1. DESCRIPTION OF BUSINESS

General Development and Narrative Description of Business -

4Kids Entertainment, Inc., together with the subsidiaries through which its businesses is conducted (the "Company" or "4Kids"), is a licensing company specializing in the youth oriented market. The Company was organized as a New York corporation in 1970.

The financial challenges facing the Company as a result of its recent history of losses and the limited liquidity available to it to fund day-to-day operations raises substantial doubt about the Company's ability to continue as a going concern. The Company's financial statements have been prepared assuming that the Company will continue as a going concern and do not contain any adjustments that may result from the outcome of this uncertainty.

Chapter 11 Bankruptcy Proceedings – On April 6, 2011 (the "Petition Date"), the Company and all of its domestic wholly-owned subsidiaries (the "Debtors") filed voluntary petitions for relief (the "Bankruptcy Cases") under Title 11 of Chapter 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"), which Bankruptcy Cases are jointly administered under Case No. 11-11607. The Company will continue to operate itself and its subsidiaries as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. In general, as debtors-in-possession, we are authorized under Chapter 11 of the Bankruptcy Code to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. 4Kids Entertainment International, Ltd. ("4Kids International"), the Company's subsidiary based in London, England, and TC Digital Games LLC ("TC Digital") and TC Websites LLC ("TC Websites"), two domestic subsidiaries in each of which the Company holds a majority ownership, were not included in the filing and will continue to operate outside the Bankruptcy Cases.

Shortly after the Petition Date, the Debtors began notifying all known current or potential creditors of the Debtors regarding the commencement of the Bankruptcy Cases. Subject to certain exceptions under the Bankruptcy Code, the commencement of the Bankruptcy Cases automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date. Thus, for example, most creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the property of the Debtors, or to collect on monies owed or otherwise exercise rights or remedies with respect to a pre-petition claim are enjoined unless and until the Bankruptcy Court lifts the automatic stay.

After the filing of the Bankruptcy Cases, the United States Trustee for the Southern District of New York appointed an official committee of unsecured creditors (the "Creditors' Committee"). The Creditors' Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court with respect to the Debtors. There can be no assurance that the Creditors' Committee will support the Debtors' positions on matters to be presented to the Bankruptcy Court in the future or on any bankruptcy plan. Disagreements between the Debtors and the Creditors' Committee could protract the Bankruptcy Cases, negatively impact the Debtors' ability to operate and delay the Debtors' emergence from Chapter 11. Under Section 365 and other relevant sections of the Bankruptcy Code, we may assume, assume and assign, or reject certain executory contracts and unexpired leases, including, without limitation, leases of real property and equipment, subject to the approval of the Bankruptcy Court and certain other conditions. Any description of an executory contract or unexpired lease in this report, including, where applicable, our express termination rights or a quantification of our obligations, must be read in conjunction with, and is qualified by, any overriding rejection rights we have under Section 365 of the Bankruptcy Code.

On February 29, 2012, 4Kids, and Nihon Ad Systems, Inc. and Tokyo Corporation (collectively, the "Licensors") entered into a Settlement Agreement, dated as of February 27, 2012 (the "Settlement Agreement"), settling all claims brought by Licensors against 4Kids and all counterclaims brought by 4Kids against the Licensors in the Yu-Gi-Oh! Litigation (as defined below). The Settlement Agreement provides, among other things, for the Licensors to make a payment to 4Kids in the amount of $8,000 upon the order of the Bankruptcy Court approving the Settlement Agreement becoming a final order. On March 9, 2012, the Bankruptcy Court issued an order approving the Settlement Agreement and, accordingly, the Company recognized a gain on litigation settlement of $8,000. Under the Settlement Agreement, the Licensors acknowledged that the Yu-Gi-Oh! Agreement (hereinafter defined) remained valid, binding and legally enforceable with 4Kids continuing to serve as the exclusive licensing agent for the merchandise licensing, television broadcast and home video rights to the Yu-Gi-Oh! Property throughout the world outside of Asia. The Settlement Agreement further provided for each of 4Kids and the Licensors to release each other from all claims they may have against each other, other than certain indemnification claims and claims that may arise under the Settlement Agreement. The Settlement Agreement also provided that the agreement does not constitute an admission by any party of any violation of any agreement or law. On March 27, 2012, 4Kids received the payment in the amount of $8,000 pursuant to the Settlement Agreement.

On April 26, 2012, the Debtors entered into an Asset Purchase Agreement (the "Asset Purchase Agreement"), which contemplated the sale of substantially all of its assets to Kidsco Media Ventures LLC ("Kidsco"), a Delaware limited liability company, and an affiliate of Saban Capital Group "Saban Bidder") for a purchase price of $10,000, subject to certain adjustments (the "Purchase Price"). The transaction was proposed as a sale of the Debtors' assets pursuant to Section 363 of the Bankruptcy Code. The transaction was subject to, among other things, (i) competitive bidding pursuant to sale procedures approved by the Bankruptcy Court at a hearing on April 27, 2012 (the "Bidding Procedures"), and (ii) approval of the transaction by the Bankruptcy Court.

In May 2012, the Company received a competing bid (the "Konami Bid") from 4K Acquisition Corp. (the "Konami Bidder"), an indirect subsidiary of Konami Corporation, a Japanese corporation ("Konami"). In the competing bid, the Konami Bidder offered to purchase substantially all of the assets of the Company in a transaction under Section 363 of the Bankruptcy Code. The Konami Bid, in the judgment of the Company, represented a Qualified Bid under the terms of the Bidding Procedures.

On June 5, 2012, the Company commenced an auction between the Saban Bidder and the Konami Bidder (together with the Saban Bidder, the "Purchasers"). During the auction, each of the Purchasers made several improved bids. After several rounds of competitive bidding, the auction was adjourned to allow the Purchasers to consider an alternative transaction among the Company and the Purchasers pursuant to which each of the Purchasers would acquire certain assets of the Company. The proposed alternative transaction represented a substantial improvement in the proceeds payable to the Company over the last bid made prior to such adjournment. The possible alternative transaction was conditioned upon the negotiation of definitive documentation among the Company and the Purchasers and the approval of such alternative transaction by the Bankruptcy Court.

On June 24, 2012, the Debtors entered into an Asset Purchase Agreement (the "Asset Purchase Agreement"), which contemplated the sale of substantially all of its assets to the Purchasers, for an aggregate purchase price of $15,000, subject to certain adjustments (the "Purchase Price"). The transaction was a sale pursuant to Section 363 of the Bankruptcy Code. On June 26, 2012, the Bankruptcy Court entered a final sale order approving the transactions contemplated by the Asset Purchase Agreement.

On July 2, 2012, 4Kids completed the sale of certain of its assets pursuant to the Asset Purchase Agreement, among 4Kids and the Purchasers. In connection with the consummation of such transactions, the Konami Bidder paid the Debtors an aggregate amount equal to $14,997, representing a base purchase price of $15,000, less a $3 downward adjustment contemplated by the Asset Purchase Agreement. In addition, in connection with the consummation of the transactions contemplated by the Asset Purchase Agreement, the following payments were made by or on behalf of the Debtors:

(a) $1,000 was delivered to the escrow agent under the escrow agreements provided for in the Asset Purchase Agreement, to be used to satisfy any indemnification obligations that the Debtors may have to either of the Purchasers pursuant to the provisions of the Asset Purchase Agreement;

(b) $3 was paid to the escrow agent as the Debtors' portion of fees payable to it for its performance of services as escrow agent under the escrow agreements;

(c) $3,051 was paid to The CW Network, LLC ("The CW") as a cure cost under the term sheet originally entered into with The CW as of October 1, 2007 and amended as of October 2, 2008 and June 23, 2010 ("The CW Agreement");

(d) $429 was paid to Toei Animation as a cure cost;

(e) $28 was paid to Twenty Three R.P. Associates as a cure cost;

(f) approximately $21 was paid to satisfy cure costs under other agreements; and

(g) $504 was paid to the Saban Bidder in accordance with the terms of the Asset Purchase Agreement, with $476 representing an adjustment to the purchase price for the Saban Purchased Business and $28 representing the Debtors' share of national advertising proceeds from the broadcast of commercials during the second calendar quarter of 2012 on the five hour Saturday morning block of programs telecast on The CW.

The assets sold by the Debtors to the Konami Bidder (the "Konami Purchased Assets") included, inter alia, all of Debtors' right, title and interest in and to the business of Debtors relating to and commercial use of Yu-Gi-Oh!, the Japanese manga (also known as cartoon or comic) created by Kazuki Takahashi and the related brand and franchise (the "Konami Purchased Business"), as well as other assets relating to the Konami Purchased Business. 4Kids was party to an agreement with Konami Corporation, dated as of August 1, 2001, as amended by the First Amendment, dated September 12, 2007 (the "Konami Agreement"), which agreement related to, inter alia, sales of Yu-Gi-Oh! trading cards and videogames. The Konami Agreement was included as part of the Konami Purchased Assets transferred to the Konami Bidder in connection with the closing of the transactions contemplated by the Asset Purchase Agreement on July 2, 2012.

The assets sold by the Debtors to the Saban Bidder included, inter alia, all of Debtors' right, title and interest in and to the television business of the Debtors including The CW Agreement and certain television episodes and rights related thereto (the "Saban Purchased Business"), as well as other assets relating to the Saban Purchased Business.

While the consummation of the Settlement Agreement and the completion of the asset sale pursuant to the Asset Purchase Agreement represent significant steps in the process of resolving the Bankruptcy Cases, the timing of any resolution of the Bankruptcy Cases will depend on the timing and outcome of numerous other ongoing matters therein, and it is not possible at this time to accurately predict when such other matters will be resolved. We have incurred and will continue to incur significant costs associated with the Bankruptcy Cases. The amount of these costs, which began in April 2011 and are being expensed as incurred, are expected to significantly affect our results of operations, financial position and liquidity. The Bankruptcy Cases have also presented challenges to our ability to generate additional revenues.

Liquidity - In recent years, the Company has incurred substantial net losses and has used substantial amounts of cash in its operating activities. Sales by the Company of certain securities held in its investment portfolio as well as certain other assets have significantly contributed to the funding of these operating losses. While the timing of these sales was not primarily motivated by then current cash needs, without these sales the Company would not have had sufficient cash to fund its operations.

The Company continues to incur costs in connection with the Bankruptcy Cases. The Company expects these costs to continue throughout the Bankruptcy proceedings. Despite the $8,000 cash received from the Yu-Gi-Oh! Settlement and the $14,997 received on the sale of certain of the Company's assets pursuant to the Asset Purchase Agreement, the Company's overall cash position as of September 30, 2012, together with the realized and anticipated effects of the significant cost cutting initiatives implemented by the Company beginning in 2009 and continuing through 2012 and beyond, provides only limited liquidity to fund the Company's day-to-day operations. As discussed below, the Company's Board of Directors has proposed a bankruptcy plan, which plan is subject to the approval of the Debtors' shareholders as well as the Bankruptcy Court. There can be no assurance that the proposed bankruptcy plan will be approved by the required classes of voters or that the Bankruptcy Court will conclude that such plan satisfies all requirements necessary for confirmation. In the event that a bankruptcy plan is approved, the Company would proceed to make distributions in accordance with the plan and the priorities established by the Bankruptcy Code. Under the plan as so proposed, the Company would be obliged to pay all administrative claims, priority and unsecured claims.

Licensing - The Company's sole business is licensing which 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"); 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 Technology develops ideas and concepts for licensing which integrate new and existing technologies with traditional game and toy play patterns.

Effective September 30, 2012, the Company's wholly-owned subsidiary, 4Kids International closed its operations. 4Kids International, based in London, managed Properties represented by the Company in the United Kingdom and European marketplaces. The closing of 4Kids International will enable the Company to further reduce costs and focus on its core domestic licensing business.

The "Yu-Gi-Oh!" Property, which was sold pursuant to the Asset Purchase Agreement, was the largest contributor for the nine months ended September 30, 2012, representing approximately 83% of the Company's revenues.

Discontinued Operations – In connection with its on-going evaluation of each of its business units, the management of the Company recommended to the Board of Directors of the Company that based upon the substantial operational losses and declining revenues being incurred by the Company's international operations, such operations should be discontinued. Accordingly, on August 16, 2012, the Company's Board of Directors determined to discontinue the operations of its UK Subsidiary, 4Kids International, effective September 30, 2012. The results of operations for the international segment is reported as a discontinued operation and the accompanying consolidated financial statements have been reclassified for all prior periods to report the assets, liabilities and operating results of this business.

On July 2, 2012, 4Kids completed the sale of certain of its assets pursuant to the Asset Purchase Agreement. The assets sold by the Debtors to the Konami Bidder included, inter alia, all of Debtors' right, title and interest in and to the business of Debtors relating to and commercial use of Yu-Gi-Oh!, the Japanese manga (also known as cartoon or comic) created by Kazuki Takahashi and the related brand and franchise, as well as other assets relating to the Konami Purchased Business. 4Kids was party to the Konami Agreement, which agreement related to, inter alia, sales of Yu-Gi-Oh! trading cards and videogames. The Konami Agreement was included as part of the Konami Purchased Assets transferred to the Konami Bidder in connection with the closing of the transactions contemplated by the Asset Purchase Agreement on July 2, 2012.

The assets sold by the Debtors to the Saban Bidder included, inter alia, all of Debtors' right, title and interest in and to the television business of the Debtors, including The CW Agreement and the television episodes and rights related thereto, as well as other assets relating to the Saban Purchased Business.

Pursuant to the Asset Purchase Agreement and the corresponding assets sold, and due to their continued lack of profitability, effective June 30, 2012, the Company terminated the operations of 4Kids Ad Sales, Inc. ("4Kids Ad Sales"), 4Kids Productions, Inc. ("4Kids Productions"), 4Kids Entertainment Music, Inc. ("4Kids Music") and 4Kids Entertainment Home Video, Inc. ("4Kids Home Video"). Additionally, effective September 30, 2010, the Company terminated the operations of TC Digital and TC Websites. The results of operations of the following segments are reported in the Company's consolidated financial statements as discontinued operations (see Note 9).

Advertising Media and Broadcast - The Company, under The CW Agreement with The CW, leased The CW's Saturday morning programming block ("The CW4Kids") which broadcasts in most markets from 7am to 12pm for an initial term of five years beginning with The CW's 2008-2009 broadcast season. The Company provided substantially all programming content to be broadcast on The CW4Kids. 4Kids Ad Sales, a wholly-owned subsidiary of the Company, retained a portion of the revenue from its sale of network advertising time for the five-hour time period.

The Advertising Media and Broadcast segment also generated revenues from the sale of advertising on the Company's multiple websites. These websites also showcase and promote The CW4Kids, as well as its many Properties.

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; 4Kids Music; and 4Kids Home Video. 4Kids Productions produced and adapted 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 composed original music for incorporation into television programming produced by 4Kids Productions and markets and managed such music. 4Kids Home Video distributed home videos associated with television programming produced by 4Kids Productions.

Trading Card and Game Distribution - Through its wholly-owned subsidiary, 4Kids Digital, the Company owns 55% of TC Digital, a Delaware limited liability company which produced, marketed and distributed the "Chaotic" trading card game. Through its wholly-owned subsidiary, 4Kids Websites, Inc. ("4Kids Websites"), the Company owns 55% of TC Websites, a Delaware limited liability company which owns and operated www.chaoticgame.com, the companion website for the "Chaotic" trading card game. 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. Effective September 30, 2010, the Company terminated the operations of TC Digital and TC Websites due to their continued lack of profitability. As a consequence of the termination of their operations, TC Digital and TC Websites ceased supporting the Chaotic trading card game and website, effective October 1, 2010.