(In thousands of dollars unless otherwise specified)

Overview

The Company's operating results for the three and nine months ended September 30, 2009 were negatively impacted by the global economic downturn, as well as a continuing decline in the popularity of the Company's significant Properties. As a result of the downturn, many retailers decided to reduce inventory on hand and the Company's Trading Card and Game Distribution segment was negatively impacted by the resulting cut back by the Company's distributors on their own orders placed with TC Digital. The overall decrease in revenues was partially offset by decreased expenses relating to the broad cost-cutting efforts of the Company.

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 block from The CW ("The CW4Kids"), 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 The CW4Kids 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.

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 the authoritative guidance issued by the FASB.

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.

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.

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 Adopted Accounting Standards - In June 2009, the FASB established the FASB Accounting Standards Codification (the "Codification") as the single source of authoritative U.S. generally accepted accounting principles ("U.S. GAAP") recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the United States Securities and Exchange Commission ("SEC") under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The adoption of the Codification by the Company did not have a material impact on its consolidated financial statements or results of operations. In accordance with the FASB's guidance, the Company's notes to consolidated financial statements will explain accounting concepts rather than cite the topics of specific U.S. GAAP.

In May 2009, the FASB issued authoritative guidance which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance sets forth (1) the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which events or transactions occurring after the balance sheet date in its financial statements and (3) the disclosures that should be made about events or transactions that occurred after the balance sheet date. This guidance is currently effective and its adoption did not have an impact on the Company's consolidated financial position and results of operations.

In April 2009, the FASB issued authoritative guidance amending the existing guidance for other-than-temporary impairment of debt securities to make the guidance more operational and to improve disclosure. This guidance is currently effective and its adoption did not have an impact on the Company's consolidated financial position and results of operations.

Recently Issued Accounting Standards - In June 2009, the FASB issued authoritative guidance that is intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor's continuing involvement, if any, in transferred financial assets. This guidance is effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial position and results of operations.

In August 2009, the FASB issued authoritative guidance regarding the measurement of liabilities at fair value when a quoted price in an active market is not available. In these circumstances, a valuation technique should be applied that uses either the quote of the liability when traded as an asset, the quoted prices for similar liabilities or similar liabilities when traded as assets, or another valuation technique consistent with existing fair value measurement guidance, such as an income approach or a market approach. The guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This guidance is effective for interim periods beginning on or after June 15, 2010. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial position and results of operations.

In October 2009, the FASB issued authoritative guidance which will allow companies to allocate arrangement consideration to multiple deliverables. The guidance provides principles and application guidance on whether multiple deliverables exist, how an arrangement should be separated, and the consideration allocated. The guidance requires an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of the selling price. The guidance eliminates the use of the residual method, requires entities to allocate revenue using the relative-selling-price method and significantly expands the disclosure requirements for multiple-deliverable revenue arrangements. The guidance requires new and expanded disclosures and is applied prospectively to revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 or retrospectively for all periods presented. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial position and 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, 2009 and 2008:



                                     Three Months Ended September 30,           Nine Months Ended September 30,
                                       2009                    2008                2009                  2008
Net revenues                                  100    %                100 %               100   %              100 %

Costs and expenses:
Selling, general and
administrative                                151                      78                 154                   81
Production service costs                        7                      10                  11                   10
Cost of sales of trading cards                 21                      19                  13                   13
Amortization of television and
film costs                                     20                      11                  17                   11
Amortization of 4Kids TV
broadcast fee                                   -                      17                   -                   25
Total costs and expenses                      199                     135                 195                  140

Loss from operations                          (99 )                   (35 )               (95 )                (40 )

Interest income                                 2                       4                   4                    4
Impairment of investment
securities                                     (1 )                     -                  (1 )                  -
Loss on sale of investment
securities                                      -                       -                 (33 )                  -
Total other (expense) income                    1                       4                 (30 )                  4

Noncontrolling interest                         -                       1                   -                    1

Net loss (98 )% (30 )% (125 )% (35 )%

Three and nine months ended September 30, 2009 as compared to three and nine months ended September 30, 2008.

Revenues



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



For the three months ended September 30, 2009 and 2008
                                               2009       2008     $ Change     % Change
Licensing                                     $ 3,333   $  4,203   $    (870 )   (21 )%
Advertising, Media and Broadcast                  411      2,707      (2,296 )   (85 )
Television and Film Production/Distribution     1,992      3,624      (1,632 )   (45 )
Trading Card and Game Distribution              1,534      7,250      (5,716 )   (79 )
Total                                         $ 7,270   $ 17,784   $ (10,514 )   (59 )%

For the nine months ended September 30, 2009 and 2008

                                          2009        2008       $ Change      % Change
Licensing                              $   11,246   $  12,737   $   (1,491 )      (12 )%
Advertising, Media and Broadcast            1,408      10,405       (8,997 )      (86 )
Television and Film
Production/Distribution                     7,423      11,478       (4,055 )      (35 )
Trading Card and Game Distribution          1,786      14,743      (12,957 )      (88 )
Total                                  $   21,863   $  49,363   $  (27,500 )      (56 )%

In the Licensing segment, decreased revenues for the three months ended September 30, 2009 were primarily attributable to:

(i) reduced licensing revenues on the "Teenage Mutant Ninja Turtles" and "Monster Jam" Properties, domestically of approximately $350 and $100, respectively; as well as

(ii) reduced licensing revenues on the "Yu-Gi-Oh!", "Winx Club" and "Dinosaur King" Properties, internationally of approximately $130, $130 and $90, respectively; partially offset by

(iii) increased revenues attributable to the "Yu-Gi-Oh!" Property, domestically of approximately $230.

In the Licensing segment, decreased revenues for the nine months ended September 30, 2009 were primarily attributable to:

(i) reduced licensing revenues on the "Teenage Mutant Ninja Turtles", "Yu-Gi-Oh!", and "Shaman King" Properties, worldwide of approximately $1,000, $590 and $440, respectively;

(ii) reduced licensing revenues on the "Winx Club" Property, internationally of approximately $280; as well as

(iii) reduced licensing revenues on the "Cabbage Patch Kids" Property, domestically of approximately $200; partially offset by

(iv) increased revenues attributable to the "Monster Jam" Property, domestically of approximately $1,090.

The "Yu-Gi-Oh!", "Monster Jam", "Teenage Mutant Ninja Turtles" and "Cabbage Patch Kids" Properties are the largest contributors with approximately 78% of the Company's revenues in this business segment for the nine months ended September 30, 2009.

In the Advertising Media and Broadcast segment, the significant decrease in revenues for the three and nine months ended September 30, 2009, as compared to the same periods in 2008, was primarily attributable to:

(i) The CW's $2,550 and $8,250 minimum guaranteed shares of revenue for the three and nine months ended September 30, 2009, respectively, was offset against the Company's revenues from the sale of network advertising time on The CW4Kids of approximately $2,636 and $8,028, respectively as compared to the same periods in the prior year in which the Fox broadcast revenue was approximately $2,544 and $8,703, respectively and the Fox broadcast fee was amortized and classified as an expense rather than offsetting revenues; partially offset by

(ii) increased revenue from the sale of internet advertising time on the Company's websites for the three and nine months of approximately $150 and $575, respectively, when compared to the same periods in 2008.

In the Television and Film Production/Distribution segment, the decrease in revenues for the three months ended September 30, 2009, as compared to the same period in 2008, was primarily attributable to:

(i) decreased production service revenue from the "Teenage Mutant Ninja Turtles", "Chaotic", "Dinosaur King" and "Viva Piņata" television series of approximately $640, $400, $180 and $180, respectively; as well as

(ii) decreased international broadcast sales from the "Viva Piņata" television series of approximately $260; partially offset by

(iii) increased international broadcast sales from the "Yu-Gi-Oh!" and "Teenage Mutant Ninja Turtles" television series of approximately $280 and $220, respectively.

In the Television and Film Production/Distribution segment, the decrease in revenues for the nine months ended September 30, 2009, as compared to the same period in 2008, was primarily attributable to:

(i) decreased production service revenue from the "Teenage Mutant Ninja Turtles", "Viva Piņata" and "Chaotic" television series of approximately $1,340, $1,160 and $720, respectively; as well as

(ii) decreased international broadcast sales from the "Yu-Gi-Oh!", "Teenage Mutant Ninja Turtles" and "Viva Piņata" television series of approximately $690, $580 and $540, respectively; partially offset by

(iii) increased international broadcast sales from the "Dinosaur King" television series of approximately $800.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased 21%, or $2,915, to $11,022 for the three months ended September 30, 2009, when compared to the same period in 2008. The decrease was attributable to broad cost-cutting initiatives implemented throughout the Company and included:

(i) decreased personnel related costs of approximately $1,260;

(ii) decreased advertising and marketing costs of approximately $440;

(iii) decreased website costs of approximately $310;

(iv) decreased travel and entertainment costs of approximately $280; and

(v) decreased international selling expenses of approximately $270.

Selling, general and administrative expenses decreased 15%, or $6,129, to $33,763 for the nine months ended September 30, 2009, when compared to the same period in 2008. The decrease was attributable to broad cost-cutting initiatives implemented throughout the Company and included:

(i) decreased personnel related costs of approximately $1,970;

(ii) decreased advertising and marketing costs of approximately $1,200;

(iii) decreased international selling expenses of approximately $1,020;

(iv) decreased travel and entertainment costs of approximately $700;

(v) decreased website costs of approximately $610; and

(vi) decreased professional fees of approximately $320.

Cost of Sales of Trading Cards

Cost of sales of trading cards represents finished goods inventory costs relating to the "Chaotic" trading card game. Cost of sales decreased 55%, or $1,900, to $1,547 and 56%, or $3,549, to $2,811 for the three and nine months ended September 30, 2009, respectively, when compared to the same periods in 2008. The decreases were primarily attributable to the overall decrease in trading card revenue. In an effort to increase future trading card sales, additional promotional allowances were given to retailers and distributors which caused a decrease in net trading card revenues while cost of sales in the quarter ended September 30, 2009 remained consistent with gross sales.

Production Service and Capitalized Film Costs

Production service and capitalized film costs were as follows:

For the three months ended September 30, 2009 and 2008

                                             2009      2008     $ Change    % Change
Production Service Costs                    $   482   $ 1,710    $ (1,228 )    (72) %
Amortization of Television and Film Costs     1,438     1,864        (426 )    (23)

For the nine months ended September 30, 2009 and 2008

                                             2009      2008     $ Change    % Change
Production Service Costs                    $ 2,503   $ 5,245    $ (2,742 )    (52) %
Amortization of Television and Film Costs     3,695     5,269      (1,574 )    (30)

The decrease in production service costs during the three months ended September 30, 2009, as compared to the same period in 2008, was primarily due to decreased production costs for the "Teenage Mutant Ninja Turtles" and "Chaotic" television series. Production service costs decreased for the nine months ended September 30, 2009, as compared to the same period in 2008 primarily due to decreased costs for the "Teenage Mutant Ninja Turtles", "Viva Piņata" and "Chaotic" television series. When the respective costs are incurred, the Company categorizes them as production service costs and reflects a corresponding amount in revenues for the amounts billed back to the property owners.

The decrease in amortization of television and film costs for the three months . . .