4Kids Entertainment, Inc. and Subsidiaries

Table of Contents

			Page #
Part I—FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of September 30, 2008 (Unaudited) and December 31, 2007	2
		Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2008 and 2007	3
		Consolidated Statements of Stockholders’ Equity and Comprehensive Loss for the nine months ended September 30, 2008 (Unaudited) and the year ended December 31, 2007	4
		Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2008 and 2007	5
		Notes to Consolidated Financial Statements (Unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37
	Item 4.	Controls and Procedures	37
Part II—OTHER INFORMATION
	Item 1.	Legal Proceedings	37
	Item 1A	Risk Factors	38
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
	Item 6.	Exhibits	40
Signatures			41

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements.

4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2008 and DECEMBER 31, 2007

(In thousands of dollars, except share data)

ASSETS:	2008			2007
Current assets:	(Unaudited		)
Cash and cash equivalents	$	40,924			$	24,872
Investments		—				36,106
Total cash, cash equivalents and investments		40,924				60,978

Accounts receivable - net		17,515				21,403
Inventories		2,383				611
Prepaid income taxes		965				1,159
Prepaid expenses and other current assets		2,250				2,985
Current assets from discontinued operations		451				372
Total current assets		64,488				87,508

Property and equipment - net		4,483				4,255
Long-term investments		26,779				31,806
Accounts receivable – non-current, net		198				208
Film and television costs - net		15,821				14,352
Non-current assets from discontinued operations		475				926
Other assets - net (includes related party amounts of $5,904 and $4,265, respectively)		17,019				12,024
Total assets	$	129,263			$	151,079

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Due to licensors	$	7,415			$	4,420
Accounts payable and accrued expenses		25,413				14,969
Deferred revenue		3,316				2,984
Total current liabilities		36,144				22,373
Deferred rent		495				618
Total liabilities		36,639				22,991

Commitments and contingencies (Note 10)
Stockholders’ equity
Preferred stock, $.01 par value - authorized, 3,000,000 shares; none issued		—				—
Common stock, $.01 par value - authorized, 40,000,000 shares; issued, 15,246,579 and 15,099,812 shares; outstanding 13,227,019 and 13,332,207 shares in 2008 and 2007, respectively		152				151
Additional paid-in capital		65,107				63,679
Accumulated other comprehensive loss		(19,376	)			(2,562	)
Retained earnings		83,117				100,323
		129,000				161,591
Less cost of 2,019,560 and 1,767,605 treasury shares in 2008 and 2007, respectively		36,376				33,503
		92,624				128,088
Total liabilities and stockholders’ equity	$	129,263			$	151,079

See notes to consolidated financial statements.

4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(In thousands of dollars, except share data)


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2008			2007			2008			2007

Net revenues:
Service revenue	$	10,534		$	12,183		$	34,620		$	39,123
Product revenue		7,250			—			14,743			—
Total net revenues		17,784			12,183			49,363			39,123

Costs and expenses:
Selling, general and administrative		13,937			10,487			39,892			29,626
Production service costs		1,710			1,482			5,245			5,050
Cost of sales of trading cards		3,447			—			6,360			—
Amortization of television and film costs		1,864			1,546			5,269			4,677
Amortization of 4Kids TV broadcast fee		3,041			5,482			12,150			13,726
Total costs and expenses		23,999			18,997			68,916			53,079

Loss from operations		(6,215	)		(6,814	)		(19,553	)		(13,956	)

Interest income		689			1,254			2,096			3,821

Loss before income taxes		(5,526	)		(5,560	)		(17,457	)		(10,135	)

Benefit from income taxes		—			2,471			—			4,746

Loss from unconsolidated operations –
net of a tax benefit		—			(1,061	)		—			(1,179	)
Minority interest (Note 11)		251			—			251			—

Net loss	$	(5,275	)	$	(4,150	)	$	(17,206	)	$	(6,568	)

Per share amounts:

Basic loss per common share	$	(0.40	)	$	(0.31	)	$	(1.31	)	$	(0.50	)

Diluted loss per common share	$	(0.40	)	$	(0.31	)	$	(1.31	)	$	(0.50	)

Weighted average common shares
outstanding - basic		13,153,508			13,211,222			13,166,281			13,196,621

Weighted average common shares
outstanding - diluted		13,153,508			13,211,222			13,166,281			13,196,621

See notes to consolidated financial statements.

4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS

NINE MONTHS ENDED SEPTEMBER 30, 2008 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2007

(In thousands of dollars and shares)

	Common Stock			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Less Treasury Stock			Total Stockholders’ Equity
	Shares	Amount		Additional Paid-In Capital		Retained Earnings						Less Treasury Stock			Total Stockholders’ Equity

BALANCE, DECEMBER 31, 2006	14,933	$	149	$	62,859	$	123,649		$	1,329		$	(33,249	)	$	154,737
Issuance of common stock and stock options exercised	167		2		820		—			—			—			822
Acquisition of treasury stock, at cost	—		—		—		—			—			(254	)		(254	)
Comprehensive loss:
Net loss	—		—		—		(23,326	)		—			—			(23,326	)
Translation adjustment	—		—		—		—			102			—			102
Unrealized loss on investment securities	—		—		—		—			(3,993	)		—			(3,993	)
Total comprehensive loss	—		—		—		—			—			—			(27,217	)

BALANCE, DECEMBER 31, 2007	15,100	$	151	$	63,679	$	100,323		$	(2,562	)	$	(33,503	)	$	128,088
Issuance of common stock and stock options exercised	147		1		1,428		—			—			—			1,429
Acquisition of treasury stock, at cost	—		—		—		—			—			(2,873	)		(2,873	)
Comprehensive loss:
Net loss	—		—		—		(17,206	)		—			—			(17,206	)
Translation adjustment	—		—		—		—			(656	)		—			(656	)
Unrealized loss on investment securities	—		—		—		—			(16,158	)		—			(16,158	)
Total comprehensive loss	—		—		—		—			—			—			(34,020	)

BALANCE, SEPTEMBER 30, 2008	15,247	$	152	$	65,107	$	83,117		$	(19,376	)	$	(36,376	)	$	92,624

See notes to consolidated financial statements.

4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(In thousands of dollars)

		2008			2007
Cash flows from operating activities:
Net loss	$	(17,206	)	$	(6,568	)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities – continuing operations:
Depreciation and amortization		1,128			674
Amortization of television and film costs		5,269			4,677
Amortization of 4Kids TV broadcast fee		12,150			13,726
Provision for doubtful accounts		350			594
Deferred income taxes		—			(5,290	)
Loss on investment in unconsolidated affiliate		—			2,005
Changes in operating assets and liabilities:
Inventory		(1,772	)		—
Accounts receivable		3,351			9,640
Film and television costs		(6,738	)		(5,569	)
Prepaid income taxes		194			104
Prepaid 4Kids TV broadcast fee		(5,760	)		(13,726	)
Prepaid expenses and other current assets		708			(738	)
Other assets - net		(5,006	)		(1,772	)
Due to licensors		2,671			2,554
Accounts payable and accrued expenses		5,296			(2,916	)
Deferred revenue		332			(2,012	)
Deferred rent		(123	)		(117	)

Net cash used in operating activities – continuing operations		(5,156	)		(4,734	)
Net cash provided by operating activities – discontinued operations		372			341
Net cash used in operating activities		(4,784	)		(4,393	)

Cash flows from investing activities:
Proceeds from maturities of investments		24,975			130,738
Purchase of investments		—			(112,683	)
Purchase of property and equipment		(1,356	)		(1,297	)
Loss from disposal of property and equipment		—			4
Purchase of investment in unconsolidated affiliate		—			(2,101	)
Net cash provided by investing activities		23,619			14,661

Cash flows from financing activities:
Proceeds from exercise of stock options		232			26
Purchase of treasury shares		(2,873	)		(135	)
Tax benefit on exercise of stock options		—			5
Net cash used in financing activities		(2,641	)		(104	)

Effect of exchange rate changes on cash and cash equivalents		(142	)		190

Net increase in cash and cash equivalents		16,052			10,354

Cash and cash equivalents, beginning of period		24,872			18,066

Cash and cash equivalents, end of period	$	40,924		$	28,420

Supplemental disclosure of cash flow information:
Cash paid during period for Income Taxes	$	55		$	—
Supplemental schedule of non-cash investing and financing activities
Unrealized loss on marketable securities included in other comprehensive loss	$	16,158		$	—

Vesting of restricted shares	$	1,197		$	566

See notes to consolidated financial statements.

4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(In thousands of dollars, except share and per share data)

1. DESCRIPTION OF BUSINESS

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

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

Advertising Media and Broadcast - The Company, through a multi-year agreement with Fox Broadcasting Corporation (“Fox”), leases Fox’s Saturday morning programming block (“4Kids TV”) from 8am to 12pm eastern/pacific time (7am to 11am central time). The Company provides substantially all programming content to be broadcast on 4Kids TV. 4Kids Ad Sales, Inc. (“4Kids Ad Sales”), a wholly-owned subsidiary of the Company, retains all of the revenue from its sale of network advertising time for the four-hour time period leased from Fox which will terminate on December 31, 2008.

On October 1, 2007, the Company and The CW Network, LLC (“The CW”) entered into an agreement (the “CW Agreement”), under which The CW granted to the Company the exclusive right to program The CW's Saturday morning children's programming block that is broadcast in most markets between 7am and 12pm (“The CW Kids Block”) for an initial term of five years which began with The CW's 2008-2009 broadcast season.

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

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

Trading Card and Game Distribution - Through its wholly-owned subsidiary, 4Kids Digital Games, Inc. (“4Kids Digital”), the Company owns 55% of TC Digital Games LLC, a Delaware limited liability company (“TC Digital”) that produces, markets and distributes the “Chaotic” trading card game. In December 2006, 4Kids Digital acquired a 53% ownership interest in TC Digital and entered into TC Digital’s operating agreement (the “TCD Agreement”) with Chaotic USA Digital Games LLC (“CUSA LLC”), a wholly-owned subsidiary of Chaotic USA Entertainment Group, Inc. (“CUSA”). The TCD Agreement contains terms and conditions governing the operations of TC Digital, and entitles 4Kids Digital and CUSA to elect two managers to the entity’s Management Committee with 4Kids Digital having the right to break any dead-locks. On December 18, 2007, 4Kids Digital purchased an additional 2% membership interest in TC Digital from CUSA increasing 4Kids Digital’s ownership percentage to 55%. The consideration for the purchase of the additional membership interest

was paid through the settlement of certain capital contributions required to be made by CUSA to TC Websites LLC, a Delaware limited liability company and subsidiary of the Company (“TC Websites”) under its operating agreement (the “TCW Agreement”).

Through its wholly-owned subsidiary, 4Kids Websites, Inc. (“4Kids Websites”), the Company owns 55% of TC Websites, a company that owns and operates www.chaoticgame.com, the companion website for the “Chaotic” trading card game which was launched as a public beta version on October 24, 2007. In December 2006, 4Kids Websites purchased a 50% membership interest in TC Websites from CUSA and entered into the TCW Agreement. The TCW Agreement contains terms and conditions governing TC Websites’ operations and entitles 4Kids Websites and CUSA to elect two managers to its Management Committee. On December 18, 2007, 4Kids Websites entered into an agreement pursuant to which it acquired an additional 5% ownership interest in TC Websites from CUSA, and the TCW Agreement was concurrently amended to provide 4Kids Websites with the right to break any deadlocks on TC Websites’ Management Committee, including with respect to operational matters. The consideration for the purchase of the additional membership interest was paid through the settlement of certain capital contributions required to be made by CUSA to TC Websites under the TCW Agreement. Prior to the acquisition by 4Kids Websites of the additional 5% ownership interest and amendment of the TCW Agreement, the Company used the equity method to account for its investment in TC Websites, where it did not have control but had significant influence. As a result of 4Kids Websites’ increased ownership and operational control, TC Websites is consolidated in the Company’s financial statements, subject to a minority interest.

TC Digital and TC Websites are the exclusive licensees of certain patents covering the uploading of coded trading cards to a website where online game play and community activities occur. The www.chaoticgame.com website provides full access to all of its content and is free of charge for all users. No purchase of trading cards is necessary to play the online version where virtual playing decks are available to users who register on the website. These two businesses enable the Company to offer traditional trading card game play with an online digital play experience. In addition, it is anticipated that TC Digital and TC Websites will diversify their product lines and will ultimately distribute and sell, and create websites for other trading card games. The Company believes that its ownership interests in TC Digital and TC Websites represent a potentially significant addition to its business strategy.

Certain of the Company’s executive officers have interests in CUSA, CUSA LLC and certain other entities with which TC Digital and TC Websites have engaged in transactions since their formation. Information regarding these relationships can be found in Note 9.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The consolidated financial statements, except for the December 31, 2007 consolidated balance sheet and the consolidated statement of stockholders’ equity and comprehensive loss for the year ended December 31, 2007, are unaudited and should be read in conjunction with audited consolidated financial statements and notes thereto for the year ended December 31, 2007 as presented in our Annual Report on Form 10-K. All significant intercompany accounts and transactions have been eliminated. In the opinion of management, the accompanying consolidated financial statements contain all adjustments, which are of a normal and recurring nature, necessary to present fairly the financial position of the Company as of September 30, 2008 and December 31, 2007, and the results of operations for the three and nine months ended September 30, 2008 and 2007, and stockholders’ equity and comprehensive loss for the nine months ended September 30, 2008 and the year ended December 31, 2007, and cash flows for the nine months ended September 30, 2008 and 2007. Because of the inherent seasonality and changing trends of the toy, game, entertainment and advertising industries, operating results for the Company on a quarterly basis may not be indicative of operating results for the full year.

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

Effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (the “FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 prescribes the financial statement recognition and measurement criteria for a tax position taken or expected to be taken in a tax return. FIN 48 also requires additional disclosures related to uncertain income tax positions. See Note 6, “Income Taxes”, for further information.

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

Broadcast advertising revenues: Advertising revenues are recognized when the related commercials are aired and are recorded net of agency commissions and net of an appropriate reserve when advertising is sold together with a guaranteed audience delivery. Internet advertising revenues are recognized on the basis of impression views in the period the advertising is displayed.

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

Production and adaptation costs charged to the licensors of television rights to Properties represented by the Company are included in net revenues and the corresponding costs are included in production service costs in the accompanying consolidated statements of operations. Production service costs included in net revenues amounted to $1,684 and $4,982 for the three and nine months ended September 30, 2008, respectively and $1,396 and $4,784 for the three and nine months ended September 30, 2007, respectively.

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

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

Trading card revenues: Emerging Issue Task Force (“EITF”) Issue No. 00-21 - Accounting for Revenue Arrangements with Multiple Deliverables, provides guidance on how and when to recognize revenues for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. Revenue arrangements with multiple deliverables are required to be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. Arrangement consideration must be allocated among the separate units of accounting based on their relative fair values. The Company has determined that because its trading card game is provided with a web component, there is a multiple deliverable arrangement. However, since no purchase of trading cards is necessary to access the website and virtual cards are available free of charge to users who register on the website, the Company has determined that the selling price of the trading cards should be fully attributable to the cards. Revenues from trading card sales, net of a reserve for returns and allowances, are recognized on the date cards are shipped by the Company’s distributor to wholesalers/retailers as reported to the Company.

Revenue generated from merchandise licensing, broadcast advertising, episodic television series, home video, and music are classified as service revenue on the consolidated statement of operations while revenue generated from the sale of trading cards is classified as product revenue.

Fair Value Measurements - The fair values of the Company’s financial instruments reflect the estimates of amounts that would be received from selling an asset in an orderly transaction between market participants at the measurement date. The fair value estimates presented in this report are based on information available to the Company as of September 30, 2008 and December 31, 2007.

The carrying values of cash and cash equivalents approximate fair value. The Company has estimated the fair value of its investment in auction rate securities (“ARS”) using unobservable inputs at September 30, 2008.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS No. 157”), the Company applies a fair value hierarchy based on three levels of inputs, the first two of which are considered observable and the last of which is considered unobservable, that may be used to measure fair value. The three levels are the following:

•

Level 1 - Quoted prices in active markets for identical assets or liabilities.

•

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Investments – The Company’s short-term investments principally consisted of ARS and other debt securities. ARS are generally rated “A” or better by one or more national rating agencies and have contractual maturities of up to 30 years. The Company classifies its investments in auction rate securities as “available for sale.” The auction rate securities that the Company invests in generally have interest reset dates that occur every 7 or 35 days and despite the long-term nature of their stated contractual maturity, the historical operation of the auction rate security market has given the Company the ability to quickly liquidate these securities at ongoing auctions every 35 days or less.

During 2007, liquidity issues began to affect the global credit and capital markets. In addition, certain individual ARS experienced liquidity issues specific to such securities. As a result, ARS, which historically have had a liquid market and had their interest rates reset periodically (e.g. monthly) through Dutch auctions, began to fail at auction. These auction failures have caused ARS to become illiquid, which in turn has caused the fair market values of these securities to decline.

As of September 30, 2008, the Company held ARS having an aggregate principal amount of approximately $46,930. The ARS currently held by the Company are private placement debt securities with long-term nominal maturities and interest rates that typically reset monthly. The Company’s investments in ARS represent interests in debt obligations issued by banks and insurance companies that originally had at least an “A” credit rating at the time of purchase, including JP Morgan Chase, bond insurers and re-insurers such as MBIA, AMBAC, FGIC, FSA, RAM and Radian, and International Lease Finance Corporation, the aircraft leasing subsidiary of AIG.

The ARS held by the Company as of September 30, 2008, have experienced failed auctions. As of September 30, 2008, the estimated fair market value of the ARS held by the Company had declined by $20,151 ($3,993 during 2007 and $16,158 during the first nine months of 2008) to $26,779, based upon an analysis of the current market conditions of the Company’s securities made by the Company in accordance with SFAS No. 157. Although all of the ARS invested in by the Company have continued to pay interest according to their stated terms and substantially all of the ARS invested in by the Company are rated “BBB” or above, the Company recorded an unrealized loss of $9,187, $1,854 and $5,117 during the first, second and third quarters of 2008, respectively, resulting in a reduction in stockholders’ equity. Since the Company has the ability and presently expects to hold these investments until recovery of their face value, which may not be prior to the maturity of the applicable security, the Company does not consider these investments to be other-than-temporarily impaired as such term is defined in the accounting literature.

The credit and capital markets, including the market for ARS have remained illiquid in 2008, and as a result of this and other factors specific to certain ARS, the Company’s unrealized loss on its ARS may subsequently increase. The Company values the ARS quarterly based upon consideration of such factors as issuer and insurer credit rating, comparable market data, if available, current market conditions, the credit quality of the ARS, the rate of interest received since the date the auctions began, yields of securities similar to the underlying ARS and input from broker-dealers’ statements provided by the investment bank through which the Company holds such securities. Additionally, during the first nine months of 2008, the Company received an early redemption by certain issuers of ARS at par value of $14,975. Since these securities were never deemed to have an unrealized loss, their redemption had no affect on stockholders’ equity. As of November 7, 2008, no securities were subsequently redeemed.

Given the failed auctions, the Company’s ARS are currently illiquid. Accordingly, the Company has reclassified $19,967, see Note 3, “Investment”, in ARS from current to non-current assets at September 30, 2008 on its balance sheet due to the fact that the Company believes that the liquidity of these ARS is unlikely to be restored in a period less than twelve months from such date.

The Company believes that Lehman Brothers, Inc., the securities broker-dealer that purchased the ARS on behalf of the Company at issue based on discretion afforded to it, has violated its legal obligations to the Company. As a result, the Company has taken various measures to obtain appropriate legal relief, including initiating an arbitration with the Financial Industry Regulatory Authority. On September 15, 2008, Lehman Brothers Holdings, Inc., the parent company of Lehman Brothers, Inc., filed for bankruptcy. On September 16, 2008, Barclays PLC announced that it had reached an agreement to purchase the assets of Lehman Brothers Holdings, Inc.’s North American operations, including substantial assets of Lehman Brothers, Inc. The Lehman-Barclays transaction was approved by the United States Bankruptcy Court for the Southern District of New York on September 20, 2008. On September 19, 2008, the Securities Investor Protection Corporation (“SIPC”) filed a proceeding, placing Lehman Brothers, Inc. in liquidation under the Securities Investor Protection Act (“SIPA”). SIPC, pursuant to its authority under SIPA, has acted to facilitate the transfer of Lehman Brothers, Inc.’s customer accounts (including the Company’s accounts) to Barclays, PLC. In view of the bankruptcy of Lehman Brothers Holdings, Inc. and the liquidation of Lehman Brothers, Inc., the Company is currently assessing what additional steps to take to pursue legal redress.

If uncertainties in the credit and capital markets continue or the Company’s investments experience any rating downgrades on any investments in its ARS portfolio or the value of such investments declines further, the Company may incur impairment charges to its investment portfolio, which could negatively affect the Company’s financial condition, results of operations and cash flow. As a result of the current market issues, the Company’s surplus cash is invested solely in U.S. Treasury securities with a maturity of 90 days or less.

The Company believes that based on the Company’s current cash and cash equivalents, the current lack of liquidity affecting a significant portion of its portfolio of ARS will not have a material impact on the Company’s liquidity necessary for day-to-day operations or its ability to fund its operations. However, such illiquidity is affecting the Company’s ability to make capital investments or expand its operations.

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

Translation of Foreign Currency – In accordance with SFAS No. 130, Reporting Comprehensive Income (“SFAS No. 130”), the Company classifies items of other comprehensive income by their nature in the financial statements and displays the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the consolidated balance sheet. The assets and liabilities of the Company’s foreign subsidiary, 4Kids International have been recorded in their local currency and translated to U.S. dollars using period-end exchange rates. Income and expense items have been translated at the average rate of exchange prevailing during the period. Any adjustment resulting from translating the financial statements of the foreign subsidiary is reflected as “other comprehensive income”, net of related tax. Comprehensive loss for the three and nine months ended September 30, 2008 was $11,070 and $34,020, respectively, which included translation adjustments of $678 and $656 for the respective periods. Comprehensive loss for the three and nine months ended September 30, 2007 was $4,043 and $6,299, respectively, which included translation adjustments of $107 and $269 for the respective periods.

Recently Issued Accounting Pronouncements – In November 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS No. 141R”), which continues to require that all business combinations be accounted for by applying the acquisition method. Under the acquisition method, the acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed, and any contingent consideration and contractual contingencies, as a whole, at their fair value as of the acquisition date. Under SFAS No. 141R, all transaction costs are expensed as incurred. SFAS No. 141R rescinds EITF Issue No. 93-7 (“EITF 93-7). Under EITF 93-7, the effect of any subsequent adjustments to uncertain tax positions were generally applied to goodwill, except for post-acquisition interest on uncertain tax positions, which was recognized as an adjustment to income tax expense. Under SFAS No. 141R, all subsequent adjustments to these uncertain tax positions that otherwise would have impacted goodwill will be recognized in the income statement. SFAS No. 141R will be applied

prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008.

In November 2007, the FASB issued SFAS No. 160, Accounting and Reporting of Noncontrolling Interest (“SFAS No. 160”). SFAS No. 160 requires that a noncontrolling interest (previously referred to as a minority interest) be separately reported in the equity section of the consolidated entity’s balance sheet. SFAS No. 160 also established accounting and reporting standards for: (i) ownership interests in subsidiaries held by parties other than the parent, (ii) the amount of consolidated net income attributable to the parent and to the noncontrolling interest, (iii) changes in a parent’s ownership interest and (iv) the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 is effective for us beginning January 1, 2009. The Company is currently evaluating the impact the adoption of SFAS No. 160 will have on its consolidated financial position and results of operations.

In March 2008, the FASB issued SFAS No. 161 (“SFAS 161”), Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No.133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”). SFAS No. 161 requires companies to provide enhanced disclosures regarding derivative instruments and hedging activities in order to better convey the purpose of derivative use in terms of risk management. Disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect a company's financial position, financial performance, and cash flows, are required. This Statement retains the same scope as SFAS No. 133 and is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact, if any, that the adoption of SFAS No. 161 will have on its consolidated financial position and results of operations.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, (“SFAS No. 162”). SFAS No. 162 sets forth the sources of accounting principles and the framework, or hierarchy, for selecting principles to be used in financial statement preparation. Prior to the issuance of SFAS No. 162, the GAAP hierarchy was defined in the AICPA Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SFAS No. 162 will be effective 60 days following the approval by the Securities and Exchange Commission (“SEC”) of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company is currently evaluating the impact, if any, that the adoption of SFAS No. 162 will have on its consolidated financial position and results of operations.

In December 2007, the FASB ratified EITF Issue No. 07-1, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property. The EITF concluded that a collaborative arrangement is one in which the participants are actively involved and are exposed to significant risks and rewards that depend on the ultimate commercial success of the endeavor. Revenues and costs incurred with third parties in connection with collaborative arrangements would be presented gross or net based on the criteria in EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, and other accounting literature. Payments to or from collaborators would be evaluated and presented based on the nature of the arrangement and its terms, the nature of the entity’s business, and whether those payments are within the scope of other accounting literature. The nature and purpose of collaborative arrangements are to be disclosed along with the accounting policies and the classification and amounts of significant financial statement amounts related to the arrangements. Activities in the arrangement conducted in a separate legal entity should be accounted for under other accounting literature; however required disclosure under EITF 07-1 applies to the entire collaborative agreement. This Issue is effective for fiscal years beginning after December 15, 2008, and is to be applied retrospectively to all periods presented for all collaborative arrangements existing as of the effective date. The Company is currently evaluating the impact that this pronouncement may have on its consolidated financial position and results of operations.

In October 2008, the FASB issued FASB Staff Position FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (“FSP 157-3”). FSP 157-3 intended to clarify the application of SFAS No. 157 by providing an example that illustrates how the fair value of a financial asset is determined when the market for that financial asset is not active. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The Company determined that the adoption of this standard has not had an impact on its consolidated financial position or results of operations.

3. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values and estimated fair values of the Company’s financial instruments for the periods presented are as follows:


	Estimated Fair Value Measurements
	Carrying Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2008:
Financial Assets
Cash and cash equivalents	$	40,924	$	40,924	$	—	$	—
Total short-term investments	$	40,924	$	40,924	$	—		—

Auction rate securities	$	26,779	$	—	$	—	$	26,779
Total long-term investments	$	26,779	$	—	$	—	$	26,779

Total Financial Assets	$	67,703	$	40,924	$	—	$	26,779

December 31, 2007:
Financial Assets
Cash and cash equivalents	$	24,872	$	24,872	$	—	$	—
Auction rate securities		31,170		—		—		31,170
Corporate obligations		4,936		—		—		4,936
Total short-term investments	$	60,978	$	24,872	$	—	$	36,106

Auction rate securities	$	26,806	$	—	$	—	$	26,806
Corporate obligations		5,000		5,000		—		—
Total long-term investments	$	31,806	$	5,000	$	—	$	26,806

Total Financial Assets	$	92,784	$	29,872	$	—	$	62,912

Level 1- The Company’s Level 1 assets consist of cash, U.S. Treasury securities with original maturities of three months or less and market quoted corporate obligations.

Level 2 - At September 30, 2008 and December 31, 2007, the Company had no investments which were considered to be Level 2 assets.

Level 3 – The Company’s Level 3 assets consist of the Company’s investment in ARS. The recent uncertainties in the credit markets have prevented the Company and other investors from liquidating their holdings of ARS in auctions for these securities during the nine months ended September 30, 2008, because the amount of securities submitted for sale has exceeded the amount of purchase orders.

The carrying value of the Company’s investments in ARS as of September 30, 2008 represents the Company’s best estimate of the fair value of these investments based on currently available information. The estimation process included consideration of such factors as issuer and insurer credit rating, comparable market data, if available, the credit quality of the ARS, the rate of interest received since the date the auctions began, yields of securities similar to the underlying ARS and input from broker-dealers. Due to the uncertainty in the credit markets, it is reasonably possible that the fair value of these investments may change in the near term. If the issuers are unable to successfully close future auctions and their credit ratings deteriorate, the Company may be required to further adjust the carrying value of its investment in ARS through additional devaluations.

The table below provides a summary of changes in fair value for the Company’s Level 3 investments:

	September 30, 2008
	Amortized Cost		Unrealized Loss		Estimated Fair Value

Auction-Rate securities – long-term		$46,930	$(20,151	)		$26,779
Total long-term investments		$46,930	$(20,151	)		$26,779

	December 31, 2007
	Amortized Cost		Unrealized Loss		Estimated Fair Value

Auction-Rate securities		$31,555	$ (385	)		$31,170
Corporate obligations		5,000	(64	)		4,936
Total short-term investments		$36,555	$ (449	)		$36,106


Auction-Rate securities – long-term		$30,350	$(3,544	)		$26,806
Corporate obligations		5,000	—			5,000
Total long-term investments		$35,350	$(3,544	)		$31,806

The following table presents additional information about assets measured at fair value using Level 3 inputs for the nine months ended September 30, 2008:

		Short-Term					Long-Term
		Auction Rate Securities			Corporate Bonds			Auction Rate Securities			Total
Balance as of January 1, 2008	$	31,170		$	4,936		$	26,806		$	62,912

Unrealized (loss) gain		(4,455	)		64			(11,767	)		(16,158	)

Sales or settlements*		(14,975	)		(5,000	)		—			(19,975	)

Transfer to long-term		(11,740	)		—			11,740			—

Balance as of September 30, 2008	$	—		$	—		$	26,779		$	26,779

*All securities were redeemed at face value.

4. STOCK-BASED EMPLOYEE COMPENSATION

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

Effective January 1, 2006, the Company adopted SFAS No. 123-R (revised 2004), Share-Based Payments, utilizing the modified prospective method whereby prior periods are not restated for comparability. SFAS 123-R requires recognition of stock-based compensation expense in the statement of operations over the vesting period based on the fair value of the award at the grant date. The Company did not grant any stock options during the nine months ended September 30, 2008 and at

January 1, 2006, all of the Company’s outstanding options were fully vested. Consequently, the adoption of this pronouncement did not have a material effect on the Company’s consolidated financial position or results of operations.

The following table summarizes activity under our stock option plans for the nine months ended September 30, 2008:

	Shares under Options (In thousands)				Weighted Average Exercise Price	Remaining Contractual Life (in years)		Aggregate Intrinsic Value
Outstanding at beginning of period		1,715		$	18.43
Grants		—			—
Exercised		(75	)		3.10
Forfeited		(328	)		12.59
Outstanding at end of period		1,312		$	20.77	1.48	$	—

Exercisable at end of period		1,312		$	20.77	1.48	$	—

As of September 30, 2008, there were no options outstanding to purchase shares with an exercise price below the quoted price of its common stock. During the nine months ended September 30, 2007, the aggregate intrinsic value of options exercised under its stock option plans was $13, determined as of the date of exercise. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing price of the Company’s common stock on the date of determination for those awards that have an exercise price currently below the closing price.

Restricted Stock Awards

The Company granted restricted stock awards of approximately 311,000 shares on May 23, 2008 under its 2007 long-term incentive compensation plan (“LTICP”), 162,000 shares on May 25, 2007 under its 2006 LTICP and 145,000 and 4,000 shares on May 23, 2006 and June 15, 2006, respectively, under its 2005 LTICP. The restricted stock awards were granted to certain employees, including officers and members of the Board of Directors, at grant prices of $7.85, $16.79, $16.52 and $15.78 (in each case, the average of the high and low stock price from the previous day of trading) for the May 23, 2008, May 25, 2007, the May 23, 2006 and the June 15, 2006 grants, respectively. The restricted stock awards vest annually over a period of three years from the date of grant for the awards made under the 2007 LTICP and over a period of four years for the awards made under the 2006 and 2005 LTICPs, with accelerated vesting upon a change of control of the Company (as defined in the applicable plan). During the restriction period, award holders do not have the rights of stockholders and cannot transfer ownership. Additionally, nonvested shares of award holders are subject to forfeiture. These awards are forfeited and revert to the Company in the event of employment termination, except in the case of death, disability, retirement or other specified events.

A summary of restricted stock award activity under the Company’s LTICPs as of September 30, 2008 and changes during the nine months then ended is presented as follows:

	Number of Shares (in thousands)			Weighted- Average Grant Date Fair Value
Outstanding at January 1, 2008		254		$	16.68
Granted		311			7.85
Vested		(71	)		16.65
Forfeited		(6	)		9.02
Outstanding at September 30, 2008		488		$	11.14

The Company recognized $490 and $1,170 of compensation costs related to the LTICPs during the three and nine months ended September 30, 2008, respectively and $309 and $653 of compensation costs during the three and nine months ended September 30, 2007, respectively. Additionally, as of September 30, 2008, there was approximately $2,082, $1,695 and $879 of unrecognized compensation cost related to restricted stock awards granted under the Company’s 2007, 2006 and 2005 LTICPs, respectively. The cost is expected to be recognized over a remaining weighted-average period of 2.6, 2.7 and 1.6

years under the 2007, 2006 and 2005 LTICPs, respectively. There were approximately 39,000 and 32,000 shares of restricted stock that vested during the nine months ended September 30, 2008 related to the 2006 and 2005 LTICPs, respectively.

Availability for Future Issuance - As of September 30, 2008, (i) options to purchase approximately 1,085,000 shares of the Company’s common stock were available for future issuance under the Company’s stock option plans and (ii) options to purchase a maximum of approximately 936,000 shares of the Company’s common stock were available for future issuance under the Company’s LTICPs, reduced by four shares for each share of restricted stock awarded under the 2006 and 2005 LTICPs, under which an aggregate of 48,000 shares of the 936,000 total shares were available for issuance as options, and reduced by two shares for each share of restricted stock awarded under the 2008 and 2007 LTICPs, under which an aggregate of 888,000 of the 936,000 total shares were available for issuance as options.

5. DEFERRED REVENUE

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

The Company has deferred all amounts received under the contract, and recognizes revenue as the Current Music Assets and Future Music Assets generate revenue over the contract term. The Company expects and continues to produce additional new music which, based on the success of the administrative service, continues to supply the unaffiliated third party with this content. Since the Company continues to deliver more than the amount of music required to be delivered under the Music Agreement, there is no way to appropriately record the fair value of the future amounts to be delivered. Based on EITF 00-21, the Company’s inability to fair value the future portion of the music deliverables results in the entire amount recorded as deferred revenue. The most appropriate and systematic method of accounting for this revenue relating to the deferred portion would be to reduce this deferred amount dollar for dollar based on the actual music earnings of the Company. Pursuant to the above, the Company recognized revenues of $165 and $434 for the three and nine months ended September 30, 2008, respectively, and $165 and $336 for the three and nine months ended September 30, 2007, respectively. The Company has included $1,560 and $1,994 as deferred revenue on the accompanying consolidated balance sheets as of September 30, 2008 and December 31, 2007, respectively.

Home Video - At various dates since May 2002, 4Kids Home Video entered into various agreements with an unaffiliated third party home video distributor (the “Video Distributor”) pursuant to which 4Kids Home Video provides ongoing advertising, marketing and promotional services with respect to certain home video titles that are owned or controlled by the Company and which are distributed by the Video Distributor. The Video Distributor has paid the Company cumulative advances of $4,119 against 4Kids Home Video’s share of the distribution and service fee proceeds to be realized by 4Kids Home Video from such titles. Pursuant to the above, the Company recognized revenue of $7 and $195 for the three and nine months ended September 30, 2008, respectively, and $3 and $108 for the three and nine months ended September 30, 2007, respectively. The Company has included $224 and $419 as deferred revenue on the accompanying consolidated balance sheets as of September 30, 2008 and December 31, 2007, respectively.

Other Agreements - In addition, the Company entered into other agreements for various Properties and advertising time on 4Kids TV in which the Company has received certain advances and/or minimum guarantees. As of September 30, 2008 and December 31, 2007, the unearned portion of these advances and guaranteed payments was $1,532 and $571, respectively, and is included in deferred revenue on the accompanying consolidated balance sheets.

6. INCOME TAXES

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Current	$	—		$	(563	)	$	—		$	(544	)
Deferred		1,849			3,034			6,935			5,290
	$	1,849		$	2,471		$	6,935		$	4,746
Less: Valuation allowance		(1,849	)		—			(6,935	)		—
Total	$	—		$	2,471		$	—		$	4,746

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

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

Certain reclassifications have been made to prior year amounts to conform to the 2008 presentation.

7. EARNINGS PER SHARE

The Company applies SFAS No. 128, Earnings per Share, which requires the computation and presentation of earnings per share (“EPS”) to include basic and diluted EPS. Basic EPS is computed based solely on the weighted average number of common shares outstanding during the period. Diluted EPS reflects all potential dilution of common stock. The following table reconciles Basic EPS with Diluted EPS for the three and nine months ended September 30, 2008 and 2007:

		Three Months Ended							Nine Months Ended
September 30, 2008		Net Loss		Weighted Average Shares		Per Share			Net Loss		Weighted Average Shares		Per Share
Basic loss per share –Loss available to common shareholders	$	(5,275	)	13,153,508	$	(0.40	)	$	(17,206	)	13,166,281	$	(1.31	)

Effect dilutive security – Stock options		—		—		—			—		—		—

Diluted loss per share	$	(5,275	)	13,153,508	$	(0.40	)	$	(17,206	)	13,166,281	$	(1.31	)

		Three Months Ended							Nine Months Ended
September 30, 2007		Net Loss		Weighted Average Shares		Per Share			Net Loss		Weighted Average Shares		Per Share
Basic loss per share –Loss available to common shareholders	$	(4,150	)	13,211,222	$	(0.31	)	$	(6,568	)	13,196,621	$	(0.50	)

Effect dilutive security – Stock options		—		—		—			—		—		—

Diluted loss per share	$	(4,150	)	13,211,222	$	(0.31	)	$	(6,568	)	13,196,621	$	(0.50	)

For the nine months ended September 30, 2008 and 2007, 1,312,000 and 1,210,750 shares, respectively, attributable to the exercise of outstanding options, were excluded from the calculation of diluted EPS because the effect was antidilutive.

8. LEGAL PROCEEDINGS

On April 24, 2008, the Company commenced an action in the Supreme Court of the State of New York, County of New York against Fox Broadcasting Company ("Fox") seeking declaratory relief and damages from Fox pursuant to the agreement dated as of January 18, 2002, as amended, between the Company and Fox (the "Fox Agreement"). Under the terms of the Fox Agreement, during each broadcast season, Fox is required to broadcast the 4Kids programming block on Saturday morning between the hours of 8am and 12pm in the Eastern and Pacific Time zones and between the hours of 7am and 11am in the Central and Mountain Time zones on stations broadcasting to, on average, at least 90% of United States television households ("Minimum Average Clearance"). Under the terms of the Fox Agreement if, in any broadcast season, the 4Kids programming block has not achieved the Minimum Average Clearance, the Company is entitled to a reduction in the time buy fee payable under the Fox Agreement determined in accordance with a formula set forth in the Fox Agreement. If there are additional payments due from the Company to Fox under the Fox Agreement, the Company is entitled to set off the amount of the reduction in the time buy fee against future payments otherwise due Fox from the Company; if such future payments due from the Company to Fox are insufficient to provide the Company with the full amount of the reduction in the time buy fee resulting from Fox's failure to maintain the required Minimum Average Clearance, the Company is entitled to a refund from Fox.

As a result of Fox's alleged failure to maintain the required Minimum Average Clearance during past broadcast seasons, the Company exercised its set-off right in the Fox Agreement and did not pay Fox the $5,000 installment of the time buy fee that was due on April 1, 2008. Since Fox disputed whether the Company was entitled to a reduced time buy fee, the Company brought this action seeking a declaratory judgment from the court confirming its set-off right. The Company also asserted a separate claim for damages against Fox alleging that, as a result of Fox's failure to achieve the Minimum Average Clearance for past broadcast seasons and its failure to broadcast 4Kids' programming within the Saturday morning block, the Company sustained damages resulting from, among other things, lost advertising and merchandising revenue.

On May 27, 2008, Fox removed the case from state court to federal court (the United States District Court for the Southern District of New York). On June 3, 2008, Fox filed its answer to the complaint and asserted counterclaims against the Company alleging that the Company's failure to pay the $5,000 installment of the time buy fee otherwise scheduled to be paid on April 1, 2008 was a breach of contract and that the Company's alleged statement to Fox that the Company would not pay the $5,000 installment of the time buy fee that was scheduled to be paid on July 1, 2008 constituted a breach of the Fox Agreement by anticipatory repudiation. The Company exercised its set-off right in the Fox Agreement and did not pay Fox the $5,000 installment of the time buy fee that was due on July 1, 2008. On July 16, 2008, the Company filed its reply to Fox's counterclaims. The Company also exercised its set-off right and paid Fox $2,000 in lieu of the $5,000 installment of the time buy fee that was due on October 1, 2008, bringing the total amount set off by the Company to $13,000. In view of the set-off right against future installments of the time buy fee specifically provided for in the Fox Agreement in the event that Fox fails to maintain the Minimum Average Clearance, the Company believes that it has meritorious defenses to the Fox counterclaims.

On November 9, 2008, the Company entered into an agreement with Fox to settle the Fox Litigation (the “Settlement Agreement”). Under the terms of the Settlement Agreement, the Fox Agreement will terminate on December 31, 2008 rather than at the end of the 2008-2009 broadcast season in September 2009. The Company’s remaining financial obligations to Fox for the first three quarters of 2009 will also terminate. Under the terms of the Settlement Agreement, the Company will pay Fox $12,250 of the $13,000 of the 2008 time buy fees owed to Fox withheld by the Company as a set off to payments to Fox in the second, third and fourth quarters of 2008, $6,000 of such amount will be paid on or before November 14, 2008, $3,125 of such amount will be paid on or before February 15, 2009 and the remaining $3,125 will be paid on or before March 15, 2009. In order to secure payment by the Company to Fox of the installments of this settlement amount, the Company granted Fox a security interest in the sale of the national advertising time sold on 4KidsTV by the Company during the fourth quarter of 2008.

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

9. RELATED PARTY

National Law Enforcement and Firefighters Children’s Foundation - The Company’s Chairman and Chief Executive Officer is the founder and President of The National Law Enforcement and Firefighters Children’s Foundation (the “Foundation”). The Foundation is a not-for-profit organization dedicated to helping the children of law enforcement and firefighting

personnel and working with law enforcement and firefighting organizations to provide all children with valuable social and life skill programs. The Company contributed approximately $29 and $90 to the Foundation for the three and nine months ended September 30, 2008, respectively, and $30 and $90 to the Foundation for the three and nine months ended September 30, 2007, respectively.

Chaotic USA Entertainment Group, Inc. (“CUSA”) - On December 11, 2006, 4Kids Digital and CUSA LLC, entered into the TCD Agreement with respect to the operation of TC Digital as a joint venture, with 4Kids Digital owning 53% of TC Digital’s membership interests and CUSA LLC owning 47% of TC Digital’s membership interests. On December 18, 2007, 4Kids Digital purchased an additional 2% membership interest in TC Digital from CUSA LLC increasing 4Kids Digital’s ownership percentage to 55%. TC Digital is treated as a consolidated subsidiary of the Company as a result of its majority ownership in TC Digital and its right to break any dead-locks within the TC Digital Management Committee. Bryan Gannon (“Gannon”), President and Chief Executive Officer of CUSA and John Milito (“Milito”), Executive Vice President and Chief Operating Officer of CUSA, each own an interest of approximately 32% in CUSA. Additionally, on December 11, 2006, Gannon and Milito became officers of TC Digital.

As of September 30, 2008, the Company has entered into the following transactions with CUSA and CUSA LLC, or parties related to Gannon and Milito that are summarized below:

Employment Agreements – On December 11, 2006, TC Digital entered into employment agreements through December 31, 2009, with Bryan Gannon, to serve as its President and Chief Executive Officer and John Milito, to serve as its Executive Vice President. Under the terms of the employment agreements, each of Gannon and Milito will receive an annual base salary of $350 and are eligible to receive additional bonuses at the sole discretion of TC Digital’s Management Committee, on which they serve with minority voting rights. Gannon and Milito are each entitled to receive a minimum bonus of $200 in 2008 if TC Digital attains 60% of the projected revenues for the year, approved by TC Digital’s Management Committee. As of September 30, 2008, no bonus had been earned with respect to 2008 under the employment agreements since the bonus is based on annual targets.

Chaotic Property Representation Agreement – On December 11, 2006, 4Kids Licensing, CUSA and Apex Marketing, Inc. (“Apex”), a corporation in which Gannon holds 60% of the outstanding capital stock and Milito owns 39% of the outstanding capital stock, entered into an amended and restated Chaotic Property Representation Agreement (“CPRA”) replacing the original Chaotic property representation agreement entered into by the parties in April 2005. Under the terms of the CPRA, 4Kids Licensing is granted exclusive television broadcast and production, merchandising licensing, and home video rights to the “Chaotic” Property worldwide in perpetuity, subject to certain limited exceptions. Under the terms of the CPRA, all “Chaotic” related income less approved merchandising and other expenses shall be distributed 50% to the Company and 50% to CUSA and Apex, excluding trading card royalties which are distributed 55% to 4Kids Digital and 45% to CUSA. Additionally, all approved production expenses for television episodes based on the “Chaotic” property are allocated 50% to 4Kids Licensing and 50% to CUSA and Apex. As of September 30, 2008, there were approximately $6,204 of production, merchandising and other general expenses owed to 4Kids Licensing by CUSA and Apex, collectively.

Patent License Agreements – On December 11, 2006, TC Digital and TC Websites each entered into an agreement (the “Patent License Agreements”) with Cornerstone Patent Technologies, LLC (“Cornerstone”), a limited liability company, in which Gannon and Milito each hold a 25% membership interest. Pursuant to the Patent License Agreements, TC Digital and TC Websites obtained exclusive licenses (subject to certain exceptions) to use certain patent rights in connection with “Chaotic” and other trading card games which are uploaded to websites owned and operated by each such entity. Additionally, each of TC Digital and TC Websites agreed to pay Cornerstone a royalty of 1.5% of the Manufacturers Suggested Retail Price for the sale of trading cards, which amounted to $191 for each such entity for the three months ended September 30, 2008, and $390 for each such entity for the nine months ended September 30, 2008. On September 10, 2007, the Company purchased a 25% interest in such patents from Cornerstone for $750. For the three and nine months ended September 30, 2008, the Company earned royalties of $128 and $260, respectively, associated with its portion of the patents relating to the sales of “Chaotic” trading cards which is eliminated in the Company’s consolidated financial statements.

TCD Agreement – Under the terms of the TCD Agreement, TC Digital is obligated to pay the following fees and/or royalties to: (i) 4Kids Digital equal to 3% of TC Digital’s gross revenues up to $350 per year for management services performed; (ii) 4Kids Digital and CUSA equal to 3% of net sales of each pack of trading cards sold; and (iii) the Company equal to (x) 10% of the net sales of “Chaotic” trading cards and (y) an additional 1% of net sales of “Chaotic” trading cards above $50 million during a calendar year. The Company acquired its rights to receive

royalties of 10% in respect to net sales of “Chaotic” trading cards under the TCD Agreement through purchases from Dracco Company Ltd. (“Dracco”) of a 5% royalty stream on October 17, 2007, a 1% royalty stream, previously allocated to CUSA from Dracco, on December 18, 2007, a 4% royalty stream on March 17, 2008 in exchange for one-time payments of $2,250, $450 and $1,100, respectively. The consideration for the purchase of the 1% royalty stream for $450 was satisfied through the settlement of certain capital contributions required to be made by CUSA to TC Websites under the TCW Agreement. During the three and nine months ended September 30, 2008, the Company earned royalties of $762 and $1,574, respectively, and CUSA earned royalties of $228 and $462, respectively, relating to the sales of “Chaotic” trading cards under the TCD agreement, respectively. The Company’s portion of royalties and its management fee were eliminated in its consolidated financial statements.

4Kids Digital is required under the terms of the TCD Agreement and the related loan and line of credit agreements to provide loans to TC Digital from time to time in an aggregate amount up to $8,000 with a maturity date of December 31, 2010. On September 15, 2008, 4Kids Digital and TC Digital agreed to reduce the interest payable on any such loans from 12% to 9% retroactive to December 11, 2006. Any transaction resulting in the sale of more than 50% of TC Digital’s membership interests or in the sale of all or substantially all of TC Digital’s assets occurring while there is no debt owed from TC Digital to 4Kids Digital under the loan and line of credit or occurring prior to August 31, 2009 requires the consent of members of TC Digital holding two-thirds of its membership interests (as opposed to a majority of its membership interests).

Chaotic Merchandise License Agreement – On December 11, 2006, 4Kids Licensing, CUSA and TC Digital entered into a merchandise licensing agreement pursuant to which 4Kids Licensing and CUSA granted TC Digital exclusive rights to manufacture, produce and license “Chaotic” trading cards and related accessories through December 31, 2016. Under the terms of the agreement, TC Digital is obligated to pay a royalty on trading cards and all related accessories equal to (i) 4% of net sales to 4Kids Licensing while any amounts are outstanding to 4Kids Digital under the loan agreement or line of credit agreement or (ii) 8% of net sales of such cards and accessories, 55% of which will be paid to 4Kids Licensing and 45% of which will be paid to CUSA. During the three and nine months ended September 30, 2008, no royalties had been earned under this agreement.

Operating Agreement of TC Websites LLC – On December 11, 2006, 4Kids Websites entered into the TCW Agreement with CUSA to purchase a 50% membership interest in TC Websites, which was amended on December 18, 2007 in connection with 4Kids Websites’ acquisition of an additional 5% ownership interest in TC Websites. On September 15, 2008, the terms of the TCW Agreement were further amended to eliminate TC Websites’ obligation to pay fees to each of the following: (i) 4Kids Websites equal to 3% of gross revenues of TC Websites with a minimum fee of $100 and a maximum fee of $200 per year for management services; (ii) Gannon equal to $100 for services as a senior executive; and (iii) Milito equal to $100 for services as a senior executive. Under the terms of the TCW Agreement, each member of TC Websites is obligated to make capital contributions on a pro-rata basis to the extent determined by its Management Committee to be necessary to fund the operation of the Website. Any transaction resulting in the sale of more than 50% of TC Websites’ membership interests or in the sale of all or substantially all of TC Digital’s assets requires the consent of members of TC Websites holding two-thirds of its membership interests (as opposed to a majority of its membership interests).

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

10. COMMITMENTS AND CONTINGENCIES

a. Broadcast Agreements - In January 2002, the Company entered into a multi-year agreement with Fox to lease Fox’s Saturday morning programming block (“4Kids TV”) which airs principally on Saturday mornings from 8am to 12pm eastern/pacific time (7am to 11am central time). The Company provides substantially all programming content to be broadcast on 4Kids TV and retains all of the revenue from network advertising sales for the four-hour time period. 4Kids Ad Sales manages and accounts for the ad revenue and costs associated with 4Kids TV. The broadcast fee for the 2007-2008 broadcast season is $20,000 payable in quarterly installments of $5,000 commencing in October 2007. Fox has exercised its option to extend this agreement

through its 2008-2009 broadcast season under the same terms and conditions as in effect for the 2007-2008 broadcast season.

The costs of 4Kids TV are capitalized and amortized over each broadcast year based on estimated advertising revenue for the related broadcast year. The Company recorded amortization expenses of $3,041 and $12,150 for the three and nine months ended September 30, 2008, respectively, and $5,482 and $13,726 for the three and nine months ended September 30, 2007, respectively. During the nine months ended September 30, 2008, the Company paid Fox and certain Fox affiliates $5,741 and $20, attributable to the 2007-2008 and 2008-2009 broadcast season fees, respectively, and during calendar year 2007, the Company paid Fox and certain Fox affiliates $15,525 and $5,263, attributable to the 2006-2007 and 2007-2008 broadcast seasons fees, respectively.

As of September 30, 2008, the remaining minimum guaranteed payment obligations under the 4Kids TV Broadcast Agreement are as follows:

Year Ending December 31,		Amount
2008	$	15,000
2009		15,000
Total	$	30,000

The minimum guaranteed payment obligation listed above for 2008 includes two payments of $5,000, totaling $10,000, in respect of the 2007-2008 broadcast season’s fees that were due on April 1, 2008 and July 1, 2008. These payments were not made by the Company in connection with the Company’s exercise of its set-off rights thereunder further described in Note 8, “Legal Proceedings”. The $10,000 time buy fees due on April 1, 2008 and July 1, 2008 have been fully accrued in the Company’s financial statements. The Company has not made a payment of $3,000 of the 2008-2009 broadcast season time buy fee of $5,000 that was due on October 1, 2008, in connection with the exercise of its set-off rights bringing the total amount set-off by the Company to $13,000.

On November 9, 2008, the Company entered into an agreement with Fox to settle the Fox Litigation (the “Settlement Agreement”). Under the terms of the Settlement Agreement, the Fox Agreement will terminate on December 31, 2008 rather than at the end of the 2008-2009 broadcast season in September 2009. The Company’s remaining financial obligations to Fox for the first three quarters of 2009 will also terminate. Under the terms of the Settlement Agreement, the Company will pay Fox $12,250 of the $13,000 of the 2008 time buy fees owed to Fox withheld by the Company as a set off to payments to Fox in the second, third and fourth quarters of 2008; $6,000 of such amount will be paid on or before November 14, 2008, $3,125 of such amount will be paid on or before February 15, 2009 and the remaining $3,125 will be paid on or before March 15, 2009. In order to secure payment by the Company to Fox of the installments of this settlement amount, the Company granted Fox a security interest in the sale of the national advertising time sold on 4KidsTV by the Company during the fourth quarter of 2008. The Company believes that the settlement enables 4Kids, beginning in 2009, to focus its resources on the five hour block of children’s Saturday morning television on The CW Network.

On October 1, 2007, the Company and The CW entered into the CW Agreement, under which The CW granted to the Company the exclusive right to program The CW's Saturday morning children's programming block that is broadcast in most markets between 7am and 12pm for an initial term of five years which began with The CW's 2008-2009 broadcast season.

Under the CW Agreement, the Company is obligated to make quarterly minimum guaranteed payments which are subject to reduction under certain circumstances. The Company and The CW share advertising revenues earned from the sale of national commercial time during The CW Kids Block with The CW's share to be applied against such quarterly guarantee payments. In addition, The CW is entitled under the CW Agreement to participate in the Company's merchandising revenue from certain content broadcast on The CW Kids Block if such merchandising revenues exceed a certain annual minimum.

As of September 30, 2008, the minimum guaranteed payment obligations under the CW Agreement are as follows:

Year Ending December 31,		Amount
2008	$	6,750
2009		15,000
2010		15,000
2011		15,000
2012		15,000
2013		8,250
Total	$	75,000

The Company’s ability to recover the cost of its fee payable to Fox and the minimum guarantee due to The CW will depend among other matters (see Note 8, “Legal Proceedings”) on the popularity of the television programs which are broadcast on 4Kids TV and The CW Kids Block and the general market demand and pricing of advertising time for Saturday morning children’s broadcast television. The popularity of such programs, broadcast on 4Kids TV and The CW Kids Block, impacts audience levels and the level of the network advertising rates that the Company can charge. Additionally, the success of the merchandise licensing programs and home video sales based on such television programs broadcast on 4Kids TV and The CW Kids Block is dependent on consumer acceptance of such television programs. If the Company estimates that it will be unable to generate sufficient future revenue from advertising sales, home video sales and merchandising licensing at levels to cover the cost of its contractual obligation to Fox and/or The CW, the Company would record a charge to earnings to reflect an expected loss on the Fox and The CW agreements in the period in which the factors negatively affecting the recoverability of the fee payable become known. The Company will be required to make certain assumptions and estimates about future events such as advertising rates and audience viewing levels in evaluating its ability to recover the cost of the broadcast fees. Such estimates and assumptions are subject to market forces and factors beyond the control of the Company and are inherently subject to change. There can be no assurance that the Company will be able to recover the full cost of the broadcast fees and in the event it cannot, it would record the resulting charge to earnings to reflect an expected loss on the broadcast fee, which could be significant.

In addition to the broadcast fee paid to Fox and minimum guarantee to be paid to The CW, the Company incurs additional costs to program each broadcast block and sell the related network advertising time. These costs include direct programming costs to acquire, adapt and deliver programming for the broadcast during the weekly broadcast blocks, as well as additional indirect expenses of advertising sales, promotion and administration.

b. Contractual Arrangements - During the normal course of business, the Company may enter into various agreements with third parties to license, acquire, distribute, broadcast, develop and/or promote Properties. The terms of these agreements will vary based on the services and/or Properties included within the agreement, as well as, geographic restrictions, duration, property and exploitation condition and results of operation.

c. Stock Purchases - On December 4, 2007, the Company announced that the Board of Directors authorized the Company to purchase up to 1,000,000 shares of the Company’s common stock from time to time through December 31, 2008 in the open market or through negotiated prices. The Company purchased 235,484 shares at an average price of $11.65 per share for the nine months ended September 30, 2008 under this authorization. As of November 8, 2008, no shares of the Company’s common stock were subsequently purchased by the Company under this authorization.

11. MINORITY INTEREST

a) TC Digital Games LLC - On December 11, 2006, 4Kids Digital and CUSA LLC entered into the TCD Agreement with respect to the operation of TC Digital as a joint venture, with 4Kids Digital owning 53% of TC Digital’s membership interests and CUSA LLC owning 47% of TC Digital’s membership interests. On December 18, 2007, 4Kids Digital purchased an additional 2% membership interest in TC Digital from CUSA for approximately $200, increasing 4Kids Digital’s ownership percentage to 55%. The consideration for the purchase of this additional membership interest was paid

through the settlement of capital contributions required to be made by CUSA to TC Websites under the TCW Agreement. TC Digital is treated as a consolidated subsidiary of the Company as a result of its majority ownership and its right to break any dead-locks within the TC Digital Management Committee.

Minority interest of membership units in TC Digital represents the minority members’ proportionate share of the equity in the entity. Income is allocated to the membership units minority interest based on the ownership percentage throughout the year. At December 18, 2007, the minority members’ proportionate share of the equity in the entity decreased by 2% to 45% and at September 30, 2008, the minority member continued to hold 45% of the equity in the entity.

The following table summarizes the minority interest loss attributable to the minority equity interest in TC Digital:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
TC Digital net loss before common units minority interest	$	(1,042	)	$	(1,207	)	$	(4,195	)	$	(2,890	)
Minority interest percentage		45	%		47	%		45	%		47	%
Minority interest loss allocation		(469	)		(567	)		(1,888	)		(1,358	)
Less: Minority member capital contribution		—			—			—			—
Loss in excess of minority interest absorbed by 4Kids Digital	$	(469	)	$	(567	)	$	(1,888	)	$	(1,358	)

The loss in excess of minority interest for TC Digital absorbed by 4Kids Digital in the aggregate, since the formation of such entity, is $4,235 as of September 30, 2008.

b) TC Websites LLC - Under the terms of the TCW Agreement, 4Kids Websites and CUSA are each entitled to elect two managers to TC Websites’ Management Committee. On December 18, 2007, 4Kids Websites entered into an agreement with CUSA and TC Websites pursuant to which 4Kids acquired an additional 5% ownership interest in TC Websites from CUSA for approximately $650 and the TCW Agreement was amended to provide 4Kids Websites with the right to break any deadlocks on TC Websites' Management Committee with respect to operational matters. The consideration for the purchase of this additional membership interest was paid through the settlement of certain capital contributions required to be made by CUSA to TC Websites under the TCW Agreement.

While the Company maintained a 50% ownership interest in TC Websites and did not control, but had significant influence, over such entity, the Company’s investment in TC Websites had been accounted for using the equity method. As permitted by Accounting Research Bulletin No. 51, Consolidated Financial Statements, due to the increased membership interest and the additional operational control, TC Websites’ financial statements are now included in the Company’s consolidated financial statements for the three and nine months ended September 30, 2008 and for the year ended December 31, 2007 as though it has been acquired by the Company at the beginning of such year, and accordingly, revenues and expenses are included for the three and nine months ended September 30, 2008.

At December 18, 2007, the minority members’ proportionate share of the equity in the entity decreased by 5% to 45%. The following table summarizes the minority interest loss attributable to the minority equity interest in TC Websites:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
TC Websites net loss before common units minority interest	$	(740	)	$	(3,583	)	$	(2,654	)	$	(4,010	)
Minority interest percentage		45	%		50	%		45	%		50	%
Minority interest loss allocation		(333	)		(1,792	)		(1,194	)		(2,005	)
Less: Minority member capital contribution		251			—			251			—
Loss in excess of minority interest absorbed by 4Kids Websites	$	(82	)	$	(1,792	)	$	(943	)	$	(2,005	)

The loss in excess of minority interest for TC Websites absorbed by 4Kids Websites in the aggregate, since the formation of such entity, is $3,399 as of September 30, 2008.

12. DISCONTINUED OPERATIONS

In June 2006, the Company announced that the business of its media buying subsidiary, Summit Media, would be terminated effective June 30, 2006. The results of discontinued operations for the media buying business had no effect on the Company’s results of operations for the three and nine months ended September 30, 2008 and 2007, however, the accompanying consolidated financial statements have been reclassified separately to report the assets and liabilities.

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

	September 30,		December 31,
	2008		2007
Prepaid expenses and other current assets	$	451	$	372
Current assets from discontinued operations	$	451	$	372

Other receivable – non-current	$	475	$	926
Non-current assets from discontinued operations	$	475	$	926

Under the terms of the Settlement Agreement entered into by Summit Media with The Beacon Media Group LLC (“Beacon”), Sheldon Hirsch, Tom Horner and Paul Caldera (the “Beacon Defendants”) on June 19, 2006, relating to the lawsuit filed by Summit Media in Supreme Court, New York County against Beacon and the Beacon Defendants, Summit Media will receive $2,000, in regularly scheduled payments through 2010, in exchange for Summit Media’s discontinuation of the lawsuit. Through September 30, 2008, the Company had received $1,000 of the scheduled payments related to the lawsuit.

13. SUBSEQUENT EVENTS

On November 9, 2008, the Company entered into an agreement with Fox to settle the Fox Litigation (the “Settlement Agreement”). Under the terms of the Settlement Agreement, the Fox Agreement will terminate on December 31, 2008 rather than at the end of the 2008-2009 broadcast season in September 2009. The Company’s remaining financial obligations to Fox for the first three quarters of 2009 will also terminate. Under the terms of the Settlement Agreement, the Company will pay Fox $12,250 of the $13,000 of the 2008 time buy fees owed to Fox withheld by the Company as a set off to payments to Fox in the second, third and fourth quarters of 2008; $6,000 of such amount will be paid on or before November 14, 2008, $3,125 of such amount will be paid on or before February 15, 2009 and the remaining $3,125 will be paid on or before March 15, 2009. In order to secure payment by the Company to Fox of the installments of this settlement amount, the Company granted Fox a security interest in the sale of the national advertising time sold on 4KidsTV by the Company during the fourth quarter of 2008. The Company believes that the settlement enables 4Kids, beginning in 2009, to focus its resources on the five hour block of children’s Saturday morning television on The CW Network.

14. SEGMENT AND RELATED INFORMATION

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

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

	Licensing		Advertising Media and Broadcast			TV and Film Production/ Distribution			Trading Card and Game Distribution			Total
Three Months Ended September 30, 2008:
Net revenues from external customers	$	4,203	$	2,707		$	3,624		$	7,250		$	17,784
Amortization of television and film costs		—		—			1,864			—			1,864
Amortization of 4Kids TV broadcast fee		—		3,041			—			—			3,041
Segment profit (loss)		(360	)	(2,699	)		(1,536	)		(931	)		(5,526	)
Interest income		676		13			—			—			689

2007
Net revenues from external customers	$	4,270	$	3,517		$	4,396		$	—		$	12,183
Amortization of television and film costs		—		—			1,546			—			1,546
Amortization of 4Kids TV broadcast fee		—		5,482			—			—			5,482
Segment profit (loss)		1,056		(4,908	)		(225	)		(1,483	)		(5,560	)
Interest income		1,197		18			39			—			1,254

Nine Months Ended September 30, 2008:
Net revenues from external customers	$	12,737	$	10,405		$	11,478		$	14,743		$	49,363
Amortization of television and film costs		—		—			5,269			—			5,269
Amortization of 4Kids TV broadcast fee		—		12,150			—			—			12,150
Segment profit (loss)		(258	)	(8,557	)		(4,130	)		(4,512	)		(17,457	)
Interest income		2,045		44			7			—			2,096
Segment assets		88,019		4,979			24,527			11,738			129,263

2007
Net revenues from external customers	$	16,319	$	10,235		$	12,569		$	—		$	39,123
Amortization of television and film costs		—		—			4,677			—			4,677
Amortization of 4Kids TV broadcast fee		—		13,726			—			—			13,726
Segment profit (loss)		5,624		(11,041	)		(1,038	)		(3,680	)		(10,135	)
Interest income		3,635		54			132			—			3,821
Segment assets		131,244		5,792			27,846			7,631			172,513

Segment assets relating to discontinued operations have been included in segment reporting from the Advertising, Media and Broadcast segment and are disclosed in Note 12.

Through the Company’s London office and network of international subagents, which allow it to license its Properties throughout the world, the Company recognized net merchandise licensing revenues from international sources, primarily in Europe, of $3,101 and $9,001 for the three and nine months ended September 30, 2008, respectively, and $1,904 and $5,611 for the three and nine months ended September 30, 2007. As of September 30, 2008 and 2007, net assets of the Company’s London office were $6,629 and $7,068, respectively.

******

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(In thousands of dollars unless otherwise specified)

Overview

The Company’s operating results for the three and nine months ended September 30, 2008 were negatively impacted by increased selling, general and administrative expenses associated with the operations of the Company’s newly formed Trading Card and Game Distribution companies. The Company’s results also reflect an overall decrease in licensing revenues worldwide. These decreases were partially offset by revenues generated from the Trading Card and Game Distribution segment resulting from the sale of “Chaotic” game trading cards.

General

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

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

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

Critical Accounting Policies

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

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

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

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

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

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

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

4Kids TV Broadcast Agreement - The Company broadcasts certain of its Properties on 4Kids TV, the Saturday morning programming block that the Company leases from Fox. The cost of 4Kids TV has been and will continue to be capitalized and amortized over each broadcast year based on estimated advertising revenue up until the termination of the Fox Agreement on December 31, 2008. See Note 13 of the Notes to the Company’s consolidated financial statements for additional information regarding the termination of the Fox Agreement. In developing estimated future revenues, the Company has made certain assumptions with regard to the anticipated popularity of the television series that the Company broadcasts on 4Kids TV and the general market demand and pricing of advertising time for Saturday morning children’s broadcast television. The popularity of such series impacts audience levels and the level of the network advertising rates that the Company can charge. These estimates are based on historical trends, as well as the Company’s subjective judgment of future customer demand and acceptance of its television programming. Differences may result in the amount and timing of revenue for any period if actual performance varies from the Company’s estimates. See Note 10 of the Notes to the Company’s consolidated financial statements for additional information.

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

Recently Issued Accounting Pronouncements – In November 2007, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141R, Business Combinations (“SFAS No. 141R”), which continues to require that all business combinations be accounted for by applying the acquisition method. Under the acquisition method, the acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed,

and any contingent consideration and contractual contingencies, as a whole, at their fair value as of the acquisition date. Under SFAS No. 141R, all transaction costs are expensed as incurred. SFAS No. 141R rescinds EITF Issue No. 93-7 (“EITF 93-7”). Under EITF 93-7, the effect of any subsequent adjustments to uncertain tax positions were generally applied to goodwill, except for post-acquisition interest on uncertain tax positions, which was recognized as an adjustment to income tax expense. Under SFAS No. 141R, all subsequent adjustments to these uncertain tax positions that otherwise would have impacted goodwill will be recognized in the income statement. SFAS No. 141R will be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008.

In November 2007, the FASB issued SFAS No. 160, Accounting and Reporting of Noncontrolling Interest (“SFAS No. 160”). SFAS No. 160 requires that a noncontrolling interest (previously referred to as a minority interest) be separately reported in the equity section of the consolidated entity’s balance sheet. SFAS No. 160 also established accounting and reporting standards for: (i) ownership interests in subsidiaries held by parties other than the parent, (ii) the amount of consolidated net income attributable to the parent and to the noncontrolling interest, (iii) changes in a parent’s ownership interest and (iv) the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 is effective for the Company beginning January 1, 2009. The Company is currently evaluating the impact the adoption of SFAS No. 160 will have on its consolidated financial position and results of operations.

In March 2008, the FASB issued SFAS No. 161) (“SFAS 161”), Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No.133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133”). SFAS No. 161 requires companies to provide enhanced disclosures regarding derivative instruments and hedging activities in order to better convey the purpose of derivative use in terms of risk management. Disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect a company's financial position, financial performance, and cash flows, are required. This Statement retains the same scope as SFAS No. 133 and is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact, if any, that the adoption of SFAS No. 161 will have on its consolidated financial position and results of operations.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, (“SFAS No. 162”). SFAS No. 162 sets forth the sources of accounting principles and the framework, or hierarchy, for selecting principles to be used in financial statement preparation. Prior to the issuance of SFAS No. 162, the GAAP hierarchy was defined in the AICPA Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SFAS No. 162 will be effective 60 days following the approval by the Securities and Exchange Commission (“SEC”) of the Public Company Accounting Oversight Board amendments to AU Section 411, the meaning of present fairly in conformity with GAAP. The Company is currently evaluating the impact, if any, that the adoption of SFAS No. 162 will have on its consolidated financial position and results of operations.

In December 2007, the FASB ratified EITF Issue No. 07-1, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property (“EITF 07-1”). The EITF concluded that a collaborative arrangement is one in which the participants are actively involved and are exposed to significant risks and rewards that depend on the ultimate commercial success of the endeavor. Revenues and costs incurred with third parties in connection with collaborative arrangements would be presented gross or net based on the criteria in EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, and other accounting literature. Payments to or from collaborators would be evaluated and presented based on the nature of the arrangement and its terms, the nature of the entity’s business, and whether those payments are within the scope of other accounting literature. The nature and purpose of collaborative arrangements are to be disclosed along with the accounting policies and the classification and amounts of significant financial statement amounts related to the arrangements. Activities in the arrangement conducted in a separate legal entity should be accounted for under other accounting literature; however required disclosure under EITF 07-1 applies to the entire collaborative agreement. This Issue is effective for fiscal years beginning after December 15, 2008, and is to be applied retrospectively to all periods presented for all collaborative arrangements existing as of the effective date. The Company is currently evaluating the impact that this pronouncement may have on its consolidated financial position and results of operations.

been issued. The Company determined that the adoption of this standard has not had an impact on its consolidated financial position or results of operations.

Results of Operations

The following table sets forth our results of operations expressed as a percentage of total net revenues for the three and nine months ended September 30, 2008 and 2007:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Net revenues		100	%		100	%		100	%		100	%

Costs and expenses:
Selling, general and administrative		78			86			81			76
Production service costs		10			12			10			13
Cost of sales of trading cards		19			—			13			—
Amortization of television and film costs		11			13			11			12
Amortization of 4Kids TV broadcast fee		17			45			25			35
Total costs and expenses		135			156			140			136

Loss from operations		(35	)		(56	)		(40	)		(36	)

Interest income		4			10			4			10

Loss before income taxes		(31	)		(46	)		(36	)		(26	)

Benefit from income taxes		—			21			—			12

Loss from unconsolidated operations –
net of a tax benefit		—			(9	)		—			(3	)
Minority interest		1			—			1			—

Net loss		(30	)%		(34	)%		(35	)%		(17	)%

Three and nine months ended September 30, 2008 as compared to three and nine months ended September 30, 2007.

Revenues

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

For the three months ended September 30, 2008 and 2007
	2008		2007		$ Change			% Change
Licensing	$	4,203	$	4,270	$	(67	)	(2	)%
Advertising, Media and Broadcast		2,707		3,517		(810	)	(23	)%
Television and Film Production/Distribution		3,624		4,396		(772	)	(18	)%
Trading Card and Game Distribution		7,250		—		7,250		n/a
Total	$	17,784	$	12,183	$	5,601		46	%

For the nine months ended September 30, 2008 and 2007
	2008		2007		$ Change			% Change
Licensing	$	12,737	$	16,319	$	(3,582	)	(22	)%
Advertising, Media and Broadcast		10,405		10,235		170		2	%
Television and Film Production/Distribution		11,478		12,569		(1,091	)	(9	)%
Trading Card and Game Distribution		14,743		—		14,743		n/a
Total	$	49,363	$	39,123	$	10,240		26	%

The increase in consolidated net revenues for the three and nine months ended September 30, 2008, as compared to the same periods in 2007, was due to a number of factors.

In the Licensing segment, the decrease in revenues for the three months ended September 30, 2008 was primarily attributable to:

(i)	decreased licensing revenues from the “Teenage Mutant Ninja Turtles” and “Nintendo” Properties, domestically; partially offset by

(ii)	increased revenues attributable to the “Yu-Gi-Oh!” Property, worldwide and the “Dinosaur King” Property, internationally.

In the Licensing segment, the decrease in revenues for the nine months ended September 30, 2008 was primarily attributable to:

(i)	decreased licensing revenues on the “Teenage Mutant Ninja Turtles”, “Nintendo” and “Cabbage Patch Kids” Properties, domestically and the “Viva Piñata” Property, worldwide; partially offset by

(ii)	increased revenues attributable to the “Shaman King” and “Dinosaur King” Properties, worldwide.

The “Yu-Gi-Oh!”, “Teenage Mutant Ninja Turtles” and “Cabbage Patch Kids” Properties continue to be the largest contributors with approximately 68% of the Company’s revenues in this business segment.

In the Advertising Media and Broadcast segment, revenues decreased for the three months ended September 30, 2008, as compared to the same period in 2007, as a result of decreased revenues from the sale of network advertising time on 4Kids TV.

In the Advertising Media and Broadcast segment, revenues remained relatively consistent for the nine months ended September 30, 2008, as compared to the same period in 2007.

In the Television and Film Production/Distribution segment, decreased revenues for the three months ended September 30, 2008, as compared to the same periods in 2007, were primarily attributable to:

(i)	decreased broadcast sales from the “Yu-Gi-Oh!” television series, worldwide and “Chaotic” television series, domestically; as well as

(ii)	decreased production service revenue from the “Viva Piñata” television series; partially offset by

(iii)

increased production service revenue from the “Teenage Mutant Ninja Turtles” and “Chaotic” television series; as well as

(iv)	increased broadcast sales from the “Dinosaur King” television series, internationally.

In the Television and Film Production/Distribution segment, decreased revenues for the nine months ended September 30, 2008 were primarily attributable to:

(i)	decreased broadcast sales from the “Yu-Gi-Oh!” television series, worldwide;

(ii)	decreased production service revenue from the “Viva Piñata” television series;

(iii)

decreased broadcast sales from the “Pokémon” television series, internationally; as well as

(iv)	decreased home video sales from the “Teenage Mutant Ninja Turtles” television series; partially offset by

(v)	increased production service revenue from the “Teenage Mutant Ninja Turtles”, “Dinosaur King” and “Chaotic” television series; as well as

(vi)	increased international broadcast sales from the “Dinosaur King” television series.

The Trading Card and Game Distribution segment began to record revenues in the fourth quarter of 2007 as a result of the October launch of the “Chaotic” trading card game to comic and hobby stores. For the three and nine months ended September 30, 2008, revenues were $7,250 and $14,743, respectively, as a result of sales to mass market distribution channels as well as to comic and hobby stores.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 33%, or $3,450, to $13,937 for the three months ended September 30, 2008, when compared to the same period in 2007. The increase was primarily attributable to:

(i)	increased costs of approximately $2,450 related to the operations of TC Digital along with costs of approximately $790 related to the operations of TC Websites which was not consolidated in the prior year;

(ii)	increased foreign exchange loss associated with currency fluctuations of approximately $500;

(iii)

increased production service expenses of approximately $290; as well as

(iv)	increased costs relating to the grant of restricted shares of approximately $170; partially offset by

(v)	decreased professional fees of approximately $190; as well as

(vi)	decreased website costs of approximately $150.

Selling, general and administrative expenses increased 35%, or $10,266, to $39,892 for the nine months ended September 30, 2008, when compared to the same period in 2007. The increase was primarily attributable to:

(i)	increased costs of approximately $6,510 related to the operations of TC Digital along with costs of approximately $2,750 related to the operations of TC Websites which was not consolidated in the prior year;

(ii)	increased international selling expenses of approximately $1,090;

(iii)

increased costs relating to the grant of restricted shares of approximately $500; as well as

(iv)	increased foreign exchange loss associated with currency fluctuations of approximately $450; partially offset by

(v)	decreased advertising and marketing costs of approximately $710; as well as

(vi)	decreased bad debt expense of approximately $250.

Cost of Sales of Trading Cards

Cost of sales of trading cards represents finished goods inventory costs relating to the “Chaotic” trading card game which was released at comic and hobby stores in October 2007.

Production Service and Capitalized Film Costs

Production service and capitalized film costs were as follows:

For the three months ended September 30, 2008 and 2007

	2008		2007		$ Change		% Change
Production Service Costs	$	1,710	$	1,482	$	228	15	%
Amortization of Television and Film Costs		1,864		1,546		318	21

For the nine months ended September 30, 2008 and 2007

	2008		2007		$ Change		% Change
Production Service Costs	$	5,245	$	5,050	$	195	4	%
Amortization of Television and Film Costs		5,269		4,677		592	13

The increase in production service costs during the three months ended September 30, 2008, as compared to the same period in 2007, was primarily due to increased production costs for the “Teenage Mutant Ninja Turtles” and “Chaotic” television series, partially offset by decreased production costs for work performed on the “Viva Piñata” television series. Production service costs increased for the nine months ended September 30, 2008 when compared to the same period in 2007, primarily due to increased production costs for the “Teenage Mutant Ninja Turtles”, “Dinosaur King” and “Chaotic” television series, partially offset by decreased production costs for work performed on the “Viva Piñata” television series. When the Company is entitled to be paid for such production costs, the Company categorizes them as production service costs and reflects a corresponding amount in revenue for the amount billed back to the property owners.

Amortization of television and film costs increased for the three and nine months ended September 30, 2008, when compared to the same periods in 2007, due to increased amortization relating to the “Yu-Gi-Oh!” and “Chaotic” television series, partially offset by decreased amortization relating to various older television series.

As of September 30, 2008, there were $15,821 of capitalized film production costs recorded in the Company’s consolidated balance sheet relating primarily to various stages of production on 428 episodes of animated programming. Based on management’s revenue estimates as of September 30, 2008, approximately 51% of the total completed and unamortized film and television costs are expected to be amortized during the next year, and over 90% of the total completed and unamortized film and television costs are expected to be amortized during the next three years.

4Kids TV Broadcast Fee

For the three months ended September 30, 2008 and 2007

	2008		2007		$ Change			% Change
Amortization of 4Kids TV Broadcast Fee	$	3,041	$	5,482	$	(2,441	)	(45	)%

For the nine months ended September 30, 2008 and 2007

	2008		2007		$ Change			% Change
Amortization of 4Kids TV Broadcast Fee	$	12,150	$	13,726	$	(1,576	)	(11	)%

As a result of the broadcast year (ending each year in September) being different than the Company’s fiscal year (ending each year in December), the amount of the amortization of the broadcast fee recognized from period to period will vary based upon: (i) the amount of advertising revenue recognized during the period; and (ii) the amount of advertising revenue already recognized for the broadcast year as a percentage of the total amount expected to be recognized for the full broadcast year.

The decrease in amortization of the 4Kids TV broadcast fee resulted from lower 4Kids TV advertising revenues recognized by the Company as well as the agreement to terminate the Fox Agreement on December 31, 2008, for the three and nine months ended September 30, 2008 when compared to the same periods in 2007.

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

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

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

The ability of the Company to further develop its merchandising and, to a lesser extent, home video and music publishing revenue streams were significant components of its evaluation process which resulted in the decision to lease an additional Saturday morning children’s programming block from The CW Network, LLC (“The CW”), as described in Note 10 of the Notes to the Company’s consolidated financial statements under “Broadcast Agreements”, which is broadcast in most markets between 7am and 12pm (“The CW Kids Block”). Other factors, such as lower guaranteed payments associated with The CW Kids Block, additional commercial units allocated to the Company for sale during the CW Kids Block, an anticipated increase in network support due to a revenue sharing arrangement, along with the availability of the CW Kids Block, also contributed to the decision to lease another Saturday morning children’s block which will overlap with our current 4Kids TV block during the same Saturday morning time period until the termination of the Fox Agreement on December 31, 2008, see Note 13 to the Notes of the Company’s consolidated financial statements for additional information.

Interest Income

Interest income decreased 45%, or $565, to $689 and 45%, or $1,725, to $2,096 for the three and nine months ended September 30, 2008, respectively, as compared to the same periods in 2007, primarily as a result of lower cash balances and the Company investing its surplus cash in U.S. Treasury securities typically yielding lower interest rates than other investments.

Income (Loss) Before Income Taxes

For the three months ended September 30, 2008 and 2007

	2008			2007			$ Change			% Change
Licensing	$	(360	)	$	1,056		$	(1,416	)	(134	)%
Advertising, Media and Broadcast		(2,699	)		(4,908	)		2,209		45
Television and Film Production/Distribution		(1,536	)		(225	)		(1,311	)	(583	)
Trading Card and Game Distribution		(931	)		(1,483	)		552		37
Total	$	(5,526	)	$	(5,560	)	$	34		1	%

For the nine months ended September 30, 2008 and 2007

	2008			2007			$ Change			% Change
Licensing	$	(258	)	$	5,624		$	(5,882	)	(105	)%
Advertising, Media and Broadcast		(8,557	)		(11,041	)		2,484		23
Television and Film Production/Distribution		(4,130	)		(1,038	)		(3,092	)	(298	)
Trading Card and Game Distribution		(4,512	)		(3,680	)		(832	)	(23	)
Total	$	(17,457	)	$	(10,135	)	$	(7,322	)	(72	)%

The loss in the Licensing segment for the three and nine months ended September 30, 2008, as compared to the same periods in 2007, was primarily attributable to lower revenues from licensed Properties as well as a decrease in interest income allocated to this segment.

In the Advertising Media and Broadcast segment, the decrease in segment loss for the three and nine months ended September 30, 2008, as compared to the same periods in 2007, was due to a decrease in amortization of the 4Kids TV broadcast fee as well as a decrease in advertising and promotional expenses.

In the Television and Film Production/Distribution segment, the increase in segment loss for the three and nine months ended September 30, 2008 as compared to the same period in 2007 was primarily due to increased amortization of television and film costs and international selling expense as well as decreased revenue.

In the Trading Card and Game Distribution segment, the decrease in segment loss for the three months ended September 30, 2008 when compared to the same period in 2007 was primarily attributable to increased revenues, partially offset by increased cost of goods sold and selling, general and administrative expenses. For the nine months ended September 30, 2008, the increase in segment loss when compared to the same periods in 2007 was primarily attributable to increased cost of goods sold and selling, general and administrative expenses, partially offset by increased revenues. Revenues in this segment continue to trend according to Company expectations while expenses continue to increase in direct correlation to the ramp up of the “Chaotic” trading card game and build out of the “Chaotic” website.

Income Taxes

The Company regularly reviews its deferred tax assets for recoverability taking into consideration such factors as historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. SFAS No. 109, Accounting for Income Taxes (SFAS No. 109), requires the Company to record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In view of the level of deferred tax assets as of September 30, 2008 and the Company’s historical losses from operations, the Company has determined that the application of SFAS No. 109 requires the Company to record a full valuation allowance against its net deferred tax assets.

The Company did not record a benefit from income taxes for the three and nine months ended September 30, 2008, as compared to a benefit from income taxes of $2,471 and $4,746, respectively, for the same periods in 2007.

In the event that the Company earns pre-tax income in the future such that it will be able to use some or all of its deferred tax assets, SFAS No. 109 permits the Company to reduce or eliminate the valuation allowance. If the Company were to reverse the valuation allowance, in whole or in part, the Company’s income statement for such reporting period would record a reduction in income tax expense and an increase in net income, to the extent of the reversal of the valuation allowance.

Our effective tax rate for 2008 would have been a benefit of 40% had the Company not taken a valuation allowance. This rate differs slightly from the Federal statutory rate of 35% primarily due to the mix of income and losses, which have tax rates that differ from the statutory rate, and due to permanent differences and tax rate differences on subsidiaries.

Net Loss

As a result of the above, the Company had a net loss for the three and nine months ended September 30, 2008, of $5,275 and $17,206, respectively, as compared to a net loss of $4,150 and $6,568 for the same periods in 2007.

Liquidity and Capital Resources

Financial Position

Cash and cash equivalents and short-term investments as of September 30, 2008 and December 31, 2007 were as follows:

	2008		2007			$ Change
Cash and cash equivalents	$	40,924	$	24,872	$		16,052
Investments		—		36,106			(36,106	)
	$	40,924	$	60,978	$		(20,054	)

Long-term investments as of September 30, 2008 and December 31, 2007 were as follows:

	2008		2007			$ Change
Investments	$	26,779	$	31,806	$		(5,027	)

The credit and capital markets, including the market for ARS have remained illiquid in 2008, and as a result of this and other factors specific to certain ARS, the Company’s unrealized loss on its ARS may subsequently increase. The Company values the ARS quarterly based upon consideration of such factors as issuer and insurer credit rating, comparable market data, if available, current market conditions, the credit quality of the ARS, the rate of interest received since the date the auctions began, yields of securities similar to the underlying ARS and input from broker-dealers’ statements provided by the investment bank through which the Company holds such securities. Additionally, during 2008, the Company received an early redemption by certain issuers of ARS at par value of $14,975. Since these securities were never deemed to have an unrealized loss, their redemption had no affect on stockholders’ equity. As of November 7, 2008, no securities were subsequently redeemed.

Given the failed auctions, the Company’s ARS are currently illiquid. Accordingly, the Company has reclassified $19,967, see Note 3, “Investment” in the Notes to the Company’s consolidated financial statements, in ARS from current to non-current assets at September 30, 2008 on its balance sheet due to the fact that the Company believes that the liquidity of these ARS is unlikely to be restored in a period less than twelve months from such date.

Sources and Uses of Cash

Cash flows for the three and nine months ended September 30, 2008 and 2007 were as follows:

Sources (Uses)	2008			2007
Operating Activities	$	(4,784	)	$	(4,393	)
Investing Activities		23,619			14,661
Financing Activities		(2,641	)		(104	)

Working capital, consisting of current assets less current liabilities, was $28,344 as of September 30, 2008 and $65,135 as of December 31, 2007. The decrease in working capital relates primarily to the transfer of investments from short-term to long-term as well as a decrease of cash used in the investment and development of new Properties classified on the Company’s consolidated balance sheet as a non-current asset.

Operating Activities

2008

Net cash used in operating activities for the nine months ended September 30, 2008 of $4,784 primarily reflects a decrease in the Company’s business performance. This decrease was partially offset by amortization of television and film costs and the 4Kids TV broadcast fee.

2007

Net cash used in operating activities for the nine months ended September 30, 2007 of $4,393 reflected a decrease in the Company’s business performance as well as payments to licensors and advances relating to the production of the “Chaotic” television series. This decrease was partially offset by amortization of television and film costs and the amortization of the 4Kids TV broadcast fee.

Investing Activities

2008

Net cash provided by investing activities for the nine months ended September 30, 2008 of $23,619 reflects a shift in the Company’s investments for the period, from auction rate securities to U.S. Treasury securities which are short in duration and are classified as cash and cash equivalents.

2007

Net cash provided by investing activities for the nine months ended September 30, 2007 of $14,661 reflected the proceeds received on the maturity of the Company’s investments, partially offset by the purchase of auction-rate securities with its excess cash balances as well as the investment in TC Websites.

Financing Activities

2008

Net cash used in financing activities for the nine months ended September 30, 2008 of $2,641 reflects the Company’s purchase of shares of its common stock classified as treasury stock on the consolidated financial statements.

2007

Net cash used in financing activities for the nine months ended September 30, 2007 of $104 reflected the Company’s purchase of shares of its common stock classified as treasury stock on the consolidated financial statements.

During 2008, the Company's cash flow from operations was impacted by consumer demand for a limited number of its licensed Properties. While the Company strives to further diversify its revenue streams, management remains cognizant of changing trends in the toy, game and entertainment business and the difficulty in predicting the length of time a property will be commercially successful. As a result, the Company's revenues, operating results and cash flow from operations may fluctuate significantly from year to year and present operating results are not necessarily indicative of future performance.

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

Broadcast Agreements

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

In March 2006, the Fox agreement was extended for two broadcast years through the 2007-2008 broadcast season. The broadcast fee for the 2007-2008 broadcast season is $20,000 payable in quarterly installments of $5,000 commencing in October 2007. Fox has exercised its option to extend this agreement through its 2008-2009 broadcast season under the same terms and conditions as in effect for the 2007-2008 broadcast season.

With respect to the broadcast fee for the 2007-2008 broadcast season, two payments of $5,000, totaling $10,000 were due on April 1, 2008 and July 1, 2008. These payments were not made by the Company in connection with the Company’s exercise of its set-off rights thereunder further described in Item 1, “Legal Proceedings”. The broadcast fees which were due on April 1, 2008 and July 1, 2008 have been fully accrued in the Company’s financial statements. The Company has not made a payment of $3,000 of the 2008-2009 broadcast season broadcast fee of $5,000 that was due on October 1, 2008, in connection with the exercise of its set-off rights.

On November 9, 2008, the Company entered into an agreement with Fox to settle the Fox Litigation (the “Settlement Agreement”). Under the terms of the Settlement Agreement, the Fox Agreement will terminate on December 31, 2008 rather than at the end of the 2008-2009 broadcast season in September 2009. The Company’s remaining financial obligations to Fox for the first three quarters of 2009 will also terminate. Under the terms of the Settlement Agreement, the Company will pay Fox $12,250 of the $13,000 of the 2008 time buy fees owed to Fox withheld by the Company as a set off to payments to Fox in the second, third and fourth quarters of 2008; $6,000 of such amount will be paid on or before November 14, 2008, $3,125 of such amount will be paid on or before February 15, 2009 and the remaining $3,125 will be paid on or before March 15, 2009. In order to secure payment by the Company to Fox of the installments of this settlement amount, the Company granted Fox a security interest in the sale of the national advertising time sold on 4KidsTV by the Company during the fourth quarter of 2008. The Company believes that the settlement enables 4Kids, beginning in 2009, to focus its resources on the five hour block of children’s Saturday morning television on The CW Network.

The CW Broadcast Agreement - On October 1, 2007, the Company and The CW entered into the CW Agreement, under which The CW granted to the Company the exclusive right to program The CW's Saturday morning children's programming block that is broadcast in most markets between 7am and 12pm for an initial term of five years which began with The CW's 2008-2009 broadcast season.

Under the CW Agreement, the Company is obligated to make quarterly minimum guaranteed payments which are subject to reduction under certain circumstances. The Company and The CW share advertising revenues earned from the sale of national commercial time during The CW Kids Block with The CW's share to be applied against such quarterly guarantee payments. In addition, The CW is entitled under the CW Agreement to participate in the Company's merchandising revenue from certain content broadcast on The CW Kids Block, if such merchandising revenues exceed a certain annual minimum.

In addition to the broadcast fee paid to Fox and the minimum guarantee to be paid to The CW, the Company incurs additional costs to program each broadcast block and sell the related network advertising time. These costs include direct programming costs to acquire, adapt and deliver programming for the broadcast during the weekly broadcast blocks as well as additional indirect expenses of advertising sales, promotion and administration.

Contractual Commitments

The Company’s contractual obligations and commitments are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. As of September 30, 2008, the Company’s contractual obligations and commitments have not materially changed since December 31, 2007.

Forward Looking Information and Risk Factors That May Affect Future Results

This Quarterly Report on Form 10-Q, including the section titled “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements that relate to future events or our future financial performance. We may also make written and oral forward-looking statements in our Securities and Exchange Commission (“SEC”) filings and otherwise. We have tried, where possible, to identify such statements by using words such as “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “project,” “plan” and similar expressions in connection with any discussion of future operating or financial performance. Any forward-looking statements are and will be based upon our then-current expectations, estimates and assumptions regarding future events and are applicable only as of the dates of such statements. By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated in any forward-looking statements. Such risks and uncertainties include those described in this Quarterly Report on Form 10-Q and in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC, as well as other factors. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Foreign Currency Exchange Rate Fluctuations

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

(a) We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be disclosed in our filings and submissions under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

We completed an evaluation under the supervision and with participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the end of the period covered by this report, such disclosure controls and procedures were effective to provide the reasonable assurance described above.

(b) There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934) during the period covered by this report that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.

Part II - OTHER INFORMATION

Item 1. Legal Proceedings.

On November 9, 2008, the Company entered into an agreement with Fox to settle the Fox Litigation (the “Settlement Agreement”). Under the terms of the Settlement Agreement, the Fox Agreement will terminate on December 31, 2008 rather than at the end of the 2008-2009 broadcast season in September 2009. The Company’s remaining financial obligations to Fox for the first three quarters of 2009 will also terminate. Under the terms of the Settlement Agreement, the Company will pay Fox $12,250 of the $13,000 of the 2008 time buy fees owed to Fox withheld by the Company as a set off to payments to Fox in the second, third and fourth quarters of 2008; $6,000 of such amount will be paid on or before November 14, 2008, $3,125 of such amount will be paid on or before February 15, 2009 and the remaining $3,125 will be paid on or before March 15, 2009. In order to secure payment by the Company to Fox of the installments of this settlement amount, the Company granted Fox a security interest in the sale of the national advertising time sold on 4KidsTV by the Company during the fourth quarter of 2008.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, 2007 (“2007 Annual Report”), which could materially affect our business, financial condition or future results. The risks described in the 2007 Annual Report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently do not consider material also may materially adversely affect our business, financial condition and/or operating results. There have been no material changes from the risk factors disclosed in the 2007 Annual Report except for the following:

If we cannot meet the New York Stock Exchange (“NYSE”) continued listing requirements, the NYSE may delist our common stock which would have an adverse impact on the liquidity and market price of our common stock.

Our common stock is currently listed on the NYSE. In the future, we may not be able to meet the continued listing requirements of the NYSE. If we are unable to satisfy the NYSE criteria for continued listing, our common stock would be subject to delisting. A delisting of our common stock could negatively impact us by reducing the liquidity and market price of our common stock, reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing.

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

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

Recent turmoil in U.S. and foreign credit markets, equity markets, and in the global financial services industry, including the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the U.S. and foreign governments, may continue to place pressure on the global economy and affect overall consumer spending and the availability of credit to us, our clients, and our customers. If conditions in the global economy, U.S. economy or other key vertical or geographic markets remain uncertain or weaken further, they may have a material adverse affect on our business, financial condition and results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a) Purchases of Equity Securities by the Issuer

ISSUER PURCHASES OF EQUITY SECURITIES

Period During 2008	Total Number of Shares Purchased	Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
Jan. 1 – Jan. 31	93,979	$11.85	93,979	896,621
Feb. 1 – Feb. 29	15,300	12.24	109,279	881,321
Mar. 1 – Mar. 31	126,205	11.42	235,484	755,116
Apr. 1 – Apr. 30	—	—	—	755,116
May 1 – May 31	—	—	—	755,116
Jun. 1 – Jun. 30	—	—	—	755,116
Jul. 1 – Jul. 31	—	—	—	755,116
Aug. 1 – Aug. 31	—	—	—	755,116
Sep. 1 – Sep. 30	—	—	—	755,116
Total	235,484	$11.65	235,484	755,116

(1) On December 4, 2007, the Company announced that the Board of Directors authorized the Company to purchase up to 1,000,000 shares of the Company’s common stock from time to time through December 31, 2008 in the open market or through negotiated prices. The Company purchased 235,484 shares at an average price of $11.65 per share for the nine months ended September 30, 2008 under this authorization. During the three months ended September 30, 2008, no shares of the Company’s common stock were purchased by the Company under this authorization. As of November 7, 2008, no shares of the Company’s common stock were subsequently purchased by the Company under this authorization.

Item 6. Exhibits.

(a)

Exhibits

31.1

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

31.2

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

32.1

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

10.1

Amendment to the Operating Agreement of TC Websites LLC dated as of September 15, 2008 between 4Kids Websites, Inc. and Chaotic USA Entertainment Group, Inc.

SIGNATURES

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

4KIDS ENTERTAINMENT, INC.

Date: November 10, 2008

By:

/s/ Alfred R. Kahn

___________________________

Alfred R. Kahn,

Chairman of the Board,

Chief Executive Officer and

Director

By:

/s/ Bruce R. Foster

___________________________

Bruce R. Foster,

Executive Vice President,

Treasurer, Chief Financial

Officer and Principal Accounting

Officer