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Exhibit 10.7

Form of
FAO, INC.
STOCK OPTION AGREEMENT
(Granted under the 2001 Employee Stock Option Plan)

Option No. ***

        This Stock Option Agreement (this "Agreement") is entered into as
of                        , (the "Grant Date"), by and between FAO, Inc., a
Delaware corporation (the "Company"), and *** (the "Optionee") pursuant to the
Company's 2001 Employee Stock Option Plan (the "Plan"). All initially
capitalized terms not expressly defined herein shall have the meanings assigned
thereto in the Plan.

        1.    Grant of Option.    The Company hereby grants to the Optionee an
option (this "Option") to purchase all or any portion of a total of *** shares
(the "Shares") of the common stock of the Company, no par value (the "Stock") at
a purchase price of $[      ] per share (the "Exercise Price"), subject to the
terms and conditions set forth herein. This Option is [not] intended to qualify
as an "incentive stock option" as defined in Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"). [Notwithstanding such designation,
however, to the extent that the aggregate Fair Market Value (determined as of
the Grant Date) of the Stock with respect to which incentive stock options,
including this Option, first become exercisable by Optionee during any calendar
year (under the Plan and any other incentive stock option plan(s) of the Company
or any Affiliate) exceeds $100,000, all later granted incentive stock options,
including, if applicable, this Option, shall be treated as a Nonqualified
Option. In making this determination, incentive stock options shall be taken
into account in the order in which they were granted.]

        2.    Vesting of Option.    The right to exercise this Option shall vest
in installments, and this Option shall be exercisable from time to time in whole
or in part as to any vested installment, as follows:

[DURING THE PERIOD COMMENCING ONE YEAR FROM THE GRANT DATE, THIS OPTION MAY BE
EXERCISED FOR 25% OF THE SHARES SUBJECT TO THIS OPTION AND, THEREAFTER, ON EACH
SUCCEEDING ANNIVERSARY OF SUCH DATE, THIS OPTION MAY BE EXERCISED FOR AN
ADDITIONAL 25% OF THE SHARES SUBJECT TO THIS OPTION SUCH THAT THIS OPTION SHALL
BE FULLY EXERCISABLE ON AND AFTER OCTOBER 31, 2005].

No additional shares shall vest after the date of termination of the Optionee's
employment relationship with the Company, but this Option shall continue to be
exercisable in accordance with Section 3 below with respect to that number of
shares that have vested as of the date of termination of such employment
relationship.

        3.    Term of Option.    The Optionee's right to exercise this Option
shall terminate upon the earliest of:

        (a)  the expiration of ten (10) years from the Grant Date;

        (b)  one (1) day less than three months after the date of the
termination of the employment relationship between the Optionee and the Company
and all Affiliates for any reason other than the death, Disability or Retirement
of the Optionee;

Whether authorized leave of absence, absence on military or government service,
or any other absence from service shall constitute a termination of the
employment relationship between the Optionee and the Company and all Affiliates
shall be determined by the committee appointed by the Board of

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Directors of the Company, or, to the extent it chooses to operate as the
committee, the Board of Directors of the Company (the "Committee") at the time
thereof;

        (c)  in the event of the severance of the employment relationship
between the Optionee and the Company and all Affiliates due to death, one
hundred eighty (180) days after the Holder's death;

        (d)  in the event of the severance of the employment relationship
between the Optionee and the Company and all Affiliates due to Disability, one
hundred eighty (180) days after such termination. Disability means a medically
determinable mental or physical impairment which, in the opinion of a physician
selected by the Committee, shall prevent the Optionee from engaging in any
substantial gainful activity and which can be expected to result in death or
which has lasted or can be expected to last for a continuous period of not less
than twelve (12) months and which: (a) was not contracted, suffered or incurred
while the Optionee was engaged in, or did not result from having engaged in, a
felonious criminal enterprise; (b) did not result from alcoholism or addiction
to narcotics; (c) did not result from an injury incurred while a member of the
Armed Forces of the United States for which the Optionee receives a military
pension; and (d) did not result from an intentionally self-inflicted injury;

        (e)  in the event of the severance of the employment relationship
between the Optionee and the Company and all Affiliates due to Retirement, one
(1) day less than three (3) months after the date of such termination.
Retirement means the termination of Optionee's employment relationship with the
Company and all Affiliates after attaining the age of 55;

        A transfer by the Optionee, without an intervening period, between the
Company and a subsidiary or parent of the Company, or between subsidiaries
and/or parents, shall not be considered a termination the employment
relationship between the Company and Optionee. Notwithstanding anything
contained in the Plan to the contrary, in the event of severance of the
employment relationship between the Optionee and the Company and all Affiliates
as described in Section 3(c) or (d), this Option shall become immediately and
fully exercisable.

        4.    Exercise of Option.    Subject to Section 3, the portion of this
Option that has vested may be exercised in whole or in part by the Optionee (or,
after his or her death, by the person designated in Section 5) by delivery of
the following to the Company at its principal executive offices:

        (a)  written notice to the Committee setting forth the number of shares
of Stock with respect to which this Option is to be exercised and specifying the
address to which the certificates for the shares are to be mailed;

        (b)  (i) cash, certified check, bank draft or postal or express money
order payable to the order of the Company for an amount equal to the exercise
price under the Option;

        (ii)  Mature Shares with a Fair Market Value on the date of exercise
equal to the exercise price under the Option; provided that the aggregate Fair
Market Value of the shares of Stock tendered must be equal to or less than the
aggregate exercise price of the shares being purchased upon exercise of the
Option, and any difference must be paid by cash, certified check, bank draft or
postal or express money order payable to the order of the Company and provided
further that the Optionee must deliver to the Company certificates registered in
the name of the Optionee representing a number of shares of Stock legally and
beneficially owned by the Optionee free of all liens, claims and encumbrances of
every kind, accompanied by stock powers duly endorsed in blank by the record
holder of the shares represented by the certificates (with signature guaranteed
by a commercial bank or trust company or by a brokerage firm having a membership
on a registered national stock exchange) and the Optionee must provide the
Company with the information the Company reasonably requests pertaining to
exercise, sale or other disposition;

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        (iii)  an election to make a cashless exercise through a registered
broker-dealer (if approved in advance by the Committee or an executive officer
of the Company); or

        (iv)  except as specified in the Plan, any other form of payment which
is acceptable to the Committee;

        (c)  cash or by check within ten days after the date of exercise of this
Option in an amount sufficient to pay any sums required by federal, state or
local tax law to be withheld with respect to the grant or exercise of this
Option (unless and to the extent the Company or an Affiliate have arranged with
the Optionee to deduct such amounts from other compensation payable to the
Optionee or the Committee and the Optionee have agreed to have the Company
reduce the number of shares of Stock issued to the Optionee upon exercise of
this Option to satisfy the tax withholding obligations of the Company or an
Affiliate).

        The Committee may permit the Optionee to elect to pay the exercise price
upon exercise of this Option by authorizing a third-party broker to sell all or
a portion of the shares of Stock acquired upon exercise of this Option and remit
to the Company a sufficient portion of the sale proceeds to pay the exercise
price and any applicable tax withholding resulting from such exercise.

        This Option may not be exercised for a fraction of a share of Stock.

        5.    Non-Transferability; Death of Optionee.    This Option is not
transferable by the Optionee other than by will or under the laws of descent and
distribution, and is exercisable, during the Optionee's lifetime, only by him or
her. In the discretion of the Committee, any attempt to transfer this Option
other than under the terms of the Plan and this Agreement may terminate this
Option. After the death of the Optionee, the Optionee's executors,
administrators or any person or persons to whom this Option may be transferred
by will or by the laws of descent and distribution, shall have the right, at any
time prior to the termination of this Option to exercise this Option, in respect
to the number of shares that the Optionee would have been entitled to exercise
if the Optionee exercised this Option prior to the Optionee's death.

        6.    Representations, Warranties and Acknowledgments of Optionee.    

        (a)  The Optionee represents and warrants that this Option is being
acquired by the Optionee for his or her personal account, for investment
purposes only, and not with a view to the distribution, resale or other
disposition thereof.

        (b)  The Optionee acknowledges that no Options or Shares are required to
be granted or issued under the Plan unless legal counsel for the Company shall
be satisfied that such issuance or grant will be in compliance with all
applicable federal and state securities laws and regulations and any other
applicable laws or regulations. The Optionee acknowledges that the Committee may
require, as a condition of any payment or share issuance pursuant to the Plan,
that such agreements, undertakings, representations, certificates, and/or
information as the Committee may deem necessary or advisable, be executed or
provided to the Company to assure compliance with all such applicable laws or
regulations, including receipt of an opinion of counsel satisfactory to the
Company to the effect that any proposed transfer complies with applicable law.
The Optionee acknowledges that certificates for Shares delivered upon exercise
of this Option may be subject to such stock transfer orders and such other
restrictions as the Committee may deem advisable under the rules, regulations,
or other requirements of the Securities and Exchange Commission, any stock
exchange or any interdealer quotation system upon which the Stock is then
listed, and any applicable federal or state securities law. In addition, if, at
any time specified herein for, (i) the granting of any Option or the making of
any determination, (ii) the issuance or other distribution of Stock, or
(iii) the payment of amounts to or through the Optionee with respect to this
Option, any law, rule, regulation or other requirement of any governmental
authority or agency shall require either the Company, any Affiliate or the
Optionee (or any estate, designated beneficiary or

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other legal representative thereof) to take any action in connection therewith,
the Optionee acknowledges that the granting of such Option, the making of such
determination, the issuance or distribution of Stock or such payment, as the
case may be, shall be deferred until such required action is taken.

        7.    Limitation of Company's Liability for Nonissuance.    The Company
shall not be required to sell or issue any Stock under this Option if issuing
that Stock would constitute or result in a violation by the Optionee or the
Company of any provision of any law, statute or regulation of any governmental
authority. The determination by the Committee on this matter shall be final,
binding and conclusive. The Company may, but shall in no event be obligated to,
register any Stock covered by the Plan pursuant to applicable securities laws of
any country or any political subdivision. In the event the Stock issuable on
exercise of this Option is not registered, the Company may imprint on the
certificate evidencing the Stock any legend that counsel for the Company
considers necessary or advisable to comply with applicable law. The Company
shall not be obligated to take any other affirmative action in order to cause
the exercise of an Option, or the issuance of shares pursuant thereto, to comply
with any law or regulation of any governmental authority.

        8.    Adjustments Upon Changes in Capital Structure, Merger, Etc.    

        (a)  The existence of this Option shall not affect in any way the right
or power of the Company or its stockholders to make or authorize any or all
adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business, any merger or consolidation of the
Company, any issue of bonds, debentures, preferred or prior preference stock
ahead of or affecting the Stock or its rights, the dissolution or liquidation of
the Company, any sale or transfer of all or any part of its assets or business
or any other corporate act or proceeding, whether of a similar character or
otherwise.

        (b)  If the Company shall effect a subdivision or consolidation of
shares or other capital readjustment, the payment of a stock dividend, or other
increase or reduction of the number of shares of Stock outstanding, without
receiving compensation for money, services or property, then the number, class
or series and per share price of shares of Stock subject to this Option shall be
appropriately adjusted in such a manner as to entitle Optionee to receive upon
exercise of this Option, for the same aggregate cash consideration, the
equivalent total number and class or series of shares the Optionee would have
received had the Optionee exercised this Option in full immediately prior to the
event requiring the adjustment.

        (c)  Notwithstanding anything contained in the Plan to the contrary, if
this Option remains outstanding and a Change in Control occurs, (i) this Option
shall become immediately and fully exercisable and (ii) the Optionee will be
permitted to (A) exercise this Option in whole or in part and exchange the
Shares received on exercise for the consideration received by holders of the
Company's Stock in the Change in Control Transaction or (B) surrender for
cancellation within ninety (90) days after such Change in Control, this Option
or portion of this Option to the extent not yet exercised and the Optionee will
be entitled to receive a cash payment per Share subject to this Option or
portion thereof surrendered in the amount equal to the excess, if any, of
(x) the Fair Market Value, on the date of surrender, of such Share over (y) the
aggregate purchase price for such Share.

        "Change in Control" means the occurrence during the term of the Plan of:

          (i)  The acquisition by any "Person" (as the term person is used for
purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as
amended (the "1934 Act")) of "Beneficial Ownership" (within the meaning of
Rule 13d-3 promulgated under the 1934 Act) of any securities of the Company
which generally entitles the holder thereof to vote for the election of
directors of the Company (the "Voting Securities") which, when added to the

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Voting Securities then "Beneficially Owned" by such person, would result in such
Person "Beneficially Owning" fifty percent (50%) or more of the combined voting
power of the Company's then outstanding Voting Securities; or

        (ii)  Individuals who are members of the Board of Directors of the
Company as a result of election by, or at the request of, Fred Kayne, Ric Kayne
or their Affiliates (the "Selected Board"), cease for any reason to constitute
at least three of seven of the Board of Directors of the Company (or one less
than a majority if the size of the Board of Directors of the Company is
changed); or

        (iii)  a merger, consolidation or reorganization involving the Company
(a "Business Combination") that has not been approved by a Selected Board; or

        (iv)  the occurrence of a Corporate Change.

        Notwithstanding the foregoing, if an Optionee's employment is terminated
and the Optionee reasonably demonstrates that such termination (x) was at the
request of a third party who has indicated an intention or taken steps
reasonably calculated to effect a Change in Control and who effectuates a Change
in Control or (y) otherwise occurred in connection with, or in anticipation of,
a Change in Control which actually occurs, then for all purposes hereof, the
date of a Change in Control with respect to the Optionee shall mean the date
immediately prior to the date of such termination of employment.

        A Change in Control shall not be deemed to occur solely because fifty
percent (50%) or more of the then outstanding Voting Securities is Beneficially
Owned by (x) a trustee or other fiduciary holding securities under one or more
employee benefit plans or arrangements (or any trust forming a part thereof)
maintained by the Company or any Controlled Entity or (y) any corporation which,
immediately prior to its acquisition of such interest, is owned directly or
indirectly by the stockholders of the Company in the same proportion as their
ownership of stock in the Company immediately prior to such acquisition.
Notwithstanding any other provision hereof, a merger by the Company with and
into a wholly-owned subsidiary shall not be deemed a Change in Control.

        9.    No Employment Contract Created.    The granting of this Option
shall not constitute an employment contract, express or implied, nor impose upon
the Company or any Affiliate any obligation to employ or continue to employ, or
utilize the services of, Optionee. The right of the Company or any Affiliate to
terminate the employment of Optionee shall not be diminished or affected by
reason of the fact that this Option has been granted Optionee.

        10.    Rights as Shareholder.    The Optionee (or a Successor pursuant
to Section 5) shall have no rights as a stockholder with respect to Stock
covered by this Option until the date a stock certificate is issued for the
Stock.

        11.    Interpretation.    This Option is subject to the terms and
conditions of the Plan, a copy of which is incorporated herein by reference. In
the event of inconsistency or conflict between the Plan and this Agreement, the
terms and provisions of the Agreement shall control.

        12.    Notices.    Any notice, demand or request required or permitted
to be given under this Agreement shall be in writing and shall be deemed given
when delivered personally or three (3) days after being deposited in the United
States mail as certified or registered mail, with postage prepaid, or one
(1) day after being delivered to a private next day delivery service, with
mailing charges paid, and addressed, if to the Company, at its principal place
of business, Attention: Chief Financial Officer, and if to the Optionee, at his
or her most recent address as shown in the employment or stock records of the
Company.

        13.    Forfeiture.    Notwithstanding any other provisions of the Plan,
if and only if (a) the Optionee is convicted of a felony involving moral
turpitude or, (ii) the Optionee is guilty of willful gross neglect

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or continued willful gross misconduct as determined by a court of competent
jurisdiction and resulting, in either case, in material economic harm to the
Company, unless such act, or failure to act, was believed by the Optionee, in
good faith, to be in the best interests of the Company, then the Optionee shall
forfeit this Option, and all exercised options granted under the Plan if the
Company has not yet delivered a stock certificate to the Optionee with respect
thereto.

        14.    Legend.    All certificates representing any of the shares of
Stock subject to the provisions of this Agreement may have endorsed thereon the
following legend or such other legends as the Company deems necessary or
desirable:

"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID
ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED."

        15.    Registration.    The Company agrees that it shall maintain a
registration statement permitting the resale of all Shares for which Optionee's
exercise rights under this Option have vested unless resale is otherwise
permitted pursuant to Rule 144 promulgated under the Securities Act of 1933, as
amended, or by any successor rule.

        16.    Governing Law.    The validity, construction, interpretation and
effect of this Option shall be governed by and determined in accordance with the
laws of the State of Pennsylvania.

        17.    Severability.    Should any provision or portion of this
Agreement be held to be unenforceable or invalid for any reason, the remaining
provisions and portions of this Agreement shall be unaffected by such holding.

        18.    Counterparts.    This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall be deemed one instrument.

        19.    Entire Agreement.    This Agreement, together with the Plan,
constitutes the entire agreement between the parties pertaining to its subject
matter and supersedes all prior written or oral agreements and understandings of
the parties, either expressed or implied.

[Remainder of Page Intentionally Left Blank]

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        IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.

    FAO, INC.
 
 
By:
 
         

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Jerry R. Welch
Chief Executive Officer

        The Optionee hereby accepts this Option subject to all terms and
provisions hereof. The Optionee hereby acknowledges receipt of a copy of the
Plan. The Optionee hereby agrees to accept as binding, conclusive and final all
decisions or interpretations of the Committee regarding all questions arising
under the Plan. The Optionee authorizes the Company to withhold in accordance
with applicable law from any compensation payable to him or her all taxes
required to be withheld by federal, state or local law as a result of the
exercise of this Option.

    OPTIONEE
 
 

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QuickLinks

Form of FAO, INC. STOCK OPTION AGREEMENT (Granted under the 2001 Employee Stock
Option Plan)