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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

              Annual Report Pursuant to Section 13 or 15 (d) of the
                         Securities Exchange Act of 1934

         For the Fiscal Year Ended                    Commission file number
               July 31, 1999                                  0-26374

                       PLAY BY PLAY TOYS & NOVELTIES, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

            Texas                                        74-2623760
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

                                  4400 Tejasco
                            San Antonio, Texas 78218
              (Address of principal executive offices and zip code)

                                 (210) 829-4666
              (Registrant's telephone number, including area code)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS                    NAME OF EACH EXCHANGE ON WHICH REGISTERED
                                      None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                           Common Stock, no par value
                                (Title of class)

   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].

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

   As of November 8, 1999, the aggregate market value of the voting stock held
by non-affiliates of the registrant (based upon the last reported sale price of
the Common Stock of the registrant as quoted on the National Market System of
the National Association of Securities Dealers Automated Quotation System) was
$20,509,582. (For purposes of calculating the preceding amount only, all
directors, executive officers and shareholders holding 5% or greater of the
registrant's Common Stock are assumed to be affiliates). The number of shares of
Common Stock of the registrant outstanding as of November 8, 1999 was 7,395,000.

                       DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Proxy Statement for its annual meeting of
shareholders are incorporated by reference into Items 10, 11, 12 and 13 of Part
III. The registrant intends to file such Proxy Statement no later than 120 days
after the end of the fiscal year covered by this Form 10-K.
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                                TABLE OF CONTENTS
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PART I
ITEM 1.  Business ..............................................................................    3
             General ...........................................................................    3
             Business History ..................................................................    3
             Company Strengths .................................................................    5
             Business Strategy .................................................................    6
             Products ..........................................................................    8
             Licensed Products .................................................................    8
             Non-Licensed Products .............................................................    9
             License Agreements ................................................................   10
             Sales, Marketing and Distribution .................................................   11
             Design and Development ............................................................   13
             Manufacturers and Suppliers .......................................................   14
             Advertising .......................................................................   14
             Vending Operations ................................................................   14
             Competition .......................................................................   15
             Product Liability .................................................................   15
             Government Regulation .............................................................   15
             Tariffs and Duties ................................................................   16
             Trademarks ........................................................................   16
             Employees .........................................................................   16
             Risk Factors ......................................................................   16
  ITEM 2.  Properties ..........................................................................   23
  ITEM 3.  Legal Proceedings ...................................................................   24
  ITEM 4.  Submission of Matters to a Vote of Security Holders .................................   24

PART II
  ITEM 5.  Market for Registrant's Common Equity and Related Shareholder Matters ...............   24
             Market Information ................................................................   24
             Shareholders ......................................................................   24
             Dividends and Distributions .......................................................   24
  ITEM 6.  Selected Consolidated Financial Data ................................................   25
  ITEM 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations   26
             General ...........................................................................   26
             Results of Operations .............................................................   28
             Liquidity and Capital Resources ...................................................   31
             Euro ..............................................................................   33
             Dividend Policy ...................................................................   34
             Year 2000 .........................................................................   34
             Seasonality .......................................................................   35
             Inflation .........................................................................   35
             New Accounting Pronouncement ......................................................   35
  ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks .........................   35
  ITEM 8.  Financial Statements and Supplementary Data .........................................   36
  ITEM 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    36

PART III
  ITEM 10. Directors and Executive Officers of the Registrant ..................................   37
  ITEM 11. Executive Compensation ..............................................................   37
  ITEM 12. Security Ownership of Certain Beneficial Owners and Management ......................   37
  ITEM 13. Certain Relationships and Related Transactions ......................................   37
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                                TABLE OF CONTENTS (CONTINUED)
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PART IV
  ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ....................   37
  SIGNATURES ...................................................................................   38
  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
      STATEMENT SCHEDULE .......................................................................   F-1
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PART I

ITEM 1.  BUSINESS

GENERAL

           THIS REPORT CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY's
ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, WITHOUT LIMITATION, THE COMPANY's liquidity and
capital resources, COMPETITIVE AND ECONOMIC FACTORS, CHANGES IN CONSUMER
PREFERENCES, PRICE CHANGES BY COMPETITORS, RELATIONSHIPS WITH LICENSORS AND
CUSTOMERS, ABILITY TO MANAGE GROWTH, ABILITY TO SOURCE PRODUCTS, INTERNATIONAL
TRADE RELATIONS, MANAGEMENT OF QUARTER TO QUARTER RESULTS, INCREASES IN COSTS OF
RAW MATERIALS, TIMING OF TECHNOLOGICAL ADVANCES BY THE COMPANY AND ITS
COMPETITORS, LACK OF ACCEPTANCE BY CONSUMERS OF NEW PRODUCTS, AND THE OTHER
FACTORS DISCUSSED BELOW IN "RISK FACTORS", ELSEWHERE HEREIN. UPDATED INFORMATION
WILL BE PERIODICALLY PROVIDED BY THE COMPANY AS REQUIRED BY THE SECURITIES
EXCHANGE ACT OF 1934. AS USED HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE
"COMPANY" MEANS Play-By-Play TOYS & NOVELTIES, INC., A TEXAS CORPORATION, AND
ITS WHOLLY OWNED SUBSIDIARIES.

           The Company designs, develops, markets and distributes a broad line
of stuffed toys, novelty items and its PLAY-FACES(R) line of sculpted toy
pillows based on licenses for popular children's entertainment characters,
professional sports team logos and corporate trademarks. The Company also
designs, develops, markets and distributes electronic toys and non-licensed
stuffed toys and markets and distributes a broad line of non-licensed novelty
items. The Company markets and distributes its products in both amusement and
retail markets and believes that it is the leading supplier of stuffed toys and
novelty items to the domestic amusement industry. The Company was incorporated
in Texas in 1992. Its principal executive offices are located at 4400 Tejasco,
San Antonio, Texas 78218 and its telephone number is (210) 829-4666.

BUSINESS HISTORY

           Since inception through fiscal 1998, the Company's net sales have
grown from $32.6 million for fiscal 1994 to $178.1 million in fiscal 1998,
representing a 54.2% average annual increase, and net income increased from $1.1
million for fiscal 1994 to $8.4 million for fiscal 1998, representing a 70.4%
average annual increase. However, in fiscal 1999, net sales declined to $156.5
million, a decrease of 12.1% as compared to the $178.1 million reported in
fiscal 1998, and the Company reported a net loss of $30.2 million including the
impact of certain significant charges recorded by the Company in fiscal 1999.

           The Company develops its licensed stuffed toys and novelties based
principally on popular, classic characters such as LOONEY TUNES, GARFIELD,
SUPERMAN, BATMAN, SCOOBY-DOO(TM), and on popular, classic trademark licenses
such as The Coca-Cola Company's COCA-COLA(R) brand stuffed toys, and
Harley-Davidson Motor Company'S HARLEY HOg(TM) as well as on popular
professional sports properties such as Major League Baseball, National Hockey
League, National Football League, and various collegiate teams. The Company
develops a licensed stuffed toy by identifying a character or trademark license,
obtaining the necessary license, designing the product and developing a
prototype, and manufacturing the products through third party manufacturers. The
Company believes that products based on popular, classic characters and
trademarks will have a longer and more stable product life cycle than products
based on newer, less established characters and trademarks. The Company believes
its position as a leading supplier to the domestic amusement industry allows it
to more effectively acquire licenses for products sold to the amusement market.
The Company has developed a significant relationship with Warner Bros., a
Division of Time Warner Entertainment Company L.P. approximately

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46.8% of the Company's net sales in fiscal 1999 were derived from the sale of
products based on Warner Bros.' Looney Tunes characters. The Company's
non-licensed products include traditional stuffed toys in various sizes,
interactive dolls and novelty items such as low-priced plastic toys and games
used primarily as redemption prizes by its amusement customers. For fiscal 1999,
net sales of licensed products and non-licensed products accounted for 70.1% and
28.2%, respectively, of the Company's net sales.

           The Company introduced its retail product line in fiscal 1995 with
its originally developed PLAY-FACES(R) line of sculpted toy pillows shaped in
the facial likeness of licensed animated characters. The Play-Faces(R) line is
based upon popular, classic characters, including The Walt Disney Company's
animated characters, LOONEY TUNES, SUPERMAN, BATMAN, GARFIELD(TM), RugrAts(R),
and new characters developed and introduced from time to time by leading
entertainment companies. During fiscal 1997, the Company extended the line by
adding full-bodied pillows. The Company believes its Play-Faces(R) line is a
distinct product category that enhances its ability to acquire additional
character and trademark licenses. Play-Faces(R) products accounted for 3.3% of
the Company's net sales for fiscal 1999.

           During fiscal 1997, the Company entered the large doll market with a
pair of electronic interactive dolls, the Talkin' Tots(TM) which talk and sing
together utilizing infrared technology. The Company began selling Talkin'
Tots(TM) during the fourth quarter of fiscal 1997 and began television
advertising during the first quarter of fiscal 1998. The Company also developed
a retail line of Looney Tunes products during fiscal 1997, including standing,
sitting and bean bag stuffed toys, and another television promoted electronic
stuffed toy, the Tornado Taz(TM) that spins, shakes, grunts and laughs. The
Looney Tunes based products include such characters as TWEETY(TM),
SYLVESTer(TM), TASMANIAN DeVIL(TM), BUgs BUNNY(TM), SPEEdy GONZALES(TM),
YoseMITE SAM(TM), and Daffy Duck(TM).

           During fiscal 1998, the Company introduced several new electronic
interactive talking products such as Bugs & Daffy Talkin' Tunes(TM), Sylvester &
Tweety Talkin' Tunes(TM), and Singin' & Swingin' Tweety(TM), that utilize
infrared technology. The Company also introduced full-bodied pillows, beanbags
based on the popular Rugrats(TM) characters, and FaniMal(TM) beanbags utilizing
professional sports properties licensed from Major League Baseball and the
National Football League. The Company also developed a retail line of infant,
toddler and preschool products ranging from play toys to pulls toys based on
Baby Looney Tunes characters.

           During fiscal 1998, the Company enhanced its existing retail and
amusement business by launching a new direct marketing division, which focuses
on selling to consumers via direct mail catalogs and via the Company's on-line
retail internet site, Funstuff4u.com. The direct mail catalog, issued under the
name Fun Stuff(TM), features many of the Company's quality licensed and
non-licensed stuffed toys and novelty items.

           During fiscal 1999, the Company introduced several new electronic
interactive talking products such as My Best Friend(TM), Tongue Twisting
Taz(TM), Macarena Tweety(TM), and Fortune Teller Tweety(TM). The Tongue Twisting
Taz(TM) features the popular Tasmanian Devil(TM) character. The Macarena
Tweety(TM) features a plush Tweety dressed for a party in a brightly colored
shirt and is sound activated. The Fortune Teller Tweety(TM) features characters
Sylvester(TM) and Tweety(TM) and is activated by pressing Sylvester in his magic
ball. The Company also introduced a wide range of plush toys including
interactive products, Play-Faces(R) pillows and backpacks, inflatable furniture
products and novelties based on the characters in the Garfield comic strip for
both retail and amusement markets. Additionally, the Company introduced
interactive plush products based on Walt Disney's classic characters including
Mickey Mouse(TM), Minnie Mouse(TM) and Winnie the Pooh(TM), in the retail market
throughout Latin America.

                                       4
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           The Company has a diversified base of customers in both the amusement
and retail markets. Amusement customers, which accounted for 73.4% of net sales
for fiscal 1999, include theme parks such as Premier Parks/Six Flags, Paramount,
Universal Studios, Busch Gardens and Sea World, family entertainment centers
such as Tilt, Dave and Buster's, Inc. and Namco, carnivals and state fairs. The
Company also distributes its merchandise to its Fun Services(R) (sales through
franchisees), fundraising and premium (products designed for specific companies)
customers. Retail customers, which accounted for 24.8% of net sales for the same
period, principally consist of mass market retailers such as Wal-Mart, Kmart,
and Target, and specialty retailers such as Toys `R' Us and Kay Bee Toy. No one
customer accounted for more than 10% of net sales for fiscal 1999.

           The Company completed two strategic acquisitions that have
contributed to its growth. In June 1996, the Company acquired substantially all
of the operating assets, business operations and facilities of Ace Novelty Co.,
Inc. ("Ace") for $44.7 million (the "Ace Acquisition"). The Ace Acquisition
provided the Company with several strategic advantages, including significant
distribution channels in the central and western United States, significant
distribution channels in the outdoor amusement markets, key United States and
international classic character licenses for retail and amusement, an in-house
design and development team and additional key personnel.

           In November 1996, the Company, through its wholly owned subsidiary
Play-By-Play Toys & Novelties Europe, S.A., ("Play-By-Play Europe") acquired The
TLC Gift Company, Ltd. ("TLC") based in Doncaster, England. Similarly, the TLC
acquisition resulted in additional distribution channels in Europe, particularly
the U.K.

           In March 1999, the Company, through a wholly owned subsidiary,
acquired certain assets and liabilities of Caribe Marketing and Sales Co., Inc.
("Caribe") for the purchase price of $2.5 million. The purchase price consisted
of cash, the issuance to the Sellers of 80,000 shares of the Company's common
stock, and the assumption of a Seller's note. The Company believes that Caribe
provides the Company with a new base for its Latin American operations and
enhances the Company's marketing and distribution capabilities.

COMPANY STRENGTHS

The Company believes its principal strengths include its:

o     focus on licenses for popular classic characters, trademarks and new
      characters introduced by leading entertainment companies,

o     capability to develop new and innovative toys such as Talkin' Tots(TM),
      Tornado Taz(TM), Talkin' Tunes(TM), Macarena Tweety(TM), Fortune Teller
      Tweety(TM), and Singin' & Swingin' Tweety(TM), new licensed products such
      aS THE COCA-Cola(R) brand stuff toys, and new product categories such as
      the Play-Faces(R) line,

o     position as the leading supplier of stuffed toys and novelty items to the
      domestic amusement industry,

o     balance between amusement and retail markets, which reduces seasonal
      fluctuations and stabilizes revenues,

o     experienced management team with toy and licensing expertise;

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o     in-house design and development team which enables the Company to shorten
      development lead times and more quickly meet changing consumer tastes and
      trends,

o     presence in Hong Kong and China which supports the Company in direct
      sourcing in the Far East and enhances its ability to better manage product
      quality, production and timely availability of products,

o     diverse customer base comprised of more than 4,000 customers,

o     multiple distribution channels which enhance the Company's ability to sell
      slower moving items while minimizing the impact on gross profit margins,
      and

o     distribution facilities strategically located throughout North America and
      Europe, allowing the Company to better serve its customers, particularly
      those with multiple locations and with minimal inventory storage capacity.

BUSINESS STRATEGY

The Company's growth strategy includes the following key elements:

           LICENSED PRODUCT LINE EXPANSION. The Company believes that by
developing licensed products based principally on popular, classic characters
and trademarks, it has established a core licensed product portfolio that is
characterized by a longer product life cycle than is typical in the toy
industry. The Company intends to continue to develop its licensed product line
by targeting licensing opportunities where it can take advantage of licensor
advertising, publicity and media exposure. The Company believes that its broad
line of licensed products prevents it from becoming overly dependent on a single
product or customer.

           DEVELOPMENT OF INNOVATIVE TOYS AND NEW PRODUCT CATEGORIES. The
Company believes that its development of proprietary toys and other
licensed-based product lines represent distinct unique products, which enhance
its market identification and ability to acquire additional character and
trademark licenses. The Company intends to develop new product categories
targeted to both its amusement and retail customers. The Company strives to
develop unique products with broad end-consumer appeal at competitive prices by
identifying previously undeveloped or under-developed products or product
categories and matching them with popular, classic licensed characters and/or
trademarks.

           INTERNATIONAL EXPANSION. The Company plans to increase its
international sales, primarily in Europe and Latin America, in both the
amusement and retail markets through the Company's Hong Kong, United States,
European and Latin America distribution facilities and independent distributors.
The Company believes that markets outside the United States present significant
opportunities, and except for Europe, are generally less competitive than the
United States market. The Company commenced toy distribution and sales
operations in Europe and Latin America in fiscal 1994. Since fiscal 1994,
international sales have increased at an average annual rate in excess of 100%,
and the Company believes there are significant additional international growth
opportunities.

           RETAIL MARKET PENETRATION. The Company intends to broaden its retail
distribution both domestically and internationally. Through its licensing and
new product development strategies, the Company plans to further penetrate the
retail market by continuing to develop and introduce new products (such as
Tongue Twisting Taz(TM), Macarena Tweety(TM), and Fortune Teller Tweety(TM)) and
product

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categories (such as Play-Faces(R)). Based on the Company's relatively small
share of the retail toy market and its proven ability to develop product niches
and obtain key licenses, increased retail distribution continues to be a growth
opportunity for the Company. The Company's retail sales declined significantly
during 1999 as a result of many factors; however, the Company has brought in new
retail industry management, and restructured its retail sales force, product
development and operations. Accordingly, the Company's objective is to have
sustained annual sales growth of its retail operations beginning in calendar
year 2000.

           AMUSEMENT MARKET PENETRATION. With the Ace Acquisition, the Company
has become a leading supplier of stuffed toys and novelty items to the domestic
amusement market. The Company believes this market is less susceptible to
changing consumer preferences than the retail market. The Company's broad and
continually updated line of licensed and non-licensed stuffed toys and novelty
items, its purchasing power, distribution facilities, and reputation as a
leading amusement supplier provide competitive advantages over many other
suppliers to this market. While the Company believes there is greater
opportunity to grow its retail and international businesses, the domestic
amusement business provides the Company with stable revenue and consistent cash
flow.

           DIRECT MARKETING PENETRATION. The Company distributed its first
direct mail catalog in October 1998 followed by series of strategically timed
Fun Stuff(TM) catalogs. The necessary executive and telemarketing resources have
been assembled which will allow the Company to consolidate resources and bring
this entire process in-house during the first quarter of calendar year 2000. In
addition, in March 1999 the Company launched its on-line retail internet site,
Funstuff4u.com, geared to the consumer and which features many of the same
products contained in the Company's direct mail catalogs. The Company believes
that the Direct Marketing Division's efforts also provides growth opportunities
and expands consumer awareness of the Company's product lines.

           ACQUISITION STRATEGY. The Company will continue to seek and evaluate
acquisition candidates that either provide new or unique products for existing
distribution channels, or conversely, that provide new venues of distribution
for existing product lines. Through this strategy, the Company intends to
achieve greater economies of scale by growing revenues while reducing general
and administrative costs. However, the Company does not anticipate making any
significant acquisitions during fiscal 2000.

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PRODUCTS

           The Company markets a variety of licensed and non-licensed stuffed
toys and novelty items. The following chart shows the breakdown of the Company's
net toy sales (which does not include vending sales) by principal product
category:

                                  1999     1998     1997
                                 ------   ------   ------
                                         (IN MILLIONS)
Licensed products
    Stuffed toys .............   $   94.6 $   90.4 $   63.4
    Play-Faces(R) ............        5.2      9.5     16.5
    Electronic toys ..........        9.9     14.5      2.0
                                 ------   ------   ------
                                    109.7    114.4     81.9
                                 ------   ------   ------
Non-licened products
    Stuffed toys .............       28.9     32.3     38.7
    Novelty items ............       10.8     13.3      8.8
    Electronic toys ..........        4.4     15.1      4.8
                                 ------   ------   ------
                                     44.1     60.7     52.3
                                 ------   ------   ------
        Total ................   $  153.8 $  175.1 $  134.2
                                 ======   ======   ======
                               (PERCENTAGES OF NET TOYS SALES)

Licensed products
    Stuffed toys .............   61.5 %   51.6 %   47.3 %
    Play-Faces(R) ............        3.4      5.4     12.3
    Electronic toys ..........        6.4      8.4      1.5
                                 ------   ------   ------
                                     71.3     65.4     61.1
                                 ------   ------   ------
Non-licensed products
    Stuffed toys .............       18.8     18.4     28.8
    Novelty items ............        7.0      7.6      6.5
    Electronic toys ..........        2.9      8.6      3.6
                                 ------   ------   ------
                                     28.7     34.6     38.9
                                 ------   ------   ------
        Total ................   100.0 %  100.0 %  100.0 %
                                 ======   ======   ======

LICENSED PRODUCTS

      In developing its licensed products, the Company seeks to take advantage
of media exposure and goodwill accompanying its licensed characters and
trademarks as well as the advertising and promotional programs provided by its
licensors. Net sales of licensed products were $109.7 million, $114.4 million
and $81.9 million (70.1%, 64.3% and 59.7% of net sales) during fiscal 1999, 1998
and 1997, respectively.

      STUFFED TOYS. The Company designs, develops, markets and distributes over
2,000 different stuffed toys based upon its licenses for children's
entertainment characters and corporate trademarks. The Company offers a variety
of sizes and styles of its licensed stuffed toys. The Company seeks to

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develop its products around both existing and newly-acquired licenses for
commercially established characters and trademarks. The Company's licensed
stuffed toys are generally sold to both amusement customers as redemption prizes
and to retail customers. Licensed stuffed toy products have suggested retail
prices ranging from $5 to $30. To date, the Company's most successful licensed
stuffed toy products have been those based on the Looney Tunes characters, which
include standing, sitting and beanbag stuffed toys. During fiscal 1999, the
Company introduced a wide range of plush toys as well as interactive products,
Play-Faces(R) pillows and backpacks, inflatable furniture products and novelties
based on the characters in the Garfield comic strip.

      Play-Faces(R). The Company's Play-Faces(R) line consists of sculpted toy
pillows shaped in the facial likenesses of licensed animated characters.
Play-Faces(R) are sold primarily to retail customers and have suggested retail
prices of under $20. The Company believes its Play-Faces(R) line is a distinct
recognizable product category, which has enhanced its ability to acquire
additional character and trademark licenses. Play-Faces(R) products accounted
for 3.3% of the Company's net sales for fiscal 1999.

      ELECTRONIC TOYS. During fiscal 1997, the Company began selling a
television promoted electronic stuffed toy, Tornado Taz(TM). Tornado TAz(TM) is
a plush depiction of Tasmanian Devil(TM) that spins, shakes, grunts and laughs.
During fiscal 1998, the Company further expanded its electronic stuffed toys
offerings by adding Bugs & Daffy Talkin' Tunes(TM), Sylvester & Tweety Talkin'
Tunes(TM), and Singin' & Swingin' Tweety(TM). During fiscal 1999, the Company
introduced several new electronic interactive products such as Tongue Twisting
Taz(TM), Macarena TweEtY(TM), and Fortune Teller Tweety(TM). The Company also
introduced interactive plush products based on Walt Disney's classic characters
including Mickey Mouse(TM), Minnie Mouse(TM) and Winnie the Pooh(TM), for retail
distribution in Latin America.

NON-LICENSED PRODUCTS

      The Company markets and distributes a broad line of non-licensed products,
including internally designed and developed stuffed and electronic toys, stuffed
toy and novelty product lines selected and modified by the Company from the
product lines of third party manufacturers, and stuffed toys and novelty items
purchased directly from third party manufacturers. Net sales of non-licensed
products were $44.1 million, $60.7 million and $52.3 million (28.1%, 34.1% and
38.0% of net sales) during fiscal 1999, 1998 and 1997, respectively.

      STUFFED TOYS. The Company designs, develops, markets and distributes a
broad line of non-licensed stuffed toys, consisting principally of generic
animal characters and a broad variety of seasonal and holiday characters. The
Company's non-licensed stuffed toys are principally marketed to the amusement
market for use as redemption prizes. The Company frequently redesigns its
product line. Over the three year period ended July 31, 1999, sales of
non-licensed stuffed toys have decreased as a percentage of total net toy sales,
primarily due to changing consumer trends and preference for licensed
merchandise and the Company's decision to focus its working capital on the
growth of its licensed products and novelty item sales. No single non-licensed
stuffed toy accounted for more than 10% of the Company's net sales during fiscal
1999, 1998 or 1997.

      NOVELTY ITEMS. The Company markets and distributes a broad line of novelty
items to the amusement market for use as redemption prizes. The Company's
novelty items include plastic toys, cosmetic jewelry, novelty school supplies,
inexpensive electronic toys and radios, rubber balls and styrofoam gliders. The
Company frequently changes its mix of novelty items. No single novelty item

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accounted for more than 10% of the Company's net sales or 10% of the Company's
net sales of novelty items during fiscal 1999, 1998 and 1997.

      ELECTRONIC TOYS. During fiscal 1997, the Company entered the large doll
market with the introduction of the Talkin' Tots(TM), a pair of interactive
dolls available in several different languages, which talk and sing together
utilizing infrared technology. A squeeze of each doll's hand initiates the
pre-recorded conversations, singing of the alphabet and nursery rhymes. Since
then, the Company has introduced other interactive dolls, such as Knickie &
Knockie(TM), Penny & PatcHes(R) and most recently My Best Friend(TM).

LICENSE AGREEMENTS

      Approximately 70.1%, 64.3% and 59.7% of the Company's net sales in fiscal
1999, 1998 and 1997, respectively, were derived from sales of licensed products.
Products based on Looney Tunes' characters accounted for 46.8% of net sales in
fiscal 1999. The Company's licenses generally have terms of one to three years
and limit sales to certain geographic territories and distribution channels. The
Company's license agreements typically require the payment of non-refundable
advances and guaranteed minimum royalties. Certain of the Company's material
licenses are non-exclusive. The Company focuses on licenses for characters or
trademarks with a popular identity, developed generally through exposure in
television programs, movies, cartoons and comic books and, in the case of
popular, classic characters, often through exposure over many years. The
Company's license agreements also require the Company to obtain approval of the
Company's third party manufacturers and approval of the final product prior to
distribution from the licensor. The Company's license agreements may also
require certain types and amounts of insurance, licensor approval prior to
merger, reorganization, certain stock sales, or assignment of the license, or
approval by the licensor of certain "Key" or "Executive" management changes of
the licensee.

      In addition to seeking licenses for popular, classic characters and
trademarks, the Company also seeks to acquire licenses for new characters
developed and introduced by leading entertainment companies. The successful
marketing of a product based on a character generally requires the Company to
anticipate and evaluate the popularity of such characters, and to capitalize on
the success of such characters in a timely manner. Such determinations must
frequently be made before the commercial introduction of the property in which
the new licensed character appears. Since many toy products based on licensed
characters are successfully marketed for only one or two years, success is
dependent upon the ability of management to acquire licenses and to develop the
corresponding products in a timely manner.

                                       10
<PAGE>
SALES, MARKETING AND DISTRIBUTION

      The Company markets and distributes its products domestically and
internationally to a diverse customer base within the amusement and retail toy
markets. The following table sets forth information concerning the Company's
domestic and international net toy sales (which do not include vending sales) by
distribution channel. Sales by the domestic division, including export sales,
such as those to customers in Latin America, are considered domestic sales. The
export sales for fiscal 1999, 1998 and 1997 were $8.8 million, $14.4 million,
and $2.6 million, respectively. Sales by the European subsidiaries are
considered international sales.

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED JULY 31,
                                                                              --------------------------
                                                                               1999      1998      1997
                                                                              ------    ------    ------
                                                                                     (IN MILLIONS)
<S>                                                                           <C>       <C>       <C>
Domestic toy sales:
     Retail ...............................................................   $ 25.5    $ 41.8    $ 31.7
     Amusement ............................................................     93.4     101.6      81.4
                                                                              ------    ------    ------
                                                                               118.9     143.4     113.1
                                                                              ------    ------    ------
International toy sales:
     Retail ...............................................................     13.4      10.1       6.6
     Amusement ............................................................     21.5      21.6      14.5
                                                                              ------    ------    ------
                                                                                34.9      31.7      21.1
                                                                              ======    ======    ======
        Total .............................................................   $153.8    $175.1    $134.2
                                                                              ======    ======    ======

                                         (AS A PERCENTAGE OF NET TOY SALES)
Domestic toy sales:
     Retail ...............................................................     16.6%     23.9%     23.6%
     Amusement ............................................................     60.7      58.0      60.7
                                                                              ------    ------    ------
                                                                                77.3      81.9      84.3
                                                                              ------    ------    ------
International toy sales:
     Retail ...............................................................      8.7       5.8       4.9
     Amusement ............................................................     14.0      12.3      10.8
                                                                              ------    ------    ------
                                                                                22.7      18.1      15.7
                                                                              ------    ------    ------
                                                                              ======    ======    ======
        Total .............................................................    100.0%    100.0%    100.0%
                                                                              ======    ======    ======
</TABLE>

      The Company markets its products to amusement and retail customers in the
United States through salaried in-house salespersons and through commissioned
independent sales representatives. The Company's in-house and independent sales
representatives use product samples, catalogs, brochures and other promotional
materials to market the Company's products at trade shows, on-site visits to
customers and customer visits to the Company's showrooms. The Company maintains
domestic product showrooms in San Antonio, Texas; Chicago, Illinois; Los
Angeles, California; New York, New York; and Woodinville, Washington, where it
displays its amusement and retail product lines. The Company designs and
develops its own product catalogs and brochures. Senior management coordinates
and supervises the Company's sales personnel and coordinates the Company's
independent sales representatives and directly participates in marketing to its
customers. No sales representative generated more than 10% of net sales to
domestic customers during fiscal 1999.

                                       11
<PAGE>
      The Company distributes its products from its warehouse/distribution
facilities located in San Antonio, Texas; Los Angeles, California; Chicago,
Illinois; Woodinville, Washington; and Burnaby, British Columbia, and arranges
direct shipments from the Far East to its larger retail and amusement customers.
In fiscal 1996, the Company established an office in Hong Kong to facilitate
sourcing, quality control and production scheduling. The Company's Far East
presence was enhanced when, in fiscal 1998, the Company opened an office in
China to assist the Hong Kong office. In fiscal 1999, the Company extended its
Latin American presence with its acquisition of Caribe and its sales and
warehouse/distribution facilities located in Puerto Rico.

      Retail customers which accounted for 24.8% of net domestic sales for
fiscal 1999, principally consisting of the largest mass market retailers in the
United States such as Wal-Mart, KMart and Target and specialty retailers such as
Toys "R" Us and Kay Bee Toys. Due to their purchasing volumes and desire to
minimize inventory risk, these retailers are increasingly requiring suppliers,
including the Company, to maintain more of the inventory on hand domestically.
Accordingly, the Company is participating in the electronic data interchange
("EDI") programs with Wal-Mart, Target, Sears, Kmart, Spencer Gifts, Mervyns and
Toys "R" Us and is testing the EDI program with other customers. The Company
plans to participate in the EDI programs with several of its other major retail
customers. No fees or other commitments are required to participate. The Company
believes that this participation will allow it to monitor store inventory
levels, schedule production to meet anticipated reorders, and to maintain
sufficient inventory levels to serve customers. The Company does not anticipate
that it will be required to make significant additional capital expenditures or
to hire additional employees in order to participate in such EDI programs. The
Company has tested the advanced shipping notice ("ASN") program, which is part
of the EDI program, with Mervyns, Sears and Target. The ASN program provides
information to the customer prior to shipment and expedites the customer's
receiving process and significantly reduces invoice quantity discrepancies.

      The Company's Fun Services(R) division sells to approximately fifty
franchisees throughout the United States with Play-By-Play serving as the
franchisor. The Fun Services(R) franchisees sell products at schools, churches
and company fairs. The most notable sales program is the Santa's Secret Shop(R)
which allows school children and their families to purchase Christmas gifts on
the school premises during the holiday season. Fun Services(R) sales during
fiscal 1999, 1998 and 1997 were $7.4 million, $6.5 million and $7.1 million,
respectively. The Fundraising division's customers consist principally of
various not-for-profit organizations or their independent event contractors. The
Premiums division designs, develops and/or sources stuffed toys and novelty
items specifically tailored for certain customers. These products are typically
distributed by the customer to their clients or employees as promotional or
incentive items. During fiscal 1999 and 1998, Premiums and Fundraising sales
totaled $11.6 million and $14.7 million, respectively.

      Generally, the Company does not sell its products on a consignment basis
and accepts returns only for defective merchandise. In certain instances, where
retailers are unable to sell the quantity of products they have ordered, the
Company may, consistent with industry practice, assist retailers in selling such
excess inventory by offering discounts on subsequent purchases or other
concessions. Returns, concessions and canceled orders have historically been
immaterial to the Company's net sales, however, in fiscal 1999, due to the
insolvency of its distributor in Mexico, the Company accepted returns of
merchandise from the distributor totaling $1.8 million in partial satisfaction
of amounts due to the Company.

      INTERNATIONAL SALES. The Company began its international expansion with
the opening of its distribution facility in Valencia, Spain in August 1993. In
November 1996, the Company acquired TLC with distribution facilities in
Doncaster, England. The Company's principal international customers are

                                       12
<PAGE>
located in Spain, the United Kingdom, France, the Benelux countries, Italy,
Germany, Portugal, Israel, Scandinavia, Ireland, Greece, Austria and certain
Eastern European countries. The Company has expanded its distribution into the
Middle East and South Africa.

      The Company markets its products to international amusement and retail
customers in Spain, Portugal, U.K. and Ireland through independent commissioned
sales representatives and distributors. Foreign independent distributors
typically retain their own sales representatives. The Company maintains product
showrooms in Valencia, Spain and Doncaster, England to display its product
lines, and the Company's independent distributors display the Company's products
in their own product showrooms.

      The Company distributes its amusement and retail products to European
customers through its Company-operated European distribution facilities. The
Company's international product line generally includes its products offered in
the United States. The Company also offers products based upon licenses from
domestic licensors, which licenses are exclusive to the European market, and
licenses from European licensors for properties such as Noddy, a classic British
character.

      The Company believes that the European and domestic retail industries are
equally competitive. The Company's European license agreements are generally
less restrictive and permit sales to a broader base of customers than do the
domestic licenses. The Company believes that, accordingly, it can expand its
European presence through these channels. The Company has introduced certain new
retail feature items, such as Tornado Taz(TM), Talkin' Tunes, and Singin' &
Swingin' Tweety to the European market and plans to introduce Tongue Twisting
Taz and Tweety Fortune Teller as well as other items in the near future.

      The Company believes that the amusement industry is generally less
competitive in Europe than in the United States. Europe is fragmented and
competitors are generally local. The Company believes that it was the first to
develop and use a product catalog for European amusement sales. Europe has
generally had limited access to licensed products but this trend is slowly
changing and exclusive licenses for amusement, such as Garfield, have been
secured and are being marketed successfully.

      European amusement customers include theme parks such as Port Aventura,
Isla Magica and Tibidabo New Park in Spain and Alton Towers, H. B. Leisure and
Chessington Park in the United Kingdom, Fort Fun Abenteurland and Warner Bros.
Movie World in Germany, Parc Asterix in France, Walibi in Belgium, Efteling in
Holland, and carnival, fair and arcade operators. International retail customers
include mass merchandisers and specialty retailers such as J-Sainsbury, Tescos,
British Homes Stores, Aucham, Pryca, Alcampo, Toys "R" Us, El Corte Ingles and
Hipercor.

DESIGN AND DEVELOPMENT

      The Company relies on senior management and the marketing department to
target licensing opportunities and relies on its product design and development
departments to design and develop additions to its product line. The Company
typically drafts initial product drawings and produces prototypes in-house and
with the assistance of outside consultants. The Company maintains its sample
design department in San Antonio, Texas. The design department enables the
Company to expedite licensed product approval, which is a typical condition of
most licenses. To date, the Company has experienced reasonable success in
obtaining licensor approval of its products. The Company's marketing department
also designs product packaging and promotional materials. To minimize risk, the
Company normally solicits the reactions to prototypes from select customers
prior to production.

                                       13
<PAGE>
MANUFACTURERS AND SUPPLIERS

      The Company contracts with third party manufacturers in the Far East,
principally within The People's Republic of China ("China"), to manufacture its
stuffed toy and Play-Faces(R) products. The Company's novelty items and
electronic toys are manufactured by third parties located in China, Taiwan and
Hong Kong. Senior management negotiates most manufacturing contracts without
using agents. The Far East is the largest and most widely used manufacturing
center of toys in the world. Manufacturers are selected based on price, quality,
consistency, and timeliness. The Company is not a party to long-term contractual
or other arrangements with any manufacturer and often uses more than one
manufacturer to produce the same item. One manufacturer in China accounted for
12.4% of the Company's purchases during fiscal 1999. No other manufacturer
accounted for more than 10% of the Company's purchases of toy products during
fiscal 1999. While the Company is not dependent on any single manufacturer,
political or economic disruptions affecting the business or operations of
manufacturers in the Far East could adversely impact ongoing operations.

      The principal materials used in the production of the Company's products
are fabrics and plastic parts made from petrochemical derivatives. The
manufacturers who deliver completed or partially completed products to the
Company generally purchase these materials. In order to reduce transportation
costs, the Company typically will import certain large toys as skins and stuffs
them with either polystyrene or polyester at its warehouse facilities in the
United States or Europe. The Company believes that an adequate supply of raw
materials used in the manufacture of its products is readily available from
existing and alternative sources at reasonable prices.

ADVERTISING

      The Company will continue to advertise certain products and believes that
television advertising in particular, is effective for certain retail products.
Although most of the retail advertising budget has historically been allocated
to television, the Company also uses retail catalogs, advertisements in trade
magazines, such as THE TOY BOOK(TM), and retailers' cooperative promotional
programs. In addition, the Company benefits from media exposure such as
television, movies, commercials, cartoons and comic books, and by advertising,
promotional and other media events produced by licensors. The Company's
amusement merchandise is typically promoted to the industry via a limited number
of advertisements in trade publications such as AMUSEMENT BUSINESS(TM) anD
REPLAY MAGAZINE(TM) and catalogs. Advertising expenses are incurred in the
design, development, printing and shipping of Company catalogs and
advertisements in trade publications. The Company's advertising expenses were
approximately $5.8 million, $7.6 million and $2.7 million during fiscal years
1999, 1998 and 1997, respectively.

VENDING OPERATIONS

      The Company owns and operates approximately 1,800 coin-operated amusement
game machines (crane machines, compact disc jukeboxes and video game machines)
located primarily in Texas and New Mexico. Approximately 900 of these are in
Pizza Hut(R) restaurants and Furr's Supermarkets. The remainder are generally
operated under month-to-month arrangements with numerous other small businesses.
The Company shares machine revenues with the owners of locations where the
machines are placed. Approximately 1.7%, 1.6% and 2.3% of the Company's net
sales in fiscal 1999, 1998 and 1997, respectively, were derived from the
Company's vending operations. The Company currently intends to maintain its
present level of vending operations.

                                       14
<PAGE>
COMPETITION

      The Company faces vigorous competition in the sale of its products.
Competitive factors include new product development, the procurement of
licenses, timely shipment of products, price, product appeal and the
availability of retail shelf space. The toy industry is highly fragmented with
several hundred domestic and international toy companies, importers and
distributors. The Company competes with many larger, better-capitalized
companies, including the Company's licensors, in the design, development,
marketing, and distribution of toys, and the procurement of licenses. The
Company's principal competitors in the retail industry include all major toy
companies. Certain of the Company's licensors, including The Walt Disney
Company, Time Warner Entertainment Company, L.P., Harley-Davidson Motor Company
and The Coca-Cola Company, distribute competing products through proprietary
retail outlets and amusement parks. The Company also faces competition from a
number of smaller toy companies, some of which market single products.

PRODUCT LIABILITY

      Products that have been or may be developed or sold by the Company may
expose the Company to potential liability from personal injury or property
damage claims by end-users of such products. The Company currently maintains
product liability insurance coverage in the amount of $1.0 million per
occurrence, with a $20.0 million liability umbrella policy. There can be no
assurance that the Company will be able to maintain such coverage or obtain
additional coverage on acceptable terms, or that such insurance will provide
adequate coverage against any potential claims. Moreover, even if the Company
maintains adequate insurance, any successful claim could materially and
adversely affect the reputation and prospects of the Company.

GOVERNMENT REGULATION

      The Company is subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Product Safety Act. Those laws
empower the Consumer Products Safety Commission (the "Consumer Commission") to
protect consumers from hazardous toys and other articles. The Consumer
Commission has the authority to exclude from the market articles which are found
to be hazardous and can require a manufacturer to repurchase such toys under
certain circumstances. Any such determination by the Consumer Commission is
subject to court review. Similar state and local laws exist in the United States
and in many jurisdictions throughout the world. The Company maintains a quality
control program, including the inspection of goods at factories and the
retention of independent testing laboratories in Hong Kong, to ensure compliance
with applicable laws. The Company believes it is in material compliance with all
applicable consumer safety laws.

      The sale of franchises is regulated by the Federal Trade Commission and by
certain state agencies located in jurisdictions where the Company has
franchisees. These regulations generally require certain written disclosures
prior to the offer for sale of a franchise. The disclosure documents are subject
to state review and registration requirements and must be updated at least
annually. Some states also have relationship laws, which prescribe the basis for
terminating franchisees' rights, and regulate both the Company's, and its
franchisee's post-termination rights and obligations. The Company believes it is
in material compliance with all applicable franchise laws.

                                       15
<PAGE>
TARIFFS AND DUTIES

      In December 1994, the United States approved a trade agreement eliminating
import duties on toys, games, dolls and other specified items manufactured in
countries with Most Favored Nation status ("MFN"), including China. The
imposition or increase in quotas, duties, tariffs, the loss of China's MFN
status or other changes or trade restrictions could have a materially adverse
effect on the Company's financial condition, operating results or ability to
import products.

      The Company could attempt to mitigate the effects of an increase in duties
by purchasing from manufacturers in other countries, but there can be no
assurance that the Company would be successful in this regard. The Company
cannot predict what regulatory changes may occur or the type or amount of any
financial impact on the Company that these changes could have in the future.

      Prior to January 1, 1998, Spain imposed an import duty for certain
products imported into the country from China that exceed specified levels. On
January 1, 1998, Spain abolished the quota on toys. Although this import duty
exemption covers all items currently imported by the Company from China to
Spain, future changes in such regulation or in the items imported could result
in the imposition of import duties.

TRADEMARKS

      The Company has registered trademarks for Play-By-Play(R) and
Play-Faces(R) in the United States and in Spain. The Company has registered
trademarks for Talkin' Tots(R), Talkin' Tunes(R), Penny and Patches(R), and
Fanimals(R) in the United States.

EMPLOYEES

      As of July 31, 1999, the Company employed approximately 652 people in its
toy operations and 15 people in its vending operation. Of the 652 employees in
the toy operations, approximately 355 are engaged in warehousing and
distribution, 98 are engaged in finance and administration, 137 are engaged in
sales and marketing, and 62 are engaged in product development. A union
represents some of the Company's employees in Chicago, Illinois. In Spain, the
Company has standard national employment contracts with all of its Spanish
employees. The Company believes its relationship with its employees is
satisfactory.

RISK FACTORS

      THIS REPORT CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, WITHOUT LIMITATIONS, COMPETITIVE AND ECONOMIC
FACTORS, CHANGES IN CONSUMER PREFERENCES, PRICE CHANGES BY COMPETITORS,
RELATIONSHIPS WITH LICENSORS AND CUSTOMERS, ABILITY TO MANAGE GROWTH, ABILITY TO
SOURCE PRODUCTS, INTERNATIONAL TRADE RELATIONS, MANAGEMENT OF QUARTER TO QUARTER
RESULTS, INCREASES IN COSTS OF RAW MATERIALS, TIMING OF TECHNOLOGICAL ADVANCES
BY THE COMPANY AND ITS COMPETITORS, LACK OF ACCEPTANCE BY CONSUMERS OF NEW
PRODUCTS, AND THE OTHER FACTORS DISCUSSED IN THIS SECTION AND ELSEWHERE HEREIN.
UPDATED INFORMATION WILL BE PERIODICALLY PROVIDED BY THE COMPANY AS REQUIRED BY
THE SECURITIES EXCHANGE ACT OF 1934.

      LEVERAGE AND FUTURE DEBT SERVICE AND CAPITAL NEEDS. Monthly principal
payments on the Company's outstanding Convertible Debentures commence in June
2000, and the Convertible Debentures

                                       16
<PAGE>
mature on December 31, 2000. The Company currently expects that, by itself, cash
flow from operations will be insufficient to meet these debt service obligations
under the Convertible Debentures. Accordingly, unless earlier converted to the
Company's common stock, the Company will need to refinance the Convertible
Debentures in order to satisfy its repayment obligations thereunder. There can
be no assurance that the Company will be able to refinance the Convertible
Debentures or, if such a refinancing is obtained, that the terms will be as
favorable to the Company as those contained in the Convertible Debentures. In
connection with a refinancing, the Company may be required to issue equity to
the new lenders which would result in dilution to existing shareholders. In the
event a refinancing cannot be accomplished, the Company may be required to sell
assets or one or more business lines to generate the funds necessary to repay
the Convertible Debentures.

      The Company has borrowed substantially all of its available capacity under
its new credit facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources. " Thus,
any future losses or other capital needs could require the Company to seek
additional financing from public or private issuances of debt and/or equity or
from asset sales. The Company may not be able to complete any such financing or
asset sale or, if so, on terms favorable to the Company. Any equity financing
could result in dilution to existing shareholders.

      RISKS ASSOCIATED WITH LICENSE AGREEMENTS. The Company's license agreements
generally require minimum guarantees, obligating the Company to make specified
royalty payments regardless of sales. The Company's existing license agreements
generally have terms ranging from one to three years. The Company expects
greater pressure to be placed on liquidity to fund significant additional
royalty advances and guarantees of minimum royalty payments. In the past, the
Company has been successful in renewing its significant licenses and none of its
significant licenses has been terminated; however, there can be no assurance
that the Company will be able to procure new license agreements or renew
existing license agreements, or that existing licenses will not be terminated.
There also can be no assurance that the renewal of existing licenses or
obtaining of additional licenses for characters or trademarks can be effected on
commercially reasonable terms. Certain of the Company's license agreements
require insurance bonds to secure payment of the guarantees of minimum
royalties. The Company's license agreements limit both the products that can be
manufactured thereunder and the territories and markets in which such products
may be marketed. Generally, the Company's license agreements require certain
types and amounts of insurance, licensor approval before any merger or
reorganization involving the licensee, certain stock sales, or assignment of the
license. In addition, the Company's licensors typically have the right to
approve, at their sole discretion, the products developed by the Company and the
third party manufacturer of such products. Obtaining such approvals may be time
consuming and could adversely affect the timing of the introduction of new
products. Some of the Company's significant licenses are non-exclusive. Licenses
that overlap the Company's licenses with respect to products, geographic areas
and markets have been and may continue to be granted to competitors of the
Company which may adversely affect the Company's product sales.

      Approximately 46.8% of the Company's net sales in fiscal 1999 were derived
from the sale of products based on Warner Brothers' Looney Tunes characters. The
loss of the Warner Bros. license rights would have a materially adverse effect
on the Company. The Company expects that Warner Bros. may from time to time
consider various opportunities, whether developed internally or proposed by
third parties, involving the commercial exploitation of the Looney Tunes
characters. Warner Bros. would be free to pursue such opportunities directly or
with others, including products and markets licensed to the Company. There can
be no assurance that Warner Bros. will offer any such business opportunities to
the Company or that such opportunities will be offered on terms acceptable to
the Company.

                                       17
<PAGE>
      As a result of weakness in the Company's domestic and international retail
business experienced during fiscal 1999, the Company has reevaluated commitments
for guaranteed minimum royalties on certain license agreements. The Company
estimates that projected future revenues over the remaining terms of three
particular license agreements with a particular licensor, will be insufficient
to allow the Company to earn-out the guaranteed minimum royalties advanced or
required to be paid to the licensor over the remaining terms of the agreements
that commenced in 1998 and expire during fiscal year 2001 and has accrued
amounts for the estimated guaranteed minimum royalty shortfall as of July 31,
1999. The Company recorded a charge of $14.9 million for the write-downs of the
guaranteed minimum royalties. The Company is in the process of negotiating
extensions of the license terms and/or concessions relative to the remaining
guaranteed minimum royalties. These negotiations are expected to be completed by
the end of the first quarter of calendar year 2000. There can be no assurance
that the Company will be able to secure extensions or concessions from the
licensor or that if secured, will be sufficient in scope to mitigate the impact
of the revenue shortfalls as it relates to the guaranteed minimum royalties.

      CONSUMER PREFERENCES; NEW PRODUCT INTRODUCTION. As a result of changing
consumer preferences, many toys are successfully marketed for only one or two
years. There can be no assurance that any of the Company's products or any of
the Company's product lines will continue to be popular for any significant
period of time or that new products and product lines introduced by the Company
will achieve an acceptable degree of market acceptance, or that if such
acceptance is achieved, it will be maintained for any significant period of
time. The Company's success will be dependent upon the Company's ability to
enhance existing product lines and develop new products and product lines. The
failure of the Company's new products and product lines to achieve and sustain
market acceptance and to produce acceptable margins could have a material
adverse effect on the Company's financial condition and results of operations.

      DEPENDENCE ON KEY PERSONNEL. The Company's future success will be highly
dependent on the continued efforts of Arturo G. Torres, Chairman of the Board
and Chief Executive Officer, Raymond G. Braun, President and Chief Operating
Officer and Richard Neitz, President-Retail Operations. Other than employment
agreements with Mr. Braun, Mr. Neitz, two other employees, and the statutory
employment contracts required in Spain, the Company has no employment agreements
or noncompete agreements with, or key-man life insurance on the lives of any of
its senior management or employees. The loss of the services of one or more of
such key personnel could have a materially adverse effect on the Company. The
Company's success also depends on its ability to retain its key management,
sales, marketing, financial and product development personnel and to attract
other personnel to satisfy the Company's needs. There can be no assurance that
the Company will be successful in retaining and attracting such personnel.

      DEPENDENCE ON THIRD PARTY MANUFACTURERS; INTERNATIONAL RELATIONS. To date,
a substantial portion of the Company's products have been manufactured by third
parties in the People's Republic of China. The Company does not have long-term
contracts with any of these manufacturers. Although the Company has begun to
arrange alternate sources of manufacturing outside of China, the Company has
made no definitive plans for securing alternate sources in the event its present
arrangements with Chinese manufacturers prove impossible to maintain.
Accordingly, there can be no assurance that there would be sufficient alternate
manufacturing facilities to meet the increased demand for production which would
likely result from a disruption of manufacturing sources in China. A shift to
alternate facilities, if available, would likely result in increased
manufacturing costs and could subject the Company's products to additional
and/or higher quotas, duties, tariffs or other restrictions.

                                       18
<PAGE>
      China currently enjoys MFN status under United States tariff laws, which
provides the most favorable category of United States import duties. There has
been, and may be in the future, opposition to the extension of MFN status for
China. The loss of MFN status for China would result in a substantial increase
in the import duty of toy products (currently 70% for non-MFN countries)
manufactured in China which would result in increased costs for the Company.
Although the Company would attempt to mitigate this increased cost by shifting
its production to other countries, there can be no assurance that the Company
would be successful in attempting to shift production within a reasonable period
of time.

      RISK OF FOREIGN OPERATIONS. Foreign operations are generally subject to
risks such as transportation delays and interruptions, political and economic
disruptions, the imposition of tariffs and import and export controls, changes
in government policies, delays in and restrictions on the transfer of funds and
currency fluctuations. In particular, purchases of inventory by the Company's
European subsidiary from its suppliers in the Far East are subject to currency
risk to the extent that there are fluctuations in the exchange rate between the
United States dollar, the Spanish peseta and the British pound. Certain of the
European subsidiaries' license agreements call for payment of royalties in a
currency different from the functional currency. These arrangements subject the
Company to currency risk to the extent that exchange rates fluctuate from the
date that royalty liabilities are incurred until the date royalties are actually
paid to the licensor. During fiscal 1999, due to significant negative market
conditions in Latin America including material currency devaluation in Brazil
and Mexico, the Company incurred bad debt losses of approximately $3.4 million,
as well as a significant decline in sales. While the Company has instituted much
more conservative terms of sales such as requiring letters of credit or reducing
credit limits, there can be no assurance that growth of the Company's
international operations will not subject it to greater exposure to risks of
foreign operations. The Company will from time to time examine the need, if any,
to engage in hedging transactions to reduce the risk of currency fluctuations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

      POTENTIAL FOR PRODUCT LIABILITY CLAIMS. Products that have been or may be
developed or sold by the Company may expose the Company to potential liability
from personal injury or property damage claims by end-users of such products.
The Company currently maintains product liability insurance coverage in the
amount of $1.0 million per occurrence, with a $20.0 million umbrella policy. The
Company's license agreements and certain customers require the Company to carry
specified types and amounts of insurance. There can be no assurance that the
Company will be able to maintain such coverage or obtain additional coverage on
acceptable terms, or that such insurance will provide adequate coverage against
any potential claims. Moreover, even if the Company maintains adequate
insurance, any successful claim could materially and adversely affect the
reputation and prospects of the Company. The Company believes that its products
meet all applicable safety standards. See "Business - Licensing," "-Product
Liability" and "-Legal Proceedings."

      COMPETITION. The toy industry is highly competitive. Many of the Company's
competitors have longer operating histories, broader product lines and greater
financial resources and advertising budgets than the Company. In addition, the
toy industry has nominal barriers to entry. Competition is based primarily on
the ability to design and develop new toys, procure licenses for popular
characters and trademarks, and successfully market products. Many of the
Company's competitors, including the Company's licensors, offer similar products
or alternatives to the Company's products. Certain of the Company's licensors
distribute competing products through proprietary retail outlets and amusement
parks. The Company's retail toy products compete with other toy products for
retail shelf space. While there are no guarantees that retail shelf space and
other particular avenues of distribution will always be available to the
company, management is confident that it will be able to continue to reach
end-consumers with its products in the foreseeable future.

                                       19
<PAGE>
      RAW MATERIALS PRICES. The principal raw materials in most of the Company's
products are fabrics and plastic parts made from petrochemical derivatives. The
prices for the Company's raw materials are influenced by numerous factors beyond
the control of the Company, including general economic conditions, competition,
labor costs, import duties, other trade restrictions and currency exchange
rates. Changing prices for such raw materials may cause the Company's results of
operations to fluctuate significantly. A large, rapid increase in the price of
raw materials could have a materially adverse effect on the Company's operating
margins unless and until the increased cost could be passed along to consumers.

      YEAR 2000. Similar to many business entities, the Company may be impacted
by the inability of computer application software programs to distinguish
between the year 1900 and 2000 due to a commonly used programming convention.
Until such programs are modified or replaced prior to 2000, calculations and
interpretations based on date-based arithmetic or logical operations performed
by such programs may be incorrect.

      Management's plan addressing the impact on the Company of the Year 2000
issue focuses on application systems, process control systems (embedded chips),
technology infrastructure, and third party business partners and suppliers with
which the Company has significant relationships. The plan is comprised of five
phases: (1) developing an inventory of hardware, software and embedded chips,
(2) assessing the degree to which each area is currently in compliance with Year
2000 requirements, (3) performing renovations and repairs as needed to attain
compliance, (4) testing to ensure compliance, and (5) developing a contingency
plan if repair and renovation efforts are either unsuccessful or untimely.

      Management has completed steps (1), (2), and (5) of this plan. Steps (3)
and (4) were in process at the Balance Sheet date, and subsequent to that date,
have been substantially completed. The Company feels that all phases will be
completed by the end of calendar 1999. Costs incurred to date have primarily
consisted of labor from the redeployment of existing information technology,
legal and operational resources as well as computer hardware and software costs.
The Company has budgeted approximately $5.2 million for these Year 2000
compliance efforts, and management feels that actual final costs will not
materially deviate from this. However, the Company's Year 2000 program is an
ongoing process and the estimates of costs and completion dates for various
aspects of the program are subject to change.

      The Company is currently replacing its financial and core business system
software with a new Oracle Enterprise Resource Planning System designed to
enhance management information, financial reporting, inventory management, order
entry, purchasing and has the added benefit of addressing the Year 2000 issues.
The new enterprise system has necessitated enhancement of the Company's existing
computer networks and desktop applications. The Company does not presently
anticipate a material business interruption as a result of the Year 2000.

      Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of third-party
suppliers and customers, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact on the
Company's results of operations, liquidity or financial condition. The Company's
current and planned activities with respect to the Year 2000 problem are
expected to significantly reduce the Company's level of uncertainty about the
problem and, in particular, about the Year 2000 compliance and readiness of its
material customers and suppliers. The Company believes that, with the
implementation of the new enterprise systems and completion of the planned
activities as scheduled, the possibility of significant interruptions of normal
operations should be minimal.

                                       20
<PAGE>
      Management believes that its customers and suppliers would also receive
advance notice of any material year 2000 compliance problems, allowing them to
implement alternate plans, if necessary.

      SEASONALITY. Both the retail and amusement toy industries are inherently
seasonal. Generally, in the past, the Company's sales to the amusement industry
have been highest during the third and fourth fiscal quarters, and collections
for those sales have been highest during the succeeding two fiscal quarters. The
Company's sales to the retail toy industry have been highest during its first
and fourth fiscal quarters, and collections from those sales have been highest
during the succeeding two fiscal quarters. The Company's working capital needs
and borrowings to fund those needs have been highest during the third and fourth
fiscal quarters. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

      GROWTH STRATEGY. The Company's growth strategy provides for (1) further
development and diversification of the Company's retail and amusement toy
business, (2) expanding new distribution channels, such as mail order catalogs
and on-line internet retailing, (3) acquiring additional license agreements and
(4) further developing international markets. Implementing this strategy
involves risks including competition, lack of acceptance of new products,
economic downturns, the inability to affordably obtain or renew licenses, and
the inability to finance increased working capital requirements, if any. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

      ACQUISITION RISKS. The Company expects to continue to evaluate and pursue
attractive acquisition candidates, although the Company is not actively pursuing
any acquisition targets currently. Assessing the characteristics of potential
target companies is necessarily inexact and its accuracy is inherently
uncertain. This review will not reveal all existing or potential problems, nor
will it permit a buyer to become sufficiently familiar with the target companies
to assess fully their deficiencies and capabilities. There can be no assurance
that the Company's future acquisitions, if any, will be successful. Any
unsuccessful acquisition could have a materially adverse effect on the Company.

      SHARES ELIGIBLE FOR FUTURE SALE. The Company has 7,395,000 shares of
Common Stock outstanding as of October 29, 1999. Certain shares of Common Stock
are "restricted securities" under the Securities Act of 1933, as amended (the
"Securities Act"). These "restricted securities," and any shares purchased by
affiliates of the Company, may be sold only if they are registered under the
Securities Act or pursuant to an applicable exemption from the registration
requirements of the Securities Act, including Rule 144 thereunder. There are
1,639,500 shares of common stock owned by existing shareholders and registered
pursuant to a registration statement on Form S-3 as filed by the Company on June
2, 1998 allowing for the resale of such shares free of restriction by applicable
securities laws. There are also (i) 1,515,300 shares of Common Stock reserved
for issuance under outstanding options to purchase shares of Common Stock, (ii)
217,000 shares of Common Stock subject to outstanding warrants and (iii) a
maximum of 2,500,000 shares of Common Stock issuable upon partial or total
conversion, if any, of the Company's outstanding convertible debentures (which
amount could increase if the Company fails to repay in full the Convertible
Debentures by December 31, 2000). In addition, various persons have "piggy-back"
and demand registration rights to register shares of Common Stock issuable upon
the exercise of certain warrants for public sale under the Securities Act. No
prediction can be made as to the effect, if any, that future sales of shares, or
the availability of shares for future sales, will have on the market price of
the Common Stock.

      DIVIDEND POLICY. The Company has never paid any cash dividends. For the
foreseeable future, the Company expects to retain earnings to finance the
expansion and development of its business. Any future payment of cash dividends
will be within the discretion of the Company's Board of Directors, and will
depend on, the earnings, capital requirements, operating and financial condition
of the Company,

                                       21
<PAGE>
compliance with various financing covenants and other relevant factors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

      ANTI-TAKEOVER PROVISIONS. The Company's Articles of Incorporation and
Bylaws contain provisions establishing a classified Board of Directors. The
Board of Directors may issue preferred stock and has the power to determine the
rights, preferences, privileges and restrictions without any further vote or
action by the shareholders. A two-thirds vote of shareholders is required to
remove directors, amend the Bylaws or approve certain business combinations with
respect to a "related person." Such provisions could delay, deter or prevent a
merger, consolidation, tender offer, or other business combination or change of
control involving the Company, including offers or attempted takeovers that
might otherwise result in current shareholders receiving a premium over the
market price for the Common Stock. The potential issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control of the
Company, may discourage bids for the Common Stock at a premium over the market
price of the Common Stock and may adversely affect the market price of, and the
voting and other rights of the holders of, Common Stock. The Company has not
issued, and currently has no plans to issue, shares of preferred stock.

      POSSIBLE VOLATILITY OF STOCK PRICE. Market prices for the Company's Common
Stock may be influenced by a number of factors, including the Company's
operating results, liquidity and capital resources and other factors affecting
the Company specifically. The price might also be influenced by factors in the
toy industry as a whole and the financial markets generally, as well as the
depth and liquidity of the market for the Common Stock. In the past, the
Company's Common Stock price has been extremely volatile and has experienced
substantial and sudden fluctuations; accordingly, such volatility may continue
in the future.

                                       22
<PAGE>
ITEM 2.  PROPERTIES

      The Company's principal executive offices, warehouse and showroom in San
Antonio, Texas, include 39,450 square feet of office space, 8,600 square feet of
showroom space and 192,014 square feet of distribution warehouse space, pursuant
to lease agreements that expire at various times during January 2000 and
December 2003.

      The Company owns the Chicago, Illinois property and building comprising
9,920 square feet of office space, 6,480 square feet of showroom space, and
363,100 square feet of distribution and warehouse space. The Company has a 51%
ownership interest in the Los Angeles, California property and building
comprised of 6,400 square feet of office space, 6,220 square feet of showroom
space, and 234,740 square feet of distribution and warehouse space. The
remaining 49% interest in the Los Angeles, California facility was owned by and
leased from certain of the Ace Sellers. On October 25, 1999, in connection with
the Company's debt refinancing and restructuring transactions, Arturo G. Torres,
Chairman and Chief Executive Officer, agreed to personally assume the Company's
$1.7 million current obligation to purchase the remaining 49% interest in the
Company's Los Angeles distribution facility.

      The Company also leases the following offices, warehouses, distribution
centers and showrooms:

                                                          APPROXIMATE
      LOCATION                TYPE OF FACILITY           SQUARE FOOTAGE
      --------                ----------------           --------------
New York, New York            Showroom                            4,600

Los Angeles, California       Warehouse                         119,000

Woodinville, Washington       Office/Warehouse                   34,100

Kowloon, Hong Kong,
China                         Office/Showroom/Warehouse           4,299

Panyu, China                  Showroom/Office                    12,000

Burnaby, British Columbia,    Office/Showroom/Warehouse          23,500
and Mississauga, Ontario
Canada

San Juan, Puerto Rico         Office/Showroom/Warehouse          35,000

Doncaster, England            Office/Showroom/Warehouse          36,000

Valencia, Spain               Office/Showroom/Warehouse         108,130

      The Company believes that additional office, showroom and warehouse space
is readily available and that such new space, together with the Company's
existing facilities, will be adequate and suitable for the operation of its
business for the foreseeable future.

                                       23
<PAGE>
ITEM 3.  LEGAL PROCEEDINGS

      The Company is involved in various legal proceedings and claims incident
to the normal conduct of its business. The Company believes that such legal
proceedings and claims, individually and in the aggregate, are not likely to
have a materially adverse effect on its financial condition.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None.

PART II

ITEM  5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

MARKET INFORMATION

      The Company's Common Stock is traded on the Nasdaq National Market System
under the symbol "PBYP." The table sets forth, for the fiscal periods indicated,
the reported high and low close sale prices of the Company's Common Stock, as
reported on the Nasdaq National Market System:

                                 1999                    1998
                            ---------------         ---------------
                            HIGH        LOW         HIGH        LOW
                            ----        ---         ----        ---
      First Quarter       $  10.88   $    7.13   $  23.63    $  16.25
      Second Quarter          8.88        7.00      21.38       16.25
      Third Quarter           7.25        4.75      21.38       16.19
      Fourth Quarter          5.56        2.38      17.75        9.06

SHAREHOLDERS

      According to the records of the Company's transfer agent, the Company had
202 holders of record of Common Stock as of October 29, 1999. The Company
believes that a substantially larger number of beneficial owners hold such
shares in depository or nominee form.

DIVIDENDS AND DISTRIBUTIONS

      It is the current policy of the Board of Directors (the "Board") to retain
earnings to finance the operations and development of the Company's business.
The Company's ability to pay dividends is limited by certain provisions of the
Company's Credit Facility. Any future determination as to the payment of cash
dividends will depend on a number of factors, including but not limited to
future earnings, capital requirements, the financial condition and prospects of
the Company and any credit agreement restrictions. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity &
Capital Resources Dividend Policy."

                                       24
<PAGE>
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

      The following table sets forth selected consolidated financial data for
the Company for the periods and at the dates indicated. The selected
consolidated financial data for the fiscal years ended July 31, 1999, 1998, and
1997 have been derived from the audited Consolidated Financial Statements of the
Company which are included elsewhere in this Form 10-K. The information set
forth below is not necessarily indicative of results of future operations. On
March 31, 1996, the Company sold Restaurants Universal Espana, S.A.
("Restaurants Universal"), its European subsidiary that operated two restaurants
in Spain. The historical financial data for Restaurants Universal has been
reported as discontinued operations and accordingly the historical financial
data for all prior years presented has been restated. This data should be read
in conjunction with, and is qualified in its entirety by, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Consolidated Financial Statements and the Notes thereto, which appear
elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                                            YEAR ENDED JULY 31,
                                                     -----------------------------------------------------------
                                                       1999         1998       1997 (3)     1996          1995
                                                     ---------    ---------   ---------   ---------    ---------
                                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                  <C>          <C>         <C>         <C>          <C>
Consolidated Statement of Operations Data (1):
Net sales (2) ....................................   $ 156,515    $ 178,103   $ 137,386   $  74,197    $  47,730
Income (loss) from continuing operations .........     (30,230)       8,445       6,216       4,052        1,898
(Loss) from discontinued operations (2) ..........        --           --          --          (384)        (259)
Net income (loss) ................................   $ (30,230)   $   8,445   $   6,216   $   3,668    $   1,639

Basic earnings (loss) per common share ...........   $   (4.12)   $    1.30   $    1.28   $    0.84    $    0.74
Diluted earnings (loss) per common share .........   $   (4.12)   $    1.19   $    1.25   $    0.84    $    0.73

Average number of shares outstanding - basic .....       7,338        6,474       4,872       4,841        2,580
Average number of shares outstanding - diluted ...       7,338        7,760       5,036       4,856        2,582

<CAPTION>
                                                                                 JULY 31,
                                                     -----------------------------------------------------------
                                                       1999         1998         1997       1996         1995
                                                     ---------    ---------   ---------   ---------    ---------
BALANCE SHEET DATA (1):
Working capital ..................................   $  32,106    $  76,454   $  35,372   $  19,910    $  26,159
Total assets .....................................     155,318      167,884     125,906     104,922       47,300
Long-term debt, including capital leases .........      22,153       20,962      23,238      11,096          148
Total liabilities ................................      97,378       78,895      82,237      62,222       15,273
Shareholders' equity .............................      57,940       88,989      43,669      38,700       32,027
                                                     ---------    ---------   ---------   ---------    ---------
</TABLE>

(1)   In June 1996, the Company acquired Ace, which was accounted for as a
      purchase. Ace's assets and certain liabilities are included in the
      Company's Consolidated Balance Sheet at July 31, 1996 and its results of
      operations were included in the Consolidated Statement of Operations
      beginning June 21, 1996. For these reasons, the Consolidated Statement of
      Operations of the Company for fiscal years 1996 and 1995 is not comparable
      to subsequent periods.
(2)   Fiscal year 1995 has been restated to reflect the disposition of 100% of
      the stock of Restaurants Universal Espana, which was sold during the third
      quarter of fiscal 1996.
(3)   In November 1996, Play By Play Europe acquired TLC, which was accounted
      for as a purchase. TLC's assets and liabilities are included in the
      Company's Consolidated Balance Sheet at January 31, 1997 and its results
      of operations were included in the Consolidated Statement of
      Operations beginning November 1996.

                                       25
<PAGE>
ITEM 7.  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND
RESULTS OF OPERATIONS

GENERAL

      THIS REPORT CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, THE COMPANY'S LIQUIDITY AND CAPITAL RESOURCES,
COMPETITIVE AND ECONOMIC FACTORS, CHANGES IN CONSUMER PREFERENCES, PRICE CHANGES
BY COMPETITORS, RELATIONSHIPS WITH LICENSORS AND CUSTOMERS, ABILITY TO MANAGE
GROWTH, ABILITY TO SOURCE PRODUCTS, INTERNATIONAL TRADE RELATIONS, MANAGEMENT OF
QUARTER TO QUARTER RESULTS, INCREASES IN COSTS OF RAW MATERIALS, TIMING OF
TECHNOLOGICAL ADVANCES BY THE COMPANY AND ITS COMPETITORS, LACK OF ACCEPTANCE BY
CONSUMERS OF NEW PRODUCTS, AND THE OTHER FACTORS DISCUSSED IN "RISK FACTORS",
AND ELSEWHERE HEREIN. THE COMPANY AS REQUIRED BY THE SECURITIES EXCHANGE ACT OF
1934 WILL PERIODICALLY PROVIDE UPDATED INFORMATION.

      The following discussion and analysis, together with the accompanying
consolidated financial statements and related notes, will aid in understanding
the Company's results of operations as well as its financial position, cash
flows, indebtedness and other key financial information.

      The Company's principal business is to design, develop, market and
distribute stuffed toys, novelty items, and sculpted toy pillows based on
licensed characters and trademarks. The Company also designs, develops, markets
and distributes electronic toys and non-licensed stuffed toys. The Company sells
these products to customers in the amusement and retail markets. The Company's
toy operations accounted for 98.3% of net sales for fiscal 1999. Approximately
1,800 coin-operated amusement game machines operated by the Company's vending
division provide the remaining 1.7% of net sales. Net sales derived from vending
operations as a percentage of net sales have declined in recent periods as the
Company has emphasized its toy operations, and the Company anticipates that such
trend will continue. Based on the current weakness in the domestic traditional
retail toy market, the Company does not expect the growth in the retail
division's sales to continue at rates as rapid as it has experienced in the past
years.

      The Company has divested and acquired several entities in its history. In
each case, management evaluates the strategic role of each entity relative to
its overall long-term business plan. Management also estimates future return
versus the current market value of such entities to determine if divesting or
acquiring a business makes economic sense at any given time. In March 1996, the
Company sold Restaurants Universal, its European subsidiary to an unrelated
third party, for approximately $1.6 million. The outstanding balance of the
non-performing note receivable in the amount of $742,000 due from the purchaser
of the restaurants was fully reserved for in the fourth quarter of fiscal 1999
by the Company due to the purchaser's failure to remit the required payments on
the note and the filing by the Company of a lawsuit against the purchaser to
enforce collection. In June 1996, the Company acquired substantially all of the
operating assets, business operations and facilities of Ace. The purchase price,
paid principally with cash and debt, was approximately $44.7 million and was
accounted for using the purchase method. In November 1996, the Company, through
Play-By-Play Europe, acquired all of the outstanding capital stock of TLC based
in Doncaster, England for 40,000 shares of the Company's common stock. The
acquisition was accounted for using the purchase method. In March 1999, the
Company through a wholly-owned subsidiary, acquired certain assets and
liabilities of Caribe Marketing and Sales Co., Inc. ("Caribe") for the purchase
price of $2.5 million consisting of cash, 80,000 shares of the Company's common
stock, and the assumption of a Sellers' note. The Company believes that Caribe
provides the Company with a new base for its Latin American operations and
enhances the Company's marketing and distribution capabilities within the
market.

                                       26
<PAGE>
      Net toy sales to amusement customers accounted for 73.4% of the Company's
net sales for fiscal 1999. The Company sells both licensed and non-licensed
products to its amusement customers for use principally as redemption prizes.
Net toy sales to retail customers accounted for 24.8% of the Company's net sales
for fiscal 1999. Since the beginning of fiscal 1994, the Company has expanded
its product offering of licensed stuffed toys through the addition of several
licensed characters and trademarks. Prior to fiscal 1997, substantially all of
the Company's sales to retail customers involved licensed products.

      Sales to amusement customers generally provide a higher gross margin than
do sales to retail customers. Among the amusement sales, licensed products
typically provide a higher gross margin than do non-licensed products. Retailers
typically buy in higher volumes, therefore they demand lower margins. However,
retail sales of television promoted products generally result in higher gross
margins than non-promoted items, but also require higher associated advertising
costs, which are reported as a component of selling, general and administrative
costs. The Company spent approximately $1.9 million on media advertising for
certain retail products during fiscal 1999.

      The Company began its international toy operations with the opening of its
distribution facility in Spain in August 1993. Since that time and with the
acquisition of TLC in the U.K., the Company has experienced significant sales
growth in its international operations, particularly in Western Europe. The
Company anticipates continued international sales growth in both the amusement
and retail markets, particularly with respect to licensed products. Non-licensed
products are comparable in both the United States and Europe; licensed products
might be sold worldwide or only in some markets, depending on local tastes and
licensing restrictions. The Company's European toy sales have historically
resulted in higher gross margins than domestic toy sales; however, the Company
believes this trend will change as the large retailers continue to quickly gain
market share.

      Most of the Company's international toy sales are made in European
countries by Play-By-Play Europe, S.A. located in Valencia, Spain and by
Play-By-Play U.K. Ltd. located in Doncaster, England. To date, the cost of most
direct shipment sales from third-party manufacturers to international customers
has been borne by Play-By-Play Europe and have been denominated in United States
dollars. Accordingly, the Company is exposed to foreign currency risk from the
shipment date until receipt of payment. Substantially all other sales by such
subsidiaries are transacted in Spanish pesetas or British pounds, their
functional currencies, and therefore any gain or loss on currency translation is
reported as a component of Shareholders' Equity on the Company's consolidated
financial statements. In addition, the Company faces similar risk on inventory
purchases from third-party manufacturers by the Company's European subsidiaries.
These transactions are also denominated in United States dollars so foreign
currency risk exists from the time that the subsidiaries are notified of the
shipment until payment is made.

      Some of the Company's license agreements require royalty payments in
Canadian dollars. Likewise, some of Play-By-Play Europe's license agreements
require payments in United States dollars. As a result, the Company experiences
currency risk to the extent that exchange rates fluctuate from the date the
royalty liability or minimum guarantee is incurred until the date the royalty is
actually paid to the licensor. Additionally, the Company is exposed to foreign
currency risk for intercompany receivable and payable transactions through the
settlement date.

      Historically, no attempt has been made to minimize, by means of hedging or
derivatives, the risk of potential currency fluctuations, since the currency
risk has not been significant to the Company on a consolidated basis.

      The Company experienced significant growth in net sales and net income
during 1997 and 1996 due in part to the Ace and TLC acquisitions, which occurred
in June and November, respectively, of

                                       27
<PAGE>
1996. Accordingly, period-to-period comparisons of operating results may not be
meaningful and results of operations from prior periods may not be indicative of
future results.

RESULTS OF OPERATIONS

      The following table sets forth the Company's results of operations as a
percentage of net sales for the periods indicated below:

                                                     YEAR ENDED JULY 31,
                                               --------------------------------
                                                 1999        1998        1997
                                               --------    --------    --------
Net sales ..................................    100.0 %     100.0 %     100.0 %
Cost of sales ..............................       82.8        65.6        66.3
Gross profit ...............................       17.2        34.4        33.7
Selling, general and administrative expenses       35.7        24.8        24.2
Operating income (loss) ....................      (18.4)        9.6         9.5
Interest expense ...........................       (3.1)       (2.6)       (3.1)
Interest income ............................        0.2         0.2        --
Other income ...............................        0.1        --          --
Income tax benefit (provision) .............        1.9        (2.6)       (2.0)
Net income (loss) ..........................      (19.3)        4.6         4.4
                                               --------    --------    --------

YEARS ENDED JULY 31, 1999 AND 1998

      NET SALES. Net sales for fiscal 1999 decreased 12.1%, or $21.6 million, to
$156.5 million from $178.1 million in fiscal 1998. The decrease in net sales was
primarily attributable to a decrease in domestic retail sales of 39.1%, or $16.3
million, to $25.5 million from $41.8 million as a result of a weak retail
environment for traditional toys in the U.S. and Latin America, caused by
several factors, including the closing of several Toys `R' Us locations in the
U.S., shrinking of toy inventories by retailers, and the economic weakness in
Latin America during fiscal 1999. Domestic amusement net sales for fiscal 1999
decreased 8.1%, or $8.2 million, to $93.4 million from $101.6 million in fiscal
1998. Domestic net toy sales for fiscal 1999 compared to fiscal 1998 decreased
17.2%, or $24.6 million, to $118.8 million, and international net toy sales
increased 10.3%, or $3.3 million, to $34.9 million.

      Net sales of licensed products for fiscal 1999 decreased by 4.1%, or $4.7
million, to $109.7 million from $114.4 million in fiscal 1998. The decrease in
licensed product sales was primarily attributable to decreased net sales of the
Company's licensed electronic products of 32.2%, or $4.6 million, to $9.9
million from $14.5 million in fiscal 1998. Within licensed products, net sales
of Looney Tunes' characters, decreased 18.7%, or $16.9 million, to $73.3 million
for fiscal 1999 from $90.2 million in fiscal 1998. Net sales of Play-Faces(R)
decreased 45.1%, or $4.3 million, to $5.2 million, from $9.5 million in fiscal
1998. Net sales of non-licensed products for fiscal 1999 and 1998 accounted for
28.2%, or $44.1 million, and 34.1%, or $60.7 million, respectively, of the
Company's net sales.

      Net toy sales to retail customers for fiscal 1999 and fiscal 1998
accounted for 24.8%, or $38.9 million, and 29.1%, or $51.9 million,
respectively, of the Company's net sales. The 25.1% decrease in net sales to
retail customers from fiscal 1998 to fiscal 1999 is primarily attributable to
the decreased net

                                       28
<PAGE>
sales of licensed and non-licensed electronic products and a decrease in sales
of Play-Faces(R) sales during fiscal 1999.

      Net toy sales to amusement customers for fiscal 1999 and fiscal 1998
accounted for 73.4%, or $114.9 million, and 69.2%, or $123.2 million,
respectively, of the Company's net sales. The 6.8%, or $8.3 million, decrease to
$114.9 million is primarily attributable to the decrease in sales of
non-licensed plush toys of $3.4 million, a 10.6% decrease from fiscal 1998, a
decrease in sales of novelty items of $2.4 million, an 18.3% decrease from
fiscal 1998, and a decrease in sales of licensed plush toys of $2.5 million, a
3.2% decrease from fiscal 1998.

      GROSS PROFIT. Gross profit decreased 56.1% to $26.9 million in fiscal 1999
from $61.3 million in fiscal 1998, due principally to charges recorded in the
fourth quarter of fiscal 1999 related to royalty and inventory write-down
reserves and the overall decrease in the Company's net sales. The Company
recorded a charge of $14.9 million for write-downs of guaranteed minimum royalty
advances paid or required to be paid on certain long-term licenses that the
Company anticipates it will be unable to earn out over the remaining term of the
license agreements. In addition, in the fourth quarter of fiscal 1999, the
Company recorded a provision of $4.5 million to write-down the carrying value of
certain slow or non-moving inventory items to their estimated net realizable
values. Accordingly, gross profit as a percentage of net sales decreased from
34.4% for fiscal 1998 to 17.2% for fiscal 1999. Exclusive of these charges,
gross profit would have decreased 25.1%, or $15.4 million to $45.9 million over
the comparable period in fiscal 1998.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net
sales, selling, general and administrative expenses increased to 35.7% in fiscal
1999 from 24.8% in fiscal 1998. Such expenses increased 26.6% to $55.8 million
for fiscal 1999 from $44.1 million in fiscal 1998. The increase in selling,
general and administrative expenses is principally attributable to bad debt
expense of $2.2 million recorded in the third quarter of fiscal 1999 related to
the write-off of amounts due from its insolvent distributor in Mexico and
approximately $1.3 million representing a provision recorded in the fourth
quarter for the anticipated loss related to the Company's acquisition of certain
assets from a U.S. distributor, as well as specific bad debt reserves of $2.1
million for certain non-performing trade and non-trade receivables from
customers and the $742,000 balance of a non-performing note receivable from the
purchaser of Restaurants Universal, as well as, approximately $409,000 of
severance costs related to recent management restructuring initiatives and
personnel reductions. Excluding these expenditures, selling, general and
administrative expenses would have increased 11.3% or $5.0 million, to $49.1
million over the comparable period in fiscal 1998.

      INTEREST EXPENSE AND OTHER INCOME. Interest expense increased 7.1% or
approximately $321,000, to $4.8 million for fiscal 1999 from $4.5 million in
fiscal 1998. The increase is attributable to increased borrowings outstanding
under the Company's credit facility partially offset by lower overall borrowing
rates.

      INCOME TAX EXPENSE (BENEFIT). The Company realized a net tax benefit of
$2.9 million as compared to a provision of $4.5 million in the prior year. The
tax benefit was realized as a result of the net loss in fiscal year 1999 to the
extent of net loss carrybacks, offset by tax expense on taxable income of
certain foreign subsidiaries.

YEARS ENDED JULY 31, 1998 AND 1997

      NET SALES. Net sales for fiscal 1998 increased 29.6%, or $40.7 million, to
$178.1 million from $137.4 million in fiscal 1997. The increase in net sales was
primarily attributable to domestic amusement sales increase of 24.9%, or $20.3
million, to $101.6 million from $81.4 million. Domestic net toy sales

                                       29
<PAGE>
for fiscal 1998 compared to fiscal 1997 increased 26.9%, or $30.3 million, to
$143.4 million, and international net toy sales increased 50.2%, or $10.6
million, to $31.7 million.

      Net sales of licensed products for fiscal 1998 increased 39.8%, or $32.6
million, to $114.5 million from $81.9 million in fiscal 1997. The increase in
licensed product sales was primarily attributable to growth of net sales of the
Company's licensed products to domestic and international amusement customers of
60.5%, or $29.3 million, to $77.7 million from $48.4 million in fiscal 1997.
Within licensed products, net sales of Looney Tunes' characters, increased
75.5%, or $38.8 million, to $90.2 million for fiscal 1998 from $51.4 million in
fiscal 1997. Net sales of the Tornado Taz(TM) accounted for $10.6 million, or
6.0%, of the Company's net toy sales for fiscal 1998. Net sales of Play-Faces(R)
decreased 42.4%, or $7.0 million, to $9.5 million, from $16.5 million in fiscal
1997. Net sales of non-licensed products for fiscal 1998 and 1997 accounted for
34.1%, or $60.7 million, and 38.0%, or $52.2 million, respectively, of the
Company's net sales.

      Net toy sales to retail customers for fiscal 1998 and fiscal 1997
accounted for 29.1%, or $51.9 million, and 27.9%, or $38.3 million,
respectively, of the Company's net sales. The 35.5% increase in net sales to
retail customers from fiscal 1997 to fiscal 1998 is primarily attributable to
the introduction of new electronic products added during fiscal 1998, the
Talkin' Tots(TM) sales increase of $10.3 million or 215.6%, the Tornado Taz(TM)
sales increase of $8.6 million or 421.1%, and the increase of licensed stuffed
toys of $1.6 million, or 10.9%. The growth in retail sales was offset with a
decrease in Play-Faces(R) sales of $7.0 million or 42.2%.

      Net toy sales to amusement customers for fiscal 1998 and fiscal 1997
accounted for 69.2%, or $123.2 million, and 69.8%, or $95.9 million,
respectively, of the Company's net sales. The 28.6%, or $27.4 million, increase
to $77.7 million, is primarily attributable to an increase in sales of licensed
plush toys to amusement customers, a 60.5% increase from fiscal 1997, sales of
novelty items of $4.5 million, a 51.2% increase from fiscal 1997, partially
offset by a decrease in sales of non-licensed plush toys of $6.4 million.

      GROSS PROFIT. Gross profit increased 32.3% to $61.3 million in fiscal 1998
from $46.4 million in fiscal 1997, due to the overall increase in the Company's
net sales. Gross profit as a percentage of net sales increased from 33.7% for
fiscal 1997 to 34.4% for fiscal 1998. This increase was principally a result of
increased retail sales of advertised products which carry a higher gross profit
margin which is offset by the advertising costs included in selling, general and
administrative expenses.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net
sales, selling, general and administrative expenses increased to 24.8% in fiscal
1998 from 24.2% in fiscal 1997. Such expenses increased 32.7% to $44.1 million
for fiscal 1998 from $33.2 million in fiscal 1997. This increase was primarily
attributable to increased television advertisement cost of $5.7 million and
increased payroll and related costs of $3.2 million, product development costs,
and the growth of the Company's infrastructure and increased expenses related to
the expansion of the Company's facilities in the U.S., Hong Kong and Europe. In
addition, during the second half of fiscal 1998, the Company established a
Direct Mail division that incurred expenses for which no revenues were
generated.

      INTEREST EXPENSE AND OTHER INCOME. Interest expense increased 2.2% or
approximately $95,000, to $4.5 million for fiscal 1998 from $4.4 million in
fiscal 1997. An increase in interest expense due to the issuance of the $15.0
million of convertible debt was almost fully offset by the decrease in interest
on the portion of the Revolving Line of Credit was paid off with funds from the
December 1997 secondary offering. Interest income increased 66.8% or
approximately $144,000, to $360,000 for fiscal

                                       30
<PAGE>
1998 from $216,000 in fiscal 1997 principally due to the interest earned on net
proceeds generated from the 1997 follow-on public offering that were temporarily
invested.

      INCOME TAX EXPENSE. Income tax expense for fiscal 1998 and 1997 reflects
an effective tax rate of 35.0%, compared to the fiscal 1997 rate of 30.5%. The
lower 1997 rate resulted from a low effective tax rate on sales by the Hong Kong
subsidiary, and from an investment tax credit in Spain related to the investment
in the TLC operations in UK.

LIQUIDITY AND CAPITAL RESOURCES

      At July 31, 1999, the Company's working capital was $32.1 million compared
to $76.4 million at July 31, 1998. The decrease is attributable to the
significant operating losses incurred during fiscal 1999 and includes certain
significant charges recorded by the Company related to provisions for projected
guaranteed minimum royalty shortfalls on three licenses, inventory write-down
reserves for slow or non-moving inventory and bad debt provisions on certain
non-performing trade and non-trade receivables and notes receivables.

      The Company believes that projected future revenues over the remaining
terms of three significant license agreements will be insufficient to allow the
Company to earn-out the guaranteed minimum royalties advanced or required to be
paid to the licensor over the remaining terms of the agreements that commenced
in 1998 and will end in fiscal 2001. Accordingly, the Company recorded a
provision totaling $14.9 million for the projected guaranteed minimum royalty
shortfall. The Company is required to pay the remaining advances or royalties
due under the license agreements irrespective of the provisions recorded by the
Company, and may result in the payment of significant royalty amounts for which
no product sales have occurred.

      The Company satisfies its capital requirements and seasonal working
capital needs with cash flow primarily from borrowings and secondarily from
operations. The Company's primary capital needs have consisted of funding for
acquisitions, purchases of inventory, customer receivables, letters of credit,
licenses and international expansion.

      Effective July 31, 1999, the Company amended its $35 million Credit
Facility which expired on July 31, 1999; the amendment effectively extended the
maturity date until October 29, 1999 and waived all existing defaults. In
connection with the amendment, the senior lender exercised certain blockage
rights preventing the Company from making any principal or interest payments to
subordinated debtors, including the Company's convertible subordinated notes. As
of July 31, 1999, borrowings outstanding under the $35 million Credit Facility
included a balance of approximately $26.1 million outstanding on the revolving
line of credit and $4.8 million on the related term loan, as well as an
aggregate of $2.1 million in outstanding irrevocable letters of credit in
support of inventory purchases.

      On October 25, 1999, the Company entered into a new $60 million Credit
Facility which replaced the Company's $35 million credit facility. The new
Credit Facility has an initial three-year term but may be extended an additional
year. The new Credit Facility includes a $57.6 million revolving line of credit
commitment, subject to availability under a borrowing base calculated by
reference to the level of eligible accounts receivable and inventory, and a $15
million sub-limit for the issuance of letters of credit. The new Credit Facility
also includes two term loans totaling $2.4 million. Interest on borrowings
outstanding under the revolving line of credit and the term loans is payable
monthly at an annual rate equal to, at the Company's option, (i) the Lender's
Prime Rate plus 1/4 percent or (ii) the Lender's Adjusted Euro Dollar rate plus
2 3/4%. The new Credit Facility is collateralized by a first lien on
substantially all of the Company's domestic assets, and 65% of the issued and
outstanding stock of its foreign subsidiaries.

                                       31
<PAGE>
Based on the level of the Company's eligible accounts receivable and inventory
at October 31, 1999, the Company had $1.4 million of additional borrowing
capacity available under the new Credit Facility, all of which could be used to
support borrowings under the revolving line of credit or additional letters of
credit. The new Credit Facility contains certain restrictive covenants and
conditions among which are a prohibition on the payment of dividends,
limitations on further indebtedness, restrictions on dispositions and
acquisitions of assets, limitations on advances to third parties and foreign
subsidiaries and compliance with certain financial covenants. In addition, the
new Credit Facility prohibits the Company's Chief Executive Officer from
reducing his ownership in the Company below specified levels. (See Footnote 5 -
Restructuring and Refinancing of Notes Payable and Long-Term Debt)

      The Company had entered into a Convertible Loan Agreement ("Convertible
Loan Agreement") dated July 3, 1997, pursuant to which the Company issued $15
million of convertible subordinated notes. In March 1999, the Company defaulted
under certain financial covenants of the Convertible Loan Agreement, and in July
1999 the Company defaulted in the payment of interest due on the convertible
subordinated notes as required by the senior lenders. On October 22, 1999, the
Company and the holders of the convertible subordinated notes entered into a
First Amendment to the Convertible Loan Agreement (the "First Amendment") which
waived existing defaults under the Convertible Loan Agreement, provided consent
to the New Credit Facility, and modified the financial covenants in the
Convertible Loan Agreement to conform to the financial covenants in the New
Credit Facility. In addition, the First Amendment increased the interest rate
from 8.5% to 10.5% per annum, changed the convertible debentures' final maturity
date from June 30, 2004 to December 31, 2000, and adjusted the conversion price
from $16 per share of common stock to the lesser of (i) $16 per share and (ii)
the greater of $6 per share or the average closing price of the Company's common
stock for the 30 days following October 22, 1999. In connection with the First
Amendment, the Company granted the holders of the convertible subordinated
debentures a first lien on its 51% interest in its Los Angeles warehouse and a
second lien on substantially all its other assets. The First Amendment also
includes limitations on the issuance of stock options to employees, and entitles
the holders to two advisory board positions. The First Amendment also provide
for permanent Board seats, as well as limitation on the total number of board
seats and a possible reset of the conversion price if the outstanding debentures
have not been converted or paid in full by final maturity.

      Principal payments on the Company's outstanding Convertible Debentures
commence in June 2000, and the Convertible Debentures mature on December 31,
2000. The Company currently expects that, by itself, cash flow from operations
will be insufficient to meet these debt service obligations under the
Convertible Debentures. Accordingly, unless earlier converted to the Company's
common stock, the Company will need to refinance in order to satisfy its
repayment obligations thereunder. There can be no assurance that the company
will be able to refinance the convertible debentures or, if such refinancing is
obtained, that the terms will be as favorable to the Company as these contained
in the convertible debentures.

      The Company has borrowed substantially all of its available capacity under
its new credit facility. Thus, any future losses or other capital needs could
require the Company to seek additional financing from public or private
issuances of debt and/or equity or from asset sales. The Company may not be able
to complete any such financing or asset sale at all or, if so, on terms
favorable to the Company. Any equity financing could result in dilution to
existing shareholders. See "Risk Factors - Leverage and Future Debt Service and
Capital Needs"

      As of July 31, 1999, Play-By-Play Europe had an aggregate of approximately
$1.0 million outstanding in irrevocable letters of credit in support of
inventory purchases. The Company's current

                                       32
<PAGE>
policy is to permanently reinvest all earnings from foreign subsidiaries in
those operations. This policy restricts the amount of cash available for
distribution by these subsidiaries, however, the Company may obtain cash from
the subsidiaries for repayment of intercompany obligations incurred in the
normal course of business. In the event the Company changes its policy, a tax
liability will be incurred for previous undistributed earnings, and any
distributions would be subject to withholding and current income taxes.

      The Company's operating activities used net cash of $1.6 million and $23.1
million in fiscal 1999 and 1998, respectively. The cash flow from operations for
fiscal 1999 was primarily affected by the net loss. The cash flow from
operations for fiscal 1998 was primarily affected by changes in accounts
receivable as a result of the increase in sales experienced by the Company, as
well as inventory which increased in part due to the increase in sales as well
as to support the expansion in the European market.

      Net cash used in investing activities during fiscal 1999 and 1998 was $8.0
million and $3.3 million, respectively. For fiscal 1999, net cash used in
investing activities consisted principally of expenditures for property and
equipment of approximately $8.2 million. In the third quarter of fiscal 1999,
the Company acquired substantially all of the assets and liabilities of Caribe
Marketing for the purchase price of $2.5 million consisting of cash, 80,000
shares of the Company's common stock and the assumption of a Seller's note. (See
Footnote 14 - "Acquisition"). For fiscal 1998, net cash used in investing
activities consisted principally of the purchase of property and equipment of
approximately $3.3 million. The $3.3 million consisted principally of
expenditures of $1.1 million for costs related to the implementation of the
Company's Oracle Enterprise Resource Planning System and $874,000 for leasehold
improvements for the San Antonio facility.

      Net cash provided by financing activities during fiscal 1999 and 1998 was
$10.4 million and $23.6 million, respectively. During fiscal 1999, the Company
received aggregate advances of $139.1 million, and made repayments of $124.8
million, on the Credit Facility, and reduced the principal on the term loan by
$2.4 million. During fiscal 1998, the Company repaid $7.8 million of net
borrowings on the revolving line of credit under the Credit Facility and repaid
$2.4 million principal on the term loan.

      The Company believes that its current available cash, net cash provided by
operating activities and available borrowings under the Company's Credit
Facility will be sufficient to meet the Company's cash requirements through July
31, 2000, however, there is no assurance that the Company will be able to obtain
additional borrowings to meet its working capital needs, or that if obtained, it
will be on terms at least as favorable as those existing credit facilities.

      EURO. On January 1, 1999, eleven of the fifteen member countries of the
European Union introduced the euro, which became the common currency among the
participating member countries. The participating members' sovereign currency
converted to the euro at the exchange rates in effect on the introduction date.
Spain is one of the participating members, which is the country in which Play By
Play Europe is located. Play By Play Europe intends to keep its books in Spain's
sovereign currency, the peseta, through the substantial portion of the
three-year introductory period, at the end of which all companies in
participating member countries must adopt the euro. As Play By Play Europe's
accounting system is currently capable of performing the euro conversion, the
Company does not anticipate that the costs related to the conversion will be
significant. In addition, as Play By Play Europe operates primarily in Spain and
in other non-European Union countries, the introduction of the euro will not
have a material effect on Play By Play Europe's results of operations, financial
position, or cash flows for the forseeable future.

                                       33
<PAGE>
      DIVIDEND POLICY. The Company has never paid any cash dividends. For the
foreseeable future, the Company expects to retain earnings to finance the
expansion and development of its business. Any future payment of cash dividends
will be within the discretion of the Company's Board of Directors, and will
depend on, among other factors, the earnings, capital requirements, operating
and financial condition of the Company and other relevant factors, and
compliance with various financing covenants such as those contained in the
agreements relative to the credit facilities to which the Company is or may
become a party.

      YEAR 2000. Similar to many business entities, the Company may be impacted
by the inability of computer application software programs to distinguish
between the year 1900 and 2000 due to a commonly used programming convention.
Until such programs are modified or replaced prior to 2000, calculations and
interpretations based on date-based arithmetic or logical operations performed
by such programs may be incorrect.

      Management's plan addressing the impact on the Company of the Year 2000
issue focuses on application systems, process control systems (embedded chips),
technology infrastructure, and third party business partners and suppliers with
which the Company has significant relationships. The plan is comprised of five
phases: (1) developing an inventory of hardware, software and embedded chips,
(2) assessing the degree to which each area is currently in compliance with Year
2000 requirements, (3) performing renovations and repairs as needed to attain
compliance, (4) testing to ensure compliance, and (5) developing a contingency
plan if repair and renovation efforts are either unsuccessful or untimely.

      Management has completed steps (1), (2), and (5) of this plan. Steps (3)
and (4) were in process at the Balance Sheet date, and subsequent to that date,
have been substantially completed. The Company feels that all phases will be
completed by the end of calendar 1999. Costs incurred to date have primarily
consisted of labor from the redeployment of existing information technology,
legal and operational resources as well as computer hardware and software costs.
The Company has budgeted approximately $5.2 million for these Year 2000
compliance efforts, and management feels that actual final costs will not
materially deviate from this. However, the Company's Year 2000 program is an
ongoing process and the estimates of costs and completion dates for various
aspects of the program are subject to change.

      The Company is currently replacing its financial and core business system
software with a new Oracle enterprise resource planning system designed to
enhance management information, financial reporting, inventory management, order
entry, purchasing and has the added benefit of addressing the Year 2000 issues.
The new enterprise system has necessitated enhancement of the Company's existing
computer networks and desktop applications. The Company does not presently
anticipate a material business interruption as a result of the Year 2000.

      Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of third-party
suppliers and customers, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact on the
Company's results of operations, liquidity or financial condition. The Company's
current and planned activities with respect to the Year 2000 problem are
expected to significantly reduce the Company's level of uncertainty about the
problem and, in particular, about the Year 2000 compliance and readiness of its
material customers and suppliers. The Company believes that, with the
implementation of the new enterprise systems and completion of the planned
activities as scheduled, the possibility of significant interruptions of normal
operations should be minimal.

      Management believes that its customers and suppliers would also receive
advance notice of any material year 2000 compliance problems, allowing them to
implement alternate plans, if necessary.

                                       34
<PAGE>
SEASONALITY

      Both the retail and amusement toy industries are inherently seasonal.
Generally, in the past, the Company's sales to the amusement industry have been
highest during the third and fourth fiscal quarters, and collections for those
sales have been highest during the succeeding two fiscal quarters. The Company's
sales to the retail toy industry have been highest during the first and fourth
fiscal quarters, and collections from those sales have been highest during the
succeeding two fiscal quarters. The Company's working capital needs and
borrowings to fund those needs have been highest during the third and fourth
fiscal quarters. As a result of the Company's increased sales to amusement
customers and to retail customers, the Company anticipates that its borrowings
to fund working capital needs may become more significant in the third and
fourth fiscal quarters.

      The Company utilizes borrowings under its Credit Facility to finance
purchases of inventory and accounts receivable, primarily during peak selling
periods. During fiscal 1999, the highest level of aggregate borrowings under the
Credit Facility was $27.9 million in May 1999.

      The following sets forth the Company's net sales by fiscal quarter for
fiscal 1999, 1998 and 1997:

                                              FISCAL YEAR
                                 --------------------------------------
            FISCAL QUARTER          1999          1998           1997
            --------------       --------        -------        -------
                                              (IN THOUSANDS)

            First                 $55,727        $58,418        $39,891
            Second                 28,432         30,867         22,039
            Third                  35,683         37,262         28,001
            Fourth                 36,673         51,556         47,455

INFLATION

      The Company does not believe that inflation in the United States or Europe
in recent years has had a significant effect on its results of operations.

NEW ACCOUNTING PRONOUNCEMENT

            In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by
SFAS No. 137, is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000 (August 1, 2000, for the Company). SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives which meet the definition of a
hedge transaction are recorded each period in the either earnings or other
comprehensive income. The Company believes that the impact of the pronouncement
will be minimal, as historically, the Company has not entered into any
derivative or hedging transactions.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in financial and commodity market prices and rates. The Company is
exposed to market risk in the areas of changes in United States and
international borrowing rates (i.e. prime rate or LIBOR), and changes in foreign
currency exchange rates as measured

                                       35
<PAGE>
against the United States ("U.S.") dollar and functional currencies of its
subsidiaries (i.e. British pound/Spanish peseta). In addition, the Company is
exposed to market risk in certain geographic areas that have experienced or are
likely to experience an economic downturn, such as China and Latin America. The
Company purchases substantially all of its inventory from companies in China,
therefore, the Company is subject to the risk that such suppliers will be unable
to provide inventory at competitive prices. Company believes if such as event
were to occur, it would be able to find alternate sources of inventory at
competitive prices, however, there can be no assurance that the Company would be
successful. Historically and as of July 31, 1999, the Company has not used
derivative instruments or engaged in hedging activities to minimize its market
risk.

INTEREST RATE RISK

      The interest payable on the Company's revolving line-of-credit and term
loan under the old credit facility was variable based on LIBOR or the Bank's
Alternate Base Rate. The interest payable on the Company's revolving
line-of-credit and term loans under the new credit facility entered into on
October 25, 1999 is variable based on the lender's prime rate or adjusted
Eurodollar rate, and therefore, affected by changes in market interest rates. At
July 31, 1999, approximately $26.1 million was outstanding under the old credit
facility with a weighted average interest rate of 8.0%.

FOREIGN CURRENCY RISK

      The Company has wholly-owned subsidiaries in Valencia, Spain and
Doncaster, England. Sales from these operations are typically denominated in
Spanish Pesetas or British Pounds, respectively, thereby creating exposures to
changes in exchange rates. Changes in the Spanish Pesetas/U.S. Dollars exchange
rate and British Pounds/U.S. Dollars exchange rate may positively or negatively
affect the Company's sales, gross margins and retained earnings. The Company
does not believe that reasonably possible near-term changes in exchange rates
will result in a material effect on future earnings, fair values or cash flows
of the Company, and therefore, has chosen not to enter into foreign currency
hedging transactions. There can be no assurance that such an approach will be
successful, especially in the event of a significant and sudden decline in the
value of the Spanish Peseta or the British Pound. Purchases of inventory by the
Company's European subsidiaries from its suppliers in the Far East are subject
to currency risk to the extent that there are fluctuations in the exchange rate
between the United States dollar and the Spanish peseta or the British Pound.
Certain of the European subsidiaries' license agreements call for payment of
royalties in a currency different from their functional currency, and these
arrangements subject the Company to currency risk to the extent that exchange
rates fluctuate from the date that royalty liabilities are incurred until the
date royalties are actually paid to the licensor.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      Reference is made to the Financial Statements referred to in the Index on
page F-1 setting forth the consolidated financial statements of Play By Play
Toys & Novelties, Inc. and Subsidiaries, together with the report of
PricewaterhouseCoopers LLP dated November 12, 1999.

ITEM 9.  CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

         None.

                                       36
<PAGE>
PART III

The information required by Part III (Items 10 through 13) is incorporated by
reference to the captions "Principal Shareholders, "Election of Directors",
"Management" and "Certain Relationships and Related Transactions" in the
Comapny's defenitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the end of the Company's fiscal year covered by this
Report.

PART IV

ITEM 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a)(1)    Financial Statements. Reference is made to the Index on page F-1 for a
          list of all financial statements filed as part of this Report.

(a)(2)    Financial Statement Schedules. Reference is made to the Index on page
          F-1 for a list of all financial statement schedules filed as part of
          this Report.

(a)(3)    Exhibits. Reference is made to the Exhibit Index on page E-1 for a
          list of all exhibts filed as part of this Report.

(b)       Reports on Form 8-K. None.

                                       37
<PAGE>
                                   SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, this 15th
day of November 1999.

                                PLAY BY PLAY TOYS & NOVELTIES, INC.

                                By: /S/ JOE M. GUERRA
                                        Joe M. Guerra
                                        Chief Financial Officer, Secretary and
                                        Treasurer

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

<TABLE>
<CAPTION>

                SIGNATURE                                              TITLE                                             DATE
                ---------                                              -----                                             ----
<S>                                                     <C>                                                        <C>


By:    /S/ ARTURO G. TORRES                             Chairman of the Board and Chief                            November 15, 1999
       -----------------------------------                     Executive Officer
            Arturo G. Torres                             (Principal Executive Officer)





By:    /S/ RAYMOND G. BRAUN                          President, Chief Operating Officer and                       November 15, 1999
   ---------------------------------------                          Director
            Raymond G. Braun




By:    /S/ JOE M. GUERRA                                    Chief Financial Officer,                               November 15, 1999
   ---------------------------------------                  Secretary and Treasurer
            Joe M. Guerra                            (Principal Financial and Accounting
                                                                     Officer)




By:    /S/ RICHARD NEITZ                                 President - Retail Division                              November 15, 1999
       -----------------------------------                       and Director
            Richard Neitz



By:    /S/ MANUEL FERNANDEZ BARROSO                  President - Caribe Sales and Marketing.                       November 15, 1999
       ----------------------------                              and Director
            Manuel Fernandez Barroso

</TABLE>

                                       38
<PAGE>
<TABLE>
<CAPTION>

<S>                                                     <C>                                                        <C>
By:    /S/ TOMAS DURAN                                                       Director                              November 15, 1999
       -----------------------------------
            Tomas Duran



By:    /S/ STEVE K. C. LIAO                                                  Director                              November 15, 1999
       -----------------------------------
            Steve K. C. Liao



By:    /S/ OTTIS W. BYERS                                                    Director                              November 15, 1999
       -----------------------------------
            Ottis W. Byers



By:    /S/ BERTO GUERRA, JR.                                                 Director                              November 15, 1999
       -----------------------------------
            Berto Guerra, Jr.

</TABLE>

                                       39
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
                                                                              PAGE
                                                                              ----
<S>                                                                           <C>
Consolidated Financial Statements:

  Report of Independent Accountants ........................................   F-2

  Consolidated Balance Sheets as of July 31, 1999 and 1998 .................   F-3

  Consolidated Statements of Operations for the Fiscal Years Ended .........   F-4

  Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended   F-5

  Consolidated Statements of Cash Flows for the Fiscal Years Ended .........   F-6

  Notes to Consolidated Financial Statements ...............................   F-7

Financial Statement Schedule:

  Report of Independent Accountants on Financial Statement Schedule ........   S-1

  Schedule II - Valuation and Qualifying Accounts ..........................   S-2
</TABLE>

All other schedules are omitted as the required information is not applicable or
the information is presented in the consolidated financial statements, related
notes or other schedules.

                                      F-1
<PAGE>
                      REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors of
Play By Play Toys & Novelties, Inc. and Subsidiaries:

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Play By Play Toys & Novelties, Inc. and Subsidiaries at
July 31, 1999 and 1998, and the results of their operations and their cash flows
for each of the three years in the period ended July 31, 1999, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

Austin, Texas
November 12, 1999

                                      F-2
<PAGE>

              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                     ASSETS
                                                                                 JULY 31,
                                                                      ------------------------------
                                                                          1999             1998
                                                                      -------------    -------------
<S>                                                                   <C>              <C>
Current assets:
     Cash and cash equivalents ....................................   $   2,345,634    $   3,024,028
     Accounts and notes receivable, less allowance for
          doubtful accounts of $7,976,984 and $5,262,053 ..........      36,243,047       48,950,055
     Inventories, net .............................................      69,116,899       72,613,130
     Prepaid royalties ............................................            --          4,677,331
     Other prepaid expenses .......................................       2,811,776        4,018,712
     Deferred income taxes ........................................            --            224,728
     Other current assets .........................................         468,710             --
                                                                      -------------    -------------
          Total current assets ....................................     110,986,066      133,507,984
Property and equipment, net .......................................      25,859,145       17,914,998
Goodwill, less accumulated amortization of $1,187,890  and $754,179      16,442,777       14,043,748
Other assets ......................................................       2,030,273        2,417,166
                                                                      =============    =============
          Total assets ............................................   $ 155,318,261    $ 167,883,896
                                                                      =============    =============

                     LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
     Book overdraft ...............................................   $   2,281,447    $        --
     Notes payable to banks .......................................      29,982,533       14,760,950
     Current maturities of long-term debt .........................       1,953,487        3,393,149
     Current obligations under capital leases .....................       1,701,911        1,142,687
     Accounts payable, trade ......................................      32,081,780       28,070,980
     Accrued royalties payable ....................................       7,706,423             --
     Other accrued liabilities ....................................       3,172,479        5,312,081
     Income taxes payable .........................................            --          4,374,249
                                                                      -------------    -------------
          Total current liabilities ...............................      78,880,060       57,054,096
                                                                      -------------    -------------
Long-term liabilities:
     Long-term debt, net of current maturities ....................       2,140,418        4,860,247
     Convertible subordinated debentures ..........................      14,701,500       15,000,000
     Obligations under capital leases .............................       1,655,826        1,102,135
     Deferred income taxes ........................................            --            878,787
                                                                      -------------    -------------
          Total liabilities .......................................      97,377,804       78,895,265
                                                                      -------------    -------------

Commitments and contingencies

SHAREHOLDERS' EQUITY:
     Preferred stock - no par value; 10,000,000 shares
          authorized; no shares issued ............................            --               --
     Common stock - no par value; 20,000,000 shares
          authorized; 7,395,000 and 7,315,000 shares issued .......           1,000            1,000
     Additional paid-in capital ...................................      71,486,820       70,986,820
     Deferred compensation ........................................        (338,333)        (478,333)
     Accumulated other comprehensive losses .......................      (3,006,208)      (1,548,381)
     Retained earnings (deficit) ..................................     (10,202,822)      20,027,525
                                                                      -------------    -------------
          Total shareholders' equity ..............................      57,940,457       88,988,631
                                                                      =============    =============
          Total liabilities and shareholders' equity ..............   $ 155,318,261    $ 167,883,896
                                                                      =============    =============
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                     F-3
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                         FISCAL YEARS ENDED JULY 31,
                                               -----------------------------------------------
                                                   1999              1998             1997
                                               -------------    -------------    -------------
<S>                                            <C>              <C>              <C>
Net sales ..................................   $ 156,515,361    $ 178,102,835    $ 137,386,257
Cost of sales ..............................     129,582,244      116,755,386       91,024,319
                                               -------------    -------------    -------------
     GROSS PROFIT ..........................      26,933,117       61,347,449       46,361,938

Selling, general and administrative expenses      55,808,965       44,088,681       33,215,225
                                               -------------    -------------    -------------
     OPERATING INCOME (LOSS) ...............     (28,875,848)      17,258,768       13,146,713

Interest expense ...........................      (4,831,276)      (4,509,897)      (4,414,701)
Interest income ............................         371,722          360,048          215,895
Other income (loss) ........................         164,751         (116,957)          (7,785)
                                               -------------    -------------    -------------
     INCOME (LOSS) BEFORE INCOME TAXES .....     (33,170,651)      12,991,962        8,940,122

Income tax benefit (provision) .............       2,940,304       (4,547,187)      (2,724,150)
                                               -------------    -------------    -------------
     NET INCOME (LOSS) .....................   $ (30,230,347)   $   8,444,775    $   6,215,972
                                               =============    =============    =============

Net income (loss) per share:
  Basic ....................................   $       (4.12)   $        1.30    $        1.28
                                                                                 -------------
  Diluted ..................................   $       (4.12)   $        1.19    $        1.25
                                               -------------    -------------    -------------

Weighted average shares outstanding:
  Basic ....................................       7,338,297        6,473,724        4,871,952
                                               -------------    -------------    -------------
  Diluted ..................................       7,338,297        7,759,866        5,035,723
                                               -------------    -------------    -------------
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.
                                       F-4
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                               ACCUMULATED
                                         COMMON STOCK          ADDITIONAL                        OTHER             RETAINED
                                   ------------------------     PAID-IN      DEFERRED        COMPREHENSIVE         EARNINGS
                                      SHARES         AMOUNT     CAPITAL     COMPENSATION     INCOME (LOSSES)       (DEFICIT)
                                   -------------     ------   ------------ --------------  ------------------    -------------
<S>                                <C>               <C>      <C>          C>              <C>                   <C>
Balance, July 31, 1996                 4,841,100      1,000     33,746,597              -           (414,306)        5,366,778

Comprehensive income:
  Net income                                                                                                         6,215,972
  Foreign currency translation
    adjustments                                                                                   (1,888,721)

       Comprehensive income


Acquisition of TLC                        40,000                   345,000
Exercise of stock options                 20,200                   214,942
Deferred employee
  compensation                                                     700,000       (700,000)
Amortization of deferred
  compensation                                                                     81,667
                                   --------------------------------------------------------------------------------------------
Balance, July 31, 1997                 4,901,300      1,000     35,006,539       (618,333)        (2,303,027)       11,582,750

Comprehensive income:
  Net income                                                                                                         8,444,775
  Foreign currency translation
    adjustments                                                                                      754,646

       Comprehensive income


Warrants issued                                                    522,000
Stock issued in secondary
  public offering                      2,300,000                34,147,474
Exercise of stock options                113,700                 1,310,807
Amortization of deferred
  compensation                                                                    140,000
                                   --------------------------------------------------------------------------------------------
Balance, July 31, 1998                 7,315,000      1,000     70,986,820       (478,333)        (1,548,381)       20,027,525

Comprehensive income (loss):
  Net loss                                                                                                         (30,230,347)
  Foreign currency translation
    adjustments                                                                                   (1,457,827)

       Comprehensive income (loss)

Acquisition of Caribe Marketing           80,000                   500,000
Amortization of deferred
  compensation                                                                    140,000
                                   ============================================================================================
Balance, July 31, 1999                 7,395,000     $1,000    $71,486,820     $ (338,333)      $ (3,006,208)    $ (10,202,822)
                                   ============================================================================================
</TABLE>
<TABLE>
<CAPTION>

                                           TOTAL
                                       SHAREHOLDERS'
                                          EQUITY
                                     ---------------
<S>                                  <C>
Balance, July 31, 1996                    38,700,069

Comprehensive income:
  Net income                               6,215,972
  Foreign currency translation
    adjustments                           (1,888,721)
                                   ------------------
       Comprehensive income                4,327,251
                                   ------------------

Acquisition of TLC                           345,000
Exercise of stock options                    214,942
Deferred employee
  compensation                                     -
Amortization of deferred
  compensation                                81,667
                                   ------------------
Balance, July 31, 1997                    43,668,929

Comprehensive income:
  Net income                               8,444,775
  Foreign currency translation
    adjustments                              754,646
                                   ------------------
       Comprehensive income                9,199,421
                                   ------------------

Warrants issued                              522,000
Stock issued in secondary
  public offering                         34,147,474
Exercise of stock options                  1,310,807
Amortization of deferred
  compensation                               140,000
                                   ------------------
Balance, July 31, 1998                    88,988,631

Comprehensive income (loss):
  Net loss                               (30,230,347)
  Foreign currency translation
    adjustments                           (1,457,827)
                                   ------------------
       Comprehensive income (loss)       (31,688,174)
                                   ------------------
Acquisition of Caribe Marketing              500,000
Amortization of deferred
  compensation                               140,000
                                   ==================
Balance, July 31, 1999                  $ 57,940,457
                                   ==================
</TABLE>
               The accompanying notes are an integral part of the
                       consolidated financial statements.
                                     F-5
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                  FISCAL YEARS ENDED JULY 31,
                                                                         --------------------------------------------
                                                                             1999            1998            1997
                                                                         ------------    ------------    ------------
<S>                                                                      <C>             <C>             <C>
Cash flows from operating activities:
  Net income (loss) ..................................................   $(30,230,347)   $  8,444,775    $  6,215,972
  Adjustments to reconcile net income (loss) to
   net cash provided by (used in) operating activities:
     Depreciation and amortization ...................................      2,973,943       2,271,943       2,041,950
     Provision for doubtful accounts receivable ......................      7,833,697       2,173,736       2,024,847
     Provision for inventory reserve .................................      4,091,849            --              --
     Provision for royalty license reserves ..........................     14,883,940            --              --
     Deferred income tax provision (benefit) .........................       (654,059)       (503,290)        554,229
     Amortization of deferred compensation ...........................        140,000         140,000          81,667
     Loss (gain) on sale of property and equipment ...................        200,154          89,248         (51,356)
     Change in operating assets and liabilities (net of acquisitions):
       Accounts and notes receivable .................................      3,332,834     (13,395,537)     (9,822,434)
       Inventories ...................................................        540,030     (25,373,610)     (5,343,092)
       Prepaids and other assets .....................................      5,755,804      (3,987,081)        985,489
       Accounts payable and accrued liabilities ......................     (6,126,917)      5,151,647       4,513,600
       Income taxes payable ..........................................     (4,377,026)      1,936,817         647,106
                                                                         ------------    ------------    ------------
          Net cash provided by (used in) operating activities ........     (1,636,098)    (23,051,352)      1,847,978
                                                                         ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment .................................     (8,245,474)     (3,269,603)       (791,869)
  Proceeds from sale of property and equipment .......................         74,571          35,115            --
  Purchase of Caribe, net of cash paid ...............................        147,088            --              --
  Purchase of TLC, net of cash acquired ..............................           --              --          (488,811)
  Payments for intangible assets .....................................           --           (32,246)        (29,999)
                                                                         ------------    ------------    ------------
          Net cash used in investing activities ......................     (8,023,815)     (3,266,734)     (1,310,679)
                                                                         ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from public offering of common stock, net .................           --        34,147,474            --
  Net borrowings (repayments) under Revolving Credit Agreement .......     14,321,583      (7,846,771)        831,912
  Payment of note payable to shareholder .............................           --              --        (3,000,000)
  Costs related to issuance of debt ..................................           --              --          (823,862)
  Proceeds from long-term debt .......................................           --              --        15,000,000
  Repayment of long-term debt ........................................     (4,847,598)     (2,570,041)     (3,964,594)
  Repayment of capital lease obligations .............................     (1,316,086)       (953,393)       (628,658)
  Proceeds from exercise of stock options ............................           --         1,310,807         214,942
  Increase (decrease) in book overdraft ..............................      2,281,447        (461,220)     (1,896,216)
                                                                         ------------    ------------    ------------
          Net cash provided by financing activities ..................     10,439,346      23,626,856       5,733,524
                                                                         ------------    ------------    ------------
EFFECT OF FOREIGN CURRENCY EXCHANGE RATES ............................     (1,457,827)        754,646      (1,841,251)
                                                                         ------------    ------------    ------------
          Increase (decrease) in cash and cash equivalents ...........       (678,394)     (1,936,584)      4,429,572
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .....................      3,024,028       4,960,612         531,040
                                                                         ============    ============    ============
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...........................   $  2,345,634    $  3,024,028    $  4,960,612
                                                                         ============    ============    ============
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.
                                     F-6
<PAGE>
             PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  NATURE OF BUSINESS

      The principal business of Play-By-Play Toys & Novelties, Inc. ("PBP" and
together with all majority owned subsidiaries, the "Company") is to design,
develop, market and distribute stuffed toys, electronic plush toys and sculpted
toy pillows and to market and distribute a broad line of novelty items. The
Company sells these products to customers in the amusement and retail markets.
The Company's toy operations accounted for 98.3% of net sales for fiscal 1999.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION
      The consolidated financial statements include the accounts of PBP and all
majority-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation. Certain reclassifications have
been made to the prior years' consolidated financial statements to conform with
the current year presentation.

PERVASIVENESS OF ESTIMATES
      The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

FOREIGN CURRENCY TRANSLATION
      All balance sheet accounts of foreign subsidiaries are translated from
foreign currencies into U.S. dollars at the year-end rates of exchange, while
income and expense accounts are translated at average currency exchange rates in
effect during the period. The resulting translation adjustment is recorded as a
separate component of shareholders' equity. Gains and losses from foreign
currency transactions (transactions denominated in a currency other than the
entity's functional currency) are included in other income. The foreign currency
transaction loss for fiscal 1999 was $25,165 the loss for fiscal 1998 was
$117,000, and the translation was not material for fiscal 1997. Transaction
gains and losses result primarily from sales in Europe and purchases of products
by the Company's foreign subsidiaries from suppliers in the Far East.

      Certain of the Company's license agreements require payment of royalties
in Canadian dollars. The Company's subsidiary in Spain also has license
agreements that requires payment of royalties in United States dollars. As a
result of these license agreements, the Company experiences currency risk to the
extent that exchange rates fluctuate from the date the royalty liability is
incurred until the date the royalty is actually paid to the licensor.
Additionally, the Company is exposed to foreign currency risk for intercompany
receivable and payable transactions through the settlement date.

                                      F-7
<PAGE>
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      Historically, no attempt has been made to manage, by means of hedging or
derivatives, the risk of potential currency fluctuations.

CASH EQUIVALENTS
      For purposes of the statements of cash flows, the Company considers all
time deposits with original maturities of three months or less to be cash
equivalents.

BUSINESS AND CREDIT RISK
      Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
trade receivables. The Company's cash and cash equivalents consist of highly
liquid cash deposits in major financial institutions. From time to time, the
Company may have on deposit in certain bank accounts including foreign banks,
amounts in excess of insured limits. The Company's trade receivables result
primarily from its retail and amusement operations and in general, reflect a
broad customer base. As of July 31, 1999, the outstanding trade receivables were
$40.3 million, of which $27.5 million trade receivables were from customers in
the United States and Canada, $642,000 were trade receivables from customers in
Latin American countries, and $12.2 million were trade receivables from European
customers. During fiscal 1999 and prior years, due to the difficult economic
environment in Latin America, the Company provided more aggressive terms to
Latin America customers. During 1999, the Company changed its credit terms to
customers in Latin America, whereby the Company generally requires letters of
credit or has reduced customer credit limits. The Company generally requires no
collateral from its customers; however, it routinely assesses the financial
strength of its customers and in some instances requires customers to issue a
letter of credit for the amount of purchases in favor of the Company. No
customer accounted for more than 10% of the Company's net sales in fiscal 1999,
1998 and 1997.

      The majority of the Company's manufacturing is arranged directly by the
Company with third party manufacturers, a substantial portion of which are
located in the People's Republic of China ("China"). The Company does not have
long-term contracts with any of the manufacturers. Although the Company has
begun to arrange alternate sources of manufacturing outside of China, the
Company has made no definitive plans for securing alternate sources in the event
its present arrangements with Chinese manufacturers prove impossible to
maintain, and there can be no assurance that there would be sufficient alternate
manufacturing facilities to meet the increased demand for production which would
likely result from a disruption of manufacturing sources in China. A Chinese
manufacturer accounted for 12.4% of the Company's purchases during fiscal 1999.
No other manufacturer accounted for more than 10% of the Company's purchases of
toy products during fiscal 1999, 1998 or 1997, with the exception of one other
Chinese manufacturer, which accounted for 4.3%, 6.6% and 26.3% of such purchases
during fiscal 1999, 1998 and 1997, respectively. During these periods, this
manufacturer manufactured plush Play-Faces(R) and thE COCA-COLA(R) brand plush
POLAR BEAR products. This manufacturer is currently one of several manufacturers
of these and other products for the Company.

INVENTORIES
      Inventories are stated at the lower of cost or market. Cost of PBP's U.S.
inventory is determined using the first-in, first-out (FIFO) and last-in,
first-out (LIFO) method. Inventory-in-transit is determined based on the
specific identification method.

                                     F-8
<PAGE>
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 PROPERTY AND EQUIPMENT
      Property and equipment are recorded at cost. Maintenance and repairs are
charged to operations, and replacements or betterments are capitalized. Property
or equipment sold, retired, or otherwise disposed of is removed from the
accounts, and any gains or losses thereon are included in operations.
Depreciation and amortization are determined using the straight-line method.

      Property and equipment is depreciated and amortized as follows:

                                                           TERM
                                                           ----
Building                                                 20 years
Equipment                                                10 years
Vehicles                                                 3 years
Computer equipment                                       3 years
Software                                                 7 years
Leasehold improvements                        Life of the lease (5-20 years)

INTANGIBLE ASSETS
      Goodwill represents the excess purchase price over the fair value of net
assets acquired and is amortized over twenty to forty years (principally forty
years) using the straight-line method.

      Other intangible assets consist primarily of debt issuance costs, which
are amortized over the term of the related debt on a straight-line basis, which
approximates the interest method.

IMPAIRMENT OF LONG-LIVED ASSETS
      In accordance with SFAS No. 121, "Accounting for the Impairment of Long
Lived Assets and Long Lived Assets to be Disposed of", at each balance sheet
date, the Company evaluates the propriety of the carrying amount of its
long-lived assets. In the event that facts and circumstances indicate that the
cost of long-lived assets may be impaired, an evaluation of recoverability would
be performed. If an evaluation of impairment were required, the estimated future
undiscounted cash flows associated with the asset would be compared to the
asset's carrying amount to determine if a write-down to market value or
discounted cash flow value is required. The Company recorded no such write-downs
during any of the periods presented.

FAIR VALUE OF FINANCIAL INSTRUMENTS
      The carrying amounts reported in the consolidated balance sheet of cash
and cash equivalents, short-term investments, accounts and notes receivable,
accounts payable, and long term debt approximates their fair value. The Company
estimates the fair value of notes receivable by discounting the future cash
flows of the instrument, using the Company's incremental rate of borrowing for a
similar instrument.

REVENUE RECOGNITION
      Revenues from sales to customers are recognized when products are shipped.


                                     F-9
<PAGE>
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ADVERTISING
      The costs of producing media advertising are capitalized and amortized to
expense over the anticipated sale period, while airtime is expensed over the
sale period. Committed media communication costs are accrued as a cost of sale
of the related product. Costs incurred in the production of catalogs are
deferred and charged to operations in the period in which the related catalogs
are mailed.

INCOME TAXES
      Deferred income taxes are recognized for the tax consequences in future
years of differences between tax basis of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.

EARNINGS PER SHARE
      The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share", effective for the year ending July 31, 1998 and
has restated its earnings per share ("EPS") disclosure for the year ended July
31, 1997 to comply with SFAS No. 128. SFAS No. 128 simplifies the standards for
computing EPS previously found in Accounting Principles Board Opinion No. 15,
"Earnings Per Share", and makes them comparable to international EPS standards.
It replaces the presentation of primary EPS with a presentation of basic EPS,
which excludes dilution. It also requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. Basic earnings per share were computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share differs from basic earnings per share due to the
assumed conversions of dilutive options, warrants and convertible debt
outstanding during the period.

The calculations of basic and diluted EPS for the fiscal years ended July 31,
1999, 1998, and 1997 are as follows:


<TABLE>
<CAPTION>
                                                             FISCAL YEARS ENDED JULY 31,
                                                     -------------------------------------------
                                                         1999            1998           1997
                                                     ------------    ------------   ------------
<S>                                                  <C>             <C>            <C>
Income (loss) from operations available
  to common stockholders - basic .................   $(30,230,347)   $  8,444,775   $  6,215,972
Plus: interest on convertible debt ...............           --           780,000         61,973
Income (loss) from operations available to
  common stockholders plus income from
                                                     ------------    ------------   ------------
  assumed conversions - diluted ..................   $(30,230,347)   $  9,224,775   $  6,277,945
                                                     ============    ============   ============

Weighted average shares outstanding - basic ......      7,338,297       6,473,724      4,871,952
Plus:  assumed exercise of options and warrants ..           --           348,642         89,285
Plus:  assumed conversion of convertible debt ....           --           937,500         74,486
                                                     ------------    ------------   ------------
Weighted average shares outstanding - diluted ....      7,338,297       7,759,866      5,035,723
                                                     ============    ============   ============
</TABLE>

                                     F-10
<PAGE>
             PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      During the fiscal years ended July 31, 1999, 1998 and 1997, the Company
had 1,732,000, 1,702,558, and 980,515, respectively, of common stock options and
warrants outstanding which were not included in the diluted earnings per share
calculation because the options and warrants would have been anti-dilutive.
Additionally, the common stock issuable upon the assumed conversion by the
Convertible Debentures holders at July 31, 1999 was not included in the diluted
earnings per share calculation as it would have been anti-dilutive.

COMPREHENSIVE INCOME (LOSS)
      In fiscal year 1998, the Company adopted SFAS No. 130. "Reporting
Comprehensive Income" which establishes new rules for the reporting and
presentation of comprehensive income and its components in a full set of
financial statements. The Company's comprehensive income is comprised of net
income and foreign currency translation adjustments. The adoption of SFAS No.
130 had no impact on the Company's net income or total shareholders' equity.
Prior to the adoption of SFAS No. 130, foreign currency translation adjustments
were reported separately in the statement of shareholders' equity. The
comprehensive income amounts in the prior fiscal years' financial statements
have been reclassified to conform to SFAS No. 130.

3.  NEW ACCOUNTING PRONOUNCEMENTS

      In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS
No. 137, is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000 (August 1, 2000, for the Company). SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives which meet the definition of a
hedge transaction are recorded each period in the either earnings or other
comprehensive income. The Company believes that the impact of the pronouncement
will be minimal, as historically, the Company has not entered into any
derivative or hedging transactions.

4.  DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

      In fiscal 1999, the Company adopted SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information", which establishes reporting
standards for the way public companies report information about operating
business segments in annual and interim reports. While the Company is organized
and managed internally by sales and operating divisions, revenues are segmented
retail and amusement customers.

                                     F-11
<PAGE>
             PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.  DISCLOSURE  ABOUT  SEGMENTS  OF  AN  ENTERPRISE  AND  RELATED  INFORMATION
(CONTINUED)

Information about revenue segments is presented below.

                             SALES REVENUE SEGMENTS
                                   (in 000's)
<TABLE>
<CAPTION>
                                                    AMUSEMENT    RETAIL     OTHER      TOTAL
                                                     --------   --------   --------   --------
<S>                                                  <C>        <C>        <C>        <C>
Fiscal Year 1999
Net operating revenue ............................   $114,906   $ 38,880   $  2,729   $156,515
Cost of sales ....................................     98,655     29,594      1,333    129,582
                                                     --------   --------   --------   --------
Gross profit .....................................     16,251      9,286      1,396     26,933

FISCAL YEAR 1998
Net operating revenue ............................   $123,234   $ 51,914   $  2,954   $178,102
Cost of sales ....................................     76,011     39,302      1,442    116,755
                                                     --------   --------   --------   --------
Gross profit .....................................     47,223     12,612      1,512     61,347

FISCAL YEAR 1997
Net operating revenue ............................   $ 95,845   $ 38,319   $  3,222   $137,386
Cost of sales ....................................     61,598     28,029      1,397     91,024
                                                     --------   --------   --------   --------
Gross profit .....................................     34,247     10,290      1,825     46,362

The following are sales by georgraphic areas as of and for the years ended July 31:

                                                       1999       1998       1997
                                                     --------   --------   --------
Domestic .........................................   $112,719   $132,002   $113,726
Europe ...........................................     34,940     31,684     21,091
Latin America ....................................      8,856     14,416      2,569

                                                     $156,515   $178,102   $137,386
                                                     --------   --------   --------
</TABLE>

5.  RESTRUCTURING AND REFINANCING OF NOTES PAYABLE AND LONG-TERM DEBT

NEW SENIOR CREDIT FACILITY
      On October 25, 1999, the Company entered into a new $60 million credit
facility ("New Credit Facility") with a new lender that replaced the Company's
$35 million credit facility. The New Credit Facility has an initial three-year
term but may be extended an additional year unless either party gives 60 days
prior written notice of intent to terminate. The New Credit Facility includes a
$57.6 million revolving line of credit commitment, subject to availability under
a borrowing base calculated by reference to the level of eligible accounts
receivable and inventory with a $15 million sub-limit for the issuance of
letters of credit. The New Credit Facility also includes two term loans totaling
$2.4 million. The term loan in the amount of $817,000 matures on October 1, 2004
and requires monthly principal payments of $13,167 plus accrued interest. The
second term loan in the amount of $1.6 million, matures on October 1, 2006 and
requires monthly principal payments of $20,836 for the first sixty months, and
monthly principal payments of $14,286 for the remaining months thereafter until
maturity, plus accrued interest.

                                    F-12
<PAGE>
             PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.   RESTRUCTURING  AND  REFINANCING  OF  NOTES  PAYABLE  AND  LONG-TERM  DEBT
(CONTINUED)

      Interest on borrowings outstanding under the revolving line of credit and
the term loans is payable monthly at an annual rate equal to, at the Company's
option, (i) the Lender's Prime Rate plus 1/4 percent or (ii) the Lender's
Adjusted Euro Dollar rate plus 2 3/4%. The New Credit Facility is collateralized
by a first lien on substantially all of the Company's domestic assets, and 65%
of the issued and outstanding stock of its foreign subsidiaries. Based on the
level of the Company's eligible accounts receivable and inventory at October 31,
1999, the Company had $1.4 million of additional borrowing capacity available
under the New Credit Facility , all of which could be used to support borrowings
under the revolving line of credit or additional letters of credit. The New
Credit Facility also calls for certain early termination fees in the event the
it is terminated before maturity, except in the event of a refinancing by an
affiliate of the lender or in connection with certain capital market events. The
New Credit Facility contains certain restrictive covenants and conditions among
which are a prohibition on the payment of dividends, limitations on further
indebtedness, restrictions on dispositions and acquisitions of assets,
limitations on advances to third parties and foreign subsidiaries and compliance
with certain financial covenants, including a minimum adjusted net worth and a
minimum domestic adjusted net worth. In addition, the New Credit Facility
prohibits the Company's Chief Executive Officer from reducing his ownership in
the Company below specified levels.

CONVERTIBLE DEBT
      The Company had entered into a Convertible Loan Agreement ("Convertible
Loan Agreement") dated July 3, 1997, pursuant to which the Company issued $15
million of convertible subordinated notes. In March 1999, the Company defaulted
under certain financial covenants of the Convertible Loan Agreement, and in July
1999 the Company defaulted in the payment of interest due on the convertible
subordinated notes as required by the senior lenders. On October 22, 1999, the
Company and the holders of the convertible subordinated notes entered into a
First Amendment to the Convertible Loan Agreement (the "First Amendment") which
waived existing defaults under the Convertible Loan Agreement, provided consent
to the New Credit Facility, and modified the financial covenants in the
Convertible Loan Agreement to conform to the financial covenants in the New
Credit Facility. In addition, the First Amendment increased the interest rate
from 8.5% to 10.5% per annum, changed the convertible debentures' final maturity
date from June 30, 2004 to December 31, 2000, and adjusted the conversion price
from $16 per share of common stock to the lesser of (i) $16 per share and (ii)
the greater of $6 per share or the average closing price of the Company's common
stock for the 30 days following October 22, 1999. Principal is payable monthly
commencing June 30, 2000 at a rate of 1% of the outstanding principal balance,
with the remaining unpaid balance due at final maturity. In connection with the
First Amendment, the Company granted the holders of the convertible subordinated
debentures a first lien on its 51% interest in its Los Angeles warehouse and a
second lien on substantially all its other assets. The First Amendment also
includes limitations on the issuance of stock options to employees, and entitles
the holders to two advisory board positions. The First Amendment also provides
for permanent Board seats, as well as limitations on the total number of board
seats and a possible reset of the conversion price if the outstanding debentures
have not been converted or paid in full by final maturity.

SETTLEMENT OF LITIGATION & RESTRUCTURING OF ACE NOTE
      On October 25, 1999, the Company entered into a Settlement Agreement that
provides for the dismissal of the outstanding action instituted against the
Company by the sellers and stockholders of Expo Management Co., formerly Ace
Novelty Co., Inc., ("Stockholders") and the related counter suit by the Company.
Under the terms of the Settlement Agreement, both parties agreed to the mutual
release of certain


                                      F-13
<PAGE>
             PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. RESTRUCTURING   AND   REFINANCING  OF  NOTES  PAYABLE  AND  LONG-TERM  DEBT
(CONTINUED)

matters and claims arising from or related to the Company's acquisition of Ace
Novelty Co., the issuance by the Company of a promissory note in the amount of
$637,000 to the Stockholders in final payment of amounts due in connection with
the Company's acquisition of Ace Novelty Co., payment of $50,000 upon execution
and the assumption by the Company's Chairman of the Company's obligation in the
amount of approximately $1.7 million to purchase the Stockholders' remaining 49%
interest in the Company's distribution center located in Los Angeles,
California. The promissory note payable to the Stockholders bears interest at
the rate of 8% per annum; calls for monthly principal payments of $60,000 plus
accrued interest beginning November 1999 and is subject to a personal guaranty
by the Chairman. The Company will continue to lease the 49% interest in the
Company's Los Angeles distribution center from the Chairman pursuant to the
terms of the existing lease agreement.



6.    WRITE-OFF OF ACCOUNTS RECEIVABLE

      During the third quarter of fiscal 1999, the Company wrote-off $2.2
million of trade accounts receivable from one of its distributors as a result of
the commencement of insolvency proceedings by the Company's former distributor
in Mexico. The write-off was included in selling, general and administrative
expenses.

      In the fourth quarter of fiscal 1999, the Company recorded allowance for
doubtful account provisions totaling $1.7 million related to non-performing
trade receivables from two Latin American customers, $742,000 for the balance of
a non-performing note receivable from the purchaser of Restaurants Universal,
and $826,000 for other specific non-performing receivables.

      On October 6, 1999, the Company purchased substantially all of the assets,
principally inventory, and assumed certain liabilities, with a net value of $1.9
million, of South Florida Toys & Novelties, Inc. ("SFT"), the Company's
distributor based in Miami, Florida in exchange for the cancellation of amounts
due to the Company from SFT totaling $2.8 million. A provision for the loss
based on the difference between the net assets acquired and the balance due to
the Company of approximately $1.0 million, less a previously established
allowance for doubtful accounts of approximately $300,000, was recorded at July
31, 1999 and is included in selling, general and administrative expenses.

7.  INVENTORIES

      Inventories consist of the following:
                                                            JULY 31,
                                                 -------------------------------
                                                    1999                 1998
                                                 -----------         -----------
Purchased for resale ...................         $68,592,189         $72,325,886
Operating supplies .....................             524,710             287,244
     Total .............................         $69,116,899         $72,613,130
                                                 -----------         -----------


      Replacement cost of inventories approximates LIFO cost at each of the
balance sheet dates. At July 31, 1999 and 1998 inventories in the amount of
$40.1 million and $45.3 million, respectively, were valued using the FIFO and
specific identification methods. The excess current cost over the LIFO value of
inventories was $215,000 at July 31, 1999 and 1998.

                                      F-14
<PAGE>
             PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.  INVENTORIES (CONTINUED)

      In the fourth quarter of fiscal 1999, the Company recorded a provision of
$4.5 million to write-down the carrying value of certain slow or non-moving
inventory items to their estimated net realizable values.

7.    PROPERTY AND EQUIPMENT

    Property and equipment consists of the following:

                                                           JULY 31,
                                                 ----------------------------
                                                     1999            1998
                                                 ------------    ------------
     Buildings ...............................   $  3,740,275    $  3,379,773
     Land ....................................      1,240,729       1,207,729
     Equipment ...............................     14,783,215      11,656,496
     Vehicles ................................        744,278         707,006
     Computer equipment ......................      3,555,294       2,524,361
     Software ................................      6,603,820       1,455,071
     Leasehold improvements ..................      2,825,698       2,213,263
                                                 ------------    ------------
                                                   33,493,309      23,143,699
                                                 ------------    ------------
     Accumulated depreciation and amortization     (7,634,164)     (5,228,701)
                                                 ------------    ------------
                                                 $ 25,859,145    $ 17,914,998

      Included in property and equipment in the accompanying consolidated
balance sheets are the following assets held under capital leases:

                                                           JULY 31,
                                                 ----------------------------
                                                     1999            1998
                                                 ------------    ------------
     Equipment ...............................   $  2,892,054    $  1,525,726
     Computer equipment ......................      2,629,563       1,073,019
     Accumulated depreciation ................       (801,752)       (766,800)
                                                 ------------    ------------
                                                 $  4,719,865    $  1,831,945
                                                 ------------    ------------

                                      F-15
<PAGE>
             PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.    NOTES PAYABLE AND LONG-TERM DEBT

      The following classifications and maturities of amounts outstanding at
July 31, 1999 are based on the refinancing and restructuring completed on
October, 25, 1999 (See Note 5):
<TABLE>
<CAPTION>
                                                                         JULY 31,
                                                                ----------------------------
                                                                    1999            1998
                                                                ------------    ------------
<S>                                                             <C>             <C>
NOTES PAYABLE:
  Revolving lines of credit .................................   $ 29,982,533    $ 14,760,950
                                                                ============    ============
LONG-TERM DEBT:
  Convertible subordinated debentures .......................   $ 15,000,000    $ 15,000,000
  Term loan .................................................      2,410,000       7,200,000
  Notes payable to banks, financing companies, and other due
     in monthly installments with interest rates ranging from
     7.4% to 12.0% collaterized by equipment ................      1,385,405       1,053,396
                                                                ------------    ------------
                                                                $ 18,795,405    $ 23,253,396
                                                                ------------    ------------
  Less current maturities ...................................     (1,953,487)     (3,393,149)
                                                                ------------    ------------
                                                                $ 16,841,918    $ 19,860,247
                                                                ============    ============
</TABLE>
The aggregate amount of maturities on long-term borrowings as of July 31, 1999
were as follows:

                         Year ended July 31:
                                       2000                $ 1,948,564
                                       2001                 15,148,008
                                       2002                    425,782
                                       2003                    413,436
                                       2004                    413,436
                                     Beyond                    446,179
                                                        ---------------
                                                           $18,795,405
                                                        ===============
CREDIT FACILITY
      In June 1996, the Company entered into a $65 million Credit Facility the
("Old Credit Facility") which included a $53 million revolving line of credit
commitment, subject to availability under a borrowing base calculated by
reference to the level of eligible accounts receivable and inventory, and a $15
million sublimit for the issuance of letters of credit. The Old Credit Facility
also included a $12 million term loan, which required sixty equal monthly
principal payments of $200,000 plus accrued interest beginning August 1, 1996,
with the last payment due and payable on June 20, 2001. During fiscal 1999, the
Old Credit Facility was amended reducing the total revolving line of credit
commitment to an aggregate amount of $35 million. The Old Credit Facility's
maturity was extended, through a series of short-term extensions, to October 29,
1999. On October 25, 1999, the Company entered into a New Credit Facility with
another lender that matures October 24, 2002 (See Note 5).

                                      F-16
<PAGE>
             PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.    NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)

      Interest on borrowings outstanding under the Old Credit Facility's
revolving line of credit is payable monthly at an annual rate equal to, at the
Company's option, (i) the Bank's Alternate Base Rate or (ii) the LIBOR rate plus
2.00%. The weighted average interest rate was 8.0% at July 31, 1999 and 8.50%
for the year ended July 31, 1998. For amounts outstanding under the term loan,
interest is payable monthly in arrears at an annual rate equal to, at the
Company's option, (i) the Bank's Alternate Base Rate plus 0.25% or (ii) the
LIBOR rate plus 2.25%. The weighted average interest rate was 8.25% at July 31,
1999 and 8.75% for the year ended July 31 1998. The Old Credit Facility is
collateralized by a first lien on substantially all of the Company's domestic
assets, and 65% of the issued and outstanding stock of its foreign subsidiaries.

      As of July 31, 1999, the Company had $2.1 million in outstanding
irrevocable letters of credit under the Old Credit Facility.

      In March 1999, Caribe Marketing and Sales Co., Inc. ("Caribe") entered
into a credit facility with a bank that provides for an aggregate commitment of
$5.0 million for the issuance of letters of credit and a $1.5 million sublimit
for cash advances. Interest accrues at prime minus .75% and is payable monthly,
with principal due at maturity, June 30, 2000. The facility is guaranteed by the
Company.

CONVERTIBLE DEBT
      During July 1997, the Company completed a private placement of $15 million
of 8% Convertible Debentures. The proceeds were used to retire a $3 million
subordinated demand note due to a shareholder, provide $3 million as collateral
on two lines of credit with banks in Spain and for general corporate purposes.
Interest accrues at 8% per annum, payable monthly until maturity on June 30,
2004. Principal is payable commencing June 30, 2000 at a rate of 1% of the
outstanding balance monthly, with the remaining balance due at maturity. The
debt is convertible into the Company's common stock at any time during the loan
period. Pursuant to the terms of the Convertible Loan Agreement, the conversion
price was adjusted from the original $17.00 per share to $16.00 per share as a
result of the December 1997 offering of the Company's common stock at $16.00 per
share. The debenture holders may force redemption if there is a change of
control of the voting stock, two-thirds of the Board changes without approval of
the holders, or the Company's stock cannot be publicly traded. The Company
incurred costs of approximately $731,000 in connection with the issuance of the
convertible debentures. Such costs were capitalized and are being amortized to
interest expense over the term of the convertible debentures on a straight-line
basis, which approximates the interest method.

      On October 25, 1999, the Company restructured its Convertible Debentures
(See Note 5).

10.  COMMITMENTS AND CONTINGENCIES

CAPITAL LEASES
      The Company leases equipment under capital lease agreements that expire at
various dates through 2003. The lease agreements generally provide purchase
options and require the Company to pay property taxes, utilities and insurance.

                                      F-17
<PAGE>
             PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.  COMMITMENTS AND CONTINGENCIES (CONTINUED)

      Future minimum lease payments under capital leases at July 31, 1999 are as
follows:

         Year ended July 31:
                  2000                             $1,701,911
                  2001                             $1,176,026
                  2002                                699,375
                  2003                                 81,714
                  2004                                 23,938
                                                   ----------
         Total minimum lease payments               3,682,964
         Less amounts representing interest          (325,227)
                                                   ----------
         Less current portion                       3,357,737
         Long-term obligations under capital
         leases                                     1,701,911
                                                   ----------
                                                   $1,655,826

OPERATING LEASES
      The Company leases equipment, vehicles and operating facilities,
consisting primarily of warehouse, distribution and office space, under
operating leases expiring at various dates through 2007. The lease agreements
generally provide renewal options and require the Company to pay property taxes,
utilities and insurance. Rent expense under operating leases was $4.2 million,
$2.1 million and $2.5 million for the years ended July 31, 1999, 1998 and 1997,
respectively.

      Minimum rental payments required under operating leases that have initial
or remaining non-cancelable lease terms in excess of one year at July 31, 1999
are as follows:

                  Year ended July 31:
                           2000                     $ 2,424,189
                           2001                       1,907,764
                           2002                       1,827,512
                           2003                       1,640,545
                           2004                       1,075,318
                  Thereafter                          3,643,839
                                                    -----------
                          Total minimum lease       $12,519,167
                                                    ===========

ROYALTIES
      The Company markets its products under a variety of licensed trademarks
for which the Company pays associated royalties based on sales of the related
products. Approximately 70.1%, 64.2% and 59.7% of the Company's net sales in
fiscal 1999, 1998 and 1997, respectively, were derived from product lines based
on licensed entertainment characters or corporate trademarks. The Company's
products based on licensed trademarks for Looney Tunes' characters accounted for
46.8%, 50.6% and 37.5% of net sales in fiscal 1999, 1998 and 1997, respectively.
No other license accounted for more than 10% of the Company's net sales. Some
licenses are renewable at the option of the Company upon payment of certain
minimum guaranteed payments or the attainment of certain sales levels during the
initial term of the license. However, there can be no assurance that the Company
will be able to renew its most successful licenses, or obtain new licenses.
Substantially all of the license agreements are for periods of one to three
years and include guaranteed

                                      F-18
<PAGE>
             PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                     F-19

10.  COMMITMENTS AND CONTINGENCIES (CONTINUED)

minimum royalty payments and advertising commitments over the life of the
agreements. Royalty expense is recorded based on sales for the period multiplied
by the contractual royalty rate specified in the related licenses and included
in cost of sales.

      The Company has estimated that projected future revenues over the
remaining terms of three significant license agreements will be insufficient to
allow the Company to earn-out the guaranteed minimum royalties advanced or
required to be paid to the licensor over the remaining terms of the agreements
that commenced in 1998 and will end in fiscal 2001. Accordingly, the Company
recorded a provision totaling $14.9 million in the fourth quarter of fiscal 1999
for the estimated guaranteed minimum royalty shortfall associated with these
licenses and is reflected in cost of sales in the accompanying consolidated
statement of operations.

In addition, two of the three above indicated licenses also require the Company
to incur certain types and amounts of advertising and promotional expenditures
relative to the licensed properties. Given the level of advertising and
promotional expenditures incurred to date by the Company, the risk exists that
the Company will not meet the advertising commitments specified in the license
agreements. Accordingly, the Company's failure to meet these commitments by the
expiration date of the licenses could impact its ability to obtain a renewal on
favorable terms, if at all, or secure additional licenses from the licensor. The
Company is in the process of negotiating extensions of the license terms and
concessions relative to the remaining guaranteed minimum royalties and the
advertising commitments. These negotiations are expected to be completed by the
end of the first quarter of calendar 2000, however, there can be no assurance
that the Company will be able to secure the extensions or concessions it is
seeking from the licensor.

      Future unpaid or unaccrued guaranteed minimum royalty obligations, in the
aggregate amount of $8.4 million, are due in various amounts through fiscal
2002.

LETTERS OF CREDIT
      The Company had commitments in the normal course of business, including
outstanding irrevocable letters of credit and bankers' acceptances to certain
banks approximating $2.1 million at July 31, 1999, relating primarily to the
purchase of merchandise from various third-party overseas manufacturers.
Liabilities under letters of credit are recorded when the Company is notified
that merchandise has been shipped.

      As of July 31, 1999, the Company's Spanish subsidiary had $1.0 million
outstanding in irrevocable letters of credit.

LEGAL PROCEEDINGS
      The Company is from time to time subject to routine litigation incidental
to its business. The Company's management believes that the results of pending
legal proceedings will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.


                                      F-19
<PAGE>
             PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.  COMMITMENTS AND CONTINGENCIES (CONTINUED)

      In December 1997, a legal action was instituted against the Company by an
individual alleging claims for unfair competition (misappropriation), breach of
contract, breach of implied in fact contract, and quasi contract in connection
with alleged infringement resulting from the sale of Tornado Taz(TM). The
plaintiff seeks to recover the Company's profits on the sale of the toy in
question which could be as much as $2 million or more, or alternatively the
plaintiff may seek to recover royalties as a measure of damages. The Company
responded by denying the essential allegations of the complaint and by filing
counterclaims. The plaintiff filed motions for summary judgement for dismissal
of the claims and counterclaims. On January 21, 1999, a judge in the United
States District Court Southern District of New York granted both the defendant's
and plaintiff's motions for summary judgement dismissing the claims and
counterclaims. On February 19, 1999, the plaintiff filed a notice of appeal with
respect to the court's granting the Company's motion for summary judgement. The
Company filed a similar notice on February 25, 1999 regarding the courts
granting plaintiffs motion for summary judgement. The matter is pending
scheduling by the court of appeals. The Company is vigorously contesting the
claims and management believes that the plaintiff has no basis for its claims.


11.  ADVERTISING EXPENSES

      Advertising expenses consist primarily of costs incurred in the design,
development, printing and shipping of Company catalogs, television advertisement
costs and a limited number of advertisements in trade publications. The Company
implemented a television promotion campaign for the first time in fiscal 1997 in
conjunction with the introduction of the Talkin' Tots(TM) and Tornado Taz(TM).
In fiscal 1999, the television advertising costs were incurred principally in
conjunction with Talkin Tunes and Tornado Taz(TM), and in fiscal 1998, the
television advertising costs were incurred principally in conjunction with
Talkin' Tots(TM), Talkin' Tunes and Tornado Taz(TM). The Company's total
television advertising expenses were $1.9 million, $5.7 million and $1.3 million
during fiscal 1999, 1998 and 1997, respectively. The Company's total advertising
expenses, including television advertisement costs, were $5.8 million, $7.6
million and $2.7 million during fiscal 1999, 1998 and 1997, respectively.

                                      F-20
<PAGE>
             PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.  INCOME TAX

      Income tax provision (benefit) is as follows:

<TABLE>
<CAPTION>
                                                                            YEAR ENDED JULY 31,
                                                               --------------------------------------------
                                                                   1999            1998            1997
                                                               ------------    ------------    ------------
<S>                                                            <C>             <C>             <C>
Federal:
  Current provision (benefit) ..............................   $ (2,825,777)   $  2,914,676    $    974,246
  Deferred provision (benefit) .............................       (654,059)       (503,290)        554,229
                                                               ------------    ------------    ------------
    Total Federal ..........................................     (3,479,836)      2,411,386       1,528,475
                                                               ------------    ------------    ------------
State - current ............................................           --           441,827         255,102
                                                               ------------    ------------    ------------
Foreign - current ..........................................        539,532       1,693,974         940,573
                                                               ------------    ------------    ------------
  Net provision (benefit) for income taxes .................   $ (2,940,304)   $  4,547,187    $  2,724,150
                                                               ------------    ------------    ------------
     Reconciliations of the differences between income taxes computed at the Federal statutory tax rates
and income tax provision are as follows:

                                                                            YEAR ENDED JULY 31,
                                                               --------------------------------------------
                                                                   1999            1998            1997
                                                               ------------    ------------    ------------
Income taxes (benefit) computed at Federal statutory rates .   $(11,276,262)   $  4,417,267    $  3,039,641
Foreign tax differentials ..................................        427,913         (23,834)       (531,107)
Valuation allowance ........................................      8,013,863            --              --
State tax provision ........................................           --           291,606         168,367
Other - net ................................................       (105,818)       (137,852)         47,249
                                                               ------------    ------------    ------------
  Total provision (benefit) ................................   $ (2,940,304)   $  4,547,187    $  2,724,150
                                                               ------------    ------------    ------------
</TABLE>

The tax effects of the significant temporary differences that comprise the
deferred tax assets and liabilities are as follows:

                                      F-21
<PAGE>
             PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                      YEAR ENDED JULY 31,
                                                          --------------------------------------------
                                                              1999            1998            1997
                                                          ------------    ------------    ------------
<S>                                                       <C>             <C>             <C>
Assets:
  Current:
    Accounts receivable ...............................   $  3,640,719    $  1,515,765    $    707,422
    Capital loss carryover ............................        135,693         135,693         135,693
    Other - net .......................................        867,642         483,848         324,971
  Non-current - net operating losses ..................      5,376,199            --              --
                                                          ------------    ------------    ------------
      Gross deferred tax assets .......................     10,020,253       2,135,306       1,168,086
                                                          ------------    ------------    ------------

Liabilities:
  Current - inventory .................................         36,590       1,774,885       1,528,824
  Non-current - basis of property and equipmen1,834,107      1,834,107         878,787         660,918
                                                          ------------    ------------    ------------
    Gross deferred tax liabilities ....................      1,870,697       2,653,672       2,189,742
                                                          ------------    ------------    ------------
    Net deferred tax assets (liabilities) before
    valuation allowance ...............................      8,149,556        (518,366)     (1,021,656)
                                                          ------------    ------------    ------------
    Less valuation allowance ..........................     (8,149,556)       (135,693)       (135,693)
                                                          ------------    ------------    ------------
      Net deferred tax liabilities ....................   $       --      $   (654,059)   $ (1,157,349)
                                                          ------------    ------------    ------------
</TABLE>

      Due to the Company's loss in fiscal 1999, the Company has recorded a
valuation allowance equal to the net deferred tax asset due to the possibility
that the net deferred tax asset may not be realized. Also during fiscal 1998 and
1997, the Company recorded a valuation allowance on the capital loss carryover
as management is uncertain that the Company will be able to realize the benefit
in future periods.

      Income taxes are not provided on undistributed earnings of foreign
subsidiaries as those earnings are intended to be permanently reinvested in
those operations. These earnings could become subject to additional tax upon
distribution in the form of dividends or otherwise. It is not practicable to
estimate the amount of additional U.S. tax that might be payable on the foreign
earnings; however, any foreign income taxes previously paid would reduce U.S.
income taxes payable.

      As of July 31, 1999, the Company had net operating loss carryfowards of
approximately $15.8 million that expire in fiscal 2019 and are available to
offset future taxable income.

                                      F-22
<PAGE>
             PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.  SHAREHOLDERS' EQUITY

SECONDARY OFFERING
      On December 2, 1997, the Company sold 2,300,000 shares of its common stock
in a follow-on public offering at a price of $16.00 per share. The total number
of shares sold included 300,000 related to underwriters' over-allotment option,
which was exercised in full. The net proceeds from the issuance and sale of
common stock amounted to $34.1 million after deducting underwriters' discounts
and other expenses. In December 1997, a portion of the net proceeds was used to
repay indebtedness of approximately $21.3 million outstanding under the Old
Credit Facility and $12.8 million was used to fund the Company's operations.

STOCK OPTIONS
      The Company has a Non-Qualified Stock Option Plan and a 1994 Incentive
Plan (the "Plans"). The Company has reserved 1,300,000 shares of its common
stock for issuance upon exercise of options granted or to be granted under these
Plans. The vesting period for options generally ranges from six months to five
years from the date of the grant. Under the Plans, and at the discretion of the
Board of Directors, awards may be granted to officers and employees of the
Company in the form of incentive stock options and restricted stock. Stock
options may be exercised at a purchase price determined by the Board of
Directors, provided that the exercise price per share shall be an amount not
less than 100% of the fair market value on the date the option is granted or
110% of fair market value for beneficial owners of 10% or more of the Company's
outstanding shares. The maximum term for Stock Options granted under the Plans
is generally ten years; the maximum term is five years for incentive stock
options granted to shareholders who own 10% or more of the Company's Common
Stock).

      In January 1997, the Company granted options to purchase 200,000 shares of
the Company's common stock at $8.00 per share, in connection with an officer's
employment agreement. These options vest equally from February 1, 1997 through
February 1, 2002. The Company recognized $140,000 of compensation expense in
both fiscal 1999 and 1998 and $81,667 in fiscal 1997 and has a balance of
$338,333, $478,333 and $618,333 in unearned compensation as of July 31, 1999,
1998 and 1997, respectively, related to these options.

      In fiscal 1997, the Company's Board of Directors voted that options
granted to officers of the Company prior to December 1996 be re-priced to the
fair market value on the date of re-pricing, which was $11.00, or 110% of fair
market value for beneficial owners. The resolution was approved at the Annual
Meeting of Shareholders on December 11, 1997. The number of shares re-priced was
159,000. The original exercise price of the shares ranged from $13.475 to
$14.58. Such options shall vest as originally granted.

      The  Company  has adopted  the  disclosure-only  provisions  of SFAS No.
123,   "Accounting   for   Stock   Based   Compensation".    Accordingly,   no
compensation expense has been recognized for the stock plan.

                                      F-23
<PAGE>
             PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.  SHAREHOLDERS' EQUITY (CONTINUED)

      A summary of the status of the Company's stock options as of July 31,
1999, 1998, and 1997 and the changes during the year ended on those dates is
presented below:

<TABLE>
<CAPTION>
                                                          FISCAL YEARS ENDED JULY 31,
                             ---------------------------------------------------------------------------------------
                                         1999                          1998                         1997
                             ---------------------------   ---------------------------   ---------------------------
                                              WEIGHTED                      WEIGHTED                     WEIGHTED
                              # SHARES OF     AVERAGE      # SHARES OF      AVERAGE      # SHARES OF     AVERAGE
                               UNDERLYING     EXERCISE      UNDERLYING      EXERCISE      UNDERLYING     EXERCISE
                                OPTIONS        PRICES         OPTIONS        PRICES         OPTIONS       PRICES
                             ------------   ------------   ------------   ------------   ------------   ------------
<S>                          <C>            <C>            <C>            <C>            <C>            <C>
Outstanding at beginning
  of year ................      1,833,000   $      15.32        959,800   $      10.71        624,000   $      12.29
Granted ..................         11,000   $       7.25      1,034,000   $      18.99        412,000   $       9.66
Exercised ................           --     $       --          111,900   $      11.82         20,200   $      12.57
Forfeited ................        114,600   $      17.23         24,140   $      13.47         49,300   $      11.28
Expired ..................        215,300   $      15.76         24,760   $      11.10          6,700   $      13.73
Outstanding at end of year      1,514,100   $      15.31      1,833,000   $      15.32        959,800   $      10.71
Exercisable at end of year        973,910   $      14.87        562,640   $      12.76        394,700   $      12.10
</TABLE>
                                    1999                1998               1997
                                    ----                ----               ----
Weighted-average fair value of
  options granted at premium          -                   -                $1.83
Weighted-average fair value of
  options granted at-the-money      $3.33              $7.26               $3.62
Weighted-average fair value of
  granted at a discount               -                   -                $5.81
Weighted-average fair value of
  modifications to options            -                   -                $1.09

      The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for all grants in 1999, 1998 and 1997: dividend yield of 0.00%;
risk-free interest rate of from 4.64% to 6.07%; an expected life of options of 5
years for 10-year options and expected life of 2.5 years for 5-year options; and
a volatility of 45.6%, 30.4% and 23.6% in fiscal 1999, 1998 and 1997,
respectively.

      During fiscal 1997, 159,000 previously granted options were modified to
reduce the exercise price. The "Outstanding at the end of year" number of shares
underlying options in the table above and the table below reflects the modified
terms of these options. The fair value of each modification of previously
granted stock options is estimated on the date of the modification using the
Black-Scholes option-pricing model to determine the amount of value added to
each option at the time of modification. The weighted-average assumptions are
the same as for the options granted during fiscal 1998 and 1997.

                                      F-24
<PAGE>
             PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.  SHAREHOLDERS' EQUITY (CONTINUED)

Options outstanding as of July 31, 1999 are summarized below:
<TABLE>
<CAPTION>
                                             OPTIONS OUTSTANDING                   OPTIONS EXERCISABLE
                                  ------------------------------------------   ---------------------------
                                               WEIGHTED AVERAGE                                  WEIGHTED
   RANGE OF                           NUMBER       REMAINING   WEIGHTED AVERAGE   NUMBER         AVERAGE
EXERCISE PRICES                    OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE  EXERCISABLE   EXERCISE PRICE
                                  ------------   ------------   ------------   ------------   ------------
<S>                               <C>            <C>            <C>            <C>            <C>
$7.25 to $13.00 ...............        467,000           7.24   $       9.48        326,600   $       9.97
$13.01 to $15.95 ..............        235,600           5.83   $      14.12        220,710   $      14.06
$15.96 to $19.63 ..............        811,500           8.23   $      19.02        426,600   $      19.05
                                  ------------   ------------   ------------   ------------   ------------
$7.25 to $19.63 ...............      1,514,100           7.55   $      15.32        973,910   $      14.87
                                  ------------   ------------   ------------   ------------   ------------
</TABLE>

      According to the terms of the Convertible Debenture Agreement, as amended
on October 22, 1999, the Company's ability to issue stock options to employees
is limited to the amount of options held by employees in the aggregate as of the
date of the amendment.

NON-EMPLOYEE STOCK OPTIONS
        In addition to the options described above, the Company granted 3,000
non-employee stock options with an exercise price of $13.48 to a non-employee
during fiscal 1995. During fiscal year 1998, the non-employee exercised 1,800
options. As of July 31, 1999, 1,200 non-employee stock options were outstanding
with a remaining contractual term of 7.85 years.

PRO FORMA NET INCOME AND NET INCOME PER COMMON SHARE
      Had the compensation cost for the Company's Plans been determined
consistent with SFAS 123, the Company's net income (loss) and net income (loss)
per common share for fiscal 1999 and 1998 would approximate the pro forma
amounts below:
<TABLE>
<CAPTION>
                                      AS REPORTED      PRO FORMA     AS REPORTED     PRO FORMA
                                        7/31/99         7/31/99         7/31/98        7/31/98
                                     ------------    ------------    ------------   ------------
<S>                                  <C>             <C>             <C>            <C>
SFAS 123 charge ..................           --      $  1,538,265            --     $  1,501,047
APB 25 charge ....................   $    140,000    $    140,000    $    140,000   $    140,000
Net income (loss) ................   $(30,230,347)   $(31,628,612)   $  8,444,775   $  7,083,728
Net income (loss) per common share   $      (4.12)   $      (4.31)   $       1.30   $       1.09
</TABLE>

      The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards granted prior to
the 1996 fiscal year.

WARRANTS
      In connection with the initial public offering in July 1995, the Company
sold warrants to the underwriters for a nominal amount that allows for the
purchase of up to 82,000 shares of the Company's Common Stock. The warrants are
exercisable at $14.70 for a period of four years beginning July 20, 1996.

      The Company issued to the Sellers of Ace, a warrant to purchase up to
35,000 shares of the Company's common stock at a price per share of $14.90. The
warrant is exercisable for a period of five years beginning June 20, 1997. The
estimated value of the warrant of $245,350 was recorded as an increase in
goodwill, with an offsetting increase in additional paid-in capital.

                                      F-25
<PAGE>
             PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.  SHAREHOLDERS' EQUITY (CONTINUED)

      In connection with the execution of certain license agreements in January
1998, the Company issued to Warner Bros. Consumer Products, a division of Time
Warner Entertainment Company, L. P., a warrant (the "Warner Bros. Warrant") to
purchase up to 100,000 shares of the Company's common stock at a price per share
of $15.4375. The warrant may be exercised in full or in part between January 1,
1998 and December 31, 2000.

PREFERRED STOCK
      Pursuant to the Company's Articles of Incorporation, the Board is
authorized to issue up to 10,000,000 shares of Preferred Stock, in one or more
series, and is authorized to fix the dividend rights, or rates, any conversion
rights or rights of exchange or redemption, any voting right, any rights and
terms or prices of redemption (including sinking fund provisions), the
liquidation preferences and any other rights, preferences, privileges and
restrictions of any series of Preferred Stock as well as the number of shares
and series designation. The Company has never issued any Preferred Stock and
there were no shares of Preferred Stock outstanding as of July 31, 1999 or 1998.

14.  ACQUISITION

      In March 1999, the Company, through a wholly-owned subsidiary, acquired
substantially all of the assets and certain liabilities of Caribe for the
purchase price of $2.5 million consisting of 80,000 shares of the Company's
common stock, and the assumption of a seller note. The shares had a fair market
value of $500,000 at the date the transaction was announced. The Company
incurred $45,500 in costs directly related to the acquisition. The acquisition
has been accounted for using the purchase method of accounting, and accordingly,
the purchase price has been allocated to the assets purchased and the
liabilities assumed based on the fair values at the date of the acquisition. The
excess of the purchase price over net assets acquired resulted in goodwill of
$2.8 million, which is being amortized on a straight-line basis over 20 years.
Caribe's operating results have been included in the Company's consolidated
financial statements since the date of the acquisition.

15.  TRANSACTIONS WITH RELATED PARTIES

      The principal shareholder leases seven land and building packages to third
parties with whom the Company incurred costs of $142,000, $436,000, and $700,000
million in the years ended July 31, 1999, 1998 and 1997, respectively, for
revenue sharing arrangements in connection with the Company's vending
operations.

      One of the Company's directors is affiliated with an insurance agency that
provided certain property, casualty and liability insurance to the Company in
fiscal years 1998 and 1997. The Company paid premiums on policies issued by the
affiliated insurance agency totaling $272,600 and $956,000 during fiscal year
1998 and 1997, respectively. Such payments amounted to 50.8% and 100.0% in
fiscal 1998 and 1997, respectively, of all payment made by the Company to all
insurance agents for such coverage.

                                      F-26
<PAGE>
             PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16.  SUPPLEMENTAL CASH FLOW DISCLOSURES

      Supplemental cash flow information with respect to payments of interest
and income taxes is as follows:

                                                YEAR ENDED JULY 31,
                                    --------------------------------------------
                                       1999             1998             1997
                                    ----------       ----------       ----------
Interest paid ...............       $4,377,084       $3,948,834       $3,794,534
Income taxes paid ...........          602,570        2,565,861          942,437

      The Company incurred capital lease and other debt obligations of $2.4
million, $1.6 million and $1.2 million in the years ended July 31, 1999, 1998
and 1997, respectively.

      The Company recorded $700,000 as deferred compensation related to the
options to purchase up to 200,000 shares of common stock, granted to an officer
in January 1997. At July 31, 1999, the unamortized balance was $338,333.

      In fiscal year 1998, in connection with the Warner Bros. Warrant (see Note
13), the Company recorded $522,000 as a prepaid royalty with an offsetting
increase in additional paid-in capital. The prepaid royalty is being amortized
to expense on a straight-line basis over the life of the related licenses, which
terminate December 2000.

      The Company issued 80,000 shares of the Company's common stock with a
value of $500,000 on the date of acquisition and recorded a reduction of
accounts receivable from Caribe of approximately $2.0 million in connection with
the acquisition of Caribe.

                                      F-27
<PAGE>
             PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17.  SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

      Summarized operating results of the Company by quarter for fiscal years
1999 and 1998 are presented as follows (in thousands, except per share data).

<TABLE>
<CAPTION>
                                                                            1999
                                                         -------------------------------------------
                                                          FIRST      SECOND       THIRD      FOURTH
                                                         QUARTER     QUARTER     QUARTER     QUARTER
                                                         --------   --------    --------    --------
<S>                                                      <C>          <C>         <C>         <C>
Net sales ............................................   $ 55,727     28,432      35,683      36,673
Gross profit (loss) ..................................     16,774      9,019      10,725      (9,585)
Operating income (loss) ..............................      3,410     (2,363)     (4,480)    (25,443)
Net income (loss) ....................................      1,426     (1,912)     (3,609)    (26,135)

Net income (loss) per share - basic ..................       0.20      (0.26)      (0.49)      (3.57)
Net income (loss) per share - diluted ................       0.20      (0.26)      (0.49)      (3.57)

<CAPTION>
                                                                            1998
                                                         -------------------------------------------
                                                          FIRST      SECOND       THIRD      FOURTH
                                                         QUARTER     QUARTER     QUARTER     QUARTER
                                                         --------   --------    --------    --------
Net sales ............................................   $ 58,418   $ 30,867    $ 37,262    $ 51,556
Gross profit .........................................     20,538     10,837      12,746      17,226
Operating income .....................................      6,505        912       3,447       6,395
Net income ...........................................      3,457         41       1,686       3,261

Net income per share - basic .........................       0.71       0.01        0.23        0.45
Net income per share - diluted .......................       0.58       0.01        0.22        0.41
</TABLE>


(1)   Includes provisions for guaranteed minimum royalty shortfalls of $14.9
      million, inventory write-down reserves of $4.5 million, and specific
      allowances for doubtful accounts of $4.1 million.

                                      F-28
<PAGE>
                              INDEX TO EXHIBITS

EXHIBIT
NUMBER                         DESCRIPTION OF EXHIBITS
-------                        -----------------------
   2.1   Asset Purchase Agreement dated May 1, 1996, by and among Ace Novelty
         Acquisition Co., Inc. a Texas corporation ("Buyer"), Play By Play Toys
         & Novelties, Inc., a Texas corporation and the parent corporation of
         Buyer ("PBYP"), Ace Novelty Co., Inc., a Washington corporation
         ("ACE"), Specialty Manufacturing Ltd., a British Columbia, Canada
         corporation ("Specialty"), ACME Acquisition Corp., a Washington
         corporation ("ACME"), and Benjamin H. Mayers and Lois E. Mayers,
         husband and wife, Ronald S. Mayers, a married individual, Karen
         Gamoran, a married individual, and Beth Weisfield, a married individual
         (collectively, "Stockholders") (filed as Exhibit 2.1 to Form 8-K, Date
         of Event: May 1, 1996), incorporated herein by reference.

   2.2   Amendment No. 1 to Asset Purchase Agreement dated June 20, 1996 by, and
         among Buyer, PBYP, ACE, Specialty, ACME and Stockholders. (filed as
         Exhibit 2.2 to Form 8-K, Date of Event: May 1, 1996), incorporated
         herein by reference.

   3.1   Amended Articles of Incorporation of the Company (filed as Exhibit 3.1
         to the Registration Statement on Form S-1, File No. 33-92204)
         incorporated herein by reference.

   3.2   Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 to the
         Registration Statement on Form S-1, File No. 33-92204), incorporated
         herein by reference.

   4.1   Specimen of Common Stock Certificate (filed as Exhibit 4.1 to the
         Registration Statement on Form S-1, File No. 33-92204) incorporated
         herein by reference.

   4.2   Form of Warrant Agreement and Form of Warrant (filed as Exhibit 4.2 to
         the Registration Statement on Form S-1, File No. 33-92204),
         incorporated herein by reference.

   4.3   Form of Play By Play Toys & Novelties, Inc. Grant of Incentive Stock
         Option (filed as Exhibit 4.3 to the Registration Statement on Form S-1,
         File No. 33-92204) incorporated herein by reference.

   4.4   Form of Play By Play Toys & Novelties, Inc. Non-qualified Stock Option
         Agreement (filed as Exhibit 4.4 to the Registration Statement on Form
         S-1, File No. 33-92204) incorporated herein by reference.

   4.5   Play By Play Toys & Novelties, Inc. Warrant to Purchase Common Stock
         (filed as Exhibit 4 to Form 8-K, Date of Event: May 1, 1996),
         incorporated herein by reference.

   10.1  Play By Play Toys & Novelties, Inc. 1994 Incentive Plan (filed as
         Exhibit 10.1 to the Registration Statement on Form S-1, File No.
         33-92204), incorporated herein by reference.

   10.2  Credit Agreement dated June 20, 1996, by and among Play By Play Toys &
         Novelties, Inc., Ace Novelty Acquisition Co., Inc., Newco Novelty, Inc.
         and Chemical Bank, a New York banking corporation as agent for the
         lenders (filed as Exhibit 10.1 to Form 8-K, Date of Event: May 1,
         1996), incorporated herein by reference.

                                      E-1
<PAGE>
                          INDEX TO EXHIBITS (CONTINUED)


EXHIBIT
NUMBER                           DESCRIPTION OF EXHIBITS
-------                          -----------------------

   10.3  Promissory Note dated June 20, 1996, of Ace Novelty Acquisition Co.,
         Inc. payable to the order of Ace Novelty Co., Inc. in the principal sum
         of $2,900,000 (filed as Exhibit 10.5 to Form 8-K, Date of Event: May 1,
         1996), incorporated herein by reference.

   10.4  Employment agreement dated November 4, 1996, between the Company and
         Raymond G. Braun, as amended by Amendment No.1 to Employment agreement
         dated August 29, 1997 (filed as Exhibit 10.4 to Form 10-K for the
         fiscal year ended July 31, 1997), incorporated herein by reference.

   10.5  Non-Qualified Stock Option agreement dated November 4, 1996, between
         the Company and Raymond G. Braun, as amended by Amendment No. 1 to
         Non-Qualified Stock Option agreement dated August 29, 1997 (filed as
         Exhibit 10.5 to Form 10-K for the fiscal year ended July 31, 1997),
         incorporated herein by reference.

   10.6  Employment agreement dated May 2, 1996, between the Company and Saul
         Gamoran, as amended by Amendment No. 1 dated May 16, 1996 (filed as
         Exhibit 10.6 to Form 10-K for the fiscal year ended July 31, 1997),
         incorporated herein by reference.

   10.7  Employment agreement dated June 20, 1997, between the Company and James
         A. Weisfield (filed as Exhibit 10.7 to Form 10-K for the fiscal year
         ended July 31, 1997), incorporated herein by reference.

   10.8  Subordinated Convertible Debenture Agreements dated July 3, 1997,
         between the Company and each of Renaissance Capital Growth and Income
         Fund III, Inc., Renaissance U.S. Growth and Income Trust PLC and Banc
         One Capital Partners II, Ltd. (the "Convertible Lenders") (filed as
         Exhibit 10.8 to Form 10-K for the fiscal year ended July 31, 1997),
         incorporated herein by reference.

   10.9  Convertible Loan Agreement dated July 3, 1997, among the Company, the
         Convertible Lenders and Renaissance Capital Group, Inc. (filed as
         Exhibit 10.9 to Form 10-K for the fiscal year ended July 31, 1997),
         incorporated herein by reference

   10.10 License Agreement dated March 22, 1994 by and between Warner Bros., a
         division of Time Warner Entertainment, L.P., and the Company (as
         successor by assignment to Ace Novelty, Inc.) (filed as Exhibit 10.10
         to Form 10-K for the fiscal year ended July 31, 1997), incorporated
         herein by reference.

   10.11 License Agreement dated March 22, 1996 by and between Warner Bros., a
         division of Time Warner Entertainment, L.P., and the Company (as
         successor by assignment to Ace Novelty, Inc.) (filed as Exhibit 10.11
         to Form 10-K for the fiscal year ended July 31, 1997), incorporated
         herein by reference.

                                      E-2
<PAGE>
                          INDEX TO EXHIBITS (CONTINUED)


EXHIBIT
NUMBER                          DESCRIPTION OF EXHIBITS
-------                         -----------------------

   10.12 License Agreement dated September 10, 1997 by and between Warner Bros.,
         a division of Time Warner Entertainment, L.P., and the Company (as
         successor by assignment to Ace Novelty, Inc.) (filed as Exhibit 10.12
         to Form 10-K for the fiscal year ended July 31, 1997), incorporated
         herein by reference.

   10.13 License Agreement dated January 1, 1998 by and between Warner Bros., a
         division of Time Warner Entertainment, L.P. and the Registrant (filed
         as Exhibit 10.13 to Form 10-Q for the quarter ended January 31, 1998,
         and incorporated herein by reference).

   10.14 License Agreement dated January 1, 1998 by and between Warner Bros., a
         division of Time Warner Entertainment, L.P. and the Registrant (filed
         as Exhibit 10.14 to Form 10-Q for the quarter ended January 31, 1998,
         and incorporated herein by reference).

   10.15 Amendment dated January 14, 1998 to License Agreement dated September
         10, 1997 by and between Warner Bros., a division of Time Warner
         Entertainment, L.P. and the Registrant (filed as Exhibit 10.15 to Form
         10-Q for the quarter ended January 31, 1998, and incorporated herein by
         reference).

   10.16 First Amendment to Convertible Loan Agreement made as of October 22,
         1999, by and among the Company, Renaissance Capital Group, Inc., and
         the Convertible Lenders party to the original Convertible Loan
         Agreement.

   10.17 Loan and Security Agreement dated October 25, 1999 by and among
         Congress Financial Corporation (Southwest), the Company, Ace Novelty
         Co., Inc., Newco Novelty, Inc., and Friends, Food & Games, Inc.

   23.1  Consent of PricewaterhouseCoopers LLP

   27    Financial Data Schedule

                                      E-3
<PAGE>
                      REPORT OF INDEPENDENT ACCOUNTANTS ON
                          FINANCIAL STATEMENT SCHEDULE

To the Shareholders and Board of Directors
of Play By Play Toys & Novelties, Inc. and Subsidiaries

Our audits of the consolidated financial statements referred to in our report
dated November 12, 1999 appearing on page F-2 of this 1999 Annual Report on Form
10-K also included an audit of the financial statement schedule listed in Item
14 (a) (2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.

PricewaterhouseCoopers LLP

Austin, Texas
November 12, 1999

                                       S-1
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
                                               BALANCE          ADDITIONS                            BALANCE
                                             AT BEGINNING    CHARGED TO COSTS                         AT END
                                              OF PERIOD       AND EXPENSES       DEDUCTIONS*        OF PERIOD
                                           ---------------   ---------------   ---------------   ---------------
<S>                                        <C>                <C>              <C>               <C>
Allowance for doubtful accounts:
Year ended July 31, 1997 ...............         1,621,603         2,024,847           432,797         3,213,653
Year ended July 31, 1998 ...............         3,213,653         2,173,736           125,336         5,262,053
Year ended July 31, 1999 ...............         5,262,053         6,330,132         3,615,201         7,976,984

                                                                                                 ---------------
*Net of recoveries of $30,000, $56,987, and $24,406 in 1999, 1998, and 1997, respectively.




Reserves for slow moving inventory:
Year ended July 31, 1999 ...............           703,740         4,483,128           292,622         4,894,246
</TABLE>

                                      S-2