
            
            24,356
            
            
            29,199$
            661,536
            
            $
            765,386
            
            $
            857,085





**Major
      Customers**





Net
      sales
      to major customers were approximately as follows (in thousands, except for
      percentages):





**2005**
            
            **2006**
            
            **2007****Percentage of**
            
            
            
            **Percentage of**
            
            
            
            **Percentage of****Amount**
            
            **Net
                Sales**
            
            **Amount**
            
            **Net
                Sales**
            
            **Amount**
            
            **Net
                Sales**Wal-Mart
            
            $
            212,620
            
            
            32.1
            %
            $
            210,758
            
            
            27.5
            %
            $
            165,574
            
            
            19.3
            %Target
            
            
            95,716
            
            
            14.5
            
            
            134,347
            
            
            17.6
            
            
            124,089
            
            
            14.5Toys
                ‘R’ Us
            
            
            82,732
            
            
            12.5
            
            
            104,392
            
            
            13.6
            
            
            120,873
            
            
            14.1$
            391,068
            
            
            59.1
            %
            $
            449,497
            
            
            58.7
            %
            $
            410,536
            
            
            47.9
            %





No
      other
      customer accounted for more than 10% of our total net sales.





At
      December 31, 2006 and 2007, the Company’s three largest customers accounted for
      approximately 78.1% and 82.2%, respectively, of net accounts receivable. The
      concentration of the Company’s business with a relatively small number of
      customers may expose the Company to material adverse effects if one or more
      of
      its large customers were to experience financial difficulty. The Company
      performs ongoing credit evaluations of its top customers and maintains an
      allowance for potential credit losses.





**Note
      4—Joint Ventures**




The
      Company owns a fifty percent interest in a joint venture with THQ Inc. (“THQ”)
      which develops, publishes and distributes interactive entertainment software
      for
      the leading hardware game platforms in the home video game market. The joint
      venture has entered into a license agreement with an initial license period
      expiring December 31, 2009 and a renewal period at the option of the joint
      venture expiring December 31, 2014 under which it acquired the exclusive
      worldwide right to publish video games based on the WWE franchise on all
      hardware platforms. The Company’s investment is accounted for using the cost
      method due to the financial and operating structure of the venture and its
      lack
      of significant influence over the joint venture. The Company’s basis consists
      primarily of organizational costs, license costs and recoupable advances and
      is
      being amortized over the term of the initial license period. The joint venture
      agreement provides for the Company to receive guaranteed preferred returns
      through June 30, 2006 at varying rates of the joint venture’s net sales
      depending on the cumulative unit sales and platform of each particular game.
      The
      preferred return was subject to change after June 30, 2006 and was to be
      set for the distribution period beginning July 1, 2006 and ending
      December 31, 2009 (the “Next Distribution Period”). The agreement provides
      that the parties will negotiate in good faith and agree to the preferred return
      not less than 180 days prior to the start of the Next Distribution Period.
      It further provides that if the parties are unable to agree on a preferred
      return, the preferred return will be determined by arbitration. The parties
      have
      not reached an agreement with respect to the preferred return for the Next
      Distribution Period and the preferred return for the Next Distribution Period
      is
      to be determined through arbitration.  The preferred return is accrued
      in the quarter in which the licensed games are sold and the preferred return
      is
      earned.  Based on the same rates as set forth under the original joint
      venture agreement, an estimated receivable of $35.3 million has been accrued
      for
      the eighteen months ended December 31, 2007, pending the resolution of this
      outstanding issue.  As of December 31, 2006 and 2007, the balance of
      the investment in the video game joint venture includes the following components
      (in thousands):




49





**December 31,****2006**
            
            **2007**Preferred
                return receivable
            
            $
            13,482
            
            $
            35,338Investment
                costs, net
            
            
            1,391
            
            
            752$
            14,873
            
            $
            36,090





The
      Company’s joint venture partner retains the financial risk of the joint venture
      and is responsible for day-to-day operations, including development, sales
      and
      distribution, for which they are entitled to any remaining profits. In addition,
      THQ is entitled to receive a preferred return based on the sale by the Company
      of its WWE-themed TV Games. During 2006 and 2007, the Company incurred a
      liability of approximately $0.1 million and nil, respectively, which is recorded
      as a reduction of profit from the joint venture. During 2005, 2006 and 2007,
      the
      Company earned $9.4 million, $13.2 million and $21.2 million, respectively,
      in
      net profit from the joint venture.





During
      2005, the Company wrote-off its $1.4 million investment in a Chinese joint
      venture to Other Expense on its determination that none of the value would
      be
      realized.





**Note
      5—Business Combinations**





The
      Company acquired the following entities to further enhance its existing product
      lines and to continue diversification into other toy categories and seasonal
      businesses:




On
      February 9, 2006, the Company acquired substantially all of the assets of
      Creative Designs International, Ltd. and a related Hong Kong company, Arbor
      Toys
      Company Limited (collectively, “Creative Designs”). The total initial
      consideration of $111.1 million consisted of cash paid at closing in the amount
      of $101.7 million, the issuance of 150,000 shares of the Company’s common stock
      valued at approximately $3.3 million and the assumption of liabilities in the
      amount of $6.1 million, and resulted in the recording of goodwill in the amount
      of $53.6 million. Goodwill represents anticipated synergies to be gained via
      the
      combination of Creative Designs with the Company.  In addition, the
      Company agreed to pay an earn-out of up to an aggregate of $20.0 million in
      cash
      over the three calendar years following the acquisition based on the achievement
      of certain financial performance criteria, which will be recorded as goodwill
      when and if earned. For the years ended December 31, 2006 and 2007, $6.9 million
      and $6.7 million of the earn-out was earned and recorded as
      goodwill.  Creative Designs is a leading designer and producer of
      dress-up and role-play toys. This acquisition expands the Company’s product
      offerings in the girls role-play and dress-up area and brings it new product
      development and marketing talent. The Company’s results of operations have
      included Creative Designs from the date of acquisition.




The
      amount of goodwill from the Creative Designs acquisition that is expected to
      be
      deductible for federal and state income tax purposes is approximately $51.4
      million. The total purchase price was allocated based on studies and valuations
      performed to the estimated fair value of assets acquired and liabilities
      assumed.  The purchase price allocation including an aggregate
      earn-out amount of $13.6 million earned through December 31, 2007 is set forth
      in the following table (in thousands):




Estimated
                fair value of net assets:Current
                assets acquired
            
            $
            15,655Property
                and equipment, net
            
            
            1,235Other
                assets
            
            
            103Liabilities
                assumed
            
            
            (6,081
            )Intangible
                assets other than
                goodwill
            
            
            40,488Goodwill
            
            
            67,186$
            118,586





50




The
      following unaudited pro forma information represents the Company’s consolidated
      results of operations as if the acquisition of Creative Designs had occurred
      on
      January 1, 2006 and after giving effect to certain adjustments including the
      elimination of certain general and administrative expenses and other income
      and
      expense items not attributable to ongoing operations, interest expense, and
      related tax effects. Such pro forma information does not purport to be
      indicative of operating results that would have been reported had the
      acquisition of Creative Designs actually occurred on January 1, 2006 or on
      future operating results (in thousands, except per share data).





**Year Ended**
              **December 31,**
              **2006**Net
                sales
            
            $
            778,269Net
                income
            
            $
            75,221Basic
                earnings per share
            
            $
            2.73Weighted
                average shares outstanding
            
            
            27,512Diluted
                earnings per share
            
            $
            2.38Weighted
                average shares and equivalents outstanding
            
            
            32,777





In
      June
      2005, the Company purchased substantially all of the operating assets and
      assumed certain liabilities relating to the Pet Pal line of pet products,
      including toys, treats and related pet products. The total initial purchase
      price of $10.6 million was paid in cash. In addition, the Company agreed to
      pay
      an earn-out of up to an aggregate amount of $25.0 million in cash over the
      three
      years ending June 30, 2008 following the acquisition based on the achievement
      of
      certain financial performance criteria, which will be recorded as goodwill
      when
      and if earned. During the years ended December 31, 2006 and 2007, $1.5 million
      and $2.0 million, respectively, of the earn-out was earned and recorded as
      goodwill.  Goodwill of $4.6 million arose from this transaction, which
      represents the excess of the purchase price over the fair value of assets
      acquired less the liabilities assumed. This acquisition expands the Company’s
      product offerings and distribution channels. The Company’s results of operations
      have included Pet Pal from the date of acquisition. Pro forma results of
      operations are not provided since the amounts are not material to the
      consolidated results of operations.





**Note
      6—Goodwill**





The
      changes in the carrying amount of goodwill for the year ended December 31,
      2007
      are as follows (in thousands):





**Traditional**
              **Toys**
            
            **Craft/Activity**
              **/Writing**
              **Products**
            
            **Pet**
              **Products**
            
            **Total**Balance, December
                31, 2005
            
            $
            181,868
            
            $
            82,826
            
            $
            4,604
            
            $
            269,298Adjustments
                to goodwill during the year
            
            
            67,181
            
            
            —
            
            
            1,520
            
            
            68,701Balance,
                December 31, 2006
            
            
            249,049
            
            
            82,826
            
            
            6,124
            
            
            337,999Adjustments
                to goodwill during the year
            
            
            13,341
            
            
            —
            
            
            2,000
            
            
            15,341Balance
                at end of the year
            
            $
            262,390
            
            $
            82,826
            
            $
            8,124
            
            $
            353,340





Adjustments
      to goodwill during the year represent earn-outs earned during the year on
      acquisitions made in prior years.


51


**Note
      7—Intangible Assets Other Than Goodwill**





Intangible
      assets other than goodwill consist primarily of licenses, product lines, debt
      offering costs from the Company’s convertible senior notes and trademarks.
      Amortized intangible assets are included in the Intangibles and other, net,
      in
      the accompanying balance sheets. Trademarks are disclosed separately in the
      accompanying balance sheets. Intangible assets are as follows (in
      thousands):





**December 31, 2006**
            
            **December 31, 2007****Weighted**
              **Useful**
              **Lives**
            
            **Gross**
              **Carrying**
              **Amount**
            
            **Accumulated**
              **Amortization**
            
            **Net**
              **Amount**
            
            **Gross**
              **Carrying**
              **Amount**
            
            **Accumulated**
              **Amortization**
            
            **Net**
              **Amount****(Years)**Amortized
                Intangible Assets:Acquired
                order backlog
            
            
            0.50
            
            $
            1,298
            
            $
            (1,298
            )
            $
            —
            
            $
            1,298
            
            $
            (1,298
            )
            $
            —Licenses
            
            
            4.77
            
            
            58,699
            
            
            (25,821
            )
            
            32,878
            
            
            58,699
            
            
            (39,091
            )
            
            19,608Product
                lines
            
            
            3.45
            
            
            17,700
            
            
            (17,700
            )
            
            —
            
            
            17,700
            
            
            (17,700
            )
            
            —Customer
                relationships
            
            
            6.23
            
            
            3,646
            
            
            (1,239
            )
            
            2,407
            
            
            3,646
            
            
            (1,805
            )
            
            1,841Non-compete/Employment
                contracts
            
            
            4.00
            
            
            2,748
            
            
            (1,753
            )
            
            995
            
            
            2,748
            
            
            (2,348
            )
            
            400Debt
                offering costs
            
            
            20.00
            
            
            3,705
            
            
            (662
            )
            
            3,043
            
            
            3,705
            
            
            (847
            )
            
            2,858Total
                amortized intangible assets
            
            
            
            
            
            87,796
            
            
            (48,473
            )
            
            39,323
            
            
            87,796
            
            
            (63,089
            )
            
            24,707Unamortized
                Intangible Assets:Trademarks
            
            
            indefinite
            
            
            19,568
            
            
            N/A
            
            
            19,568
            
            
            19,568
            
            
            N/A
            
            
            19,568$
            107,364
            
            $
            (48,473
            )
            $
            58,891
            
            $
            107,364
            
            $
            (63,089
            )
            $
            44,275





For
      the
      years ended December 31, 2005, 2006, and 2007, the Company’s aggregate
      amortization expense related to intangible assets was $9.1 million, $16.5
      million and $14.6 million, respectively. The Company currently estimates
      continuing amortization expense for the next five years to be approximately
      (in
      thousands):





2008
            
            $
            8,5682009
            
            
            5,5782010
            
            
            3,0482011
            
            
            2,0112012
            
            
            2,043





**Note
      8—Concentration of Credit Risk**





Financial
      instruments that subject the Company to concentration of credit risk are cash
      and cash equivalents and accounts receivable. Cash equivalents consist
      principally of short-term money market funds. These instruments are short-term
      in nature and bear minimal risk. To date, the Company has not experienced losses
      on these instruments.





The
      Company performs ongoing credit evaluations of its customers’ financial
      condition, but does not require collateral to support domestic customer accounts
      receivable. Most goods shipped FOB Hong Kong or China are secured with
      irrevocable letters of credit.





At
      December 31, 2006 and 2007, the Company’s three largest customers accounted for
      approximately 78.1% and 82.2%, respectively, of net accounts receivable. The
      concentration of the Company’s business with a relatively small number of
      customers may expose the Company to material adverse effects if one or more
      of
      its large customers were to experience financial difficulty. The Company
      performs ongoing credit evaluations of its top customers and maintains an
      allowance for potential credit losses.


52




**Note
      9—Accrued Expenses**





Accrued
      expenses consist of the following (in thousands):





**2006**
            
            **2007**Royalties
            
            $
            17,829
            
            $
            25,318Bonuses
            
            
            7,172
            
            
            17,223Acquisition
                earn-out
            
            
            13,598
            
            
            13,333Employee
                salaries and benefits
            
            
            1,616
            
            
            1,273Promotional
                commitment
            
            
            1,341
            
            
            —Sales
                commissions
            
            
            1,764
            
            
            2,225Molds
                and tools
            
            
            1,489
            
            
            1,952Other
            
            
            9,855
            
            
            8,761$
            54,664
            
            $
            70,085





**Note
      10—Related Party Transactions**





A
      director of the Company is a partner in a law firm that acts as counsel to
      the
      Company. The Company incurred legal fees and expenses to the law firm in the
      amount of approximately $3.2 million in 2005, $2.7 million in 2006 and $1.9
      million in 2007.





**Note
      11—Convertible Senior Notes**





Convertible
      senior notes consist of the following (in thousands):





**2006**
            
            **2007**4.625%
                Convertible senior notes
            
            $
            98,000
            
            $
            98,000





In
      June
      2003, the Company sold an aggregate of $98.0 million of 4.625% Convertible
      Senior Notes due June 15, 2023. The notes may be converted into shares of the
      Company’s common stock at an initial conversion price of $20.00 per share, or 50
      shares per note, subject to certain circumstances. The notes may be converted
      in
      each quarter subsequent to any quarter in which the closing price of the
      Company’s common stock is at or above a prescribed price for at least 20 trading
      days in the last 30 trading day period of the quarter.  The prescribed
      price for the conversion trigger is $24.00 through June 30, 2010, and increases
      nominally each quarter thereafter.  Cash interest is payable at an
      annual rate of 4.625% of the principal amount at issuance, from the issue date
      to June 15, 2010, payable on June 15 and December 15 of each year, commencing
      on
      December 15, 2003. After June 15, 2010, interest will accrue at the same rate
      on
      the outstanding notes. At maturity, the Company will redeem the notes at their
      accreted principal amount, which will be equal to $1,811.95 (181.195%) per
      $1,000 principal amount at issuance, unless redeemed or converted
      earlier.  The notes were not convertible as of December 31, 2007, but
      are convertible in the first quarter of 2008.





The
      Company may redeem the notes at its option in whole or in part beginning on
      June
      15, 2010, at 100% of their accreted principal amount plus accrued and unpaid
      interest, if any, payable in cash. Holders of the notes may also require the
      Company to repurchase all or part of their notes on June 15, 2010, for cash,
      at
      a repurchase price of 100% of the principal amount per note plus accrued and
      unpaid interest, if any. Holders of the notes may also require the Company
      to
      repurchase all or part of their notes on June 15, 2013 and June 15, 2018 at
      a
      repurchase price of 100% of the accreted principal amount per note plus accrued
      and unpaid interest, if any. Any repurchases at June 15, 2013 and June 15,
      2018
      may be paid in cash, in shares of common stock or a combination of cash and
      shares of common stock.





The
      Company’s convertible senior notes of $98.0 million are not scheduled to be paid
      during the next five years.


53


**Note
      12—Income Taxes**





The
      Company does not file a consolidated return with its foreign subsidiaries.
      The
      Company files federal and state returns and its foreign subsidiaries file Hong
      Kong and United Kingdom returns. Income taxes reflected in the accompanying
      consolidated statements of income are comprised of the following (in
      thousands):





**2005**
            
            **2006**
            
            **2007**Federal
            
            $
            20,821
            
            $
            22,031
            
            $
            23,931State
                and local
            
            
            4,326
            
            
            4,310
            
            
            6,016Foreign
            
            
            13,290
            
            
            8,204
            
            
            8,71938,437
            
            
            34,545
            
            
            38,666APIC
            
            
            —
            
            
            58
            
            
            1,053Deferred
            
            
            (5,293
            )
            
            (1,043
            )
            
            831$
            33,144
            
            $
            33,560
            
            $
            40,550





The
      components of deferred tax assets/(liabilities) are as follows (in
      thousands):





**2006**
            
            **2007**Net
                deferred tax assets/(liabilities):Current:Reserve
                for sales allowances and possible losses
            
            $
            881
            
            $
            115Accrued
                expenses
            
            
            2,404
            
            
            4,915Restricted
                stock grant
            
            
            1,882
            
            
            3,076Federal
                and state net operating loss carryforwards
            
            
            2,993
            
            
            2,993Uncertain
                tax positions
            
            
            —
            
            
            624Deductible
                intangible assets
            
            
            2,079
            
            
            —State
                income taxes
            
            
            1,302
            
            
            2,272Other
            
            
            (29
            )
            
            (130
            )11,512
            
            
            13,865Long
                Term:Property
                and equipment
            
            
            (608
            )
            
            1,064Original
                issue discount interest
            
            
            (8,816
            )
            
            (12,249
            )Deductible
                goodwill and intangibles
            
            
            1,873
            
            
            1,678Foreign
                tax credit
            
            
            2,718
            
            
            2,718Stock
                options
            
            
            686
            
            
            802Section
                481(a) adjustments
            
            
            —
            
            
            (2,312
            )Income
                from joint venture
            
            
            1,770
            
            
            1,763Uncertain
                tax positions
            
            
            —
            
            
            976(2,377
            )
            
            (5,560
            )Valuation
                allowance related to federal and state net operating loss
                carryforwards
            
            
            (920
            )
            
            (920
            )Total
                net deferred tax assets/(liabilities)
            
            $
            8,215
            
            $
            7,385





In
      October 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into
      law. The Act created a one-time incentive for U.S. corporations to repatriate
      undistributed earnings from their international subsidiaries by providing an
      85%
      dividends-received deduction for certain international earnings. The deduction
      was available to corporations during the tax year that included October 2004,
      or
      in the immediately subsequent tax year. In the fourth quarter of 2005, the
      Company’s Board of Directors approved a plan to repatriate $105.5 million in
      foreign earnings, which was completed in December 2005. The Federal and State
      income tax expense related to this repatriation was approximately $5.4
      million.


54


Income
      tax expense varies from the U.S. federal statutory rate. The following
      reconciliation shows the significant differences in the tax at statutory and
      effective rates:





**2005**
            
            **2006**
            
            **2007**Federal
                income tax expense
            
            
            35.0
            %
            
            35.0
            %
            
            35.0
            %State
                income tax expense, net of federal tax effect
            
            
            2.1
            
            
            2.6
            
            
            3.3One
                time dividend from foreign subsidiaries
            
            
            8.3
            
            
            —
            
            
            —Effect
                of differences in U.S. and Foreign statutory rates
            
            
            (9.0
            )
            
            (5.4
            )
            
            (5.1
            )Other,
                including adjustments to previously accrued taxes for statute
                expirations
            
            
            (2.1
            )
            
            (0.5
            )
            
            (1.9
            )34.3
            %
            
            31.7
            %
            
            31.3
            %





Deferred
      taxes result from temporary differences between tax bases of assets and
      liabilities and their reported amounts in the consolidated financial statements.
      The temporary differences result from costs required to be capitalized for
      tax
      purposes by the U.S. Internal Revenue Code (“IRC”), and certain items accrued
      for financial reporting purposes in the year incurred but not deductible for
      tax
      purposes until paid.





As
      of
      December 31, 2007, the Company has federal and state net operating loss
      carryforwards of $5.9 million and $12.5 million, respectively, expiring through
      2023 and 2024. These carryforwards resulted from the acquisitions of Pentech
      and
      Toymax. The utilization of these losses to offset future income is limited
      under
      IRC§382. As of December 31, 2007, the Company’s management concluded that a
      deferred tax asset valuation allowance was necessary for $0.9 million of the
      state net operating loss carryforwards due to uncertainty about the ability
      to
      utilize these losses prior to expiration.





The
      components of income before provision for income taxes are as follows (in
      thousands):





**2005**
            
            **2006**
            
            **2007**Domestic
            
            $
            24,953
            
            $
            58,227
            
            $
            73,115Foreign
            
            
            71,684
            
            
            47,708
            
            
            56,426$
            96,637
            
            $
            105,935
            
            $
            129,541





As
      of
      January 1, 2007, the Company adopted the provisions of FIN 48 “Accounting for
      Uncertainty in Income Taxes” which prescribes a recognition threshold and
      measurement process for recording in the financial statements uncertain tax
      positions (“UTP”) taken or expected to be take in a tax return. As a result of
      FIN 48, the Company recognized a liability for UTP of $22.8 million, which
      was
      accounted for as a reduction to the January 1, 2007 balance of retained
      earnings. These UTPs are primarily due to income allocation issues between
      the
      United States and Hong Kong, and fixed asset depreciation in Hong Kong. The
      Company has also recognized an additional liability of $2.5 million for
      penalties and $2.8 for interest on the potential tax liability. These amounts
      were also accounted for as a reduction in the January 1, 2007 balance of
      retained earnings. Current interest on potential tax liabilities is recognized
      as interest expense.





Approximately
      $0.3 million of the liability for UTP relating to the timing of interest
      deductions were recognized during 2007. The following table provides further
      information of UTPs that would affect the effective tax rate, if recognized,
      as
      of 12/31/07 (in millions):





Balance,
                January 1, 2007
            
            $
            22.8Current
                year additions
            
            
            0.3Current
                year reduction due to lapse of applicable statute of
                limitations
            
            
            (2.8
            )Balance,
                December 31, 2007
            
            $
            20.3





Current
      year interest and penalties related to UTPs are $0.9 million and $0.6 million,
      respectively. The interest and penalty liabilities related to UTPs is $3.7
      million and $2.0 million on the December 31, 2007 statement of financial
      position.





Approximately
      $1.3 million of United States based, and $1.5 million of Hong Kong based UTPs
      became recognized during 2007 as they related to income tax years for which
      the
      audit period had expired. These items are included in the 2007 income tax
      provision. The tax years 2001 through 2007 are subject to examination in Hong
      Kong, the tax years 2004 through 2007 are subject to examination in the United
      States, and the tax year 2003 through 2007 are subject to examination in
      California.


55


**Note
      13—Leases**





The
      Company leases office, warehouse and showroom facilities and certain equipment
      under operating leases. Rent expense for the years ended December 31, 2005,
      2006
      and 2007 totaled $7.1 million, $9.1 million and $10.4 million, respectively.
      The
      following is a schedule of minimum annual lease payments (in
      thousands).





2008
            
            $
            9,6622009
            
            
            6,7962010
            
            
            5,7362011
            
            
            5,7792012
            
            
            5,451Thereafter
            
            
            4,034$
            37,458





**Note
      14—Common Stock, Preferred Stock and Warrants**





The
      Company has 105,000,000 authorized shares of stock consisting of 100,000,000
      shares of $.001 par value common stock and 5,000,000 shares of $.001 par value
      preferred stock.





During
      2007, the Company issued an aggregate of 240,000 shares of restricted stock
      to
      two of its executive officers, which vest 50% in each of January 2008 and 2009
      subject to acceleration based on the Company achieving certain financial
      performance criteria, and an aggregate of 27,340 shares of restricted stock
      to
      its five non-employee directors, which vest in January 2008, at an aggregate
      value of approximately $5.8 million. In July 2007, the Company issued 15,000
      shares of restricted stock at a value of $0.5 million to an executive officer,
      which vests one-third on each of December 31, 2007, 2008 and
      2009.  During 2007, the Company also issued 216,200 shares of common
      stock on the exercise of options at a value of $3.6 million, and 83,644 shares
      of restricted stock previously received by two executive officers were
      surrendered at a value of $1.8 million to cover their income taxes due on the
      2007 vesting of the restricted shares granted them in 2006. This surrendered
      restricted stock was subsequently retired by the
      Company.   Additionally, one executive officer surrendered
      107,637 shares of common stock of the Company at a value of $2.8 million to
      cover his exercise of options to purchase 175,000 shares of common stock of
      the
      Company.   During 2007, certain employees surrendered an
      aggregate of 1,340 shares of restricted stock at a value of $29,931 to cover
      their income taxes on the 2007 vesting of the restricted shares granted them
      in
      2006. The Company granted and issued an aggregate of 41,000 shares of
      restricted stock to its employees at an aggregate value of approximately $1.1
      million.  As of December 31, 2007, 536,977 shares of the restricted stock
      remained unvested, of which $2.9 million remained unamortized.





In
      February 2008, the Board of Directors of the Company authorized the repurchase
      of up to $30.0 million of the Company’s common stock. To date, no shares have
      been repurchased.





During
      2006, the Company issued 150,000 shares of common stock at a value of $3.3
      million in connection with the Creative Designs acquisition. The Company issued
      473,160 shares of restricted stock to two executive officers, five non-employee
      directors of the Company and certain of the Company’s management at a value of
      approximately $9.0 million. The Company also issued 333,228 shares of common
      stock on the exercise of options for a total value of $4.4 million, including
      37,910 shares of common stock acquired by two executive officers in a cashless
      exercise of options through the surrender of an aggregate of 13,264 shares
      of
      restricted stock as payment of the exercise prices therefor at a value of $0.3
      million. In addition, the two executive officers surrendered an aggregate of
      110,736 shares of restricted stock at a value of $2.5 million as payment for
      income taxes due on the vesting of such stock.  This restricted stock
      was subsequently retired by the Company.





During
      2005, the Company issued 245,000 shares of restricted stock to two executive
      officers and five non-employee directors of the Company at a value of
      approximately $5.1 million. The Company also issued 566,546 shares of common
      stock on the exercise of options for a total of $4.9 million, including 215,982
      shares of common stock acquired by two executive officers in a cashless exercise
      of options through the surrender of an aggregate of 101,002 shares of restricted
      stock as payment of the exercise prices therefor at a value of $1.7 million.
      This restricted stock was subsequently retired by the Company.





During
      2003, the Company awarded 2,760,000 shares of restricted stock to four executive
      officers of the Company pursuant to its 2002 Stock Award and Incentive Plan
      (“the Award’), of which 636,000 were earned during 2003, 396,000 were earned
      during 2004, 288,000 were canceled upon the termination of employment of one
      of
      our executive officers in October 2004, and the balance may be earned through
      2010 based upon the achievement of certain financial criteria and continuing
      employment (see Note 16.)





During
      2003, the Company issued 100,000 fully vested warrants, expiring in 2013, in
      connection with license costs relating to its video game joint venture. The
      fair
      value of these warrants was approximately $1.1 million and has been included
      in
      the basis of the joint venture (Note 4). The Company also issued $98.0 million
      of convertible senior notes payable that may be converted (at their initial
      conversion rate of $20.00 per share) into an aggregate of 4.9 million shares
      of
      the Company’s common stock (Note 11).


56


Warrant
      activity is summarized as follows:





**Weighted****Average****Number**
            
            **Exercise****of Shares**
            
            **Price**Outstanding,
                December 31, 2007
            
            
            100,000
            
            $
            11.35





There
      has
      been no other warrant activity since the issuance in 2003.





**Note
      15—Commitments**





The
      Company has entered into various license agreements whereby the Company may
      use
      certain characters and intellectual properties in conjunction with its products.
      Generally, such license agreements provide for royalties to be paid at 1% to
      14%
      of net sales with minimum guarantees and advance payments.





Future
      annual minimum royalty guarantees as of December 31, 2007 are as follows (in
      thousands):





2008
            
            $
            21,2602009
            
            
            10,2242010
            
            
            5,0012011
            
            
            1,1752012
            
            
            500$
            38,160





The
      Company has entered into employment and consulting agreements with certain
      executives expiring through December 31, 2010. The aggregate future annual
      minimum guaranteed amounts due under those agreements as of December 31, 2007
      are as follows (in thousands):





2008
            
            $
            5,9192009
            
            
            3,7892010
            
            
            2,280$
            11,988





The
      Company has entered into a retirement plan agreement with one of its executives.
      Upon meeting the eligibility criteria for retirement, the executive can elect
      to
      retire and receive a single-life annuity retirement payment of approximately
      $1.0 million per year for a period of ten years following his
      retirement.  Furthermore, in the event of his death during such
      period, his estate will receive a death benefit equal to the difference between
      approximately $2.9 million and retirement benefits previously paid to
      him.  This retirement benefit is conditioned upon the executive
      agreeing to accept the position of Chairman Emeritus of our Board of Directors,
      if so requested by the Board.





**Note
      16—Share-Base Payments**





Under
      its
      2002 Stock Award and Incentive Plan (“the Plan”), which incorporated its Third
      Amended and Restated 1995 Stock Option Plan, the Company has reserved 6,025,000
      shares of its common stock for issuance upon the exercise of options granted
      under the Plan, as well as for the awarding of other securities. Under the
      Plan,
      employees (including officers), non-employee directors and independent
      consultants may be granted options to purchase shares of common stock and other
      securities (Note 14). The vesting of these options and other securities may
      vary, but typically vest on a step-up basis over a maximum period of 5 years
      and
      restricted shares typically vest over one to two years.  Share-based
      compensation expense is recognized on a straight-line basis over the requisite
      service period.


57


*Restricted
      Stock*





Under
      the
      Plan, share-based compensation payments may include the issuance of shares
      of
      restricted stock. Two executive officers are each entitled to be awarded 120,000
      shares of restricted stock annually on each January 1 (through and including
      January 1, 2010).  Such awards vest 50% each on the first and second
      anniversaries of issuance, subject to acceleration.  Beginning in
      January 2006, the Company’s five non-employee directors each receive annual
      grants of restricted stock at a value of $120,000 (or, for 2007, 5,468 shares
      per director) which vest after one year. In March 2003, two executive officers
      of the Company were each granted 240,000 shares of restricted stock which,
      based
      on the achievement of certain financial performance criteria, vested on January
      1, 2004.  In January 2004, the Company issued 240,000 shares of
      restricted stock which, based on the achievement of certain financial
      performance criteria, vested on January 1, 2005.  In January 2006 and
      2007, respectively, the Company issued 268,660  shares of restricted
      stock at a value of $5.6 million and 267,340 shares of restricted stock at
      a
      value of $5.8 million to two executive officers and five non-employee directors
      of the Company. In July 2007, the Company issued 15,000 shares of
      restricted stock at a value of $0.5 million to an executive officer, which
      vests
      one-third on each of December 31, 2007, 2008 and 2009.  During 2006,
      the Company granted and issued an aggregate of 204,500 shares of restricted
      stock to its employees, which vest over a five-year period, at an aggregate
      value of approximately $3.4 million, which represents the fair market value
      at
      the grant date.  During 2007, the Company granted and issued an
      aggregate of 41,000 shares of restricted stock to its employees at an aggregate
      value of approximately $1.1 million. As of December 31, 2007, 536,977 shares
      of
      the restricted stock remained unvested, of which $2.9 million remained
      unamortized.





The
      table
      below summarizes the grant activity for the year ending December 31, 2007 and
      is
      broken down in the following three distinct groups because each group has unique
      characteristics: executives, board of directors, and employees:





Group Type
            
            # Shares
              Granted
            
            Grant Price Range
            
            Vest Schedule RangeExecutives
            
            
            255,000
            
            $
            21.84 –
                31.04
            
            
            2 –
                3 yearsBoard
                of directors
            
            
            27,340
            
            $
            21.84
            
            
            1
                yearEmployees
            
            
            41,000
            
            $
            24.60
                – 26.86
            
            
            3 –
                5 yearsTotal
            
            
            323,340
            
            $
            21.84
                – 31.04
            
            
            1
                to 5 years





*Stock
      Options*





Under
      SFAS 123R, share-based compensation cost is measured at the grant date, based
      on
      the estimated fair value of the award, and is recognized as expense over the
      employee's requisite service period. The Company adopted the provisions of
      SFAS
      123R using a modified prospective application. The valuation provisions of
      SFAS
      123R apply to new awards and to awards that are outstanding on the effective
      date and subsequently vest or are modified or cancelled. Estimated compensation
      expense for awards outstanding at the effective date will be recognized over
      the
      remaining service period using the compensation cost calculated for pro forma
      disclosure purposes under SFAS 123, *Accounting
      for Stock-Based Compensation* .




The
      Company uses the Black-Scholes method of valuation for share-based option
      awards. In valuing the stock options, the Black-Scholes model incorporates
      assumptions about stock volatility, expected term of stock options, and risk
      free interest rate. The valuation is reduced by an estimate of stock option
      forfeitures.




The
      amount of share-based compensation expense recognized in the year ended December
      31, 2007 is based on options granted prior to January 1, 2006 and restricted
      stock issued during the years ended December 31, 2006 and 2007, and ultimately
      expected to vest, and it has been reduced for estimated forfeitures. SFAS 123R
      requires forfeitures to be estimated at the time of grant and revised, if
      necessary, in subsequent periods if actual forfeitures differ from those
      estimates.





The
      following table summarizes the total share-based compensation expense and
      related tax benefits recognized (in thousands):





**Year Ended December 31,****2006**
            
            **2007**Stock
                option compensation expense
            
            $
            1,903
            
            $
            972Tax
                benefit related to stock option compensation
            
            $
            623
            
            $
            314Restricted
                stock compensation expense
            
            $
            4,580
            
            $
            8,082Tax
                benefit related to restricted stock compensation
            
            $
            1,404
            
            $
            2,859


58


As
      of
      December 31, 2007, 807,876 shares were available for future grant. Additional
      shares may become available to the extent that options or shares of restricted
      stock presently outstanding under the Plan terminate or expire. Stock option
      activity pursuant to the Plan is summarized as follows:




**Weighted****Average****Number**
            
            **Exercise****of Shares**
            
            **Price**Outstanding,
                December 31, 2004
            
            
            2,088,006
            
            $
            13.28Granted
            
            
            360,000
            
            
            21.74Exercised
            
            
            (566,546
            )
            
            8.60Canceled
            
            
            (77,354
            )
            
            15.74Outstanding,
                December 31, 2005
            
            
            1,804,106
            
            
            16.33Granted
            
            
            —
            
            
            —Exercised
            
            
            (333,228
            )
            
            13.15Canceled
            
            
            (8,500
            )
            
            17.23Outstanding,
                December 31, 2006
            
            
            1,462,378
            
            $
            17.05Granted
            
            
            —
            
            
            —Exercised
            
            
            (391,200
            )
            
            16.54Canceled
            
            
            (235,000
            )
            
            17.10Outstanding,
                December 31, 2007
            
            
            836,178
            
            $
            17.27





The
      weighted average fair value of options granted to employees in 2005 was $21.74
      per share.





In
      2005,
      the fair value of each employee option grant was estimated on the date of grant
      using the Black-Scholes option-pricing model with the following assumptions
      used: risk-free rate of interest of 4.25%; dividend yield of 0%; with volatility
      of 130.2%; and expected term of five years.  There were no option
      grants in 2006 and 2007.





The
      following table summarizes information about stock options outstanding and
      exercisable at December 31, 2007:





**Outstanding**
            
            **Exercisable****Weighted**
            
            **Weighted**
            
            
            
            **Weighted****Average**
            
            **Average**
            
            
            
            **Average****Number**
            
            **Life**
            
            **Exercise**
            
            **Number**
            
            **Exercise****Option
                Price Range**
            
            **of Shares**
            
            **in Years**
            
            **Price**
            
            **of Shares**
            
            **Price**$7.875
                — $13.39
            
            
            280,063
            
            
            3.55
            
            $
            11.20
            
            
            276,313
            
            $
            11.19$13.47
                — $20.55
            
            
            281,100
            
            
            4.39
            
            $
            18.69
            
            
            201,050
            
            $
            18.31$20.94
                — $22.11
            
            
            275,015
            
            
            3.85
            
            $
            21.99
            
            
            95,469
            
            $
            21.96





The
      following characteristics apply to the Plan stock options that are fully vested,
      or expected to vest, as of December 31, 2007:




Number
                of options outstanding
            
            
            836,178Weighted-average
                exercise price
            
            $
            17.27Aggregate
                intrinsic value of options outstanding
            
            $
            5,304,576Weighted-average
                contractual term of options outstanding
            
            
            3.9
                yearsNumber
                of options currently exercisable
            
            
            572,832Weighted-average
                exercise price of options currently exercisable
            
            $
            15.48Aggregate
                intrinsic value of options currently exercisable
            
            $
            4,656,208Weighted-average
                contractual term of currently exercisable
            
            
            4.34
                years




At
      and
      for the year ended December 31, 2005, the Company accounted for options granted
      under the Plan using the recognition and measurement principles of APB Opinion
      No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related Interpretations. Prior to the implementation of SFAS 123R, stock-based
      employee compensation expense was not generally reflected in net income, as
      all
      options granted under the Plan had an exercise price equal to the market value
      of the underlying common stock on the date of grant. The following table
      illustrates the effect on net income and earnings per share if the Company
      had
      applied the fair value recognition provisions of SFAS 123R to stock-based
      employee compensation for the year ended December 31, 2005 (in thousands, except
      per share data):


59





**Year Ended**
              **December 31,**
              **2005**Net
                income, as reported
            
            $
            63,493Add
                (Deduct): Stock-based employee compensation expense (income) included
                in
                reported net income net of related tax effects
            
            
            (1,121
            )Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value method for all awards net of related tax effects
            
            
            (2,343
            )Pro
                forma net income
            
            $
            60,029Earnings
                per share:Basic
                — as reported
            
            $
            2.37Basic
                — pro forma
            
            $
            2.25Diluted
                — as reported
            
            $
            2.06Diluted
                — pro forma
            
            $
            1.96





**Note
      17—Employee Benefits Plan**





The
      Company sponsors for its U.S. employees, a defined contribution plan under
      Section 401(k) of the Internal Revenue Code. The plan provides that employees
      may defer up to 50% of their annual compensation subject to annual dollar
      limitations, and that the Company will make a matching contribution equal to
      100% of each employee’s deferral, up to 5% of the employee’s annual
      compensation. Company matching contributions, which vest immediately, totaled
      $0.5 million, $0.7 million and $0.9 million for 2005, 2006 and 2007,
      respectively.





**Note
      18—Supplemental Information to Consolidated Statements of Cash
      Flows**





In
      2007,
      two executive officers surrendered an aggregate of 83,644 shares of restricted
      at a value of $1.8 million to cover their income taxes due on the 2007 vesting
      of the restricted shares granted them in 2006. This surrendered restricted
      stock
      was subsequently retired by the Company.   Additionally, one
      executive officer surrendered 107,637 shares of common stock of the Company
      at a
      value of $2.8 million to cover his exercise of options to purchase 175,000
      shares of common stock of the Company.   During 2007, certain
      employees surrendered an aggregate of 1,340 shares of restricted stock at a
      value of $29,931 to cover their incomes taxes on the 2007 vesting of the
      restricted shares granted them in 2006.  Additionally, the Company
      recognized a $1.1 million tax benefit from the exercise of stock
      options.





In
      2006,
      two executive officers acquired 37,910 shares of common stock in a cashless
      exercise of options through the surrender of an aggregate of 13,264 shares
      of
      restricted stock as payment of the exercise prices therefor at a value of $0.3
      million. In addition, the two executive officers surrendered an aggregate of
      110,736 shares of restricted stock at a value of $2.5 million as payment for
      income taxes due on the vesting of such stock.  This restricted stock
      was subsequently retired by the Company.  Additionally, the Company
      recognized a $1.5 million tax benefit from the exercise of stock options. During
      2006, the Company issued 150,000 shares of common stock at a value of $3.3
      million in connection with the Creative Designs acquisition.





In
      2005,
      two executive officers acquired 215,982 shares of common stock in a cashless
      exercise of options through the surrender of an aggregate of 101,002 shares
      of
      restricted stock as payment of the exercise prices therefor at a value of $1.7
      million. This restricted stock was subsequently retired by the Company.
      Additionally, the Company recognized a $4.1 million tax benefit from the
      exercise of stock options.


60


**Note
      19—Selected Quarterly Financial Data (Unaudited)**





Selected
      unaudited quarterly financial data for the years 2006 and 2007 are summarized
      below:





**2006**
            
            **2007****First**
            
            **Second**
            
            **Third**
            
            **Fourth**
            
            **First**
            
            **Second**
            
            **Third**
            
            **Fourth****Quarter**
            
            **Quarter**
            
            **Quarter**
            
            **Quarter**
            
            **Quarter**
            
            **Quarter**
            
            **Quarter**
            
            **Quarter****(in
                thousands, except per share data)**Net
                sales
            
            $
            107,244
            
            $
            124,041
            
            $
            295,789
            
            $
            238,312
            
            $
            124,062
            
            $
            129,547
            
            $
            318,391
            
            $
            285,085Gross
                profit
            
            $
            44,163
            
            $
            49,280
            
            $
            112,883
            
            $
            88,468
            
            $
            45,508
            
            $
            45,295
            
            $
            124,050
            
            $
            108,797Income
                from operations
            
            $
            2,244
            
            $
            8,963
            
            $
            58,204
            
            $
            22,901
            
            $
            3,324
            
            $
            6,488
            
            $
            65,057
            
            $
            32,129Income
                before income taxes
            
            $
            3,283
            
            $
            9,135
            
            $
            57,855
            
            $
            35,662
            
            $
            4,762
            
            $
            7,403
            
            $
            67,087
            
            $
            50,289Net
                income
            
            $
            2,331
            
            $
            6,361
            
            $
            40,499
            
            $
            23,184
            
            $
            3,238
            
            $
            5,034
            
            $
            47,318
            
            $
            33,401Basic
                earnings per share
            
            $
            0.09
            
            $
            0.23
            
            $
            1.46
            
            $
            0.85
            
            $
            0.12
            
            $
            0.18
            
            $
            1.71
            
            $
            1.20Weighted
                average shares outstanding
            
            
            27,310
            
            
            27,536
            
            
            27,694
            
            
            27,298
            
            
            27,498
            
            
            27,631
            
            
            27,733
            
            
            27,738Diluted
                earnings per share
            
            $
            0.09
            
            $
            0.22
            
            $
            1.26
            
            $
            0.73
            
            $
            0.12
            
            $
            0.17
            
            $
            1.45
            
            $
            1.03Weighted
                average shares and equivalents outstanding
            
            
            32,617
            
            
            32,790
            
            
            32,736
            
            
            32,803
            
            
            27,985
            
            
            33,133
            
            
            33,145
            
            
            33,251





**Note
      20—Litigation**




In
      October 2004, the Company was named as a defendant in a lawsuit commenced by
      World Wrestling Entertainment, Inc. (“WWE”) (the “WWE Action”). The complaint
      also named as defendants, among others, the joint venture with THQ Inc., certain
      of the Company’s foreign subsidiaries and the Company’s three executive
      officers. The Complaint was amended, the antitrust claims were dismissed and,
      on
      grounds not previously considered by the Court, a motion to dismiss the RICO
      claim, the only remaining basis for jurisdiction, was argued and submitted
      in
      September 2006.  Discovery remained stayed. In December 2007 the Court
      dismissed the WWE Action and WWE appealed. The Company sought reconsideration
      of
      and filed a cross-appeal with respect to certain parts of the Court’s Orders. In
      November 2004, several purported class action lawsuits were filed in the United
      States District Court for the Southern District of New York, alleging damages
      associated with the facts alleged in the WWE Action (the “Class Action”). A
      motion to dismiss was filed, was fully briefed and argument occurred on November
      30, 2006. The motion was granted without prejudice to seeking leave to amend;
      such leave has been sought by plaintiffs.  Three shareholder
      derivative actions have also been filed against the Company, nominally, and
      against certain of the Company’s Board members (the “Derivative Actions”). The
      Derivative Actions seek to hold the individual defendants liable for damages
      allegedly caused to the Company by their actions, and, in one of the Derivative
      Actions, seeks restitution to the Company of profits, benefits and other
      compensation obtained by them. These actions are currently stayed or the time
      to
      answer has been extended.




The
      Company received notice from WWE alleging breaches of the video game license
      in
      connection with  sales of WWE video games in Japan and other countries
      in Asia. The joint venture responded that WWE acquiesced in the arrangements,
      and separately released any claim against the joint venture in connection
      therewith and accordingly there is no breach of the joint venture’s video game
      license.  While the joint venture does not believe that WWE has a
      valid claim, it tendered a protective “cure” of the alleged breaches with a full
      reservation of rights. WWE “rejected” that cure and reserved its
      rights.  On October 12, 2006, WWE commenced a lawsuit in
      Connecticut state court against THQ and the joint venture, involving the claim
      set forth above concerning allegedly improper sales of WWE video games in Japan
      and other countries in Asia (the “JV Action”).  The lawsuit seeks,
      among other things, a declaration that WWE is entitled to terminate the video
      game license and monetary damages.  A motion to strike one claim was
      argued on March 12, 2007 and submitted to the Court.  Additionally, a
      schedule was set, with trial no earlier than October 2008. Thereafter, WWE
      amended the complaint to import state law claims from the WWE Action. WWE has
      proposed a case management order calling for trial on or after October 2009.
      O n
      February 22, 2008, we submitted a response in which we requested that no case
      management order be adopted prior to the determination of the motion to strike
      and for summary judgment because it would moot such a case management order
      but
      that if a case management order is to be adopted it should provide for a trial,
      if the matter is not fully dismissed, not before June 2010.




In
      connection with the joint venture with THQ (see Note 4), the Company receives
      its profit through a preferred return based on net sales of the joint venture,
      which was to be reset as of July 1, 2006 for the period through
      December 31, 2009 (the “Next Distribution Period”). The agreement with THQ
      provides for the parties to agree on the reset of the preferred return or,
      if no
      agreement is reached, for arbitration of the issue. No agreement has been
      reached and the preferred return for the Next Distribution Period is to be
      determined through arbitration.  The preferred return is accrued in
      the quarter in which the licensed games are sold and the preferred return is
      earned.  Based on the same rates as set forth under the original joint
      venture agreement, an estimated receivable of $35.3 million has been accrued
      for
      the eighteen months ended December 31, 2007, pending the resolution of this
      outstanding issue.


61


The
      Company is a party to, and certain of its property is the subject of, various
      other pending claims and legal proceedings that routinely arise in the ordinary
      course of its business. Other than with respect to the claims in the WWE Action,
      the Class Action, the JV Action and the matter of the reset of the preferred
      return from THQ in connection with the joint venture, with respect to which
      the
      Company cannot give assurance as to the outcome, the Company does not believe
      that any of these claims or proceedings will have a material effect on its
      business, financial condition or results of operations.


62


**Report
      of Independent Registered Public Accounting Firm**




The
      Board
      of Directors and Stockholders


JAKKS
      Pacific, Inc.


Malibu,
      California




The
      audits referred to in our report dated February 28, 2008 relating to the 2007
      and 2006 consolidated financial statements of JAKKS Pacific, Inc., which is
      contained in Item 8 of this Form 10-K also included
      the audit of the 2007 and 2006 amounts in the accompanying financial statement
      schedule. This financial statement schedule is the responsibility of the
      Company's management. Our responsibility is to express an opinion on this
      financial statement schedule based upon our audits.




In
      our
      opinion such financial statement schedule, when considered in relation to the
      basic consolidated financial statements taken as a whole, presents fairly,
      in
      all material respects, the information for 2007 and 2006 set forth
      therein.





/s/
                BDO Seidman, LLPBDO
                Seidman, LLPLos
                Angeles, CaliforniaFebruary
                28, 2008


63





**JAKKS
      PACIFIC, INC. AND SUBSIDIARIES**


**SCHEDULE
      II—VALUATION AND QUALIFYING ACCOUNTS**


**YEARS
      ENDED DECEMBER 31, 2005, 2006 and 2007**





Allowances
      are deducted from the assets to which they apply, except for sales returns
      and
      allowances.


**Balance at**
              
              **Charged to**
              
              **Charged to**
              
              
              
              **Balance****Beginning**
              
              **Costs and**
              
              **Other**
              
              
              
              **at End****of Period**
              
              **Expenses**
              
              **Accounts**
              
              **Deductions**
              
              **of Period****(In
                  thousands)**Year
                  ended December 31, 2005:Allowance
                  for:Uncollectible
                  accounts
              
              $
              7,058
              
              $
              902
              
              $
              (1,291
              )(a)
              $
              (4,333
              )
              $
              2,336Reserve
                  for potential product obsolescence
              
              
              8,042
              
              
              6,981
              
              
              —
              
              
              (7,576
              )
              
              7,447Reserve
                  for sales returns and allowances
              
              
              23,173
              
              
              54,767
              
              
              218
              (b)
              
              (53,035
              )
              
              25,123$
              38,273
              
              $
              62,650
              
              $
              (1,073
              )
              $
              (64,944
              )
              $
              34,906Year
                  ended December 31, 2006:Allowance
                  for:Uncollectible
                  accounts
              
              $
              2,336
              
              $
              37
              
              $
              —
              
              $
              (1,167
              )
              $
              1,206Reserve
                  for potential product obsolescence
              
              
              7,447
              
              
              3,412
              
              
              —
              
              
              (3,504
              )
              
              7,355Reserve
                  for sales returns and allowances
              
              
              25,123
              
              
              49,951
              
              
              2,213
              (c)
              
              (44,698
              )
              
              32,589$
              34,906
              
              $
              53,400
              
              $
              2,213
              
              $
              (49,369
              )
              $
              41,150Year
                  ended December 31, 2007:Allowance
                  for:Uncollectible
                  accounts
              
              $
              1,206
              
              $
              (269
              )
              $
              —
              
              $
              417
              
              $
              1,354Reserve
                  for potential product obsolescence
              
              
              7,355
              
              
              2,788
              
              
              —
              
              
              (5,072
              )
              
              5,071Reserve
                  for sales returns and allowances
              
              
              32,589
              
              
              40,193
              
              
              —
              
              
              (46,746
              )
              
              26,036$
              41,150
              
              $
              42,712
              
              $
              —
              
              $
              (51,401
              )
              $
              32,461


___________





(a)
      Pet
      Pal acquired reserve, $0.1 million; customer preference payments booked to
      Accrued Expenses, ($1.4 million).





(b)  Pet
      Pal
      acquired reserve.





(c)
      Creative Designs acquired reserve.





**Item
      9A.** ***Controls
      and Procedures***





*Evaluation
                of Disclosure Controls and Procedures.*





Our
      Chief
      Executive Officer and Chief Financial Officer, after evaluating the
      effectiveness of our disclosure controls and procedures (as defined in Exchange
      Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
      Annual Report, have concluded that as of that date, our disclosure controls
      and
      procedures were adequate and effective to ensure that information required
      to be
      disclosed by us in the reports we file or submit with the Securities and
      Exchange Commission is recorded, processed, summarized and reported within
      the
      time periods specified in the Securities and Exchange Commission’s rules and
      forms.





*Changes
                in Internal Control over Financial Reporting.*





There
      were no changes in our internal control over financial reporting identified
      in
      connection with the evaluation required by Exchange Act Rules 13a-15(d) and
      15d-15 that occurred during the fourth quarter period covered by this Annual
      Report that has materially affected, or is reasonably likely to materially
      affect, our internal control over financial reporting.





*Management’s
      Annual Report on Internal Control over Financial Reporting.*





We,
      as
      management, are responsible for establishing and maintaining adequate “internal
      control over financial reporting” (as defined in Exchange Act Rule 13a-15(f)).
      Our internal control system was designed by or is under the supervision of
      management and our board of directors to provide reasonable assurance regarding
      the reliability of financial reporting and the preparation of published
      financial statements.


64


All
      internal control systems, no matter how well designed, have inherent
      limitations. Therefore, even those systems determined to be effective can
      provide only reasonable assurance with respect to financial statement
      preparation and presentation.





Our
      management, including our Chief Executive Officer and Chief Financial Officer,
      evaluated the effectiveness of our internal control over financial reporting
      as
      of December 31, 2007. In making this assessment, management used the criteria
      set forth by the Committee of Sponsoring Organizations of the Treadway
      Commission (COSO) in *Internal
      Control — Integrated Framework* .
      We
      believe that, as of December 31, 2007, our internal control over financial
      reporting is effective based on those criteria.





Our
      independent auditors have issued a report on our internal controls over
      financial reporting. This report appears below.





*Report
      of the Independent Registered Public Accounting Firm* .





**Report
      of Independent Registered Public Accounting Firm**




Board
      of
      Directors and Stockholders


JAKKS
      Pacific, Inc.


Malibu,
      California





We
      have
      audited JAKKS Pacific, Inc.’s internal control over financial reporting as of
      December 31, 2007, based on criteria established in *Internal
      Control*–*Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (the
      “COSO criteria”). JAKKS Pacific, Inc.’s management is responsible for
      maintaining effective internal control over financial reporting and for its
      assessment of the effectiveness of internal control over financial reporting,
      included in the accompanying Item 9A, “Management’s Annual Report on Internal
      Control over Financial Reporting.” Our responsibility is to express an opinion
      on the Company’s internal control over financial reporting based on our audit.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, assessing the risk that a material weakness exists, and
      testing and evaluating the design and operating effectiveness of internal
      control based on the assessed risk. Our audit also included performing such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.




A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.




In
      our
      opinion, JAKKS Pacific, Inc. maintained, in all material respects, effective
      internal control over financial reporting as of December 31, 2007, based on
      the
      COSO criteria *.*




We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated
      balance sheets of JAKKS Pacific, Inc. as of December 31, 2007 and 2006 and
      the
      related consolidated statements of income, other comprehensive income,
      stockholders’ equity and cash flows for the years then ended and our
      report dated February 28, 2008 expressed an unqualified opinion
      thereon.





/s/
                BDO Seidman, LLPBDO
                Seidman, LLPLos
                Angeles, California


February
        28, 2008


65


**PART
        III**
 
 **Item
        10.** ***Directors,
        Executive Officers, and Corporate Governance***
 
 **Directors
        and Executive Officers**
 
 Our
        directors and executive officers are as follows:
 
 **Name**
              **Age**
              **Positions
                  with the Company**Jack
                  Friedman
              68
              Chairman
                  and Chief Executive OfficerStephen
                  G. Berman
              43
              Chief
                  Operating Officer, President, Secretary and DirectorJoel
                  M. Bennett
              46
              Executive
                  Vice President and Chief Financial OfficerDan
                  Almagor
              54
              DirectorDavid
                  C. Blatte
              43
              DirectorRobert
                  E. Glick
              62
              DirectorMichael
                  G. Miller
              60
              DirectorMurray
                  L. Skala
              61
              Director
 
 *Jack
        Friedman* has
        been
        our Chairman and Chief Executive Officer since co-founding JAKKS with Mr.
        Berman
        in January 1995. Until December 31, 1998, he was also our President. From
        January 1989 until January 1995, Mr. Friedman was Chief Executive Officer,
        President and a director of THQ. From 1970 to 1989, Mr. Friedman was President
        and Chief Operating Officer of LJN Toys, Ltd., a toy and software company.
        After
        LJN was acquired by MCA/Universal, Inc. in 1986, Mr. Friedman continued as
        President until his departure in late 1988.
 
 *Stephen
        G. Berman* has
        been
        our Chief Operating Officer and Secretary and one of our directors since
        co-founding JAKKS with Mr. Friedman in January 1995. Since January 1, 1999,
        he
        has also served as our President. From our inception until December 31, 1998,
        Mr. Berman was also our Executive Vice President. From October 1991 to August
        1995, Mr. Berman was a Vice President and Managing Director of THQ
        International, Inc., a subsidiary of THQ. From 1988 to 1991, he was President
        and an owner of Balanced Approach, Inc., a distributor of personal fitness
        products and services.
 
 *Joel
        M. Bennett* joined
        us
        in September 1995 as Chief Financial Officer and was given the additional
        title
        of Executive Vice President in May 2000. From August 1993 to September 1995,
        he
        served in several financial management capacities at Time Warner Entertainment
        Company, L.P., including as Controller of Warner Brothers Consumer Products
        Worldwide Merchandising and Interactive Entertainment. From June 1991 to
        August
        1993, Mr. Bennett was Vice President and Chief Financial Officer of TTI
        Technologies, Inc., a direct-mail computer hardware and software distribution
        company. From 1986 to June 1991, Mr. Bennett held various financial management
        positions at The Walt Disney Company, including Senior Manager of Finance
        for
        its international television syndication and production division. Mr. Bennett
        holds a Master of Business Administration degree and is a Certified Public
        Accountant.
 
 *Dan
        Almagor* has been
        one of our directors since September 2004. Since March 1992, Mr. Almagor
        has
        served as the Chairman of ACG Inc., an advisory firm affiliated with First
        Chicago Bank One Equity Capital, a global private equity organization which
        provides equity capital financing primarily to private companies.
 
 *David
        C. Blatte* has been
        one of our directors since January 2001. From January 1993 to May 2000, Mr.
        Blatte was a Senior Vice President in the consumer/retail group of the
        investment banking division of Donaldson, Lufkin and Jenrette Securities
        Corporation. From May 2000 to January 2004, Mr. Blatte was a partner in
        Catterton Partners, a private equity fund. Since February 2004, Mr. Blatte
        has
        been a partner in Centre Partners, a private equity fund.
 
 *Robert
        E. Glick* has
        been
        one of our directors since October 1996. For more than 20 years until May,
        2007,
        Mr. Glick was an officer, director and principal stockholder in a number
        of
        privately-held companies which manufacture and market women’s apparel and he is
        currently employed as President of a division by a publicly-held company
        engaged in the apparel industry.
 
 *Michael
        G. Miller* has
        been
        one of our directors since February 1996. From 1979 until May 1998, Mr. Miller
        was President and a director of a group of privately-held companies, including
        a
        list brokerage and list management consulting firm, a database management
        consulting firm, and a direct mail graphic and creative design firm. Mr.
        Miller’s interests in such companies were sold in May 1998. Mr. Miller is
        currently retired.
 
 *Murray
        L. Skala* has
        been
        one of our directors since October 1995. Since 1976, Mr. Skala has been a
        partner of the law firm Feder, Kaszovitz, Isaacson, Weber, Skala, Bass &
Rhine LLP, our general counsel.
  66
  A
        majority of our directors are “independent,” as defined under the rules of
        Nasdaq. Such independent directors are Messrs. Blatte, Glick, Miller and
        Almagor. Our directors hold office until the next annual meeting of stockholders
        and until their successors are elected and qualified. Our officers are elected
        annually by our Board of Directors and serve at its discretion.
  **Committees
        of the Board of Directors**
 
 We
        have
        an Audit Committee, a Compensation Committee and a Nominating and Corporate
        Governance Committee.
 
 *Audit
        Committee.* The
        primary functions of the Audit Committee are to select or to recommend to
        our
        Board the selection of outside auditors; to monitor our relationships with
        our
        outside auditors and their interaction with our management in order to ensure
        their independence and objectivity; to review, and to assess the scope and
        quality of, our outside auditor’s services, including the audit of our annual
        financial statements; to review our financial management and accounting
        procedures; to review our financial statements with our management and outside
        auditors; and to review the adequacy of our system of internal accounting
        controls. Messrs. Blatte, Glick and Miller are the current members of the
        Audit
        Committee and are each “independent” (as that term is defined in NASD Rule
        4200(a)(14)), and are each able to read and understand fundamental financial
        statements. Mr. Blatte, our audit committee financial expert, is the Chairman
        of
        the Audit Committee and possesses the financial expertise required under
        Rule
        401(h) of Regulation SK of the Act and NASD Rule 4350(d)(2). He is further
        “independent”, as that term is defined under Item 7(d)(3)(iv) of Schedule 14A
        under the Exchange Act. We will, in the future, continue to have (i) an Audit
        Committee of at least three members comprised solely of independent directors,
        each of whom will be able to read and understand fundamental financial
        statements (or will become able to do so within a reasonable period of time
        after his or her appointment); and (ii) at least one member of the Audit
        Committee that will possess the financial expertise required under NASD Rule
        4350(d)(2). Our Board has adopted a written charter for the Audit Committee
        and
        the Audit Committee reviews and reassesses the adequacy of that charter on
        an
        annual basis.
 
 *Compensation
        Committee.* The
        functions of the Compensation Committee are to make recommendations to the
        Board
        regarding compensation of management employees and to administer plans and
        programs relating to employee benefits, incentives, compensation and awards
        under our 2002 Stock Award and Incentive Plan (the “2002 Plan”). Messrs. Glick
        (Chairman), Almagor and Miller are the current members of the Compensation
        Committee. The Board has determined that each of them are “independent,” as
        defined under the applicable rules of Nasdaq.
 
 *Nominating
        and Corporate Governance Committee.* The
        functions of the Nominating and Corporate Governance Committee are to develop
        our corporate governance system and to review proposed new members of our
        board
        of directors, including those recommended by our stockholders. Messrs. Almagor
        (Chairman), Glick and Miller are the current members of our Nominating and
        Corporate Governance Committee. The Nominating and Corporate Governance
        Committee operates pursuant to a written charter adopted by the Board. The
        full
        text of the charter is available on our website at *www.jakkspacific.com.* The
        Board has determined that each member of this Committee is “independent,” as
        defined under the applicable rules of Nasdaq.
 
 **Section
        16(a) Beneficial Ownership Reporting Compliance**
 
 Based
        solely upon a review of Forms 3 and 4 and amendments thereto furnished to
        us
        during 2007 and Forms 5 and amendments thereto furnished to us with respect
        to
        2007, during 2007, Jack Friedman and Stephen Berman, executive officers of
        our
        Company and members of our Board of Directors, each untimely filed two reports
        on Form 4 reporting two late transactions and each of our directors also
        untimely filed one report on Form 4 reporting one late
        transaction.  Based solely upon a review of Forms 3 and 4 and
        amendments thereto furnished to us during 2007 and Forms 5 and amendments
        thereto furnished to us with respect to 2007, all other Forms 3, 4 and 5
        required to be filed during 2007 were done so on a timely basis.
 
 **Code
        of Ethics**
 
 We
        have a
        Code of Ethics that applies to all our employees, officers and directors.
        This
        code was filed as an exhibit to our Annual Report on Form 10-K for the fiscal
        year ended December 31, 2003. We have posted on our website,
        www.jakkspacific.com, the full text of such Code. We will disclose when there
        have been waivers of, or amendments to, such Code, as required by the rules
        and
        regulations promulgated by the Securities and Exchange Commission and/or
        Nasdaq.
 
 67
  **Item
        11.** ***Executive
        Compensation***
 
 COMPENSATION
        DISCUSSION AND ANALYSIS
  Compensation
        Philosophy and Objectives
 
 We
        believe that a strong management team comprised of highly talented individuals
        in key positions is critical to our ability to deliver sustained growth and
        profitability, and our executive compensation program is an important tool
        for
        attracting and retaining such individuals.  We also believe that our
        most important resource is our people. While some companies may enjoy an
        exclusive or limited franchise or are able to exploit unique assets or
        proprietary technology, we depend fundamentally on the skills, energy and
        dedication of our employees to drive our business. It is only through their
        constant efforts that we are able to innovate through the creation of new
        products and the continual rejuvenation of our product lines, to maintain
        superior operating efficiencies, and to develop and exploit marketing channels.
        With this in mind, we have consistently sought to employ the most talented,
        accomplished and energetic people available in the
        industry.  Therefore, we believe it is vital that our named executive
        officers receive an aggregate compensation package that is both highly
        competitive with the compensation received by similarly-situated executive
        officers at peer group companies, and also reflective of each individual
        named
        executive officer’s contributions to our success on both a long-term and
        short-term basis.  As discussed in greater depth below, the objectives
        of our compensation program are designed to execute this philosophy by
        compensating our executives at the top quartile of their peers.
  Our
        executive compensation program is designed with three main
        objectives:
 
 ·
              to
                  offer a competitive total compensation opportunity that will allow
                  us to
                  continue to retain and motivate highly talented individuals to
                  fill key
                  positions;
  ·
              to
                  align a significant portion of each executive’s total compensation with
                  our annual performance and the interests of our stockholders; and
  ·
              reflect
                  the qualifications, skills, experience and responsibilities of
                  our
                  executives
  Administration
        and Process
  Our
        executive compensation program is administered by the Compensation
        Committee.  The Compensation Committee receives legal advice from our
        outside general counsel and has retained Frederick W. Cook & Co., Inc.
        (“FWC), a compensation consulting firm, that provided advice directly to the
        Compensation Committee.  The base salary, bonus structure and the
        long-term equity compensation of our executive officers are governed by the
        terms of their individual employment agreements (see “-Employment Agreements and
        Termination of Employment Arrangements”).  With respect to our chief
        executive officer and president, the Compensation Committee, with input from
        FWC, establishes target performance levels for incentive bonuses based on
        a
        number of factors that are designed to further our executive compensation
        objectives, including our performance, the compensation received by
        similarly-situated executive officers at peer group companies, the conditions
        of
        the markets in which we operate and the relative earnings performance of
        peer
        group companies.
 
 Pursuant
        to the terms of their employment agreements, during the first quarter of
        each
        year, the Compensation Committee establishes the targeted level of our Adjusted
        EPS (as defined below) growth and corresponding bonus levels, as a percentage
        of
        base salary, Messrs. Friedman and Berman will earn if the target is
        met.  Pursuant to the terms of their employment agreements, this bonus
        is capped at a maximum of 200% of base salary, although the Compensation
        Committee has the authority, in its discretion, to increase the
        maximum.  The Compensation Committee also has wide discretion to set
        the target levels of Adjusted EPS and they work together with FWC to establish
        target levels that will accomplish the general objectives outlined above
        of also
        promoting growth and alignment with our shareholders’ interests.  The
        employment agreements also give the Compensation Committee the authority
        to
        award additional compensation to Messrs. Friedman, Berman and Bennett as
        it
        determines in its sole discretion based upon criteria it
        establishes.
  68
  Adjusted
        EPS is the net income per share of our common stock calculated on a
        fully-diluted basis in accordance with GAAP, applied on a basis consistent
        with
        past periods, as adjusted in the sole discretion of the Compensation Committee
        to take account of extraordinary or special items.
 
 While
        the
        Compensation Committee does not establish target performance levels for our
        chief financial officer, it does consider similar factors when determining
        such
        officer’s bonus. The employment agreement for Mr. Bennett authorizes our
        Compensation Committee and Board of Directors to award an annual bonus to
        Mr.
        Bennett in an amount up to 50% of his salary as the Committee or Board
        determines in its discretion and also gives the Compensation Committee and
        the
        Board the discretionary authority to pay Mr. Bennett additional incentive
        compensation as it determines.
 
 The
        Compensation Committee also annually reviews the overall compensation of
        our
        named executive officers for the purpose of determining whether discretionary
        bonuses should be granted.  In 2007, FWC presented a report to the
        Compensation Committee comparing our performance, size and executive
        compensation levels to those of peer group companies.  FWC also
        reviewed with the Compensation Committee the base salaries, annual bonuses,
        total cash compensation, long-term compensation and total compensation of
        our
        senior executive officers relative to those companies.  The
        performance comparison presented to the Compensation Committee each year
        includes a comparison of our total shareholder return, earnings per share
        growth, sales, net income (and one-year growth of both measures) to the peer
        group companies.  The Compensation Committee reviews this information
        along with details about the components of each named executive officer’s
        compensation.
  Peer
        Group
 
 One
        of
        the factors considered by the Compensation Committee is the relative performance
        and the compensation of executives of peer group companies. The peer group
        is
        comprised of a group of the companies selected in conjunction with FWC that
        we
        believe provides relevant comparative information, as these companies represent
        a cross-section of publicly-traded companies with product lines and businesses
        similar to our own throughout the comparison period.  The composition
        of the peer group is reviewed annually and companies are added or removed
        from
        the group as circumstances warrant. For the last fiscal year, the peer group
        companies utilized for executive compensation analysis were:
 
 ·
              Activision,
                  Inc.
 ·
              Electronic
                  Arts, Inc.
 ·
              EMak
                  Worldwide, Inc.
 ·
              Hasbro,
                  Inc.
 ·
              Leapfrog
                  Enterprises, Inc.
 ·
              Marvel
                  Enterprises, Inc.
 ·
              Mattel,
                  Inc.
 ·
              RC2
                  Corp.
 ·
              Russ
                  Berrie and Company, Inc.
 ·
              Take-Two
                  Interactive, Inc.
 ·
              THQ
                  Inc.
  Elements
        of Executive Compensation
 
 The
        compensation package for the Company’s senior executives has both
        performance-based and non-performance based elements. Based on its review
        of
        each named executive officer’s total compensation opportunities and performance,
        and our performance, the Compensation Committee determines each year’s
        compensation in the manner that it considers to be most likely to achieve
        the
        objectives of our executive compensation program. The specific elements,
        which
        include base salary, annual cash incentive compensation and long-term equity
        compensation, are described below.
  69
  The
        Compensation Committee has negative discretion to adjust performance results
        used to determine annual incentive and the vesting schedule of long-term
        incentive payouts to the named executive officers.  The Compensation
        Committee also has discretion to grant bonuses even if the performance targets
        were not met.
 
 Base
        Salary
 
 Each
        of
        our named executive officers received compensation in 2007 pursuant to the
        terms
        of his respective employment agreement.  As discussed in greater
        detail below, the employment agreements for Messrs. Friedman and Berman expire
        on December 31, 2010 and Mr. Bennett’s employment agreement expires on
        December 31, 2009.  Pursuant to the terms of their employment
        agreements, Messrs. Friedman and Berman each receive a base salary which,
        pursuant to his employment agreement, is increased automatically each year
        by
        $25,000. Mr. Bennett’s employment agreement does not provide for automatic
        annual increases in base salary.  Any increase or additional increase
        in base salary, as the case may be, is determined by the Compensation Committee
        based on a combination of two factors. The first factor is the Compensation
        Committee’s evaluation of the salaries paid in peer group companies to
        executives with similar responsibilities. The second factor is the Compensation
        Committee’s evaluation of the executive’s unique role, job performance and other
        circumstances. Evaluating both of these factors allows us to offer a competitive
        total compensation value to each individual named executive officer taking
        into
        account the unique attributes of, and circumstances relating to, each
        individual, as well as marketplace factors. This approach has allowed us
        to
        continue to meet our objective of offering a competitive total compensation
        value and attracting and retaining key personnel. Based on its review of
        these
        factors, the Compensation Committee determined not to increase any of the
        base
        salaries of Messrs. Friedman and Berman above the contractually required
        minimum
        increase in 2007 as unnecessary to maintain our competitive total compensation
        position in the marketplace, but did determine to raise Mr. Bennett’s base
        salary for 2008 by $20,000.
 
 Annual
        Cash Incentive Compensation
  The
        function of the annual cash bonus is to establish a direct correlation between
        the annual incentives awarded to the participants and our financial performance.
        This purpose is in keeping with our compensation program’s objective of aligning
        a significant portion of each executive’s total compensation with our annual
        performance and the interests of our shareholders.
  The
        employment agreements for Messrs. Friedman and Berman provide for an incentive
        cash bonus award based on a percentage of each participant’s base salary if the
        performance goals set by the Compensation Committee are met for that
        year.  The employment agreements mandate that the specific criteria to
        be used is earnings per share and the Compensation Committee sets the various
        target thresholds to be met to earn increasing amounts of the bonus up to
        a
        maximum of 200% of base salary, although the Compensation Committee has the
        ability to increase the maximum in its discretion.  During the first
        quarter of each year, the Compensation Committee meets to establish the target
        thresholds for that year.  During 2007, growth in the Company’s EPS
        was almost 22%, which exceeded the target levels established by the Compensation
        Committee entitling each of Messrs. Friedman and Berman to a cash bonus equal
        to
        250% of base salary, or $2,662,500. Mr. Bennett’s employment agreement provides
        for an annual bonus of up to 50% of his base salary to be awarded in the
        discretion of the Compensation Committee or the Board of Directors, upon
        consideration of such factors as economic and business conditions affecting
        us
        and his personal performance. Following such consideration, the Board of
        Directors determined to award Mr. Bennett a bonus of $300,000.
  70
 
 The
        employment agreement for each of our named executive officers contemplates
        that
        the Compensation Committee may grant discretionary bonuses in situations
        where,
        in its sole judgment, it believes they are warranted.  The
        Compensation Committee approaches this aspect of the particular executive’s
        compensation package by looking at the other components of each executive’s
        aggregate compensation and then evaluating if any additional compensation
        is
        appropriate to meet our compensation goals.  As part of this review,
        the Compensation Committee, with significant input from FWC, collects
        information about the total compensation packages in our peer group and various
        indicia of performance by the peer group such as sales, one-year sales growth,
        net income, one-year net income growth, market capitalization, size of
        companies, one- and three-year stockholder returns, etc. and then compares
        such
        data to our corresponding performance data.  The Compensation
        Committee also gave particular consideration to the fact that we ended the
        year
        with over $240 million in cash, no long term debt other than the debentures
        and
        a strong balance sheet, all of which poised us for continued growth, that
        our
        earnings per share grew by 20.5% over 2006, that our strong performance occurred
        in the face of negative economic trends in the economy in general and the
        toy
        industry in particular, with little growth in Christmas sales reported by
        most
        retailers and specific weakness in toy company sales, and that we have not
        experienced to date any recall issues such as those plaguing other toy
        companies. In addition, in the case of Mr. Bennett, the Compensation Committee
        and the Board of Directors considered the continued expansion of Mr. Bennett’s
        responsibilities as a result of our growth and Mr. Bennett’s management of the
        integration of the operations we acquired into our overall financial controls.
        Following consideration of all of the above as well as input from FWC, the
        Compensation Committee recommended and the Board of Directors approved
        discretionary bonuses in the amount of $500,000 of restricted shares of our
        common stock to each of Messrs. Friedman and Berman (representing approximately
        47% of their respective 2007 base salary) and a discretionary bonus in the
        amount of $200,000 to Mr. Bennett and $100,000 restricted shares of our common
        stock (representing  in the aggregate 75% of his 2007 base
        salary).  The restricted shares so awarded to Messrs. Friedman and
        Berman are fully vested, but are subject to a three-year restriction on sale
        and
        may not be sold until February 14, 2011. In addition, as a condition to
        this award, the Board required that Messrs. Friedman and Berman agree that,
        with
        respect to the 120,000 shares of our restricted stock each received on
        January 1, 2008 pursuant to the terms of their employment agreements, sale
        of 10,000 of the first 60,000 shares scheduled to vest on January 1, 2009
        be restricted for two years from the date of vesting and sale of 10,000 of
        the
        balance of such 120,000 shares initially scheduled to vest on January 1,
        2010 be restricted for two years from the vesting date of the balance of
        such
        120,000 shares. The restricted shares so awarded to Mr. Bennett vest as to
        50%
        on March 1, 2009 and the balance on March 1, 2010.
  Long-Term
        Compensation
 
 Long-term
        compensation is an area of particular emphasis in our executive compensation
        program, because we believe that these incentives foster the long-term
        perspective necessary for our continued success.  Again, this emphasis
        is in keeping with our compensation program objective of aligning a significant
        portion of each executive’s total compensation with our long-term performance
        and the interests of our shareholders.
 
 Historically,
        our long-term compensation program has focused on the granting of stock options
        that vested over time.  However, commencing in 2006 we began shifting
        the emphasis of this element of compensation and we currently favor the issuance
        of restricted stock awards.  The Compensation Committee believes that
        the award of full- value shares that vest over time is consistent with our
        overall compensation philosophy and objectives as the value of the restricted
        stock varies based upon the performance of our common stock, thereby aligning
        the interests of our executives with our shareholders.  The
        Compensation Committee has also determined that awards of restricted stock
        are
        anti-dilutive as compared to stock options inasmuch as it feels that less
        restricted shares have to be granted to match the compensation value of stock
        options.
  The
        employment agreements for Messrs. Friedman and Berman provide for annual
        grants
        of 120,000 shares of restricted stock subject to a two-year vesting period,
        all
        or part of which may be accelerated to one year if we achieve earnings per
        share
        growth targets.  The initial vesting of the restricted stock is
        subject to our achieving pre-tax income in excess of $2 million in the fiscal
        year that the grant is made.  Since we had in excess of $2 million of
        pre-tax income for 2007, 50% of the 2007 restricted stock awards to Messrs.
        Friedman and Berman vested on January 1, 2008.  Moreover, since the
        2007 earnings per share growth exceeded certain of the targets for 2007,
        the
        vesting schedule for 75% of the 2007 award was accelerated and vested completely
        on January 1, 2008.  The remaining 25% of the 2007 award will vest on
        January 1, 2009.  Mr. Bennett’s employment agreement does not provide
        for any specified award of restricted shares, rather the Compensation Committee
        has discretion to determine if an award of restricted shares (or stock options)
        should be granted and if granted, the specific terms of the grant.
  71
  After
        a
        review of all of the factors discussed above, the Compensation Committee
        determined that, in keeping with our compensation objectives, other than
        the
        contractual amounts and the $500,000 special stock award noted above for
        Messrs.
        Friedman and Berman and $100,000 special stock award noted above for Mr.
        Bennett, no additional restricted stock (or stock option) awards should be
        granted to our named executives for fiscal 2007.
  Other
        Benefits and Perquisites
  Our
        executive officers participate in the health and dental coverage, life
        insurance, paid vacation and holidays, 401(k) retirement savings plans and
        other
        programs that are generally available to all of the Company’s
        employees.
  The
        provision of any additional perquisites to each of the named executive officers
        is subject to review by the Compensation Committee.  Historically,
        these perquisites include payment of an automobile allowance and matching
        contributions to a 401(k) defined contribution plan.  In 2007, the
        named executive officers were granted the following
        perquisites:  automobile allowance and matching contributions to a
        401(k) defined contribution plan.  We value perquisites at their
        incremental cost to us in accordance with SEC regulations.
  We
        believe that the benefits and perquisites we provide to our named executive
        officers are within competitive practice and customary for executives in
        key
        positions at comparable companies. Such benefits and perquisites serve our
        objective of offering competitive compensation that allows us to continue
        to
        attract, retain and motivate highly talented people to these critical positions,
        ultimately providing a substantial benefit to our shareholders.
  Change
        of
        Control/Termination Agreements
  We
        recognize that, as with any public company, it is possible that a change
        of
        control may take place in the future.  We also recognize that the
        threat or occurrence of a change of control can result in significant
        distractions of key management personnel because of the uncertainties inherent
        in such a situation.  We further believe that it is essential and in
        our best interest and the interests of our shareholders to retain the services
        of our key management personnel in the event of the threat or occurrence
        of a
        change of control and to ensure their continued dedication and efforts in
        such
        event without undue concern for their personal financial and employment
        security. In keeping with this belief and its objective of retaining and
        motivating highly talented individuals to fill key positions, which is
        consistent with our general compensation philosophy, the employment agreements
        for our executive officers contain provisions which guarantee the named
        executive officers specific payments and benefits upon a termination of
        employment as a result of a change of control of the Company.  In
        addition, the employment agreements also contain provisions providing for
        certain lump-sum payments in the event the executive is terminated without
        “cause” or if we materially breach the agreement leading the affected executive
        to terminate the agreement for good reason.
  Additional
        details of the terms of the change of control agreements and termination
        provisions outlined above are provided below.
  Retirement
        Plans
  Mr.
        Friedman’s employment agreement provides that, commencing at age 67, he may
        retire and receive a single-life annuity retirement payment of $975,000 per
        year
        for a period of ten (10) years following his retirement.  Mr. Friedman
        is currently 68 years old.  In the event of his death during such
        period, his estate will receive a death benefit equal to the difference between
        $2,925,000 and retirement benefits previously paid to him.  This
        retirement benefit is conditioned upon Mr. Friedman agreeing to accept the
        position of Chairman Emeritus of our Board of Directors, if so requested
        by the
        Board.
  72
  We
        believe that by limiting our retirement benefits to only our senior-most
        executive we are striking a fair and reasonable balance between achieving
        our
        compensation objective of retaining a highly-talented individual to fill
        our
        most key position and the best interests of our stockholders.
  Impact
        of
        Accounting and Tax Treatments
  Section 162(m)
        of the Internal Revenue Code (the “Code”) prohibits publicly held companies like
        us from deducting certain compensation to any one named executive officer
        in
        excess of $1,000,000 during the tax year. However, Section 162(m) provides
        that, to the extent that compensation is based on the attainment of performance
        goals set by the Compensation Committee pursuant to plans approved by the
        Company’s shareholders, the compensation is not included for purposes of
        arriving at the $1,000,000.
  The
        Company, through the Compensation Committee, intends to attempt to qualify
        executive compensation as tax deductible to the extent feasible and where
        it
        believes it is in our best interests and in the best interests of our
        shareholders.  However, the Compensation Committee does not intend to
        permit this arbitrary tax provision to distort the effective development
        and
        execution of our compensation program. Thus, the Compensation Committee is
        permitted to and will continue to exercise discretion in those instances
        in
        which mechanistic approaches necessary to satisfy tax law considerations
        could
        compromise the interests of our shareholders. In addition, because of the
        uncertainties associated with the application and interpretation of
        Section 162(m) and the regulations issued thereunder, there can be no
        assurance that compensation intended to satisfy the requirements for
        deductibility under Section 162(m) will in fact be deductible.
 
 **Compensation
        Committee Report**
 
 The
        compensation committee has reviewed and discussed the Compensation Discussion
        and Analysis (the “CD&A”) for the year ended December 31, 2007 with
        management. In reliance on the reviews and discussions referred to above,
        the
        compensation committee recommended to the board, and the board has approved,
        that the CD&A be furnished in the annual report on Form 10-K for the year
        ended December 31, 2007.
 
 By
        the
        Compensation Committee of the Board of Directors:
 
 Robert
        E.
        Glick, Chairman
 Dan
        Almagor, Member
 Michael
        G. Miller, Member
 
 73
  The
        following table sets forth the compensation we paid for our fiscal years
        ended
        December 31, 2006 and 2007 to (i) our Chief Executive Officer; (ii) each
        of our
        other executive officers whose compensation exceeded $100,000 on an annual
        basis; and (iii) up to two additional individuals for whom disclosure would
        have
        been provided under the foregoing clause (ii) but for the fact that the
        individual was not serving as an executive officer of our Company at the
        end of
        the last completed fiscal year (collectively, the “Named
        Officers”).
 
 **Summary
        Compensation Table**
  **Name
                  and Principal Position**
              
              **Year**
              
              **Salary**
                **($)**
              
              **Bonus**
                **($)**
              
              **Stock**
                **Awards**
                **($)**
              
              **Option**
                **Awards**
                **($)**
              
              **Non-Equity**
                **Incentive
                  Plan**
                **Compensation**
                **($)**
              
              **Change in**
                **Pension**
                **Value and**
                **Nonqualified**
                **Deferred**
                **Compensation**
                **Earnings ($)**
              
              **All Other**
                **Compensation**
                **($) (3)**
              
              **Total**
                **($)**Jack
                  Friedman
              
              
              2007
              
              
              1,065,000
              
              
              2,662,500
              
              
              3,421,400
              (1)
              
              —
              
              
              —
              
              
              —
              
              
              28,000
              
              
              7,176,900Chairman
                  and Chief Executive Officer
              
              
              2006
              
              
              1,040,000
              
              
              250,000
              
              
              1,884,600
              (2)
              
              —
              
              
              —
              
              
              —
              
              
              28,000
              
              
              3,202,000Stephen
                  G. Berman
              
              
              2007
              
              
              1,065,000
              
              
              2,662,500
              
              
              3,421,400
              (1)
              
              —
              
              
              —
              
              
              —
              
              
              25,500
              
              
              7,176,900Chief
                  Operating Officer, President and Secretary
              
              
              2006
              
              
              1,040,000
              
              
              250,000
              
              
              1,884,600
              (2)
              
              —
              
              
              —
              
              
              —
              
              
              25,500
              
              
              3,199,500Joel
                  M. Bennett
              
              
              2007
              
              
              400,000
              
              
              300,000
              
              
              155,200
              
              
              —
              
              
              —
              
              
              —
              
              
              19,500
              
              
              874,700Executive
                  Vice President and Chief Financial Officer
              
              
              2006
              
              
              360,000
              
              
              300,000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              14,700
              
              
              674,700
 
 
 (1)
              Pursuant
                  to the 2002 Plan, on January 1, 2007, 120,000 shares of restricted
                  stock
                  were granted to the Named Officer, of which 50% vest on January
                  1, 2008
                  and 50% vest on January 1, 2009, subject to acceleration. Based
                  on the
                  Company’s 2007 financial performance, the vesting of 45,000 of the January
                  1, 2009 vesting shares were accelerated. The amount in this column
                  reflects the expense recorded in the Company’s 2007 financial statements
                  and was calculated as the product of (a) 105,000 shares of restricted
                  stock multiplied by (b) $21.84, the last sales price of our common
                  stock,
                  as reported by Nasdaq on January 1, 2007, the date the shares were
                  granted, reflecting the 60,000 shares vested on January 1, 2008
                  and 45,000
                  of the remaining 60,000 shares whose vesting accelerated based
                  on the
                  Company’s 2007 financial performance. See “— Critical Accounting
                  Policies.” Also reflects the expense recorded in the Company’s 2007
                  financial statements and was calculated as the product of (a) 30,000
                  shares of restricted stock multiplied by (b) $20.94, the last sales
                  price
                  of our common stock, as reported by Nasdaq on January 1, 2006,
                  the date
                  the shares were granted, reflecting the 30,000 shares vested on
                  January 1,
                  2007. Also includes stock award of $500,000 of restricted stock
                  as
                  additional bonus compensation granted on February 14,
                  2008.
 
 (2)
              Pursuant
                  to the 2002 Plan, on January 1, 2006, 120,000 shares of restricted
                  stock
                  were granted to the Named Officer, of which 50% vest on January
                  1, 2007
                  and 50% vest on January 1, 2008, subject to acceleration. Based
                  on the
                  Company’s 2006 financial performance, the vesting of 30,000 of the January
                  1, 2008 vesting shares were accelerated. The amount in this column
                  reflects the expense recorded in the Company’s 2006 financial statements
                  and was calculated as the product of (a) 90,000 shares of restricted
                  stock
                  multiplied by (b) $20.94, the last sales price of our common stock,
                  as
                  reported by Nasdaq on January 1, 2006, the date the shares were
                  granted,
                  reflecting the 60,000 shares vested on January 1, 2007 and 30,000
                  of the
                  remaining 60,000 shares whose vesting accelerated based on the
                  Company’s
                  2006 financial performance. See “— Critical Accounting Policies.”
 
 (3)
              Represents
                  automobile allowances paid in the amount of $18,000 to each of
                  Messrs.
                  Friedman and Berman and $7,200 and $12,000 for 2006 and 2007,
                  respectively, to Mr. Bennett and matching contributions made by
                  us to the
                  Named Officer’s 401(k) defined contribution plan in the amount of $10,000,
                  $7,500 and $7,500, respectively, for Messrs. Friedman, Berman and
                  Bennett.
                  See “— Employee Pension Plan.”
 
 74
  The
        following table sets forth certain information regarding the annual bonus
        performance structure for our fiscal year ended December 31, 2007 for the
        Named
        Officers:
 
 **Grants
        of Plan-Based Awards**
  **Estimated**
                **Possible Payouts**
                **Under Non-Equity**
                **Incentive Plan Awards**
              
              **Estimated**
                **Future Payouts**
                **Under Equity**
                **Incentive Plan Awards**
              
              **All**
                **Other**
                **Stock**
                **Awards:**
                **Number of**
                **Shares**
                **of**
                **Stock**
              
              **All**
                **Other**
                **Options**
                **Awards:**
                **Number of**
                **Securities**
                **Underlying**
              
              **Exercise**
                **or Base**
                **Price**
                **of**
                **Option**
              
              **Closing**
                **Price of**
                **Stock**
                **on**
                **Grant**
              
              **Grant**
                **Date**
                **Fair Value**
                **Of Stock and**
                **Option****Name**
              
              **Grant**
                **Date**
              
              **Threshold**
                *($)*
              
              **Target**
                **($)**
              
              **Maximum**
                **($)**
              
              **Threshold**
                **($)**
              
              **Target**
                **($)**
              
              **Maximum**
                **($)**
              
              **Or Units**
                **(#)**
              
              **Options**
                **(#)**
              
              **Awards**
                **($/Sh)**
              
              **Date**
                **($)**
              
              **Awards**
                **($) (1)**Jack
                  Friedman
              
              
              1/1/07
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              120,000
              
              
              —
              
              
              —
              
              
              21.84
              
              
              2,620,800Stephen
                  G. Berman
              
              
              1/1/07
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              120,000
              
              
              —
              
              
              —
              
              
              21.84
              
              
              2,620,800Joel
                  M. Bennett
              
              
              7/17/07
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              15,000
              
              
              —
              
              
              —
              
              
              31.04
              
              
              465,600Jack
                  Friedman
              
              
              —
              
              
              426,000
              
              
              1,065,000
              
              
              2,662,500
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Stephen
                  G. Berman
              
              
              —
              
              
              426,000
              
              
              1,065,000
              
              
              2,662,500
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
 
 (1)
        The
        product of (x) $21.84 for Messrs. Friedman and Berman (the closing sale price
        of
        the common stock on December 29, 2006) and $31.04 for Mr. Bennett (the closing
        sale price of the common stock on July 17, 2007) multiplied by (y) the number
        of
        restricted shares granted on January 1, 2007 for Messrs. Friedman and Berman
        and
        on July 17, 2007, for Mr. Bennett.
  The
        following table sets forth certain information regarding all equity-based
        compensation awards outstanding as of December 31, 2007 by the Named
        Officers:
 
 **Outstanding
        Equity Awards At Fiscal Year-end**
 
 **Option Awards**
              
              **Stock Awards****Name**
              
              **Number of**
                **Securities**
                **Underlying**
                **Unexercised**
                **Options**
                **Exercisable**
                **(#)**
              
              **Number of**
                **Securities**
                **Underlying**
                **Unexercised**
                **Options**
                **Unexercisable**
                **(#)**
              
              **Equity**
                **Incentive**
                **Plan**
                **Awards:**
                **Number of**
                **Securities**
                **Underlying**
                **Unexercised**
                **Unearned**
                **Options (#)**
              
              **Option**
                **Exercise**
                **Price**
                **($)**
              
              **Option**
                **Expiration**
                **Date**
              
              **Number of**
                **Shares or**
                **Units of**
                **Stock**
                **that**
                **Have**
                **Not Vested**
                **(#)**
              
              **Market**
                **Value of**
                **Shares or**
                **Units of**
                **Stock**
                **that**
                **Have**
                **Not Vested**
                **($) (1)**
              
              **Equity**
                **Incentive**
                **Plan**
                **Awards:**
                **Number**
                **of**
                **Unearned**
                **Shares,**
                **Units or**
                **Other**
                **Rights**
                **that**
                **Have Not**
                **Vested**
                **(#)**
              
              **Equity**
                **Incentive**
                **Plan**
                **Awards:**
                **Market**
                **or Payout**
                **Value of**
                **Unearned**
                **Shares,**
                **Units or**
                **Other**
                **Rights**
                **That**
                **Have Not**
                **Vested**
                **($)**Jack
                  Friedman
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              150,000
              
              
              3,541,500
              
              
              —
              
              
              —Stephen
                  G. Berman
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              150,000
              
              
              3,541,500
              
              
              —
              
              
              —Joel
                  M. Bennett
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              10,000
              
              
              236,100
              
              
              —
              
              
              —
 
 75
  (1)
              The
                  product of (x) $23.61 (the closing sale price of the common stock
                  on
                  December 31, 2007) multiplied by (y) the number of unvested restricted
                  shares outstanding.
 
 The
        following table sets forth certain information regarding amount realized
        upon
        the vesting and exercise of any equity-based compensation awards during 2007
        by
        the Named Officers:
 
 **Options
        Exercises And Stock Vested**
 
 **Option Awards**
              
              **Stock Awards****Name**
              
              **Number of**
                **Shares**
                **Acquired on**
                **Exercise (#)**
              
              **Value**
                **Realized on**
                **Exercise**
                **($) (1)**
              
              **Number of**
                **Shares**
                **Acquired on**
                **Vesting (#)**
              
              **Value**
                **Realized on**
                **Vesting ($)**
                **(2)**Jack
                  Friedman
              
              
              175,000
              
              
              1,779,750
              
              
              90,000
              
              
              2,005,500Stephen
                  G. Berman
              
              
              —
              
              
              —
              
              
              90,000
              
              
              2,005,500Joel
                  M. Bennett
              
              
              20,000
              
              
              135,800
              
              
              5,000
              
              
              118,050
 
 (1)
              Represents
                  the product of (x) the difference between the closing sale price
                  of the
                  common stock on the date of exercise less the exercise price, multiplied
                  by (y) the number of shares acquired on
                  exercise.
 
 (2)
              Represents
                  the product of (x) the closing sale price of the common stock on
                  the date
                  of vesting multiplied by (y) the number of restricted shares vested.
 
 **Potential
        Payments upon Termination or Change in Control**
 
 The
        following tables describe potential payments and other benefits that would
        have
        been received by each Named Officer at, following or in connection with any
        termination, including, without limitation, resignation, severance, retirement
        or a constructive termination of such Named Officer, or a change in control
        of
        our Company or a change in such Named Officer’s responsibilities.  The
        potential payments listed below assume that there is no earned but unpaid
        base
        salary at December 31, 2007.  Under our vacation policy, the Named
        Officers would not receive payment for 2008 vacation unless they were employed
        at January 1, 2008.
 
 ***Jack
        Friedman***
 
 Upon
                Retirement
              
              Quits For
                “Good
                Reason”
                (3)
              
              Upon
                Death
              
              Upon
                “Disability”
                (4)
              
              Termination
                Without
                “Cause”
              
              Termination
                For “Cause”
                (6)
              
              Involuntary
                Termination
                In
                Connection
                with Change
                of
                Control(7)Base
                  Salary
              
              $
              -
              
              $
              1,397,813
              
              $
              -
              
              $
              (5)
              
              $
              1,397,813
              
              $
              -
              
              $
              3,184,350
              (8)Retirement
                  Benefit (1)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Restricted
                  Stock - Performance-Based
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,833,200
              (9)Annual
                  Cash Incentive Award (2)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
 
 76
 ***Stephen
        G. Berman***
 
 Upon
                Retirement
              
              Quits For
                “Good
                Reason”
                (3)
              
              Upon
                Death
              
              Upon
                “Disability”
                (4)
              
              Termination
                Without
                “Cause”
              
              Termination
                For “Cause”
                (6)
              
              Involuntary
                Termination
                In
                Connection
                with Change
                of
                Control(7)Base
                  Salary
              
              $
              -
              
              $
              1,397,813
              
              $
              -
              
              $
              -
              
              $
              1,397,813
              
              $
              -
              
              $
              3,184,350
              (8)Restricted
                  Stock - Performance-Based
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,833,200
              (9)Annual
                  Cash Incentive Award (2)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
 
 ***Joel
        M. Bennett***
 
 Upon
                Retirement
              
              Quits For
                “Good
                Reason”
                (3)
              
              Upon
                Death
              
              Upon
                “Disability”
                (4)
              
              Termination
                Without
                “Cause”
              
              Termination
                For “Cause”
                (6)
              
              Involuntary
                Termination
                In
                Connection
                with Change
                of
                Control(7)Base
                  Salary
              
              $
              -
              
              $
              400,000
              
              $
              200,000
              
              $
              200,000
              
              $
              400,000
              
              $
              -
              
              $
              200,000Restricted
                  Stock - Performance-Based
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Annual
                  Cash Incentive Award (2)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
 
 (1)
        Mr.
        Friedman’s employment agreement with us (see “ - Employment Agreements”)
        provides that if he retires and is at least 67 years old, then he is entitled
        to
        be paid an annual retirement benefit of $975,000 (the “Retirement Benefit”)
        during the 10-year period following his retirement; provided, however, that
        Mr.
        Friedman must agree to serve as our non-executive Chairman Emeritus for so
        long
        as may be requested by the Board of Directors; and provided further, however,
        that if Mr. Friedman dies before the payment of his entire Retirement Benefit,
        the remaining Retirement Benefit will be reduced such that his designated
        beneficiary or estate, as the case may be, will receive in a lump sum the
        positive difference, if any, between $2,925,000 and any Retirement Benefit
        already paid to him.  Mr. Friedman was 67 years of age as at December
        31, 2007.
 
 (2)
        Assumes that if the Named Officer is terminated on December 31, 2007, they
        were
        employed through the end of the incentive period.
  (3)
        Defined as (i) our violation or failure to perform or satisfy any material
        covenant, condition or obligation required to be performed or satisfied by
        us,
        or (ii) the material change in the nature or scope of the duties, obligations,
        rights or powers of the Named Officer’s employment resulting from any action or
        failure to act by us.
 
 (4)
        Defined as a Named Officer’s inability to perform his duties by reason of any
        disability or incapacity (due to any physical or mental injury, illness or
        defect) for an aggregate of 180 days in any consecutive 12-month
        period.
 (5)
          An
          amount equal to 90% of the Retirement Benefit described in footnote (1)
          above.
 
 (6)
        Defined as (i) the Named Officer’s conviction of, or entering a plea of guilty
        or nolo contendere (which plea is not withdrawn prior to its approval by
        the
        court) to, a felony offense and either the Named Officer’s failure to perfect an
        appeal of such conviction prior to the expiration of the maximum period of
        time
        within which, under applicable law or rules of court, such appeal may be
        perfected or, if he does perfect such an appeal, the sustaining of his
        conviction of a felony offense on appeal; or (ii) the determination by our
        Board
        of Directors, after due inquiry, based on convincing evidence, that the Named
        Officer has:
 
 (A)
        committed fraud against, or embezzled or misappropriated funds or other assets
        of, our Company;
 (B)
        violated, or caused us or any of our officers, employees or other agents,
        or any
        other individual or entity to violate, any material law, rule, regulation
        or
        ordinance, or any material written policy, rule or directive of our Company
        or
        our Board of Directors;
 (C)
        willfully, or because of gross or persistent inaction, failed properly to
        perform his duties or acted in a manner detrimental to, or adverse to our
        interests; or
  77
  (D)
        violated, or failed to perform or satisfy any material covenant, condition
        or
        obligation required to be performed or satisfied by him under his employment
        agreement with us;
 
 and
        that,
        in the case of any violation or failure referred to in clause (B), (C) or
        (D),
        above, such violation or failure has caused, or is reasonably likely to cause,
        us to suffer or incur a substantial casualty, loss, penalty, expense or other
        liability or cost.
 
 (7)
        Section 280G of the Code disallows a company’s tax deduction for what are
        defined as “excess parachute payments” and Section 4999 of the Code imposes a
        20% excise tax on any person who receives excess parachute payments.  As
        discussed above, Messrs. Friedman and Berman are entitled to certain payments
        upon termination of their employment, including termination following a change
        in control of our Company.  Under the terms of their respective employment
        agreements (see “ - Employment Agreements”), neither Mr. Friedman nor Mr. Berman
        are entitled to any payments that would be an excess parachute payment, and
        such
        payments are to be reduced by the least amount necessary to avoid the excise
        tax.  Accordingly, our tax deduction would not be disallowed under Section
        280G of the Code, and no excise tax would be imposed under Section 4999 of
        the
        Code.
 
 (8)
        Under
        the terms of Messrs. Friedman’s and Berman’s respective employment agreements
        (see “ - Employment Agreements”), if a change of control occurs, then they each
        have the right to terminate their employment and receive a payment equal
        to 2.99
        times their then current annual salary (which was $1,065,000 in
        2007).
 
 (9)
        Each
        of Messrs. Friedman and Berman were granted and are scheduled to be granted
        restricted stock of our Company in accordance with the terms of their respective
        employment agreements (see “ – Employment
        Agreements”).  Pursuant to the terms of those employment agreements,
        vesting accelerates for performance-based restricted stock upon a change
        in
        control, whether or not the relevant performance targets are
        met.  Furthermore, under our Third Amended and Restated 1995 Stock
        Option Plan and 2002 Stock Award and Incentive Plan, in the event of a change
        in
        control, stock options granted under those plans become immediately exercisable
        in full and under our 2002 Stock Award and Incentive Plan, shares of restricted
        stock granted under that plan are immediately vested.  The stock price
        used to calculate values in the above tables is $23.61 per share, the closing
        price on the last trading day of 2007.
 
 *Compensation
        of Directors*
 
 Analogous
        to our executive compensation philosophy, it is our desire to similarly
        compensate our non-employee directors for their services in a way that will
        serve to attract and retain highly qualified members.  As changes in
        the securities laws require greater involvement by, and places additional
        burdens on, a company’s directors it becomes even more necessary to locate and
        retain highly qualified directors.  As such, in close cooperation with
        FWC, the Compensation Committee has reconfigured the structure of the
        compensation package of our directors so that it places our directors at
        approximately the median total compensation package for directors in our
        peer
        group.
 
 For
        2007,
        each of our non-employee directors received (i) a cash stipend of $30,000
        for serving on the Board, (ii) $1,000 for each board or committee meeting
        attended (whether in person or by telephone), and (iii) a grant of
        restricted shares of our common stock valued at $121,000 (using a per share
        value equal to the average closing price of our common stock for the last
        ten
        trading days of December in the year preceding the grant date). Directors
        are
        also reimbursed for reasonable expenses incurred in attending
        meetings.  The Chairman of the Audit Committee receives a cash stipend
        of $25,000 for serving in such capacity and the Chairmen of the Compensation
        Committee and the Nominating and Corporate Governance Committee each receive
        cash stipends of $10,000 for serving in such capacities.
 
 Newly-elected
        non-employee directors will receive a portion of the foregoing annual
        consideration, pro rated according to the portion of the year in which they
        serve in such capacity.
 
 78
  The
        following table sets forth the compensation we paid to our non-employee
        directors for our fiscal year ended December 31, 2007:
  **Director
        Compensation**
 
 **Name**
              
              **Year**
              
              **Fees Earned**
                **or
                  Paid in**
                **Cash**
                **($)**
              
              **Stock Awards**
                **($) (1)**
              
              **Option Awards**
                **($)**
              
              **Non-Equity**
                **Incentive**
                **Plan**
                **Compensation**
                **($)**
              
              **Change in**
                **Pension Value**
                **and**
                **Nonqualified**
                **Deferred**
                **Compensation**
                **Earnings**
                **($)**
              
              **All Other**
                **Compensation**
                **($)**
              
              **Total**
                **($)**Dan
                  Almagor
              
              
              2007
              
              
              67,000
              
              
              120,996
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              187,996David
                  Blatte
              
              
              2007
              
              
              55,000
              
              
              120,996
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              175,996Robert
                  Glick
              
              
              2007
              
              
              67,000
              
              
              120,996
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              187,996Michael
                  Miller
              
              
              2007
              
              
              50,000
              
              
              120,996
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              170,996Murray
                  Skala
              
              
              2007
              
              
              30,000
              
              
              120,996
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              150,996
 
 (1)
        Represents the product of (a) 5,468 shares of restricted stock multiplied
        by (b)
        $22.128, the average last sales price of our common stock over the last ten
        trading days in December 2006, as reported by Nasdaq, which represents the
        last
        tradings preceding January 1, 2007, the date the shares were granted, all
        of
        which shares vested on January 1, 2008.
  *Employment
        Agreements and Termination of Employment Arrangements*
 
 In
        March
        2003 we amended and restated our employment agreements with each of Messrs.
        Friedman and Berman and on July 17, 2007 entered into a new employment
        agreement with Joel Bennett.
 
 Mr.
        Friedman’s amended and restated employment agreement, pursuant to which he
        serves as our Chairman and Chief Executive Officer, provides for an annual
        base
        salary in 2007 of $1,065,000. Mr. Friedman’s agreement expires December 31,
        2010. His base salary is subject to annual increases determined by our Board
        of
        Directors, but in an amount not less than $25,000 per annum. For each fiscal
        year between 2007 through 2010, Mr. Friedman’s bonus will depend on our
        achieving certain earnings per share growth targets, with such earnings per
        share growth targets to be determined annually by the Compensation Committee
        of
        our Board of Directors. Depending on the levels of earnings per share growth
        that we achieve in each fiscal year, Mr. Friedman will receive an annual
        bonus
        from 0% to up to 200% of his base salary. This bonus will be paid in accordance
        with the terms and conditions of our 2002 Stock Award and Incentive Plan.
        In
        addition, in consideration for modifying and replacing the pre-tax income
        formula provided in his prior employment agreement for determining his annual
        bonus, and for entering into the amended employment agreement, Mr. Friedman
        was
        granted the right to be issued an aggregate of 1,080,000 shares of restricted
        stock. The first tranche of restricted stock, totaling 240,000 shares, was
        granted at the time the agreement became effective, and 120,000 shares were
        granted on each of January 1, 2004, 2005, 2006 and 2007 (or 480,000 shares
        in
        the aggregate). In each subsequent year of the employment agreement term,
        Mr.
        Friedman will receive 120,000 shares of restricted stock. The grant of these
        shares is in accordance with our 2002 Stock Award and Incentive Plan, and
        the
        vesting of each tranche of restricted stock is subject to our achieving pre-tax
        income in excess of $2,000,000 in the fiscal year that the grant is made.
        Each
        tranche of restricted stock granted or to be granted from January 1, 2004
        through January 1, 2008 is subject to a two-year vesting period, which may
        be
        accelerated to one year if we achieve certain earnings per share growth targets.
        Each tranche of restricted stock to be granted thereafter through January
        1,
        2010, is subject to a one-year vesting period. Finally, the agreement provides
        that Mr. Friedman upon his retirement at or after age 67 will receive a
        single-life annuity retirement payment equal to $975,000 a year for a period
        of
        10 years, or in the event of his death during such retirement period, his
        estate
        will receive a death benefit equal to the difference between $2,925,000 and
        any
        prior retirement benefits previously paid to him; provided, however, that
        Mr.
        Friedman must agree to serve as Chairman Emeritus of our Board of Directors,
        if
        requested to do so by such Board.
 
 Mr.
        Berman’s amended and restated employment agreement, pursuant to which he serves
        as our President and Chief Operating Officer, provides for an annual base
        salary
        in 2007 of $1,065,000. Mr. Berman’s agreement expires December 31, 2010. His
        base salary is subject to annual increases determined by our Board of Directors,
        but in an amount not less than $25,000 per annum. For our fiscal year ended
        December 31, 2006, Mr. Berman received a bonus of $250,000. For each fiscal
        year
        between 2007 through 2010, Mr. Berman’s bonus will depend on our achieving
        certain earnings per share growth targets, with such earnings per share growth
        targets to be determined annually by the Compensation Committee of our Board
        of
        Directors. Depending on the levels of earnings per share growth that we achieve
        in each fiscal year, Mr. Berman will receive an annual bonus of from 0% to
        up to
        200% of his base salary. This bonus will be paid in accordance with the terms
        and conditions of our 2002 Stock Award and Incentive Plan. In addition, in
        consideration for modifying and replacing the pre-tax income formula provided
        in
        his prior employment agreement for determining his annual bonus, and for
        entering into the amended employment agreement, Mr. Berman was granted the
        right
        to be issued an aggregate of 1,080,000 shares of restricted stock. The first
        tranche of restricted stock, totaling 240,000 shares, was granted at the
        time
        the agreement became effective, and 120,000 shares were granted on each of
        January 1, 2004, 2005, 2006 and 2007 (or 480,000 shares in the aggregate).
        In
        each subsequent year of the employment agreement term, Mr. Berman will receive
        120,000 shares of restricted stock. The grant of these shares is in accordance
        with our 2002 Stock Award and Incentive Plan, and the vesting of each tranche
        of
        restricted stock is subject to our achieving pre-tax income in excess of
        $2,000,000 in the fiscal year that the grant is made. Each tranche of restricted
        stock granted or to be granted from January 1, 2004 through January 1, 2008
        is
        subject to a two-year vesting period, which may be accelerated to one year
        if we
        achieve certain earnings per share growth targets. Each tranche of restricted
        stock to be granted thereafter through January 1, 2010, is subject to a one-year
        vesting period.
  79
  On
        July 17, 2007, we entered into a new employment agreement with Mr. Bennett
        that expires on December 31, 2009, pursuant to which he will receive (i) a
        base salary of $400,000 per year; (ii) an annual discretionary bonus of up
        to
        50% of his annual base salary, determined by the Compensation Committee or
        the
        Board of Directors; (iii) a $1,000 per month car allowance; and (iv) a one-time
        grant of 15,000 shares of restricted stock, vesting over three years in equal
        annual installments of 5,000 shares on December 31, 2007, 2008 and 2009,
        provided he remains employed by us on each vesting
        date.
 
 If
        we
        terminate Mr. Friedman’s or Mr. Berman’s employment other than “for cause” or if
        such Named Officer resigns because of our material breach of the employment
        agreement or because we cause a material change in his employment, we are
        required to make a lump-sum severance payment in an amount equal to the sum
        of
        his base salary on the termination date and the performance bonus paid for
        the
        last completed year prior to the termination date multiplied by a fraction
        the
        numerator of which is the number of full months remaining in the balance
        of the
        term of the employment agreement after the termination date and the denominator
        of which is 96. In the event of the termination of his employment under certain
        circumstances after a “Change of Control” (as defined in each employment
        agreement), we are required to make a one-time payment of an amount equal
        to
        2.99 times of the “base amount” of such Named Officer determined in accordance
        with the applicable provisions of the Internal Revenue Code.
 
 If
        Mr.
        Bennett’s employment is terminated by (a) him for “good reason” (as
        described in his employment agreement) or due to a Change of Control (as
        defined
        in his employment agreement), or (b) by us other than as a result of the
        occurrence of a “For Cause Event” (as defined in his employment agreement), Mr.
        Bennett will be entitled to receive an amount equal to the total amount of
        his
        base annual salary in effect as of the date of termination; and if Mr. Bennett’s
        employment terminates as a result of his death or disability, he or his
        guardian, custodian or other legal representative or successor will be entitled
        to continue to receive his base salary for a period of six months following
        the
        date of termination.
 
 The
        foregoing is only a summary of the material terms of our employment agreements
        with the Named Officers. For a complete description, copies of such agreements
        are annexed herein in their entirety as exhibits or are otherwise incorporated
        herein by reference.
 
 *Employee
        Benefits Plan*
 
 We
        sponsor for our U.S. employees (including the Named Officers), a defined
        contribution plan under Section 401(k) of the Internal Revenue Code. The
        plan
        provides that employees may defer up to 50% of their annual compensation
        subject
        to annual dollar limitations, and that we will make a matching contribution
        equal to 100% of each employee’s deferral, up to 5% of the employee’s annual
        compensation. Our matching contributions, which vest immediately, totaled
        $0.5
        million, $0.7 million and $0.9 million for 2005, 2006 and 2007,
        respectively.
 
 *Compensation
        Committee Interlocks and Insider Participation*
 
 None
        of
        our executive officers has served as a director or member of a compensation
        committee (or other board committee performing equivalent functions) of any
        other entity, one of whose executive officers served as a director or a member
        of our Compensation Committee.
 
 80
  **Item
        12.** ***Security
        Ownership of Certain Beneficial Owners and Management and Related Stockholder
        Matters***
 
 The
        following table sets forth certain information as of February 27, 2008 with
        respect to the beneficial ownership of our common stock by (1) each person
        known
        by us to own beneficially more than 5% of the outstanding shares of our common
        stock, (2) each of our directors, (3) each Named Officer, and (4) all our
        directors and executive officers as a group.
 
 
 **Name
                  and Address of**
                **Beneficial
                  Owner(1)(2)**
              
              **Amount and**
                **Nature of**
                **Beneficial**
                **Ownership**
                **(s)(3)**
              
              **Percent of**
                **Outstanding**
                **Shares(4)**Third
                  Avenue Management LLC
              
              
              2,549,525
              (5)
              
              8.9
              %Barclays
                  Global Investors, NA.
              
              
              2,000,117
              (6)
              
              7.0Dimensional
                  Fund Advisors LP
              
              
              2,433,579
              (7)
              
              8.5AXA
                  Financial, Inc.
              
              
              1,590,238
              (8)
              
              5.6Jack
                  Friedman
              
              
              614,101
              (9)
              
              2.1Stephen
                  G. Berman
              
              
              290,567
              (10)
              
              *Joel
                  M. Bennett
              
              
              47,773
              (11)
              
              *Dan
                  Almagor
              
              
              47,222
              (12)
              
              *David
                  C. Blatte
              
              
              95,768
              (13)
              
              *Robert
                  E. Glick
              
              
              117,289
              (14)
              
              *Michael
                  G. Miller
              
              
              107,914
              (15)
              
              *Murray
                  L. Skala
              
              
              116,042
              (16)
              
              *All
                  directors and executive officers as a group (8 persons)
              
              
              1,436,673
              (17)
              
              5.0
              %
 
 *      
        Less than 1% of our outstanding shares.
 
 (1)
              Unless
                  otherwise indicated, such person’s address is c/o JAKKS Pacific, Inc.,
                  22619 Pacific Coast Highway, Malibu, California 90265.
 
 (2)
              The
                  number of shares of common stock beneficially owned by each person
                  or
                  entity is determined under the rules promulgated by the Securities
                  and
                  Exchange Commission. Under such rules, beneficial ownership includes
                  any
                  shares as to which the person or entity has sole or shared voting
                  power or
                  investment power. The percentage of our outstanding shares is calculated
                  by including among the shares owned by such person any shares which
                  such
                  person or entity has the right to acquire within 60 days after
                  February
                  27, 2008. The inclusion herein of any shares deemed beneficially
                  owned
                  does not constitute an admission of beneficial ownership of such
                  shares.
 
 (3)
              Except
                  as otherwise indicated, exercises sole voting power and sole investment
                  power with respect to such shares.
 
 (4)
              Does
                  not include any shares of common stock issuable upon the conversion
                  of
                  $98.0 million of our 4.625% convertible senior notes due 2023,
                  initially
                  convertible at the rate of 50 shares of common stock per $1,000
                  principal
                  amount at issuance of the notes (but subject to adjustment under
                  certain
                  circumstances as described in the notes).
 
 (5)
              The
                  address of Third Avenue Management LLC is 622 Third Avenue, New
                  York, NY
                  10017. All the information presented in this Item with respect
                  to this
                  beneficial owner was extracted solely from the Schedule 13G/A filed
                  on
                  February 11, 2008.
 
 (6)
              The
                  address of Barclays Global Investors, NA. is 45 Fremont Street,
                  San
                  Francisco, CA 94105. Possesses sole voting power with respect to
                  1,612,442
                  of such shares and sole dispositive power with respect to all of
                  such
                  2,000,117 shares. All the information presented in this Item with
                  respect
                  to this beneficial owner was extracted solely from the Schedule
                  13G/A
                  filed on February 5, 2008.
 
 (7)
              The
                  address of Dimensional Fund Advisors LP (formerly known as Dimensional
                  Fund Advisors, Inc.) is 1299 Ocean Avenue, 11th Floor, Santa Monica,
                  CA
                  90401. All the information presented in this Item with respect
                  to this
                  beneficial owner was extracted solely from the Schedule 13G/A filed
                  on
                  February 6, 2008.
 
 (8)
              The
                  address of AXA Financial, Inc. is 1290 Avenue of the Americas,
                  New York,
                  NY 10104. Possesses sole voting power with respect to 737,414 of
                  such
                  shares and sole dispositive power with respect to all of such 1,590,238
                  shares. All the information presented in this Item with respect
                  to this
                  beneficial owner was extracted solely from the Schedule 13G filed
                  on
                  February 14, 2008.




81







(9)
            Includes
                3,186 shares held in trusts for the benefit of children of Mr. Friedman.
                Also includes 120,000 shares of common stock issued on January 1,
                2008
                pursuant to the terms of Mr. Friedman’s January 1, 2003 Employment
                Agreement, which shares are further subject to the terms of our January
                1,
                2008 Restricted Stock Award Agreement with Mr. Friedman (the “Friedman
                Agreement”). The Friedman Agreement provides that Mr. Friedman will
                forfeit his rights to all 120,000 shares unless certain conditions
                precedent are met prior to January 1, 2009, including the condition
                that
                our Pre-Tax Income (as defined in the Friedman Agreement) for 2008
                exceeds
                $2,000,000, whereupon the forfeited shares will become authorized
                but
                unissued shares of our common stock. The Friedman Agreement, as modified
                by a subsequent agreement with our Board of Directors as a condition
                to
                receiving the 20,567 restricted share grant described below, further
                prohibits Mr. Friedman from selling, assigning, transferring, pledging
                or
                otherwise encumbering (a) 50,000 of the 120,000 shares prior to January
                1,
                2009 and 10,000 until January 1, 2011, (b) of the remaining 60,000
                shares,
                50,000 shares prior to January 1, 2010; provided, however, that if
                our
                Pre-Tax Income for 2008 exceeds $2,000,000 and our Adjusted EPS Growth
                (as
                defined in the Friedman Agreement) for 2008 increases by certain
                percentages as set forth in the Friedman Agreement, the vesting of
                some or
                all of the 50,000 shares that would otherwise vest on January 1,
                2010 will
                be accelerated to the date the Adjusted EPS Growth is determined
                and (c)
                the remaining 10,000 shares until two years after the vesting date
                of all
                of the 50,000 shares described in (b).  Mr. Friedman is
                prohibited from selling, assigning, transferring, pledging or otherwise
                encumbering 15,000 shares issued him on January 1, 2007 until January
                1,
                2009. Also includes 20,567 shares granted on February 14, 2008 which
                are
                subject to a three-year restriction on sale and 175,000 shares subject
                to
                restriction on sale until June 11, 2009 of which shares not more
                than
                87,500 shares may be sold prior to June 11,
                2010.





(10)
            Includes
                120,000 shares of common stock issued on January 1, 2008 pursuant
                to the
                terms of Mr. Berman’s January 1, 2003 Employment Agreement, which shares
                are further subject to the terms of our January 1, 2008 Restricted
                Stock
                Award Agreement with Mr. Berman (the “Berman Agreement”). The Berman
                Agreement provides that Mr. Berman will forfeit his rights to all
                120,000
                shares unless certain conditions precedent are met prior to January
                1,
                2009, including the condition that our Pre-Tax Income (as defined
                in the
                Berman Agreement) for 2008 exceeds $2,000,000, whereupon the forfeited
                shares will become authorized but unissued shares of our common stock.
                The
                Berman Agreement, as modified by a subsequent agreement with our
                Board of
                Directors as a condition to receiving the 20,567 restricted share
                grant
                described below, further prohibits Mr. Berman from selling, assigning,
                transferring, pledging or otherwise encumbering (a) 50,000 of the
                120,000
                shares prior to January 1, 2009 and 10,000 until January 1, 2011,
                (b) of
                the remaining 60,000 shares, 50,000 shares prior to January 1, 2010;
                provided, however, that if our Pre-Tax Income for 2008 exceeds $2,000,000
                and our Adjusted EPS Growth (as defined in the Berman Agreement)
                for 2008
                increases by certain percentages as set forth in the Berman Agreement,
                the
                vesting of some or all of the 50,000 shares that would otherwise
                vest on
                January 1, 2010 will be accelerated to the date the Adjusted EPS
                Growth is
                determined and (c) the remaining 10,000 shares until two years after
                the
                vesting date of all of the 50,000 shares described in (b).   Mr.
                Berman is prohibited from selling, assigning, transferring, pledging
                or
                otherwise encumbering 15,000 shares issued him on January 1, 2007
                until
                January 1, 2009. Also includes 20,567 shares granted on February
                14, 2008
                which are subject to a three-year restriction on sale and 175,000
                shares
                subject to restriction on sale until June 11, 2009 of which shares
                not
                more than 87,500 shares may be sold prior to June 11,
                2010.





(11)
            Includes
                10,000 shares of restricted common stock granted by our Board of
                Directors
                to Mr. Bennett upon the execution of his new employment agreement
                (see
                “Executive Compensation- Employment Agreements”), which restricted shares
                vest in equal annual installments of 5,000 shares each on December
                31,
                2008 and 2009. Does not include 3,593 restricted shares on February
                29,
                2008 and which vest 50% on March 1, 2009 and the balance on March
                1,
                2010.





(12)
            Includes
                29,644 shares which Mr. Almagor may purchase upon the exercise of
                certain
                stock options and 17,578 shares of common stock issued pursuant to
                our
                2002 Stock Award and Incentive Plan, pursuant to which 5,068 shares
                may
                not be sold, mortgaged, transferred or otherwise encumbered prior
                to
                January 1, 2009.





(13)
            Includes
                82,500 shares which Mr. Blatte may purchase upon the exercise of
                certain
                stock options and 13,268 shares of common stock issued pursuant to
                our
                2002 Stock Award and Incentive Plan, pursuant to which 5,068 of such
                shares may not be sold, mortgaged, transferred or otherwise encumbered
                prior to January 1, 2009.





(14)
            Includes
                99,021 shares which Mr. Glick may purchase upon the exercise of certain
                stock options and 18,268 shares of Common Stock issued pursuant to
                our
                2002 Stock Award and Incentive Plan, pursuant to which 5,068 of such
                shares may not be sold, mortgaged, transferred or otherwise encumbered
                prior to January 1, 2009.





(15)
            Includes
                89,646 shares which Mr. Miller may purchase upon the exercise of
                certain
                stock options and 18,268 shares of Common Stock issued pursuant to
                our
                2002 Stock Award and Incentive Plan, pursuant to which 5,068 of such
                shares may not be sold, mortgaged, transferred or otherwise encumbered
                prior to January 1, 2009.





(16)
            Includes
                97,771 shares which Mr. Skala may purchase upon the exercise of certain
                stock options and 18,268 shares of common stock issued pursuant to
                our
                2002 Stock Award and Incentive Plan, pursuant to which 5,068 of such
                shares may not be sold, mortgaged, transferred or otherwise encumbered
                prior to January 1, 2009.




82





(17)
            Includes
                3,186 shares held in trust for the benefit of Mr. Friedman’s children,
                20,567 shares 41,134 shares granted to each of Messrs. Friedman and
                Berman
                but are unissued on the date hereof and an aggregate of 398,582 shares
                which the directors and executive officers may purchase upon the
                exercise
                of certain stock options.




**Item
      13.** ***Certain
      Relationships and Related Transactions, and Director
      Independence***





*(a)*
            *Transactions
                with Related Persons*





One
      of
      our directors, Murray L. Skala, is a partner in the law firm of Feder,
      Kaszovitz, Isaacson, Weber, Skala, Bass & Rhine LLP, which has performed,
      and is expected to continue to perform, legal services for us. In 2007, we
      incurred approximately $1,572,007 for legal fees and $362,949 for reimbursable
      expenses payable to that firm. As of December 31, 2006 and 2007, legal fees
      and
      reimbursable expenses of $825,749 and $916,048, respectively, were payable
      to
      this law firm.





*(b)*
            *Review,
                Approval or Ratification of Transactions with Related Persons*





Pursuant
      to our Code of Ethics (a copy of which may be found on our website,
      www.JAKKSpacific.com), all of our employees are required to disclose to our
      General Counsel, the Board of directors or any committee established by the
      Board of Directors to receive such information, any material transaction or
      relationship that reasonably could be expected to give rise to actual or
      apparent conflicts of interest between any of them, personally, and
      us.  In addition, our Code of Ethics also directs all employees to
      avoid any self-interested transactions without full disclosure.  This
      policy, which applies to all of our employees, is reiterated in our Employee
      Handbook which states that a violation of this policy could be grounds for
      termination.  In approving or rejecting a proposed transaction, our
      General Counsel, Board of Directors or designated committee will consider the
      facts and circumstances available and deemed relevant, including but not limited
      to, the risks, costs, and benefits to us, the terms of the transactions, the
      availability of other sources for comparable services or products, and, if
      applicable, the impact on director independence.  Upon concluding
      their review, they will only approve those agreements that, in light of known
      circumstances, are in or are not inconsistent with, our best interests, as
      they
      determine in good faith





*(c)*
            *Director
                Independence*





For
      a
      description of our Board of Directors and its compliance with the independence
      requirements therefor as promulgated by the Securities and Exchange Commission
      and Nasdaq, see “Item 10- Directors, Executive Officers and Corporate
      Governance”.





**Item
      14.** ***Principal
      Accountant Fees and Services.***





Before
      our principal accountant is engaged by us to render audit or non-audit services,
      where required by the rules and regulations promulgated by the Securities and
      Exchange Commission and/or Nasdaq, such engagement is approved by the Audit
      Committee.





The
      following are the fees of BDO Seidman, LLP, our principal auditor since June
      28,
      2006, for services rendered in connection with the 2006 audit (all of which
      have
      been pre-approved by the Audit Committee):





**2006**
            
            **2007**Audit Fees
            
            $
            1,015,700
            
            $
            1,026,500Audit Related Fees
            
            $
            —
            
            $
            —Tax Fees
            
            $
            —
            
            $
            —All Other Fees
            
            $
            —
            
            $
            —




*Audit
      Fees* consist
      of the aggregate fees for professional services rendered for the audit of our
      annual financial statements and the reviews of the financial statements included
      in our Forms 10-Q and for any other services that were normally provided by
      our
      auditors in connection with our statutory and regulatory filings or
      engagements.





*Audit
      Related Fees* consist
      of the aggregate fees billed for professional services rendered for assurance
      and related services that were reasonably related to the performance of the
      audit or review of our financial statements and were not otherwise included
      in
      Audit Fees.





*Tax
      Fees* consist
      of the aggregate fees billed for professional services rendered for tax
      consulting. Included in such Tax Fees were fees for consultancy, review, and
      advice related to our income tax provision and the appropriate presentation
      on
      our financial statements of the income tax related accounts.




83





*All
      Other Fees* consist
      of the aggregate fees billed for products and services provided by our auditors
      and not otherwise included in Audit Fees, Audit Related Fees or Tax
      Fees.





Our
      Audit
      Committee has considered whether the provision of the non-audit services
      described above is compatible with maintaining our auditors’ independence and
      determined that such services are appropriate.




84




**PART
      IV**





**Item
      15.** ***Exhibits
      and Financial Statement Schedules***





The
      following documents are filed as part of this Annual Report on Form
      10-K:





(1)
            Financial
                Statements (included in Item 8):





•
            Reports
                of Independent Registered Public Accounting Firms





•
            Consolidated
                Balance Sheets as of December 31, 2006 and 2007





•
            Consolidated
                Statements of Operations for the years ended December 31, 2005, 2006
                and
                2007





•
            Consolidated
                Statements of Other Comprehensive Income for the years ended December
                31,
                2005, 2006 and 2007





•
            Consolidated
                Statements of Stockholders’ Equity for the years ended December 31, 2005,
                2006 and 2007





•
            Consolidated
                Statements of Cash Flows for the years ended December 31, 2005, 2006
                and
                2007





•
            Notes
                to Consolidated Financial Statements





(2)
            Financial
                Statement Schedules (included in Item 8):





•
            Schedule
                II — Valuation and Qualifying Accounts





(3)
            Exhibits:





**Exhibit**
              **Number**
            
            **Description**3.1
            
            Amended
                and Restated Certificate of Incorporation of the Company
                (1)3.2.1
            
            By-Laws
                of the Company (2)3.2.2
            
            Amendment
                to By-Laws of the Company (3)10.1.1
            
            Third
                Amended and Restated 1995 Stock Option Plan (4)10.1.2
            
            1999
                Amendment to Third Amended and Restated 1995 Stock Option Plan
                (5)10.1.3
            
            2000
                Amendment to Third Amended and Restated 1995 Stock Option Plan
                (6)10.1.4
            
            2001
                Amendment to Third Amended and Restated 1995 Stock Option Plan
                (7)10.2
            
            2002
                Stock Award and Incentive Plan (8)10.3
            
            Amended
                and Restated Employment Agreement between the Company and Jack Friedman,
                dated as of March 26, 2003 (9)10.4
            
            Amended
                and Restated Employment Agreement between the Company and Stephen
                G.
                Berman dated as of March 26, 2003 (9)10.5
            
            Office
                Lease dated November 18, 1999 between the Company and Winco Maliview
                Partners (10)10.6
            
            Form
                of Restricted Stock Agreement (9)10.7
            
            Employment
                Agreement between the Company and Joel M. Bennett, dated July 17,
                2007
                (11)14
            
            Code
                of Ethics (11)21
            
            Subsidiaries
                of the Company (*)31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification of Jack Friedman (*)31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification of Joel Bennett (*)32.1
            
            Section
                1350 Certification of Jack Friedman (*)32.2
            
            Section
                1350 Certification of Joel Bennett
                (*)




85







(1)
            Filed
                previously as Appendix 2 to the Company’s Schedule 14A Proxy Statement,
                filed August 23, 2002, and incorporated herein by reference.





(2)
            Filed
                previously as an exhibit to the Company’s Registration Statement on Form
                SB-2 (Reg. No. 333-2048-LA), effective May 1, 1996, and incorporated
                herein by reference.





(3)
            Filed
                previously as an exhibit to the Company’s Registration Statement on Form
                SB-2 (Reg. No. 333-22583), effective May 1, 1997, and incorporated
                herein
                by reference.





(4)
            Filed
                previously as Appendix A to the Company’s Schedule 14A Proxy Statement,
                filed June 23, 1998, and incorporated herein by reference.





(5)
            Filed
                previously as an exhibit to the Company’s Registration Statement on Form
                S-8 (Reg. No. 333-90055), filed November 1, 1999, and incorporated
                herein
                by reference.





(6)
            Filed
                previously as an exhibit to the Company’s Registration Statement on Form
                S-8 (Reg. No. 333-40392), filed June 29, 2000, and incorporated herein
                by
                reference.





(7)
            Filed
                previously as Appendix B to the Company’s Schedule 14A Proxy Statement,
                filed June 11, 2001, and incorporated herein by reference.





(8)
            Filed
                previously as an exhibit to the Company’s Registration Statement on Form
                S-8 (Reg. No. 333-101665), filed December 5, 2002, and incorporated
                herein
                by reference.





(9)
            Filed
                previously as an exhibit to the Company’s Annual Report on Form 10-K for
                its fiscal year ended December 31, 2002, filed March 31, 2003, and
                incorporated herein by reference.





(10)
            Filed
                previously as an exhibit to the Company’s Annual Report on Form 10-K for
                its fiscal year ended December 31, 1999, filed March 30, 2000, and
                incorporated herein by reference.  (11)
            Filed
                previously as an exhibit to the Company’s Current Report on Form
                8-K filed July 17, 2007, and incorporated herein by reference.





(12)
            Filed
                previously as an exhibit to the Company’s Annual Report on Form 10-K for
                its fiscal year ended December 31, 2003, filed March 15, 2004, and
                incorporated herein by reference.





(*)
            Filed
                herewith.




86





**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.





Dated:
                February 29, 2008
            JAKKS
                PACIFIC, INC.By:
            /s/
                JACK FRIEDMANJack
                Friedman*Chairman
                and**Chief
                Executive Officer*





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.





**Signature**
            
            **Title**
            
            **Date**/s/
                JACK FRIEDMAN
            
            Chairman
                of the Board
            
            February
                29, 2008Jack
                Friedman
            
            of
                Directors andChief
                Executive Officer
              (Principal
                Executive Officer)/s/
                JOEL M. BENNETT
            
            Chief
                Financial Officer
            
            February
                29, 2008Joel
                M. Bennett
            
            (Principal
                Financial Officer andPrincipal
                Accounting Officer)/s/
                STEPHEN G. BERMAN
            
            Director
            
            February
                29, 2008Stephen
                G. Berman/s/
                DAN ALMAGOR
            
            Director
            
            February
                29, 2008Dan
                Almagor/s/
                DAVID C. BLATTE
            
            Director
            
            February
                29, 2008David
                C. Blatte/s/
                ROBERT E. GLICK
            
            Director
            
            February
                29, 2008Robert
                E. Glick/s/
                MICHAEL G. MILLER
            
            Director
            
            February
                29, 2008Michael
                G. Miller/s/
                MURRAY L. SKALA
            
            Director
            
            February
                29, 2008Murray
                L. Skala




87





**EXHIBIT
      INDEX**





**Exhibit**
              **Number**
            
            **Description**3.1
            
            Amended
                and Restated Certificate of Incorporation of the Company
                (1)3.2.1
            
            By-Laws
                of the Company (2)3.2.2
            
            Amendment
                to By-Laws of the Company (3)10.1.1
            
            Third
                Amended and Restated 1995 Stock Option Plan (4)10.1.2
            
            1999
                Amendment to Third Amended and Restated 1995 Stock Option Plan
                (5)10.1.3
            
            2000
                Amendment to Third Amended and Restated 1995 Stock Option Plan
                (6)10.1.4
            
            2001
                Amendment to Third Amended and Restated 1995 Stock Option Plan
                (7)10.2
            
            2002
                Stock Award and Incentive Plan (8)10.3
            
            Amended
                and Restated Employment Agreement between the Company and Jack Friedman,
                dated as of March 26, 2003 (9)10.4
            
            Amended
                and Restated Employment Agreement between the Company and Stephen
                G.
                Berman dated as of March 26, 2003 (9)10.5
            
            Office
                Lease dated November 18, 1999 between the Company and Winco Maliview
                Partners (10)10.6
            
            Form
                of Restricted Stock Agreement (9)10.7
            
            Employment
                Agreement between the Company and Joel M. Bennett, dated July 17,
                2007
                (11)14
            
            Code
                of Ethics (11)21
            
            Subsidiaries
                of the Company (*)31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification of Jack Friedman (*)31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification of Joel Bennett (*)32.1
            
            Section
                1350 Certification of Jack Friedman (*)32.2
            
            Section
                1350 Certification of Joel Bennett
                (*)







(1)
                Filed
                    previously as Appendix 2 to the Company’s Schedule 14A Proxy Statement,
                    filed August 23, 2002, and incorporated herein by reference.





(2)
                Filed
                    previously as an exhibit to the Company’s Registration Statement on Form
                    SB-2 (Reg. No. 333-2048-LA), effective May 1, 1996, and incorporated
                    herein by reference.





(3)
                Filed
                    previously as an exhibit to the Company’s Registration Statement on Form
                    SB-2 (Reg. No. 333-22583), effective May 1, 1997, and incorporated
                    herein
                    by reference.





(4)
                Filed
                    previously as Appendix A to the Company’s Schedule 14A Proxy Statement,
                    filed June 23, 1998, and incorporated herein by reference.





(5)
                Filed
                    previously as an exhibit to the Company’s Registration Statement on Form
                    S-8 (Reg. No. 333-90055), filed November 1, 1999, and incorporated
                    herein
                    by reference.





(6)
                Filed
                    previously as an exhibit to the Company’s Registration Statement on Form
                    S-8 (Reg. No. 333-40392), filed June 29, 2000, and incorporated
                    herein by
                    reference.





(7)
                Filed
                    previously as Appendix B to the Company’s Schedule 14A Proxy Statement,
                    filed June 11, 2001, and incorporated herein by reference.





(8)
                Filed
                    previously as an exhibit to the Company’s Registration Statement on Form
                    S-8 (Reg. No. 333-101665), filed December 5, 2002, and incorporated
                    herein
                    by reference.





(9)
                Filed
                    previously as an exhibit to the Company’s Annual Report on Form 10-K for
                    its fiscal year ended December 31, 2002, filed March 31, 2003,
                    and
                    incorporated herein by reference.





(10)
            Filed
                previously as an exhibit to the Company’s Annual Report on Form 10-K for
                its fiscal year ended December 31, 1999, filed March 30, 2000, and
                incorporated herein by reference.





(11)
            Filed
                previously as an exhibit to the Company’s Current Report on Form
                8-K filed July 17, 2007, and incorporated herein by reference.  (12)
            Filed
                previously as an exhibit to the Company’s Annual Report on Form 10-K for
                its fiscal year ended December 31, 2003, filed March 15, 2004, and
                incorporated herein by reference.





(*)
            Filed
                herewith.




88