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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, 2000                                 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 6, 2000, 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
$5,610,080. (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 6, 2000 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

                                                                          PAGE
 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                                         14
            Manufacturers and Suppliers                                    14
            Advertising                                                    15
            Vending Operations                                             15
            Competition                                                    15
            Product Liability                                              15
            Government Regulation                                          16
            Tariffs and Duties                                             16
            Trademarks                                                     16
            Employees                                                      17
            Risk Factors                                                   17
  ITEM 2.  Properties                                                      24
  ITEM 3.  Legal Proceedings                                               25
  ITEM 4.  Submission of Matters to a Vote of Security Holders             25

 PART II
  ITEM 5.  Market for Registrant's Common Equity and Related
             Shareholder Matters                                           25
            Market Information                                             25
            Shareholders                                                   25
            Dividends and Distributions                                    25
  ITEM 6.  Selected Consolidated Financial Data                            26
  ITEM 7.  Management's Discussion and Analysis of Financial
             Condition and Results of Operations                           27
             General                                                       27
             Results of Operations                                         29
             Liquidity and Capital Resources                               32
             Euro                                                          37
             Dividend Policy                                               37
             Seasonality                                                   37
             Inflation                                                     37
             New Accounting Pronouncement                                  38
  ITEM 7A. Quantitative and Qualitative Disclosures About Market
             Risks                                                         38
  ITEM 8.  Financial Statements and Supplementary Data                     39
  ITEM 9.  Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure                           39

 PART III
  ITEM 10. Directors and Executive Officers of the Registrant              39
  ITEM 11. Executive Compensation                                          39
  ITEM 12. Security Ownership of Certain Beneficial Owners and Management  39
  ITEM 13. Certain Relationships and Related Transactions                  39

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                          TABLE OF CONTENTS (CONTINUED)
                                                                         PAGE

 PART IV
  ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
             Form 8-K                                                      39
   SIGNATURES                                                              40
   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, CHANGES IN CONSUMER PREFERENCES, PRICE CHANGES BY
COMPETITORS, RELATIONSHIPS WITH LICENSORS AND CUSTOMERS, REALIZATION OF ROYALTY
ADVANCES, NEW PRODUCT INTRODUCTIONS, CAPABILITY OF MANAGING GROWTH, ABILITY TO
SOURCE PRODUCTS, CONCENTRATION OF CREDIT RISK, 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
quality stuffed toys, novelties, consumer electronics based on its 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

      From fiscal 1994 through fiscal 1998, the Company's net sales increased
from $32.6 million in fiscal 1994 to $178.0 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 $178.0 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. In fiscal 2000, net
sales totaled $153.1 million, a decrease of 2.2% as compared to the $156.5
million reported in fiscal 1999, and the Company reported a net loss of $5.5
million, compared to a $30.2 million net loss in fiscal 1999.

      The Company develops its licensed stuffed toys and novelties based
principally on popular, classic entertainment 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

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position as the leading supplier of stuffed toys and novelties 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. Consumer Products ("Warner Bros."), a Division of
Time Warner Entertainment Company L.P., and approximately 31.3% of the Company's
net toy sales in fiscal 2000 were derived from the sale of products based on
Looney Tunes characters licensed from Warner Bros. 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 2000, net sales of
licensed products and non-licensed products accounted for 69.3% and 28.8%,
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 animated characters licensed from leading entertainment
companies.

      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
and introduced a retail line of Looney Tunes products during fiscal 1997,
including stuffed and bean bag toys, and another television promoted electronic
stuffed toy, the Tornado Taz(TM) that spins, shakes, grunts and laughs.

      During fiscal 1998, the Company introduced several new electronic
interactive talking products including 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 PLAY-FACES(R)
pillows and beanbags based on the popular Rugrats(TM) characters, and
Fanimal(TM) beanbag toys utilizing properties licensed from Major League
Baseball and the National Football League. The Company also developed a retail
line of infant, toddler and preschool based on Baby Looney Tunes characters.

      During fiscal 1999, the Company introduced several new electronic
interactive talking products such as the My Best Friend(TM) doll, Tongue
Twisting Taz(TM), Macarena Tweety(TM), and Fortune Teller Tweety(TM). The
Company also introduced a wide range of plush, 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.

      During fiscal 2000, the Company resolved to revamp and redirect its Retail
Products Division. On October 5, 1999, the Company appointed Mr. Richard R.
Neitz as President, Retail Products Division, and as a Director. Mr. Neitz
joined the Company from DSI Toys, Inc., Houston, TX, where he was President and
Chief Operating Officer since 1992. The Company then set about to replace its
outside sales representative force at mass market retail accounts, such as
Wal-Mart, Toys R Us, Kmart, K B Toys and Target. It also moved to strengthen and
improve relationships with customers that had been strained by certain slow
moving products within the Company's fiscal 1999 retail line. The Company
believes relationships with all such retailers are currently in a healthy and
normal condition, positioning the Company to effectively introduce new product
offerings. During fiscal 2000, the Company also set about to broaden its product
range away from a significant reliance on plush and feature plush based on
licensed character products. The Company recognizes these two categories are
weakening in the retail marketplace based on industry data and customer
feedback. The Company believes that growth and stability will result from the
expansion of its existing doll business, which it considers a core category, and
diversification into boys' toys and electronics. The Company is currently
offering products within

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these categories into the marketplace, and expects to have significant
contributions from these categories in fiscal 2001 and 2002. The Company will
look for further expansion and product diversification opportunities in the
future.

      The Company has a diversified base of customers in both the amusement and
retail markets. Amusement customers, which accounted for 74.3% of net sales for
fiscal 2000, include theme parks such as Six Flags (formerly Premier Parks),
Paramount, Universal Studios, Busch Gardens and Sea World; family entertainment
centers such as Dave and Buster's, Tilt, Aladdin's Castle, Cyberstation and
Peter Piper's Pizza; carnivals, state fairs and arcade operators. Retail
customers, which accounted for 23.8% 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 K B Toys. The Company also
distributes its merchandise to its Fun Services(R) (sales through franchisees),
fundraising and premium (products designed for specific companies) customers. No
one customer accounted for more than 10% of net sales for fiscal 2000.

      The Company completed three 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") in cash and debt. 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 domestic
and international classic character licenses for retail and amusement, in-house
design and development capabilities 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 and capabilities 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 paid in the form of cash,
shares of the Company's common stock, and the assumption of a note. Caribe
provides the Company with a new base for its Latin American operations including
distribution channels in Puerto Rico, the Caribbean, and Central and South
America and enhanced 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), and My Best Friend(TM), new products
   based on popular licensed properties such as Pokemon(TM) and 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 and European amusement industry,

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

o  experienced management team with toy and licensing expertise,

o  in-house design and development capabilities which enable 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
   of product 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, 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 87.8%, and the Company believes there are
significant additional international growth opportunities.

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      RETAIL MARKET PENETRATION. The Company intends to broaden its retail
distribution both domestically and internationally. The Company recognizes the
need to service many classes of trade, including, but not limited to, mass
market toy retailers and discounters, specialty toy retailers, warehouse clubs,
drug and variety chains. Additionally, the Company intends to market its
expanded product range to the souvenir, gift, and collectable doll retail
markets. Internationally, the Company intends to take advantage of its presence
in Spain, the United Kingdom, and Puerto Rico by soliciting other manufacturers'
proprietary products for distribution in those markets. 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, retail distribution continues to
offer significant growth opportunities for the Company. The Company's retail
sales declined significantly during 1999 and 2000; however, the Company
dedicated considerable resources and efforts assessing and rebuilding its retail
operations, product lines and modified its offering base of core categories, and
expects to have significant improvement in 2001 and beyond.

      AMUSEMENT MARKET PENETRATION. With the Ace Acquisition, the Company has
become the 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. Further, the Company believes that international amusement markets present
opportunities for increased market penetration and growth.

      DIRECT MARKETING. The Company experimented with direct marketing to
consumers through direct mail catalogs and an on-line retail
(business-to-consumer) internet site during fiscal years 1999 and 2000, however,
the Company elected to exit this business at the end of fiscal 2000 to focus its
efforts and resources on its core retail and amusement businesses. Additionally,
the Company is refocusing its internet strategies on business-to-business sales
and marketing opportunities within its core retail and amusement businesses.

      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 2001.

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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:

                                                    2000      1999      1998
                                                   ------    ------    ------
                                                          (IN MILLIONS)
Licensed products
    Stuffed toys ............................      $ 95.9    $ 94.6    $ 90.4
    Play-Faces(R) ...........................         1.4       5.2       9.5
    Electronic toys .........................         8.8       9.9      14.5
                                                   ------    ------    ------
                                                    106.1     109.7     114.4
                                                   ------    ------    ------
Non-licensed products
    Stuffed toys ............................        27.7      28.9      32.3
    Novelty items ...........................        13.2      10.8      13.3
    Electronic toys .........................         3.2       4.4      15.1
                                                   ------    ------    ------
                                                     44.1      44.1      60.7
                                                   ------    ------    ------
        Total ...............................      $150.2    $153.8    $175.1
                                                   ======    ======    ======

                                                 (PERCENTAGES OF NET TOYS SALES)

Licensed products
    Stuffed toys ............................        63.8%     61.5%     51.6%
    Play-Faces(R) ...........................         1.0       3.4       5.4
    Electronic toys .........................         5.8       6.4       8.4
                                                   ------    ------    ------
                                                     70.6      71.3      65.4
                                                   ------    ------    ------
Non-licensed products
    Stuffed toys ............................        18.4      18.8      18.4
    Novelty items ...........................         8.8       7.0       7.6
    Electronic toys .........................         2.2       2.9       8.6
                                                   ------    ------    ------
                                                     29.4      28.7      34.6
                                                   ------    ------    ------
        Total ...............................       100.0%    100.0%    100.0%
                                                   ======    ======    ======
LICENSED PRODUCTS

      In developing its licensed products, the Company seeks to take advantage
of media exposure, brand awareness 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 $106.1 million,
$109.7 million and $114.4 million (69.3%, 70.1% and 64.3% of net sales) during
fiscal 2000, 1999 and 1998, respectively.

      STUFFED TOYS. The Company designs, develops, markets and distributes a
large number of different stuffed toys based upon its licenses for children's
entertainment characters, professional and collegiate sports properties and
corporate trademarks. The Company offers a variety of sizes and styles of its
licensed stuffed toys. The Company seeks to develop its products around both
existing and

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newly-acquired licenses for commercially established properties. 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. During fiscal 1999, the Company introduced a wide range of
plush toys, PLAY-FACES(R) pillows and backpacks, inflatable furniture products
and novelties based on the characters in the Garfield comic strip. During fiscal
2000, the Company introduced a broad line of amusement plush toys based on the
characters from the children's animated TV series Pokemon.

      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 the Looney Tunes Tasmanian Devil(TM) that spins, shakes,
grunts and laughs. During fiscal 1998, the Company further expanded its licensed
electronic stuffed toy 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 licensed 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. During fiscal
2000, the Company's interactive electronic stuffed toy offerings included Tic
Tac Taz(TM), an interactive plush toy that pits the user against Taz in an
electronic game of tic tac toe, and My Best Friend Tweety(TM), which utilizes
voice recognition technology adopted from our My Best Friend(TM) doll.

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, $44.1 million and $60.7 million (28.8%, 28.2% and
34.1% of net sales) during fiscal 2000, 1999 and 1998, respectively.

      STUFFED TOYS. The Company designs, develops, markets and distributes a
broad line of non-licensed stuffed toys, consisting principally of generic
animated 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 lines. Over the three year period ended July 31, 2000, sales of
non-licensed stuffed toys have decreased as a percentage of total net toy sales,
primarily due to changing consumer preference for licensed merchandise and the
Company's decision to focus its working capital on the growth of licensed
product and novelty item sales. No single non-licensed stuffed toy accounted for
more than 10% of the Company's net sales during fiscal 2000, 1999 or 1998.

      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
accounted for more than 10% of the Company's net sales or 10% of the Company's
net sales of novelty items during fiscal 2000, 1999 or 1998.

      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,

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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), which utilizes voice recognition technology.

LICENSE AGREEMENTS

      Approximately 69.3%, 70.1% and 64.3% of the Company's net sales in fiscal
2000, 1999 and 1998, respectively, were derived from sales of licensed products.
Products based on Looney Tunes' characters accounted for 31.3% of net toy sales
in fiscal 2000. 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, 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.

      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.

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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, Latin American and international net toy sales (which do not include
vending sales) by distribution channel. Sales by the European subsidiaries are
considered international sales.

                                                      YEAR ENDED JULY 31,
                                               --------------------------------
                                                 2000        1999        1998
                                               --------    --------    --------
                                                        (IN MILLIONS)
Domestic toy sales:
     Retail ................................   $   11.8    $   16.6    $   36.1
     Amusement .............................       83.6        93.4        92.9
                                               --------    --------    --------
                                                   95.4       110.0       129.0
                                               --------    --------    --------
Latin American toy sales:
     Retail ................................   $   11.9    $    8.0    $    5.7
     Amusement .............................        0.4         0.9         8.7
                                               --------    --------    --------
                                                   12.3         8.9        14.4
                                               --------    --------    --------
International toy sales:
     Retail ................................       12.6        13.4        10.1
     Amusement .............................       29.9        21.5        21.6
                                               --------    --------    --------
                                                   42.5        34.9        31.7
                                               --------    --------    --------
        Total ..............................   $  150.2    $  153.8    $  175.1
                                               ========    ========    ========

                                              (AS A PERCENTAGE OF NET TOY SALES)
Domestic toy sales:
     Retail ................................        7.9%       10.8%       20.6%
     Amusement .............................       55.6        60.7        53.1
                                               --------    --------    --------
                                                   63.5        71.5        73.7
                                               --------    --------    --------
Latin American toy sales:
     Retail ................................        8.0%        5.2%        3.2%
     Amusement .............................        0.2         0.6         5.0
                                               --------    --------    --------
                                                    8.2         5.8         8.2
                                               --------    --------    --------
International toy sales:
     Retail ................................        8.4         8.7         5.8
     Amusement .............................       19.9        14.0        12.3
                                               --------    --------    --------
                                                   28.3        22.7        18.1
                                               --------    --------    --------
        Total ..............................      100.0%      100.0%      100.0%
                                               ========    ========    ========

      DOMESTIC SALES. The Company markets its products to amusement and retail
customers in the United States and Canada 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

                                       11
<PAGE>
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 2000.

      The Company distributes its products from its distribution centers located
in San Antonio, Texas; Los Angeles, California; Chicago, Illinois; Woodinville,
Washington; Miami, Florida; and Burnaby, British Columbia, and arranges direct
shipments from the Far East to its larger retail and amusement customers. The
Company has offices in Hong Kong and China that facilitate sourcing, quality
control and production scheduling. The Miami and Woodinville distribution
centers are scheduled to be closed prior to the end of calendar year 2000.

      Retail customers, which accounted for 12.4% of domestic net toy sales for
fiscal 2000, principally consists of the largest mass market retailers in North
America such as Wal-Mart, Kmart and Target and specialty retailers such as Toys
R Us and K B 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 electronic data interchange ("EDI")
programs with Wal-Mart, Target, Sears, Kmart and Toys R Us. 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 uses the advanced shipping notice ("ASN") program, which is part of the
EDI program, with 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 2000, 1999 and 1998 were $7.4 million, $7.4 million and $6.4 million,
respectively. The Fundraising division's customers consist principally of
various not-for-profit organizations or their independent event contractors.
During fiscal 2000, 1999 and 1998, Fundraising sales totaled $5.1 million, $6.7
million and $9.0 million, respectively. The Premiums division designs, develops
and/or sources toys and novelty items specifically tailored for their customers,
and are typically distributed by the customer to their clients or employees as
promotional or incentive items. During fiscal 2000, 1999 and 1998, Premiums
sales totaled $5.5 million, $4.8 million and $5.7 million, respectively.

      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.

                                       12
<PAGE>
      LATIN AMERICAN SALES. In fiscal 1999, the Company extended its Latin
American presence with its acquisition of Caribe and its sales and distribution
center located in San Juan, Puerto Rico.

      The Company markets its products to amusement and retail customers
throughout the Caribbean, and Central and South America through salaried
in-house sales persons and through independent distributors. The Company's
in-house 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.
Foreign independent distributors typically retain their own sales
representatives. The Company maintains a product showroom in San Juan, Puerto
Rico, where it displays its amusement and retail product lines, and the
Company's independent distributors typically display the Company's products in
their own product showrooms.

      The Company distributes its amusement and retail products to customers
through its Company-operated distribution center in San Juan, Puerto Rico, and
arranges direct shipments from the Far East to its larger retail and amusement
customers. The Company's Latin American product line generally includes its
products offered in the United States, as well as products based upon licenses
from domestic licensors exclusive or specific to the Latin American market. In
addition, the Company markets and distributes products sourced from third party
manufacturers to customers in Latin America.

      Latin American retail customers include mass merchandisers and specialty
retailers. Latin American amusement customers include theme parks, carnivals,
fairs and arcade operators.

      The Company believes that the Latin American markets present significant
opportunities and are generally less competitive than the United States markets.
The Company's Latin American license agreements are generally less restrictive
and permit sales to a broader base of customers than its domestic licenses.

      INTERNATIONAL SALES. The Company's principal international customers are
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 typically display the
Company's products in their own product showrooms.

      The Company distributes its amusement and retail products to international
customers from its distribution centers located in Valencia, Spain and
Doncaster, England and arranges direct shipments from the Far East to its larger
customers. The Company's international product line generally includes its
products offered in the United States, as well as products based upon licenses
from domestic licensors, which licenses are exclusive or specific to the
European market, and licenses from European licensors for properties such as
Noddy, a classic children's entertainment character from the British market.

      The Company believes that the European and domestic retail markets are
equally competitive. The Company's European license agreements are generally
less restrictive and permit sales to a broader base of customers than its
domestic licenses. The Company believes that, accordingly, it can expand its
European presence through these channels.

                                       13
<PAGE>
      The Company believes that the European amusement market is generally less
competitive than in the United States. The European amusement market 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, Looney
Tunes and Pokemon, 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 its marketing department to
target licensing opportunities and relies on its product design and development
personnel 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. These design and development
capabilities enable 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
design 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.

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 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. Two manufacturers in China accounted for 13.3% and 12.9%,
or a total of 26.2%, of the Company's purchases during fiscal 2000. No other
manufacturer accounted for more than 10% of the Company's purchases of toy
products during fiscal 2000. 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 distribution centers 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.

                                       14
<PAGE>
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
magazines, 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), catalogs and through
participation at industry trade shows. Advertising expenses are incurred in the
design, development, printing and shipping of Company catalogs and
advertisements in trade publications.

VENDING OPERATIONS

      The Company owns and operates approximately 1,500 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
located in Pizza Hut(R) restaurants and Furr's Supermarkets pursuant to
contractual agreements. 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 1.9%, 1.7% and 1.6% of the Company's net sales in fiscal
2000, 1999 and 1998, respectively, were derived from the Company's vending
operations.

COMPETITION

      The Company faces vigorous competition in the sale of its products.
Competitive factors include new product development, the procurement of
entertainment character or trademark licenses, timely shipment of products,
price, product appeal and the availability of retail shelf space. The toy
industry is highly fragmented and is comprised of 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 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.

                                       15
<PAGE>
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.

TARIFFS AND DUTIES

      To date, a substantial portion of the Company's products have been
manufactured by third parties in the People's Republic of China. Under U.S.
tariff laws, China currently enjoys "normal trade relations" ("NTR") status,
which provides a favorable category of U.S. import duties. There has been, and
may be in the future, opposition to the extension of NTR status for China as a
result of continuing concerns regarding China's human rights policies, and
disputes regarding Chinese trade policies. The loss of China's NTR status, or
the imposition or increase in quotas, duties, tariffs, 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.

                                       16
<PAGE>
EMPLOYEES

      As of July 31, 2000, the Company employed approximately 559 people in its
toy operations and 15 people in its vending operation. Of the 559 employees in
the toy operations, approximately 294 are engaged in warehousing and
distribution, 116 are engaged in administration and finance, 114 are engaged in
sales and marketing, and 35 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 LIMITATION, THE COMPANY's LIQUIDITY AND
CAPITAL RESOURCES, CHANGES IN CONSUMER PREFERENCES, PRICE CHANGES BY
COMPETITORS, RELATIONSHIPS WITH LICENSORS AND CUSTOMERS, REALIZATION OF ROYALTY
ADVANCES, NEW PRODUCT INTRODUCTIONS, CAPABILITY OF MANAGING GROWTH, ABILITY TO
SOURCE PRODUCTS, CONCENTRATION OF CREDIT RISK, 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

      LEVERAGE AND FUTURE DEBT SERVICE AND CAPITAL NEEDS. Monthly principal
payment requirements on the Company's outstanding Convertible Debentures
commenced in June 2000, and the Convertible Debentures mature on December 31,
2000. The Company currently expects that, by itself, cash flows from operations
will be insufficient to enable the Company to retire the unsatisfied Convertible
Debenture obligations due at maturity. 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. The Company
has retained the services of an investment banking firm to assist management
with its Convertible Debenture refinancing efforts. The Company is also in
negotiations with the holders of its existing Convertible Debentures relative to
modifying or restructuring the terms of the debentures, including a long-term
extension of the maturity date. The conversion of the obligations under the
Convertible Debentures pursuant to the terms of the Convertible Loan Agreements
would result in substantial dilution to existing shareholders and would give the
debenture holders majority ownership in the Company's stock. In addition, in the
event the Company is unable to refinance the Convertible Debentures prior to
maturity, the debenture holders would be granted board seats proportionate to
their ownership interests on an as converted basis, as well as limitations on
the total number of board seats, which could result in a change in control of
the board. Pursuant to the terms of the Debentures, the holders of the
Debentures have the right to commence legal proceedings against the Company (but
not against the collateral pledged to the senior lender) in the event the
Company fails to make any regularly scheduled payment due under the Debentures
or upon any other default and commencing 180 days after the date of the receipt
by the senior lender of written notice from all of the Debenture holders of the
declaration of the default and the written demand for immediate payment of all
the debt outstanding under the Debentures. The Company defaulted in the payment
of principal and interest due under the Debentures beginning in October 2000.
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 existing Convertible
Debentures. In connection with a refinancing, the Company may be required to
issue equity to the new lenders which would result in

                                       17
<PAGE>
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 senior 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 sales of assets or one or more business lines. 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 surety bonds to secure payment of the guarantees of minimum royalties.
There can be no assurance that the Company will be able to renew existing surety
bonds or procure surety bonds for new license agreements. 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 31.3% of the Company's net toy sales in fiscal 2000 were
derived from the sale of products based on Warner Bros.' Looney Tunes
characters. The loss of the Warner Bros. licensing 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.

      Two of the Company's significant entertainment character licenses with a
particular licensor expired on March 31, 2000 and were extended to May 31, 2000.
The agreement covering entertainment character licensing rights for the
amusement market was replaced by a new multi-year agreement effective July 2000
under substantially similar terms as the expired agreement. The existing license
agreement covering entertainment character licensing rights for the retail
market has been extended on a month-to-month basis through December 31, 2000,
and will be replaced by a new agreement effective

                                       18
<PAGE>
January 2001 with significantly modified terms including limitations on products
that can be sold and the licensing period. As a percentage of total net sales,
the combined sales under these two agreements were 16.8%, 26.4% and 30.9% for
fiscal years 2000, 1999 and 1998, respectively. In addition, a significant
portion of the Company's inventory is comprised of merchandise based on
characters licensed under these two agreements.

      On November 10, 2000, the Company entered into amendments with this
licensor relative to three other significant entertainment character licensing
agreements originally scheduled to expire on December 31, 2000. The amendments
provide for extensions of the license terms for up to two additional years and
specifically provide for the payment of the remaining balance of the guaranteed
minimum royalties due to the licensor over the extended two-year period. The
aforementioned extensions are conditioned upon the Company's ability to obtain
extensions of the existing surety bonds that secure payment of the guaranteed
minimum royalties over the amended licensing agreement periods by November 22,
2000. The Company is in discussions with the issuer of the existing surety bonds
relative to extending the surety bonds over the recently extending licensing
periods. There can be no assurance that the surety bonds will be extended. The
Company's failure to obtain extensions of the surety bonds could negatively
impact the amendments to the license agreements, which could result in the loss
of licensing rights, as well as the immediate demand for payment by the licensor
of approximately $14 million of guaranteed minimum royalties. This in turn would
exceed available cash and would have an immediate and material adverse impact on
the Company. In Fiscal 1999, the Company had estimated that projected future
revenues over the remaining terms of these three license agreements would be
insufficient to allow the Company to earn-out the guaranteed minimum royalties
advanced or required to be paid to the licensor prior to their expiration on
December 31, 2000. Accordingly, the Company recorded a provision totaling $14.9
million in the fourth quarter of fiscal 1999 for the estimated guaranteed
minimum royalty shortfalls associated with these licenses.

      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
could impact its ability to obtain renewals on favorable terms, if at all, or
secure additional licenses from the licensor. The Company is seeking concessions
relative to these advertising commitments from the licensor, however, there can
be no assurance that the Company will be able to secure the extensions or
concessions it is seeking from the licensor.

      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 and Mr. Neitz 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.

                                       19
<PAGE>
      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.

      Under U.S. tariff laws, China currently enjoys "normal trade relations"
("NTR") status, which provides a favorable category of U.S. import duties. There
has been, and may be in the future, opposition to the extension of NTR status
for China. The loss of NTR status for China would result in a substantial
increase in the import duty of toy products 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/or 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 implemented
much more conservative terms of sales for customers in Latin America 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.
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.

      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

                                       20
<PAGE>
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.

      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.

      Management's plan to address the impact on the Company of the Year 2000
issue focused 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 Company's plan was
comprised of five phases, all of which have been substantially completed.

      To date, the Company has experienced no material adverse effects from Year
2000 issues. In its domestic operations, the Company's accounts receivable,
inventory and warehouse management legacy systems were successfully modified to
achieve Year 2000 compliance, and the Company successfully implemented the
accounts payable, general ledger and purchasing modules from its Oracle
enterprise resource planning system (ERP), which system is Year 2000 compliant,
prior to the end of calendar 1999. The Company plans to implement the remaining
Oracle ERP modules, including accounts receivable, inventory, as well as a
warehouse management system, prior to the end of calendar year 2001, in
replacement of the existing legacy systems. Year 2000 compliance costs incurred
to date primarily consisted of labor from the redeployment of existing
information technology, legal and operational resources, as well as computer
hardware and software costs.

      In the Company's international operations, existing information systems
were already substantially Year 2000 compliant, and no material modifications
were necessary. In addition, the Company has experienced no material adverse
effects from Year 2000 issues in its international operations.

      Currently, the Company has not experienced nor does it anticipate any
material adverse effects related to Year 2000 issues. However, 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 ultimately will have a material impact on the
Company's results of operations, liquidity or financial condition.

                                       21
<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 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 while divesting unprofitable or non-core businesses, (2) expanding new
distribution channels, (3) acquiring additional licensing rights for
entertainment characters and trademarks and (4) further penetration of
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. Although the Company is not actively pursuing any
acquisition opportunities currently, the Company expects to continue to evaluate
and pursue attractive acquisition candidates. 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 fully assess 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 November 6, 2000. 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) 811,800 shares of Common Stock reserved for
issuance under outstanding options to purchase shares of Common Stock, (ii)
135,000 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). 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, compliance with various financing covenants and other relevant
factors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

                                       22
<PAGE>
      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.

                                       23
<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 241,364 square feet of distribution warehouse space, pursuant
to a lease agreement that expires December 31, 2008.

      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 is owned by and
leased from Arturo G. Torres, the Chairman of the Board and Chief Executive
Officer. On October 25, 1999, in connection with the Company's debt refinancing
and restructuring transactions and in settlement of certain litigation related
to the acquisition of Ace, Mr. Torres personally assumed the Company's $1.7
million obligation to purchase the remaining 49% interest in the Company's Los
Angeles distribution facility from the former owner.

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

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

      Los Angeles,            Warehouse                        119,000
       California

      Kowloon, Hong Kong,     Office/Showroom/Warehouse          1,906
       China

      Panyu, China            Office                            25,806

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

      San Juan, Puerto Rico   Office/Showroom/Warehouse         37,673

      Doncaster, England      Office/Showroom/Warehouse        112,500

      Valencia, Spain         Office/Showroom/Warehouse         96,258

      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.

                                       24
<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:

                               2000                    1999
                        -------------------     -------------------
                         HIGH         LOW        HIGH         LOW
                        ------      -------     ------      -------
      First Quarter     $ 6.25      $  1.00     $10.88      $  7.13
      Second Quarter      3.81         1.50       8.88         7.00
      Third Quarter       3.16         1.38       7.25         4.75
      Fourth Quarter      2.25         1.13       5.56         2.38

SHAREHOLDERS

      According to the records of the Company's transfer agent, the Company had
191 holders of record of Common Stock as of November 6, 2000. 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."

                                       25
<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, 2000, 1999 and
1998 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. 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,
                                                        --------------------------------------------------------------------------
                                                            2000            1999          1998 (4)       1997 (3)      1996 (1)(2)
                                                        ------------    ------------    ------------   ------------   ------------
                                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                     <C>             <C>             <C>            <C>            <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales ...........................................   $    153,089    $    156,515    $    177,987   $    137,386   $     74,197
Income (loss) from continuing operations ............         (5,534)        (30,230)          8,445          6,216          4,052
(Loss) from discontinued operations .................           --              --              --             --             (384)
Net income (loss) ...................................   $     (5,534)   $    (30,230)   $      8,445   $      6,216   $      3,668

Basic earnings (loss) per common share ..............   $      (0.75)   $      (4.12)   $       1.30   $       1.28   $       0.84
Diluted earnings (loss) per common share ............   $      (0.75)   $      (4.12)   $       1.19   $       1.25   $       0.84

Average number of shares outstanding - basic ........          7,395           7,338           6,474          4,872          4,841
Average number of shares outstanding - diluted ......          7,395           7,338           7,760          5,036          4,856

                                                                                          JULY 31,
                                                        -------------------------------------------------------------------------
                                                            2000            1999            1998           1997           1996
                                                        ------------    ------------    ------------   ------------   ------------
BALANCE SHEET DATA:
Working capital .....................................   $      8,803    $     32,106    $     76,454   $     35,372   $     19,910
Total assets ........................................        139,082         155,318         167,884        125,906        104,922
Long-term debt, including capital leases ............         19,242          22,153          20,962         23,238         11,096
Total liabilities ...................................         87,809          97,378          78,895         82,237         62,222
Shareholders' equity ................................         51,273          57,940          88,989         43,669         38,700
</TABLE>

(1)   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 fiscal year 1996 has been restated.
(2)   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 year 1996 is not comparable to
      subsequent periods.
(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 July 31, 1997 and its results of
      operations were included in the Consolidated Statement of Operations
      beginning November 1996.
(4)   Fiscal year 1998 net sales have been restated to reflect stuffing fees and
      franchise fees, which have been reclassified from net sales to other
      income.

                                       26
<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, WITHOUT LIMITATION, THE COMPANY's LIQUIDITY AND
CAPITAL RESOURCES, CHANGES IN CONSUMER PREFERENCES, PRICE CHANGES BY
COMPETITORS, RELATIONSHIPS WITH LICENSORS AND CUSTOMERS, REALIZATION OF ROYALTY
ADVANCES, NEW PRODUCT INTRODUCTION, CAPABILITY OF MANAGING GROWTH, ABILITY TO
SOURCE PRODUCTS, CONCENTRATION OF CREDIT RISK, 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

      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 and novelty items based on licensed entertainment
characters and trademarks. The Company also designs, develops, markets and
distributes electronic toys and non-licensed stuffed toys and novelties. The
Company sells these products to customers in the amusement and retail markets.
The Company's toy operations accounted for 98.1% of net sales for fiscal 2000.
The Company's vending division provides the remaining 1.9% of net sales. Net
sales derived from vending operations as a percentage of net sales have remained
relatively flat in recent periods as the Company has emphasized its toy
operations, and the Company anticipates that such trend will continue.

      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. 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 TLC based in Doncaster,
England for 40,000 shares of the Company's common stock, and 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 note.

      Net toy sales to amusement customers accounted for 74.3% of the Company's
net sales for fiscal 2000. 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 23.8% of the Company's net sales
for fiscal 2000. Since the beginning of fiscal 1994, the Company has expanded
its product offering of licensed stuffed toys through the acquisition of several
entertainment character and trademark licensing agreements.

                                       27
<PAGE>
      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, in particular mass market retailers, typically buy in larger volumes,
therefore they generally command more competitive pricing which results in 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 $0.4 million
on media advertising for certain retail products during fiscal 2000.

      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 is changing 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.

      Until fiscal year 2000, the Company has historically made no attempt to
manage, by means of hedging or derivatives, the risk of potential currency
fluctuations.

                                       28
<PAGE>
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,
                                                 -------------------------
                                                 2000      1999      1998
                                                 -----     -----     -----
Net sales ....................................   100.0%    100.0%    100.0%
Cost of sales ................................    68.8      82.8      65.6
                                                 -----     -----     -----
Gross profit .................................    31.2      17.2      34.4
Selling, general and
  administrative expenses ....................    30.8      35.7      24.8
                                                 -----     -----     -----
Operating income (loss) ......................     0.4     (18.4)      9.6
Interest expense .............................    (4.2)     (3.1)     (2.5)
Interest income ..............................     0.1       0.2       0.2
Other income .................................     0.1       0.1      --
Income tax benefit (provision)................     0.0       1.9      (2.6)
                                                 -----     -----     -----
Net income (loss) ............................    (3.6)    (19.3)      4.7
                                                 =====     =====     =====

YEARS ENDED JULY 31, 2000  AND 1999

      NET SALES. Net sales for fiscal 2000 were $153.1 million, a decrease of
2.2%, or $3.4 million, from $156.5 million in fiscal 1999. The decrease in net
sales was primarily attributable to a decrease in the Company's worldwide retail
net sales of 4.3%, or $1.6 million, to $36.4 million and a decrease in the
Company's worldwide amusement net sales of 1.7%, or $1.9 million, to $113.8
million. International net toy sales increased 21.8%, or $7.6 million, to $42.5
million, from $34.9 million and Latin American net toy sales increased 38.8%, or
$3.4 million, to $12.3 million, from $8.9 million. Domestic net toy sales for
fiscal 2000 compared to fiscal 1999 decreased 13.3%, or $14.6 million, to $95.4
million from $110.0 million.

      Net toy sales to retail customers for fiscal 2000 and fiscal 1999
accounted for 23.8%, or $36.4 million, and 24.3%, or $38.1 million,
respectively, of the Company's net sales. The 4.3%, or $1.6 million, decrease in
sales to retail customers for fiscal 2000 over fiscal 1999 reflects an increase
in sales of licensed plush toys of 23.5%, or $4.4 million, to $23.0 million
offset by decreases in sales of licensed electronic toys of 10.5%, or $1.0
million, PLAY-FACES(R) of 72.9%, or $3.8 million and non-licensed electronic
toys of 26.1%, or $1.1 million.

      Net toy sales to amusement customers for fiscal 2000 and fiscal 1999
accounted for 74.3%, or $113.8 million, and 73.9%, or $115.7 million,
respectively, of the Company's net sales. The 1.7%, or $1.9 million, decrease
from fiscal 1999 is primarily attributable to a decrease of $3.1 million, or
4.1%, in sales of licensed plush toys, and a decrease in sales of non-licensed
plush toys of $1.2 million, or 4.1%, to amusement customers, offset by an
increase in sales of novelty items of $2.4 million, or 22.1%, from fiscal 1999.

      Net sales of licensed products for fiscal 2000 were $106.1 million, a
decrease of 3.3%, or $3.6 million, from $109.7 million in fiscal 1999. The
decrease in licensed product sales was attributable to a decrease in domestic
and Latin American net sales of licensed products of 7.8%, or $5.8 million, and
of

                                       29
<PAGE>
30.2%, or $2.1 million, respectively, offset by an increase in international net
sales of licensed products of 15.2%, or $4.3 million. Within licensed products,
net sales of Looney Tunes' characters accounted for $47.0 million, or 31.3%, of
the Company's net toys sales for fiscal 2000. This is a decrease of 35.9%, or
$26.3 million, from $73.3 million in fiscal 1999 and is principally due to
increased sales of merchandise based on other licensed properties such as
Pokemon, Scooby Doo and Garfield. Net sales of licensed electronic toys
accounted for $8.8 million, or 5.8%, of the Company's net toy sales for fiscal
2000.

      Net sales of non-licensed products for fiscal 2000 remained flat at $44.1
million in fiscal 2000 and 1999.

      GROSS PROFIT. Gross profit increased 77.4% to $47.8 million in fiscal 2000
from $26.9 million in fiscal 1999, due principally to charges recorded in the
fourth quarter of fiscal 1999 related to royalty and inventory write-down
reserves offset by lower overall sales for fiscal 2000, as well as low margins
on sales made within the Company's domestic retail division offset by improved
margins, as compared to the prior year, on sales within the Company's domestic
amusement and international divisions. Although margins improved in certain
areas, they were negatively impacted by sales within the Company's amusement and
retail divisions in connection with the Company's inventory reduction
initiatives. During fiscal 1999, the Company recorded a charge of $14.9 million
for write-downs of guaranteed minimum royalties on three licensing agreements
that the Company anticipated it would be unable to earn out prior to their
expiration on December 31, 2000. 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. Gross profit as a percentage of net sales increased from
17.2% for fiscal 1999 to 31.2% for fiscal 2000. Exclusive of the 1999 charges,
gross profit for fiscal 2000 would have increased 0.9%, or $448,000, to $47.8
million from $47.3 million in the comparable period in fiscal 1999.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net
sales, selling, general and administrative expenses decreased to 30.8% in fiscal
2000 from 35.7% in fiscal 1999. Such expenses decreased approximately 15.6%, or
$8.7 million, to $47.1 million for fiscal 2000 from $55.8 million in fiscal
1999. This decrease is primarily attributable to decreased payroll and related
costs of approximately $3.0 million and a $1.5 million decrease in domestic
media advertising costs, offset by a $1.2 million increase in costs related
principally to the Company's recently discontinued direct marketing division,
and a $1.0 million increase in amortization expense related principally to the
amortization of costs incurred in connection with the Company's recently
implemented ERP system. Additionally, included in selling, general and
administrative expenses for fiscal 1999 are certain charges totaling $6.7
million including bad debt expense of $2.2 million related to the write-off of
amounts due from the Company's insolvent distributor in Mexico, a $1.3 million
provision 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
$2.8 million for certain non-performing accounts and notes receivables, as well
as approximately $409,000 of severance costs. Excluding these expenditures,
selling, general and administrative expenses would have decreased 4.0% or $2.0
million, to $47.1 million for fiscal 2000 from $49.1 million in the comparable
period in fiscal 1999.

      INTEREST EXPENSE AND OTHER INCOME. Interest expense increased 34.2% or
approximately $1.7 million, to $6.5 million for fiscal 2000 from $4.8 million in
fiscal 1999. The increase is attributable to increased borrowings outstanding
under the Company's revolving lines of credit, and increased borrowing costs,
including increases in the interest rates on loan amounts outstanding under the
Company's Credit Facility and Convertible Debentures and the amortization of
costs incurred and capitalized in October 1999 in connection with obtaining the
Company's new Credit Facility.

                                       30
<PAGE>
      INCOME TAX BENEFIT (PROVISION). The Company was unable to record an income
tax benefit as a result of the net loss for fiscal 2000 as all available net
operating loss carrybacks were exhausted by the Company in the previous fiscal
year and the Company's ability to record a tax benefit based on available net
operating loss carryforwards is deferred until future periods, if any, in which
the Company generates taxable income. As a result, the Company has provided a
full valuation allowance for deferred tax assets resulting from net operating
losses. The Company realized a tax benefit of $2.9 million for fiscal 1999. 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. The Company recorded no tax expense for fiscal
2000 due to the net loss for the period and the reduction of certain tax
reserves in certain foreign jurisdictions.

YEARS ENDED JULY 31, 1999 AND 1998

      NET SALES. Net sales for fiscal 1999 decreased 12.1%, or $21.5 million, to
$156.5 million from $178.0 million in fiscal 1998. The decrease in net sales was
primarily attributable to a decrease in domestic retail sales of 54.0% or $19.5
million, to $16.6 million from $36.1 million, and a decrease in Latin American
amusement sales of 90.5%, or $7.9 million, to $0.8 million from $8.7 million,
offset by increases in international and Latin American retail sales of 32.9%,
or $3.3 million, from $10.1 million to $13.4 and of 40.0%, or $2.3 million, from
$5.7 million to $8.0 million, respectively. The decreases were primarily
attributable to a weak retail environment for traditional toys in the U.S.,
caused by several factors, including the closing of several Toys R Us locations
in the U.S., and shrinking of toy inventories by retailers, and the economic
weakness in Latin America during fiscal 1999. Domestic and international
amusement net toy sales remained relatively flat.

      Net toy sales to retail customers for fiscal 1999 and fiscal 1998
accounted for 24.3%, or $38.1 million, and 29.2%, or $51.9 million,
respectively, of the Company's net sales. The 26.7%, or $13.9 million, decrease
in sales to retail customers for the fiscal 1999 over fiscal 1998 reflects an
increase in sales of licensed plush toys of 46.1%, or $5.9 million, to $18.6
million offset by decreases in sales of licensed electronic toys of 32.2%, or
$4.7 million, PLAY-FACES(R) of 45.1%, or $4.3 million and non-licensed
electronic toys of 71.1%, or $10.8 million.

      Net toy sales to amusement customers for fiscal 1999 and fiscal 1998
accounted for 73.9%, or $115.7 million, and 69.2%, or $123.2 million,
respectively, of the Company's net sales. The 6.1%, or $7.5 million, decrease
from fiscal 1998 is primarily attributable to a decrease in sales of
non-licensed plush toys of $3.4 million, or 10.6%, a decrease in sales of
novelty items of $2.4 million, or 18.3%, and a decrease in sales of licensed
plush toys of $1.6 million, or 2.1%.

      Net sales of licensed products for fiscal 1999 decreased by 4.2%, or $4.8
million, to $109.7 million from $114.5 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 $4.7 million, to $9.9
million from $14.5 million in fiscal 1998, decreased net sales of PLAY-FACES(R)
of 45.1%, or $4.3 million, to $5.2 million, from $9.5 million in fiscal 1998,
offset by increased net sales of licensed stuffed toys of 4.7%, or $4.2 million,
to $94.6 million from $90.4 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 non-licensed products for fiscal 1999 decreased 27.4%, or
$16.6 million, to $44.1 million from $60.7 million in fiscal 1998. This decrease
is primarily attributable to a decrease in sales of

                                       31
<PAGE>
non-licensed electronic toys of $10.8 million, a decrease in sales of
non-licensed stuffed toys of $3.4 million and a decrease in sales of novelty
items of $2.4 million.

      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 the Company's 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 BENEFIT (PROVISION). 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.

LIQUIDITY AND CAPITAL RESOURCES

      At July 31, 2000, the Company's working capital was $8.8 million compared
to $32.1 million at July 31, 1999. This decrease is principally attributable to
the reclassification of the balance of the Convertible Debenture obligation from
long term debt to current at July 31, 2000, as the debentures mature on December
31, 2000, and the net loss incurred during fiscal 2000.

      Generally, the Company satisfies its capital requirements and seasonal
working capital needs with cash flow primarily from borrowings and operations.
The Company's primary capital needs have consisted of repayment of indebtedness,
funding for business acquisitions, inventory, property and equipment, customer
receivables, licensing agreements and international expansion.

                                       32
<PAGE>
      The Company's operating activities provided net cash of $11.3 million in
fiscal 2000 and used net cash of $1.6 million in fiscal 1999. The cash flow from
operations in fiscal 2000 was primarily affected by decreases in inventory,
accounts receivable and prepaids, offset by the net loss and decreases in
accounts payable and accrued liabilities. The cash flow from operations for
fiscal 1999 was primarily affected by the net loss.

      Net cash used in investing activities during fiscal 2000 and 1999 was $2.5
million and $8.0 million, respectively. For fiscal 2000, net cash used in
investing activities consisted of $2.6 million of expenditures for property and
equipment, including $1.5 million for costs related to implementation of the
Company's enterprise resource planning system and $293,000 for vending
equipment. 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 80,000 shares of the Company's common stock,
reduction of accounts receivable of $2.0 million and the assumption of a
Seller's note. (See Footnote 14 - "Acquisition").

      Financing activities used net cash of $4.9 million during fiscal 2000 and
provided net cash of $10.4 million during fiscal 1999. During fiscal 2000, the
Company received aggregate advances of $143.7 million under, and made repayments
of $144.1 million on, its revolving line under its senior credit facilities, and
reduced the principal on its term loans by $2.7 million which included
reductions of principal on the current term loans of $276,000 and $2.4 million
on the Company's term loan with its former lender which was satisfied in
connection with the refinancing of its senior Credit Facility in October 1999.
In addition, the Company obtained a loan in the principal amount of $2.5 million
from the Chairman of the Board, which was repaid upon receipt of the Company's
1999 Federal income tax refund of approximately $2.8 million. During fiscal
1999, the Company received aggregate advances of $139.1 million, and made
repayments of $124.8 million, on its revolving line under its senior credit
facility, and reduced the principal on the term loan by $2.4 million.

      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 included 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 in the original principal amount of $2.4 million.
Before it was amended, as discussed below, interest on borrowings outstanding
under the revolving line of credit and the term loans was 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. 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 9
-Notes Payable and Long-Term Debt, in the Notes to Consolidated Financial
Statements of the Company included herein).

      On March 20, 2000, the Company's Credit Facility was amended to reduce the
maximum credit commitment from $60 million to $35 million and the revolving line
of credit commitment to $32.6

                                       33
<PAGE>
million and provided for a supplemental loan under the revolving line of credit
in the principal amount of $500,000. The supplemental loan was repaid in weekly
installments and matured in May 2000.

      On June 1, 2000, the Company's Credit Facility was amended to temporarily
extend the seasonal advance rate percentage applicable to inventory and to waive
the Company's non-compliance with a financial covenant at April 30, 2000 under
the Credit Facility. Under the terms of the amendment, the inventory advance
rate percentage decreases from 55% to 50% based on a series of scheduled weekly
reductions in the advance rate percentage during the period from July to
September 2000. In addition, the Credit Facility was further amended to increase
the interest rate for borrowings outstanding under the Credit Facility from the
prime rate plus .25 percent (.25%) to the prime rate plus one percent (1%) for
prime rate loans and from two and three-quarters percent (2.75%) per annum in
excess of the adjusted eurodollar rate to three and one-half percent (3.5%) per
annum in excess of the adjusted eurodollar rate for eurodollar rate loans.

      On November 10, 2000 the Company's Credit Facility was amended to
permanently increase the advance rate percentage applicable to inventory from
50% to 55%, and to waive the Company's non-compliance with certain financial
covenants under the Credit Facility at July 31, 2000 and to modify these same
financial covenants for future periods. In addition, the Credit Facility was
further amended to increase the fees that would be payable in the event the
Credit Facility is terminated prior to maturity, and also requires the Company
to reduce the term loan balance by a specified percentage in the event the
Company completes a sale of certain assets.

      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 to $6 per share of common stock. 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 proportionate to their ownership interests on an as
converted basis, as well as limitations on the total number of board seats,
which could result in a change in control of the board if the debentures have
not been paid in full by final maturity. The First Amendment also provides for a
possible reset of the conversion price based on the average closing price of the
Company's stock for the month of December 2000 if the outstanding debentures
have not been converted or paid in full by final maturity. Conversion at current
stock prices would result in substantial dilution and would give the debenture
holders majority ownership of the Company's stock.

      Monthly principal payment requirements on the Company's outstanding $15
million of Convertible Debentures commenced on June 30, 2000, at a rate of 1% of
the outstanding principal balance, and the remaining unpaid balance is due at
maturity on December 31, 2000. The Company currently expects that, by itself,
cash flows from operations will be insufficient to enable the Company to retire
the unsatisfied obligations under the Convertible Debentures due at maturity.
Accordingly, unless

                                       34
<PAGE>
the debentures are converted into the Company's common stock before the
scheduled maturity, the Company will need to refinance in order to satisfy its
repayment obligations thereunder. Pursuant to the terms of the Debentures, the
holders of the Debentures have the right to commence legal proceedings against
the Company (but not against the collateral pledged to the senior lender) in the
event the Company fails to make any regularly scheduled payment due under the
Debentures or upon any other default and commencing 180 days after the date of
the receipt by the senior lender of written notice from all of the Debenture
holders of the declaration of the default and the written demand for immediate
payment of all the debt outstanding under the Debentures. The Company defaulted
in the payment of principal and interest due under the Debentures beginning in
October 2000. The Company has retained the services of an investment banking
firm to assist management with its Convertible Debenture refinancing efforts.
The Company is also in negotiations with the holders of its existing Convertible
Debentures relative to modifying or restructuring the terms of the debentures,
including a long-term extension of the maturity date.

      The Company has borrowed substantially all of its available capacity under
its 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 sales of assets or one or more business
lines. 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, 2000, the balance of the revolving line of credit and the
term loans under the Credit Facility was $29.6 million, and $2.1 million,
respectively, and the amount of convertible debt outstanding was $14.9 million.
The Company utilizes borrowings under its revolving line of credit to finance
purchases of inventory and accounts receivable, primarily during peak selling
periods. During fiscal 2000, the highest level of aggregate borrowings
outstanding under the Credit Facility was $31.3 million in November 1999. As of
July 31, 2000, the Company had a world-wide aggregate of $7.8 million
outstanding in irrevocable letters of credit in support of inventory purchases.

      Two of the Company's significant entertainment character licenses with a
particular licensor expired on March 31, 2000 and were extended to May 31, 2000.
The agreement covering entertainment character licensing rights for the
amusement market was replaced by a new multi-year agreement effective July 2000
under substantially similar terms as the expired agreement. The existing license
agreement covering entertainment character licensing rights for the retail
market has been extended on a month-to-month basis through December 31, 2000,
and will be replaced by a new agreement effective January 2001 with
significantly modified terms including limitations on products that can be sold
and the licensing period. As a percentage of total net sales, the combined sales
under these two agreements were 16.8%, 26.4% and 30.9% for fiscal years 2000,
1999 and 1998, respectively. In addition, a significant portion of the Company's
inventory is comprised of merchandise based on characters licensed under these
two agreements.

      On November 10, 2000, the Company entered into amendments with this
licensor relative to three other significant entertainment character licensing
agreements originally scheduled to expire on December 31, 2000. The amendments
provide for extensions of the license terms for up to two additional years and
specifically provide for the payment of the remaining balance of the guaranteed
minimum royalties due to the licensor over the extended two-year period. The
aforementioned extensions are conditioned upon the Company's ability to obtain
extensions of the existing surety bonds that secure payment of the guaranteed
minimum royalties over the amended licensing agreement periods by November 22,
2000. The Company is in discussions with the issuer of the existing surety bonds
relative to extending the surety bonds over the recently extending licensing
periods. There can be no assurance that the surety bonds will be extended. The
Company's failure to obtain extensions of the surety bonds could negatively
impact the amendments to the license agreements, which could result in the loss
of licensing rights, as well as the immediate demand for payment by the licensor
of approximately $14 million of guaranteed minimum royalties. This in turn would
exceed available cash and would have an immediate and material adverse impact on
the Company. In Fiscal 1999, the Company had estimated that projected future
revenues over the remaining terms of these three license agreements would be
insufficient to allow the Company to earn-out the guaranteed minimum royalties
advanced or required to be paid to the licensor prior to their expiration on
December 31, 2000. Accordingly, the Company recorded a provision totaling $14.9
million in the fourth quarter of fiscal 1999 for the estimated guaranteed
minimum royalty shortfalls associated with these licenses.

                                       35
<PAGE>
      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
could impact its ability to obtain renewals on favorable terms, if at all, or
secure additional licenses from the licensor. The Company is seeking concessions
relative to these advertising commitments from the licensor, however, there can
be no assurance that the Company will be able to secure the extensions or
concessions it is seeking from the licensor.

      The Company's Latin American subsidiary, Caribe, had a credit facility
with a lender that provided for an aggregate commitment of $5.0 million for the
issuance of letters of credit and a $1.5 million sublimit for cash advances.
This credit facility was replaced at expiration on June 30, 2000 by a new line
of credit facility with the same lender. The new credit facility provides a
commitment of $1.5 million for the issuance and refinancing of letters of credit
and expires on February 1, 2001.

      Play By Play Europe previously had credit facilities with three separate
banks in Europe that recently merged into a single entity resulting in a greater
concentration of Company's credit arrangements within the surviving bank
("Bank"). To reduce this increased concentration of the Bank's credit risk, the
Bank has advised the Company that it is progressively reducing its credit
commitment to the Company from 1.1 billion pesetas (approximately $6.0 million)
at March 31, 2000, to 575 million pesetas (approximately $3.2 million) by
November 30, 2000, concurrent with the maturity date of the credit arrangements
with this Bank. The Company is in negotiations with the Bank to renew and extend
these credit arrangements. In addition, the Company is in discussions with
additional lenders to replace the portion of the Company's credit requirements
that the Bank is reducing or that will be maturing. The credit arrangements with
the Bank consist principally of letter of credit, discounting and revolving loan
facilities. The Company believes it will be able to renew its existing credit
arrangements by the maturity date, however, there can be no assurance that the
Company will be able to renew the existing facilities or obtain financing from
alternate lenders or if such financing is obtained, that the terms will be as
favorable to the Company as those contained in the current credit arrangements.
The Company's failure to renew or extend the credit facilities would have a
material adverse impact on the European subsidiary's liquidity and working
capital.

      The Company's current 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.

      As previously indicated, cash flows from operations and borrowings
available under existing credit facilities will be insufficient to enable the
Company to retire the unsatisfied obligations outstanding under the Convertible
Debentures at maturity on December 31, 2000. If, or unless, the Company is
successful in refinancing the Convertible Debentures under commercially
reasonable terms, or if the Convertible Debentures are converted into the
Company's stock at maturity, and if the Company is successful in obtaining
extensions relative to the payment of royalty obligations under certain
licensing agreements more fully discussed in preceding paragraphs, then the
Company believes that its current available cash, net cash provided by operating
activities and available borrowings under the Company's credit facilities will
be sufficient to meet the Company's cash requirements through July 31, 2001.

                                       36
<PAGE>
      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 by converting to the euro at the exchange rates
in effect on the introduction date. One of the participating members is Spain,
which is the country in which Play-By-Play Toys & Novelties, Europa, S.A.
("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. Play-By-Play Europe's
accounting system is currently capable of performing the euro conversion, and
the Company does not anticipate that the costs related to the conversion will be
significant. In addition, because Play-By-Play Europe operates primarily in
Spain and in non-European Union countries, currently management does not
anticipate that the introduction of the euro will have a material adverse effect
on Play-By-Play Europe's results of operations, financial position, or cash
flows for the forseeable future.

      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.

      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 following sets forth the Company's net sales by fiscal quarter for
fiscal 2000, 1999 and 1998:

                                              FISCAL YEAR
                                 --------------------------------------
            FISCAL QUARTER         2000           1999          1998
            --------------       --------      ---------      ---------
                                             (IN THOUSANDS)

            First                $ 48,035      $  55,727      $  58,391
            Second                 27,501         28,432         30,841
            Third                  31,645         35,683         37,227
            Fourth                 45,908         36,673         51,528

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.

                                       37
<PAGE>
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 are recorded each period in the
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is the type
of hedge transaction. The Company is currently evaluating SFAS No. 133 to
determine its impact on the financial statements and related disclosures, if
any.

      In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." In SAB No. 101, the SEC staff expresses its views regarding the
appropriate recognition of revenue with regard to a variety of circumstances,
some of which are of particular relevance to the Company. The Company will be
required to adopt SAB No. 101 for the quarter beginning May 1, 2001. The Company
is currently evaluating SAB No. 101, however, the Company believes that it will
not have a material impact on the financial statements.

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, LIBOR or other Eurodollar
rates), and changes in foreign currency exchange rates as measured against the
United States ("U.S.") dollar and functional currencies of its subsidiaries
(i.e. British pound, Spanish peseta, Hong Kong dollar, Canadian dollar). 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
suppliers in China, therefore, the Company is subject to the risk that such
suppliers will be unable to provide inventory at competitive prices. The Company
believes that if such an 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.

INTEREST RATE RISK

      The interest payable on the Company's revolving line-of-credit and term
loans under the Credit Facility is variable based on its Lender's prime rate or
adjusted eurodollar rate, and therefore, affected by changes in market interest
rates. At July 31, 2000, approximately $31.7 million was outstanding under the
Credit Facility with a weighted average interest rate of 10.36%.

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 Peseta/U.S. Dollars exchange rate and
British Pounds/U.S. Dollars exchange rate may positively or negatively affect
the Company's sales, gross margins, net income and retained earnings. Purchases
of inventory by the Company's

                                       38
<PAGE>
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 Ernst &
Young LLP dated November 13, 2000 and the report of PricewaterhouseCoopers dated
November 12, 1999.

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

      None.


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
Company's definitive 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 exhibits filed as part of this Report.

(b)    REPORTS ON FORM 8-K. The Company filed a report on Form 8-K, date of
       event July 24, 2000, regarding changes in the Company's certifying
       accountant from PricewaterhouseCoopers LLP to Ernst & Young LLP.

                                       39
<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 13th day of
November 2000.

                                PLAY BY PLAY TOYS & NOVELTIES, INC.

                                By: /S/ JOE M. GUERRA
                                    --------------------------------------------
                                     Joe M. Guerra
                                     Chief Financial Officer 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 13, 2000
        Arturo G. Torres                     Executive Officer
                                       (Principal Executive Officer)

By: /s/ RAYMOND G. BRAUN           President, Chief Operating Officer and     November 13, 2000
        Raymond G. Braun                         Director

By: /s/ JOE M. GUERRA                    Chief Financial Officer,             November 13, 2000
        Joe M. Guerra                          and Treasurer
                                    (Principal Financial and Accounting
                                                  Officer)

By: /s/ RICHARD NEITZ                   President, Retail Division            November 13, 2000
        Richard Neitz                           and Director

By: /s/ MANUEL FERNANDEZ BARROSO   President - Caribe Sales and Marketing     November 13, 2000
        Manuel Fernandez Barroso               and Director

By: /S/ JAMES L. DOW               Senior Vice President, General Counsel     November 13, 2000
        James L. Dow                          and Secretary
</TABLE>

                                       40
<PAGE>
<TABLE>
<CAPTION>
         SIGNATURE                                TITLE                             DATE
         ---------                                -----                             ----
<S>                                <C>                                        <C>
By: /S/ STEVE K. C. LIAO                        Director                      November 13, 2000
        Steve K. C. Liao

By: /S/ OTTIS W. BYERS                          Director                      November 13, 2000
        Ottis W. Byers

By: /S/ BERTO GUERRA, JR.                       Director                      November 13, 2000
        Berto Guerra, Jr.

By: /S/ GUARIONE M. DIAZ                        Director                      November 13, 2000
        Guarione M. Diaz

By: /S/ HOWARD G. PERETZ                        Director                      November 13, 2000
        Howard G. Peretz
</TABLE>

                                       41
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE

                                                                            PAGE
Consolidated Financial Statements:

  Reports of Independent Auditors                                            F-2

  Consolidated Balance Sheets as of July 31, 2000 and 1999                   F-4

  Consolidated Statements of Operations for the Fiscal Years Ended
    July 31, 2000, 1999 and 1998                                             F-5

  Consolidated Statements of Shareholders' Equity for the Fiscal Years
     Ended July 31, 2000, 1999 and 1998                                      F-6

  Consolidated Statements of Cash Flows for the Fiscal Years Ended
    July 31, 2000, 1999 and 1998                                             F-7

  Notes to Consolidated Financial Statements                                 F-8

Financial Statement Schedule:

  Schedule II - Valuation and Qualifying Accounts                            S-1

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 AUDITORS

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

We have audited the accompanying consolidated balance sheet of Play By Play Toys
& Novelties, Inc. and Subsidiaries (the Company) at July 31, 2000, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year then ended. Our audit also included the financial statement
schedule listed in the Index at Item 14 (a) (2). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and schedule
based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards 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. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Play By
Play Toys & Novelties, Inc. and Subsidiaries at July 31, 2000 and the
consolidated results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 10,
the Company has incurred operating losses and has current obligations for
subordinated debt and other current obligations that exceed projected cash
flows. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. (Management's plans in regard to these matters are
also described in Note 10.) These financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.

Ernst & Young LLP

San Antonio, Texas
November 10, 2000

                                      F-2
<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 the results of their operations and their cash flows for each
of the two years in the period ended July 31, 1999, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 14 (a) (2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, 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-3
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
<TABLE>
<CAPTION>
                                                                                                              JULY 31,
                                                                                                -----------------------------------
                                                                                                     2000                1999
                                                                                                ---------------     ---------------
<S>                                                                                             <C>                 <C>
 CURRENT ASSETS:
      Cash and cash equivalents ............................................................    $     4,898,838     $     2,345,634
      Accounts and notes receivable, less allowance for
           doubtful accounts of $7,649,799 and $10,377,672 .................................         32,243,309          36,243,047
      Inventories, net .....................................................................         56,223,075          69,116,899
      Prepaid expenses .....................................................................          2,512,308           2,811,776
      Other current assets .................................................................                                468,710
                                                                                                ---------------     ---------------
           Total current assets ............................................................         95,877,530         110,986,066
 Property and equipment, net ...............................................................         25,272,499          25,859,145
 Goodwill, less accumulated amortization of $1,700,187 and $1,187,890 ......................         15,930,479          16,442,777
 Other assets ..............................................................................          2,001,363           2,030,273
                                                                                                ---------------     ---------------
           Total assets ....................................................................    $   139,081,871     $   155,318,261
                                                                                                ===============     ===============

                      LIABILITIES AND SHAREHOLDERS' EQUITY

 CURRENT LIABILITIES:
      Book overdraft .......................................................................    $     1,036,523     $     2,281,447
      Notes payable to banks ...............................................................         29,556,028          29,982,533
      Long-term debt classified as current .................................................          1,840,114                --
      Current maturities of convertible subordinated debentures ............................         14,850,000             298,500
      Current maturities of long-term debt .................................................            644,217           1,654,987
      Current obligations under capital leases .............................................          1,173,571           1,701,911
      Accounts payable, trade ..............................................................         27,612,837          32,081,780
      Accrued royalties payable ............................................................          4,052,896           7,706,423
      Other accrued liabilities ............................................................          3,402,027           3,172,479
      Income taxes payable .................................................................          2,906,103                --
                                                                                                ---------------     ---------------
           Total current liabilities .......................................................         87,074,316          78,880,060
                                                                                                ---------------     ---------------
 Long-term liabilities:
      Long-term debt, net of current maturities ............................................               --             2,140,418
      Convertible subordinated debentures, net of current maturities .......................               --            14,701,500
      Obligations under capital leases, net of current maturities ..........................            734,571           1,655,826
                                                                                                ---------------     ---------------
           Total liabilities ...............................................................         87,808,887          97,377,804
                                                                                                ---------------     ---------------

 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 shares issued .............................................              1,000               1,000
      Additional paid-in capital ...........................................................         71,486,820          71,486,820
      Deferred compensation ................................................................           (198,333)           (338,333)
      Accumulated other comprehensive losses ...............................................         (4,279,982)         (3,006,208)
      Accumulated deficit ..................................................................        (15,736,521)        (10,202,822)
                                                                                                ---------------     ---------------
           Total shareholders' equity ......................................................         51,272,984          57,940,457
                                                                                                ---------------     ---------------
           Total liabilities and shareholders' equity ......................................    $   139,081,871     $   155,318,261
                                                                                                ===============     ===============
</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 OPERATIONS

<TABLE>
<CAPTION>
                                                                                         FISCAL YEARS ENDED JULY 31,
                                                                          ---------------------------------------------------------
                                                                               2000                 1999                 1998
                                                                          ---------------      ---------------      ---------------
<S>                                                                       <C>                  <C>                  <C>
Net sales ...........................................................     $   153,089,132      $   156,515,361      $   177,986,735
Cost of sales .......................................................         105,300,456          129,582,244          116,755,386
                                                                          ---------------      ---------------      ---------------
     GROSS PROFIT ...................................................          47,788,676           26,933,117           61,231,349

Selling, general and administrative expenses ........................          47,116,217           55,808,965           44,088,681
                                                                          ---------------      ---------------      ---------------
     OPERATING INCOME (LOSS) ........................................             672,459          (28,875,848)          17,142,668

Interest expense ....................................................          (6,483,795)          (4,831,276)          (4,509,897)
Interest income .....................................................             127,995              371,722              360,048
Other income (expense) ..............................................             149,642              164,751                 (857)
                                                                          ---------------      ---------------      ---------------
     INCOME (LOSS) BEFORE INCOME TAXES ..............................          (5,533,699)         (33,170,651)          12,991,962

Income tax benefit (provision) ......................................                --              2,940,304           (4,547,187)
                                                                          ---------------      ---------------      ---------------
     NET INCOME (LOSS) ..............................................     $    (5,533,699)     $   (30,230,347)     $     8,444,775
                                                                          ===============      ===============      ===============

Net income (loss) per share:
  Basic .............................................................     $         (0.75)     $         (4.12)     $          1.30
                                                                          ---------------      ---------------      ---------------
  Diluted ...........................................................     $         (0.75)     $         (4.12)     $          1.19
                                                                          ---------------      ---------------      ---------------

Weighted average shares outstanding:
  Basic .............................................................           7,395,000            7,338,297            6,473,724
                                                                          ---------------      ---------------      ---------------
  Diluted ...........................................................           7,395,000            7,338,297            7,759,866
                                                                          ---------------      ---------------      ---------------
</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 SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                           ACCUMULATED
                                         COMMON STOCK           ADDITIONAL                   OTHER         RETAINED        TOTAL
                                   --------------------------    PAID-IN     DEFERRED     COMPREHENSIVE    EARNINGS    SHAREHOLDERS'
                                     SHARES         AMOUNT       CAPITAL   COMPENSATION  INCOME (LOSSES)   (DEFICIT)      EQUITY
                                   -----------   ------------ ------------ ------------   ------------    ------------ ------------
<S>                                  <C>         <C>          <C>          <C>            <C>             <C>          <C>
Balance, July 31, 1997 ...........   4,901,300   $      1,000 $ 35,006,539 $   (618,333)  $ (2,303,027)   $ 11,582,750 $ 43,668,929

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

Warrants issued ..................                                 522,000                                                  522,000
Stock issued in secondary
  public offering ................   2,300,000                  34,147,474                                               34,147,474
Exercise of stock options ........     113,700                   1,310,807                                                1,310,807
Amortization of deferred
  compensation ...................                                              140,000                                     140,000
                                   -----------   ------------ ------------ ------------   ------------    ------------ ------------
Balance, July 31, 1998 ...........   7,315,000   $      1,000 $ 70,986,820 $   (478,333)  $ (1,548,381)   $ 20,027,525 $ 88,988,631

Comprehensive income (loss):
  Net loss .......................                                                                         (30,230,347) (30,230,347)
  Foreign currency translation
    adjustments ..................                                                          (1,457,827)                  (1,457,827)
                                                                                                                       ------------
       Comprehensive income (loss)                                                                                      (31,688,174)
                                                                                                                       ------------

Acquisition of Caribe ............      80,000                     500,000                                                  500,000
Amortization of deferred
  compensation ...................                                              140,000                                     140,000
                                   -----------   ------------ ------------ ------------   ------------    ------------ ------------
Balance, July 31, 1999 ...........   7,395,000   $      1,000 $ 71,486,820 $   (338,333)  $ (3,006,208)   $(10,202,822)$ 57,940,457

Comprehensive income (loss):
  Net loss .......................                                                                          (5,533,699)  (5,533,699)
  Foreign currency translation
    adjustments ..................                                                          (1,273,774)                  (1,273,774)
                                                                                                                       ------------
       Comprehensive loss ........                                                                                       (6,807,473)
                                                                                                                       ------------

Amortization of deferred
  compensation ...................                                              140,000                                     140,000
                                   -----------   ------------ ------------ ------------   ------------    ------------ ------------
Balance, July 31, 2000 ...........   7,395,000   $      1,000 $ 71,486,820 $   (198,333)  $ (4,279,982)   $(15,736,521)$ 51,272,984
                                   ===========   ============ ============ ============   ============    ============ ============
</TABLE>

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

                                       F-6
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                               FISCAL YEARS ENDED JULY 31,
                                                                                   ------------------------------------------------
                                                                                       2000              1999              1998
                                                                                   ------------      ------------      ------------
<S>                                                                                <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss) ..........................................................     $ (5,533,699)     $(30,230,347)     $  8,444,775
  Adjustments to reconcile net income (loss) to
   net cash provided by (used in) operating activities:
     Depreciation and amortization ...........................................        3,957,823         2,973,943         2,271,943
     Provision for doubtful accounts receivable ..............................          828,470         7,833,697         2,173,736
     Provision for inventory reserve .........................................       (1,947,927)        4,091,849              --
     Provision for royalty license reserves ..................................       (1,214,129)       14,883,940              --
     Deferred income tax provision (benefit) .................................             --            (654,059)         (503,290)
     Amortization of deferred compensation ...................................          140,000           140,000           140,000
     Loss (gain) on sale of property and equipment ...........................          103,662           200,154            89,248
     Change in operating assets and liabilities (net of acquisitions):
       Accounts and notes receivable .........................................        3,171,269         3,332,834       (13,395,537)
       Inventories ...........................................................       14,841,751           540,030       (25,373,610)
       Prepaids and other assets .............................................          749,537         5,755,804        (3,987,081)
       Accounts payable and accrued liabilities ..............................       (6,696,271)       (6,126,917)        5,151,647
       Income taxes payable ..................................................        2,906,103        (4,377,026)        1,936,817
                                                                                   ------------      ------------      ------------
          Net cash provided by (used in) operating activities ................       11,306,589        (1,636,098)      (23,051,352)
                                                                                   ------------      ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment, net ....................................       (2,552,558)       (8,245,474)       (3,269,603)
  Proceeds from sale of property and equipment ...............................           22,833            74,571            35,115
  Purchase of Caribe, net of cash paid .......................................             --             147,088              --
  Payments for intangible assets .............................................             --                --             (32,246)
                                                                                   ------------      ------------      ------------
          Net cash used in investing activities ..............................       (2,529,725)       (8,023,815)       (3,266,734)
                                                                                   ------------      ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from public offering of common stock, net .........................                               --          34,147,474
  Net borrowings (repayments) under Revolving Credit Agreements ..............         (426,504)       14,321,583        (7,846,771)
  Proceeds from short-term loan from shareholder .............................        2,500,000              --                --
  Repayment of note payable to shareholder ...................................       (2,500,000)             --                --
  Proceeds from long-term debt ...............................................        2,410,000              --                --
  Repayment of long-term debt ................................................       (4,168,768)       (4,847,598)       (2,570,041)
  Repayment of capital lease obligations .....................................       (1,519,690)       (1,316,086)         (953,393)
  Proceeds from exercise of stock options ....................................                               --           1,310,807
  Increase (decrease) in book overdraft ......................................       (1,244,924)        2,281,447          (461,220)
                                                                                   ------------      ------------      ------------
          Net cash provided by (used in) financing activities ................       (4,949,886)       10,439,346        23,626,856
                                                                                   ------------      ------------      ------------
EFFECT OF FOREIGN CURRENCY EXCHANGE RATES ....................................       (1,273,774)       (1,457,827)          754,646
                                                                                   ------------      ------------      ------------
          Increase (decrease) in cash and cash equivalents ...................        2,553,204          (678,394)       (1,936,584)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .............................        2,345,634         3,024,028         4,960,612
                                                                                   ------------      ------------      ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................................     $  4,898,838      $  2,345,634      $  3,024,028
                                                                                   ============      ============      ============
</TABLE>

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

                                       F-7
<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 a broad line of stuffed and electronic plush toys
and to market and distribute a wide variety of novelty items. The Company sells
these products to customers in the amusement and retail markets. The Company's
toy operations accounted for 98.1% of net sales for fiscal 2000.

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 gain for fiscal 2000 was $21,494, the loss for fiscal 1999 was
$25,165, and the loss for fiscal 1998 was $117,000. 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.

      Until the recent fiscal year, the Company has historically made no attempt
to manage, by means of hedging or derivatives, the risk of potential currency
fluctuations.

                                      F-8
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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, 2000, the outstanding trade receivables were
$35.1 million, of which $19.0 million were from customers in the United States
and Canada, $3.6 million were from customers in Latin American countries, and
$12.5 million were 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 American customers. During 1999, the Company
changed its credit terms to customers in Latin America, whereby the Company
generally requires letters of credit or 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 2000, 1999 and 1998.

      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 proves 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. Two
manufacturers in China accounted for 13.3% and 12.9%, or a total of 26.2%, of
the Company's purchases during fiscal 2000. The manufacturer which accounted for
12.9% in fiscal 2000, accounted for 12.4% and 8.8% in fiscal 1999 and 1998,
respectively. No other manufacturer accounted for more than 10% of the Company's
purchases of toy products during fiscal 2000, 1999 or 1998.

INVENTORIES
      Inventories are stated at the lower of cost or market. Cost of the
Company's primary U.S. inventory is determined using the last-in, first-out
(LIFO) method. Cost of the remaining U.S. inventory is determined using average
cost and inventory held by the Company's foreign subsidiaries are determined by
the first-in, first-out (FIFO) method. The cost of the Company's
inventory-in-transit is determined based on the specific identification method.

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.

                                      F-9
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      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
      The Company recognizes revenue when each of the following four criteria
are met: 1) a contract or sales arrangement exists; 2) products have been
shipped or services have been rendered; 3) the price of the products or services
is fixed or determinable; and 4) collectibility is reasonably assured.

ADVERTISING
      The costs of producing media advertising, including airtime, is expensed
when incurred. Committed media communication costs are expensed 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.

401(K) PLAN
      On April 1, 2000, the Company sponsored a 401(k) plan to provide its
domestic employees with additional income upon retirement. The Company generally
matches a portion of employees' voluntary before-tax contributions. Employees
are fully vested in their own contributions and generally vest in the

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

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Company's matching contributions upon 5 years of contributing to the plan. Total
401(k) expense recognized by the Company in fiscal 2000 was $44,000.

RECLASSIFICATION
      Certain amounts in the prior period financial statements have been
reclassified to conform to the current year presentation.

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. 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,
2000, 1999, and 1998 are as follows:

<TABLE>
<CAPTION>
                                                                                          FISCAL YEARS ENDED JULY 31,
                                                                          ----------------------------------------------------------
                                                                               2000                  1999                 1998
                                                                          ---------------       ---------------      ---------------
<S>                                                                       <C>                   <C>                  <C>
Income (loss) from operations available
  to common stockholders - basic ...................................      $    (5,533,699)      $   (30,230,347)     $     8,444,775
Plus: interest on convertible debt .................................                 --                    --                780,000
                                                                          ---------------       ---------------      ---------------
Income (loss) from operations available to
  common stockholders plus income from
  assumed conversions - diluted ....................................      $    (5,533,699)      $   (30,230,347)     $     9,224,775
                                                                          ===============       ===============      ===============
Weighted average shares outstanding - basic ........................            7,395,000             7,338,297            6,473,724
Plus:  assumed exercise of options and warrants ....................                 --                    --                348,642
Plus:  assumed conversion of convertible debt ......................                 --                    --                937,500
                                                                          ---------------       ---------------      ---------------
Weighted average shares outstanding - diluted ......................            7,395,000             7,338,297            7,759,866
                                                                          ===============       ===============      ===============
</TABLE>

                                      F-11
<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, 2000, 1999 and 1998, the Company
had 946,800, 1,732,300, and 1,702,558, 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, 2000 and 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
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
are recorded each period in the current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is the type of hedge transaction. The Company is currently evaluating
SFAS No. 133 to determine its impact on the financial statements and related
disclosures, if any.

      In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." In SAB No. 101, the SEC staff expresses its views regarding the
appropriate recognition of revenue with regard to a variety of circumstances,
some of which are of particular relevance to the Company. The Company will be
required to adopt SAB No. 101 for the quarter beginning May 1, 2001. The Company
is currently evaluating SAB No. 101, however, the Company believes that it will
not have a material impact on the financial statements.

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
by retail and amusement customers.

                                      F-12
<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.

                                REVENUE SEGMENTS
                                   (in 000's)

                                 AMUSEMENT     RETAIL       OTHER        TOTAL
                                 --------     --------     --------     --------
FISCAL YEAR 2000
Net operating revenue ......     $113,823     $ 36,437     $  2,829     $153,089
Cost of sales ..............       76,292       27,408        1,600      105,300
                                 --------     --------     --------     --------
Gross profit ...............       37,531        9,029        1,229       47,789

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     $  2,838     $177,986
Cost of sales ..............       76,011       39,302        1,442      116,755
                                 --------     --------     --------     --------
Gross profit ...............       47,223       12,612        1,396       61,231

The following are sales by geographic areas for the years ended July 31:

                                    2000         1999         1998
                                 --------     --------     --------
Domestic ...................     $ 98,248     $112,719     $131,886
International ..............       42,547       34,940       31,684
Latin America ..............       12,294        8,856       14,416
                                 --------     --------     --------
                                 $153,089     $156,515     $177,986

Identifiable Assets:

                                    2000            1999
                                ------------    ------------
Domestic ...................    $ 93,748,057    $114,006,984
Foreign ....................      45,333,814      41,311,277
                                ------------    ------------
Consolidated ...............    $139,081,871    $155,318,261

5.    WRITE-OFF OF ACCOUNTS RECEIVABLE

      During the third quarter of fiscal 1999, the Company wrote-off $2.2
million of trade accounts receivable from its former distributor in Mexico as a
result of the commencement of insolvency proceedings by this entity. 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.

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

5.    WRITE-OFF OF ACCOUNTS RECEIVABLE (CONTINUED)

      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, plus a previously established
allowance for doubtful accounts of approximately $300,000, was recorded at July
31, 1999 and was included in selling, general and administrative expenses.

6.    INVENTORIES

      Inventories consist of the following:

                                                JULY 31,
                                        ---------------------------
                                            2000           1999
                                        -------------  ------------
         Purchased for resale              55,686,257    68,592,189
         Operating supplies                   536,818       524,710
                                        -------------  ------------
              Total                     $  56,223,075  $ 69,116,899
                                        =============  ============

      Replacement cost of inventories approximates LIFO cost at each of the
balance sheet dates. At July 31, 2000 and 1999 inventories in the amount of
$30.1 million and $39.9 million, respectively, were valued using the average
cost and FIFO methods, and in the amount of $3.6 million and $3.0 million,
respectively, were valued using the specific identification method. The excess
current cost over the LIFO value of inventories was $215,819 at July 31, 2000
and 1999. As of July 31, 2000 and 1999 there was an inventory valuation
allowance of $2.9 million and $4.9 million, respectively.

      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.    FORWARD CONTRACTS

      During fiscal year 2000, the Company's European subsidiary entered into
certain foreign exchange hedging contracts relative to certain payments arising
out of its foreign operations and denominated in a currency other than its
functional currency. The Company does not enter into these contracts for
speculative purposes. At July 31, 2000, the Company had one option exchange
contract outstanding, which will settle in November 2000. The notional value of
the contract at issuance was approximately $1.5 million. At July 31, 2000, there
were no unrealized gains or losses. The Company realized hedging gains of
approximately $3,000 from the settlement of a contract in fiscal 2000.

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

8.    PROPERTY AND EQUIPMENT

    Property and equipment consists of the following:

                                                             JULY 31,
                                                   ----------------------------
                                                       2000            1999
                                                   ------------    ------------
Buildings ......................................   $  3,783,755    $  3,740,275
Land ...........................................      1,240,729       1,240,729
Equipment ......................................     14,840,633      14,783,215
Vehicles .......................................        615,979         744,278
Computer equipment .............................      3,927,611       3,555,294
Software .......................................      8,376,566       6,603,820
Leasehold improvements .........................      2,227,129       2,825,698
                                                   ------------    ------------
                                                     35,012,402      33,493,309
Accumulated depreciation and amortization ......     (9,739,903)     (7,634,164)
                                                   ------------    ------------
                                                   $ 25,272,499    $ 25,859,145
                                                   ============    ============

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


                                                             JULY 31,
                                                   ----------------------------
                                                       2000            1999
                                                   ------------    ------------
Equipment ......................................   $  2,789,952    $  2,796,587
Computer equipment .............................      2,501,348       2,501,348
Computer software ..............................        128,215         128,215
Vehicles .......................................        195,027         343,337
Accumulated depreciation .......................     (1,390,019)     (1,368,316)
                                                   ------------    ------------
                                                   $  4,224,523    $  4,401,171
                                                   ============    ============
                                      F-15
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.    NOTES PAYABLE AND LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                          JULY 31,
                                                                ----------------------------
                                                                    2000            1999
                                                                ------------    ------------
<S>                                                             <C>             <C>
NOTES PAYABLE:
  Revolving lines of credit .................................   $ 29,556,028    $ 29,982,533
                                                                ============    ============
LONG-TERM DEBT:
  Convertible subordinated debentures .......................   $ 14,850,000    $ 15,000,000
  Term loans ................................................      2,134,376       2,410,000
  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 ................        349,955       1,385,405
                                                                ------------    ------------
                                                                $ 17,334,331    $ 18,795,405
                                                                ------------    ------------
  Less current maturities ...................................    (15,494,217)     (1,953,487)
                                                                ------------    ------------
                                                                $  1,840,114    $ 16,841,918
                                                                ============    ============
</TABLE>
The aggregate amount of maturities on long-term borrowings as of July 31, 2000
were as follows:

                               Year ended July 31:
                                             2001                $15,494,217
                                             2002                    532,609
                                             2003                    413,436
                                             2004                    413,436
                                             2005                    245,530
                                             Beyond                  235,102
                                                                 -----------
                                                                 $17,334,330
                                                                 ===========


      The classifications and maturities of amounts outstanding at July 31, 1999
are based on the refinancing and restructuring completed on October, 25, 1999.

NEW 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. The new Credit Facility included 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 in the
original principal amount of $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-16
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

      Before it was amended, as discussed below, interest on borrowings
outstanding under the revolving line of credit and the term loans was 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 weighted average interest rate was 10.36% at July 31, 2000. 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. 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.

      On March 20, 2000, the Company's Credit Facility was amended to reduce the
maximum credit commitment from $60 million to $35 million and the revolving line
of credit commitment to $32.6 million and provided for a supplemental loan under
the revolving line of credit in the principal amount of $500,000. The
supplemental loan was repaid in weekly installments and matured in May 2000.

      On June 1, 2000, the Company's Credit Facility was amended to temporarily
extend the seasonal advance rate percentage applicable to inventory and to waive
the Company's non-compliance with a financial covenant at April 30, 2000 under
the Credit Facility. Under the terms of the amendment, the inventory advance
rate percentage decreases from 55% to 50% based on a series of scheduled weekly
reductions in the advance rate percentage during the period from July to
September 2000. In addition, the Credit Facility was further amended to increase
the interest rate for borrowings outstanding under the Credit Facility from the
prime rate plus .25 percent (.25%) to the prime rate plus one percent (1%) for
prime rate loans and from two and three-quarters percent (2.75%) per annum in
excess of the adjusted eurodollar rate to three and one-half percent (3.5%) per
annum in excess of the adjusted eurodollar rate for eurodollar rate loans.

      On November 10, 2000 the Company's Credit Facility was amended to
permanently increase the advance rate percentage applicable to inventory from
50% to 55%, and to waive the Company's non-compliance with certain financial
covenants under the Credit Facility at July 31, 2000 and to modify these same
financial covenants for future periods. In addition, the Credit Facility was
further amended to increase the fees that would be payable in the event the
Credit Facility is terminated prior to maturity, and also requires the Company
to reduce the term loan balance by a specified percentage in the event the
Company completes a sale of certain assets.

OLD 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,

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

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

1999. On October 25, 1999, the Company entered into a new Credit Facility with
another lender that matures October 24, 2002.

      Interest on borrowings outstanding under the Old Credit Facility's
revolving line of credit was 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. For amounts
outstanding under the term loan, interest was 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. The Old Credit Facility was 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.

      On March 20, 2000, the Company obtained a loan in the principal amount of
$2.5 million from the Chairman of the Board. The loan provided for interest at
8% per annum and was secured by a first lien on the Company's 1999 Federal
income tax refund of approximately $2.8 million. The tax refund was received and
the loan from the Chairman plus accrued interest was repaid shortly thereafter.

      The Company's Latin American subsidiary, Caribe, had a credit facility
with a lender that provided for an aggregate commitment of $5.0 million for the
issuance of letters of credit and a $1.5 million sublimit for cash advances.
This credit facility was replaced at expiration on June 30, 2000 by a new line
of credit facility with the same lender. The new credit facility provides a
commitment of $1.5 million for the issuance and refinancing of letters of credit
and expires on February 1, 2001.

      Play By Play Europe previously had credit facilities with three separate
banks in Europe that recently merged into a single entity resulting in a greater
concentration of Company's credit arrangements within the surviving bank
("Bank"). To reduce this increased concentration of the Bank's credit risk, the
Bank has advised the Company that it is progressively reducing its credit
commitment to the Company from 1.1 billion pesetas (approximately $6.0 million)
at March 31, 2000, to 575 million pesetas (approximately $3.2 million) by
November 30, 2000, concurrent with the maturity date of the credit arrangements
with this Bank. The Company is in negotiations with the Bank to renew and extend
these credit arrangements. In addition, the Company is in discussions with
additional lenders to replace the portion of the Company's credit requirements
that the Bank is reducing or that will be maturing. The credit arrangements with
the Bank consist principally of letter of credit, discounting and revolving loan
facilities. The Company believes it will be able to renew its existing credit
arrangements by the maturity date, however, there can be no assurance that the
Company will be able to renew the existing facilities or obtain financing from
alternate lenders or if such financing is obtained, that the terms will be as
favorable to the Company as those contained in the current credit arrangements.
The Company's failure to renew or extend the credit facilities would have a
material adverse impact on the European subsidiary's liquidity and working
capital.

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

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

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

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
to $6 per share of common stock. Monthly principal payments on the Company's
outstanding $15 million of Convertible Debentures commenced on June 30, 2000, at
a rate of 1% of the outstanding principal balance, and the remaining unpaid
balance is due at maturity on December 31, 2000. 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 proportionate to their ownership interests on an as
converted basis, as well as limitations on the total number of board seats,
which would result in a change in control of the board if the debentures have
not been paid in full by final maturity. The First Amendment also provides for a
possible reset of the conversion price based on the average closing price of the
Company's stock for the month of December 2000 if the outstanding debentures
have not been converted or paid in full by final maturity. Conversion at current
stock prices would result in substantial dilution and would give the debenture
holders majority ownership of the Company's stock.

      The Company currently expects that, by itself, cash flows from operations
will be insufficient to enable the Company to retire the unsatisfied obligations
under the Convertible Debentures due at maturity. Accordingly, unless the
debentures are converted into the Company's common stock before the scheduled
maturity, the Company will need to refinance in order to satisfy its repayment
obligations thereunder. Pursuant to the terms of the Debentures, the holders of
the Debentures have the right to commence legal proceedings against the Company
(but not against the collateral pledged to the senior lender) in the event the
Company fails to make any regularly scheduled payment due under the Debentures
or upon any other default and commencing 180 days after the date of the receipt
by the senior lender of written notice from all of the Debenture holders of the
declaration of the default and the written demand for immediate payment of all
the debt outstanding under the Debentures. The Company defaulted in the payment
of principal and interest due under the Debentures beginning in October 2000.
The Company has retained the services of an investment banking firm to assist
management with its Convertible Debenture refinancing efforts. The Company is
also in negotiations with the holders of its existing Convertible Debentures
relative to modifying or restructuring the terms of the debentures, including a
long-term extension of the maturity date.

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 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 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.



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

10.  COMMITMENTS AND CONTINGENCIES

CAPITAL LEASES
      The Company leases equipment under capital lease agreements that expire at
various dates through 2005. The lease agreements generally provide purchase
options and require the Company to pay property taxes, utilities and insurance.

      Future minimum lease payments under capital leases at July 31, 2000 are as
follows:

         Year ended July 31:
                  2001                                  $ 1,196,188
                  2002                                      698,433
                  2003                                      128,366
                  2004                                       22,400
                  2005                                       22,081
                                                        -----------
         Total minimum lease payments                     2,067,468
         Less amounts representing interest                (159,326)
                                                        -----------
                                                          1,908,142
         Less current portion                             1,173,571
                                                        -----------
         Long-term obligations under capital leases         734,571
                                                        ===========

OPERATING LEASES
      The Company leases operating facilities, consisting primarily of
warehouse, distribution and office space as well as vehicles and equipment,
under operating leases expiring at various dates through 2020. The lease
agreements generally provide renewal options and require the Company to pay
property taxes, utilities and insurance. Rent expense under operating leases was
$3.5 million, $4.2 million and $2.1 million for the years ended July 31, 2000,
1999 and 1998, 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, 2000
are as follows:

                  Year ended July 31:
                           2001                         $  2,722,569
                           2002                            2,647,109
                           2003                            2,586,579
                           2004                            2,045,330
                           2005                            2,085,547
                  Thereafter                              11,789,754
                                                        ------------
                          Total minimum lease payments  $ 23,876,889
                                                        ============

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

10.  COMMITMENTS AND CONTINGENCIES (CONTINUED)

ROYALTIES
      The Company develops and markets a broad range of products under various
license agreements for entertainment characters and corporate trademarks for
which the Company pays associated royalties based on sales of the related
products. Approximately 69.3%, 70.1% and 64.3% of the Company's net sales in
fiscal 2000, 1999 and 1998, respectively, were derived from sales of licensed
products. The Company's products based on licensed Looney Tunes' characters
accounted for 31.3%, 46.8% and 50.6% of net sales in fiscal 2000, 1999 and 1998,
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 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.

      Two of the Company's significant entertainment character licenses with the
same licensor expired on March 31, 2000 and were renewed effective July 2000 and
January 2001. The agreement covering entertainment character licensing rights
for the amusement market was replaced by a new multi-year agreement effective
July 2000 under substantially similar terms as the expired agreement. The
existing license agreement covering entertainment character licensing rights for
the retail market continues on a month-to-month basis through December 31, 2000,
and will be replaced by a new agreement effective January 2001 with
significantly modified terms including limitations on products that can be sold
and the licensing period.

      On November 10, 2000, the Company entered into amendments with this
licensor relative to three other significant entertainment character licensing
agreements originally scheduled to expire on December 31, 2000. The amendments
provide for extensions of the license terms for up to two additional years and
specifically provide for the payment of the remaining balance of the guaranteed
minimum royalties due to the licensor over the extended two-year period. The
aforementioned extensions are conditioned upon the Company's ability to obtain
extensions of the existing surety bonds that secure payment of the guaranteed
minimum royalties over the amended licensing agreement periods by November 22,
2000. The Company is in discussions with the issuer of the existing surety bonds
relative to extending the surety bonds over the recently extending licensing
periods. There can be no assurance that the surety bonds will be extended. The
Company's failure to obtain extensions of the surety bonds could negatively
impact the amendments to the license agreements, which could result in the loss
of licensing rights, as well as the immediate demand for payment by the licensor
of approximately $14 million of guaranteed minimum royalties. This in turn would
exceed available cash and would have an immediate and material adverse impact on
the Company. In Fiscal 1999, the Company had estimated that projected future
revenues over the remaining terms of these three license agreements would be
insufficient to allow the Company to earn-out the guaranteed minimum royalties
advanced or required to be paid to the licensor prior to their expiration on
December 31, 2000. Accordingly, the Company recorded a provision totaling $14.9
million in the fourth quarter of fiscal 1999 for the estimated guaranteed
minimum royalty shortfalls associated with these licenses.

      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
could impact its ability

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

10.   COMMITMENTS AND CONTINGENCIES (CONTINUED)

to obtain renewals on favorable terms, if at all, or secure additional licenses
from the licensor. The Company is seeking concessions relative to these
advertising commitments from the licensor, 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 $8.1 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 $7.8 million world-wide at July 31, 2000, 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.

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.

      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 two million dollars 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 and by filing a motion for summary judgement. 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 granting of the plaintiff's motion for summary
judgement. The Court of Appeals reversed the grant of summary judgement against
the plaintiff and affirmed the grant of summary judgement against the Company,
thus dismissing all of the Company's counterclaims against the plaintiff,
thereby remanding the matter back to the United States District Court Southern
District of New York for trial. To date, no trial date has been set by the
United States District Court. In September 2000, the District Judge allowed the
Company to file another motion for summary judgement with the court of which it
is presently filing.

      In April 2000, the Company commenced arbitration before the American
Arbitration Association against a software vendor seeking to recover certain
amounts advanced by the Company to the vendor, to terminate the contract and
cancel remaining amounts due to the software vendor under the contract, and to
recover damages. The Company contends in the arbitration matter that the
software and services provided to the Company are unsuitable for their intended
use and that the capabilities of the software were misrepresented by the
software vendor and cannot be used by the Company in its operations. The
software vendor has filed a counter claim to the arbitration contending it
completed the project in accordance with the

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

10.    COMMITMENTS AND CONTINGENCIES (CONTINUED)

terms of the contract and seeks to recover full payment of the contract price.
To date, the Company has paid the software vendor approximately $878,000 and the
software vendor is seeking to recover remaining amounts due under the contract
totaling approximately $500,000. On October 5, 2000, the parties reached an
agreement to dismiss all claims in the arbitration proceedings, which is being
finalized.

      Both the infringement action and the arbitration matters are not expected
to have a material adverse effect on the Company's results of operations,
financial position or liquidity.

GOING CONCERN
      The Company's consolidated financial statements have been presented on the
basis that it is a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
operating losses incurred in the fiscal years ended July 31, 2000 and 1999, the
current maturity of the Convertible Debentures and the guaranteed minimum
royalty payments required to be paid in connection with certain expiring license
agreements with a particular licensor raises concerns as to the Company's
ability to produce profitable operations and positive cash flows.

      Due to the significant minimum cash requirements, the Company may be
unable to meet all of its cash needs. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of these uncertainties.

      Management is addressing the minimum cash requirements to service its
subordinated debt and is currently in negotiations with the holders of the
Convertible Debentures relative to modifying or restructuring the terms of the
debentures. In addition, the Company has retained the services of an investment
banking firm to assist management with its Convertible Debenture refinancing
efforts. Management believes it has addressed the cash requirements to satisfy
the guaranteed minimum royalties by entering into agreements with the licensor
that extend the terms of the license agreements, including the due dates of the
minimum royalty payments. The Company's remaining liquidity requirements will be
met principally through cash flows from continuing operations, borrowings on its
revolving credit lines, and with the proceeds from sales of certain assets or
business lines.

11.  ADVERTISING EXPENSES

Advertising expenses consist primarily of costs incurred in the design,
development, printing and shipping of Company catalogs, television advertisement
costs and advertisements in trade publications. In fiscal 1999, television
advertising costs were incurred principally in conjunction with the promotion of
Talkin Tunes and Tornado Taz(TM), and in fiscal 1998, the television advertising
costs were incurred principally in conjunction with the promotion of Talkin'
Tots(TM), Talkin' Tunes and Tornado Taz(TM). The Company's total television
advertising expenses were $0.4 million, $1.9 million and $5.7 million during
fiscal 2000, 1999 and 1998, respectively. The Company's total advertising
expenses, including television advertisement costs, were $5.1 million, $5.8
million and $7.6 million during fiscal 2000, 1999 and 1998, respectively.

                                      F-23
<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,
                                             --------------------------------------------
                                                 2000            1999            1998
                                             ------------    ------------    ------------
<S>                                          <C>             <C>             <C>
Federal:
  Current provision (benefit) ............   $       --      $ (2,825,777)   $  2,914,676
  Deferred provision (benefit) ...........           --          (654,059)       (503,290)
                                             ------------    ------------    ------------
    Total Federal ........................           --        (3,479,836)      2,411,386
                                             ------------    ------------    ------------
State - current ..........................           --              --           441,827
                                             ------------    ------------    ------------
Foreign - current ........................       (393,426)        539,532       1,693,974
                                             ------------    ------------    ------------
        - deferred .......................        393,426            --              --
                                             ------------    ------------    ------------
  Net provision (benefit) for income taxes   $       --      $ (2,940,304)   $  4,547,187
                                             ============    ============    ============

<CAPTION>
     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,
                                             --------------------------------------------
                                                 2000            1999            1998
                                             ------------    ------------    ------------
<S>                                          <C>             <C>             <C>
Income taxes (benefit) computed at
  U.S. Federal statutory rates ...........   $ (1,903,919)   $(11,276,262)   $  4,417,267
Foreign tax differentials ................        295,598         427,913         (23,834)
Change in valuation allowance ............      1,560,791       8,013,863            --
State tax provision ......................           --              --           291,606
Other - net ..............................         47,530        (105,818)       (137,852)
                                             ------------    ------------    ------------
  Total provision (benefit) ..............   $       --      $ (2,940,304)   $  4,547,187
                                             ============    ============    ============
</TABLE>

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

12.  INCOME TAX (CONTINUED)

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

<TABLE>
<CAPTION>
                                                               YEAR ENDED JULY 31,
                                                   --------------------------------------------
                                                       2000            1999            1998
                                                   ------------    ------------    ------------
<S>                                                <C>             <C>             <C>
Assets:
  Current:
    Accounts receivable ........................   $  2,506,875    $  3,640,719    $  1,515,765
    Capital loss carryover .....................        135,693         135,693         135,693
    Other - net ................................        535,432         867,642         483,848
  Non-current - net operating losses ...........     11,855,288       5,376,199            --
                                                   ------------    ------------    ------------
      Gross deferred tax assets ................     15,033,288      10,020,253       2,135,306
                                                   ------------    ------------    ------------

Liabilities:
  Current - inventory ..........................      1,743,598          36,590       1,774,885
  Non-current - basis of property and
    equipment and other ........................      3,579,344       1,834,107         878,787
                                                   ------------    ------------    ------------
    Gross deferred tax liabilities .............      5,322,942       1,870,697       2,653,672
                                                   ------------    ------------    ------------
    Net deferred tax assets (liabilities) before
     valuation allowance .......................      9,710,346       8,149,556        (518,366)
                                                   ------------    ------------    ------------
    Less valuation allowance ...................     (9,710,346)     (8,149,556)       (135,693)
                                                   ------------    ------------    ------------
      Net deferred tax assets (liabilities) ....   $       --      $       --      $   (654,059)
                                                   ============    ============    ============
</TABLE>

      Uncertainties exist as to the future utilization of operating loss
carryforwards under the criteria set forth under FASB Statement No. 109.
Therefore, the Company has established a valuation allowance of $9,710,346,
$8,149,556 and $135,693 for deferred tax assets at July 31, 2000, 1999 and 1998,
respectively.

      As of July 31, 2000, the Company had net operating loss carryforwards of
approximately $32.7 million that will begin to expire in 2019 and are available
to offset future taxable income.

      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.

                                      F-25
<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
fiscal 2000, 1999 and 1998, and has a balance of $198,333, $338,333 and $478,333
in unearned compensation as of July 31, 2000, 1999 and 1998, 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 resultant from SFAS No. 123.

                                      F-26
<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,
2000, 1999 and 1998 and the changes during the year ended on those dates is
presented below:

<TABLE>
<CAPTION>
                                                                         FISCAL YEARS ENDED JULY 31,
                                            ---------------------------------------------------------------------------------------
                                                       2000                           1999                          1998
                                            ---------------------------   ---------------------------   ---------------------------
                                                             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 ........      1,514,100   $      15.31      1,833,000   $      15.32        959,800   $      10.71
Granted .................................        265,500   $       3.25         11,000   $       7.25      1,034,000   $      18.99
Exercised ...............................           --     $       --             --     $       --          111,900   $      11.82
Forfeited ...............................        239,600   $      17.98        114,600   $      17.23         24,140   $      13.47
Expired .................................        728,200   $      16.62        215,300   $      15.76         24,760   $      11.10
Outstanding at end of year ..............        811,800   $       9.31      1,514,100   $      15.31      1,833,000   $      15.32
Exercisable at end of year ..............        446,000   $      11.51        973,910   $      14.87        562,640   $      12.76
</TABLE>

                                   2000               1999                1998
                                   ----               ----                ----
Weighted-average fair value of
  options granted at premium          -                  -                   -
Weighted-average fair value of
  options granted at-the-money    $3.07              $3.33                $7.26
Weighted-average fair value of
  granted at a discount               -                  -                   -
Weighted-average fair value of
  modifications to options            -                  -                   -

      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 2000, 1999 and 1998: dividend yield of 0.00%;
risk-free interest rate of from 4.64% to 6.67%; an expected life of options
ranging from 5 to 12 years; and a volatility of 166.5%, 45.6% and 30.4% in
fiscal 2000, 1999 and 1998, respectively.

      During fiscal 1997, 159,000 previously granted options were modified to
reduce the exercise price. At July 31, 2000, 10,000 of these options remain
outstanding. 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-27
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.  SHAREHOLDERS' EQUITY (CONTINUED)

Options outstanding as of July 31, 2000 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>
$ 1.00 to $ 7.24 .........................           271,500              4.43   $          3.34            25,700   $          3.93
$ 7.25 to $13.00 .........................           357,800              1.36   $          9.34           297,800   $          9.61
$13.01 to $15.95 .........................            32,500               .19   $         14.33            32,500   $         14.33
$15.96 to $19.63 .........................           150,000              2.37   $         18.95            90,000   $         18.95
                                             ---------------                                       ---------------
$ 7.25 to $19.63 .........................           811,800              2.53   $          9.31           446,000   $         11.51
                                             ===============                                       ===============
</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.

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 2000 and 1999 would approximate the pro forma
amounts below:

<TABLE>
<CAPTION>
                                            AS REPORTED         PRO FORMA         AS REPORTED         PRO FORMA
                                              7/31/00            7/31/00            7/31/99            7/31/99
                                          ---------------    ---------------    ---------------    ---------------
<S>  <C>                                  <C>                <C>                <C>                <C>
SFAS 123 charge ........................  $          --      $       848,600    $          --      $     1,538,265
APB 25 charge ..........................  $       140,000    $          --      $       140,000    $          --
Net income (loss) ......................  $    (5,533,699)   $    (6,242,299)   $   (30,230,347)   $   (31,628,612)
Net income (loss) per common share .....  $         (0.75)   $         (0.84)   $         (4.12)   $         (4.31)
</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
      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.

      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.

                                      F-28
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.  SHAREHOLDERS' EQUITY (CONTINUED)


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, 2000 or 1999.

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 Chairman of the Board leases seven land and building packages to third
parties with whom the Company incurred costs of $501,880, $407,222 and $565,998
in the years ended July 31, 2000, 1999 and 1998, respectively, for revenue
sharing arrangements in connection with the Company's vending operations.

      Since October 1999, the Company has leased the remaining 49% interest in
its Los Angeles facility from the Chairman of the Board (see Footnote 9). In
connection with this lease, the Company paid rents totaling $157,500 to the
Chairman during fiscal year 2000.

      On March 20, 2000, the Company obtained a loan in the principal amount of
$2.5 million from the Chairman of the Board. The loan provided for interest at
8% per annum and was secured by a first lien on the Company's 1999 Federal
income tax refund of approximately $2.8 million. The tax refund was received and
the loan from the Chairman plus a nominal amount of accrued interest was repaid
shortly thereafter.

      A former director of the Company was affiliated with an insurance agency
that provided certain property, casualty and liability insurance to the Company
in fiscal year 1998. The Company paid premiums on policies issued by the
affiliated insurance agency totaling $272,600 during fiscal year 1998. Such
payments amounted to 50.8% in fiscal 1998 of all payments made by the Company to
all insurance agents for such coverage.

                                      F-29
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.  TRANSACTIONS WITH RELATED PARTIES (CONTINUED)

      One of the Company's directors is affiliated with a company from which it
has secured two product licensing agreements, and also acts as a consultant to
the Company in sales, licensing and product development matters. The product
licensing agreements call for the payment of minimum guaranteed royalties, as
well as royalties based on sales of the licensed items over the licensing
periods. The Company made advance payments on the license agreements totaling
$10,000 in fiscal 2000. The Company paid consulting fees to the consultant
totaling $87,125 during fiscal year 2000.

      From April 1999 through August 2000, the Company leased a facility in
Puerto Rico from an executive officer/director of the Company. In connection
with this lease, the Company paid rents totaling $60,000 to the executive
officer during fiscal year 2000.

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,
                                        ---------------------------------
                                           2000        1999       1998
                                        ----------  ---------- ----------
           Interest paid                $5,391,170  $4,377,084 $3,948,834
           Income taxes paid               381,439     602,570  2,565,861

      The Company incurred capital lease and other debt obligations of $0.4
million, $2.4 million and $1.6 million in the years ended July 31, 2000, 1999
and 1998, respectively.

      The Company recorded $700,000 as deferred compensation related to options
to purchase up to 200,000 shares of common stock granted to an officer in
January 1997. The Company recognized $140,000 of compensation expense in each of
fiscal years 2000, 1999 and 1998, and had a balance of $198,333, $338,333 and
$478,333 in unearned compensation as of July 31, 2000, 1999 and 1998,
respectively, related to these options.

      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
expire December 31, 2000.

      In connection with the acquisition of Caribe, 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.

      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.

                                      F-30
<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
2000 and 1999 are presented as follows (in thousands, except per share data).

                                                         2000
                                        ---------------------------------------
                                         FIRST     SECOND     THIRD      FOURTH
                                        QUARTER   QUARTER    QUARTER    QUARTER
                                        -------   -------    -------    -------
Net sales ...........................   $48,035   $27,501    $31,645    $45,908
Gross profit (loss) .................    14,452     9,576      8,728     15,033
Operating income (loss) .............     2,820    (2,105)    (2,981)     2,938
Net income (loss) ...................     1,154    (3,091)    (4,448)       852

Net income (loss) per share - basic .      0.15     (0.42)     (0.60)      0.12
Net income (loss) per share - diluted      0.15     (0.42)     (0.60)      0.12



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

Net income per share - basic ........      0.20     (0.26)     (0.49)     (3.53)
Net income per share - diluted ......      0.20     (0.26)     (0.49)     (3.53)

(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-31
<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.

   10.8  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.

  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).

                                      E-2

<PAGE>
                          INDEX TO EXHIBITS (CONTINUED)

 EXHIBIT
 NUMBER                         DESCRIPTION OF EXHIBITS
 ------- -----------------------------------------------------------------------
  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 (filed as Exhibit 10.16 to Form 10-K for the fiscal year
         ended July 31, 1999), incorporated herein by reference.

  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. (filed
         as Exhibit 10.17 to Form 10-K for the fiscal year ended July 31, 1999),
         incorporated herein by reference.

  10.18  Amendment No. 1 to Loan and Security Agreement dated March 20, 2000 by
         and among Congress Financial Corporation (Southwest), the Company, Ace
         Novelty Co., Inc., Newco Novelty, Inc., and Friends, Food & Games, Inc.
         (filed as Exhibit 10.18 to Form 10-Q for the quarter ended April 30,
         2000, and incorporated herein by reference).

  10.19  Amendment No. 2 to Loan and Security Agreement dated May 31, 2000 by
         and among Congress Financial Corporation (Southwest), the Company, Ace
         Novelty Co., Inc., Newco Novelty, Inc., and Friends, Food & Games, Inc.
         (filed as Exhibit 10.19 to Form 10-Q for the quarter ended April 30,
         2000, and incorporated herein by reference).

  10.20  License Agreement dated July 26, 2000 by and between Warner Bros., a
         division of Time Warner Entertainment, L.P. and the Registrant.

  10.21  Employment agreement dated October 4, 1999, between the Company and
         Richard R. Neitz.

  23.1   Consent of PricewaterhouseCoopers LLP

  23.2   Consent of Ernst & Young LLP

  27     Financial Data Schedule

                                      E-3
<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, 1998 ...................................   $     3,213,653   $     2,173,736   $       125,336   $     5,262,053
Year ended July 31, 1999 ...................................         5,262,053         8,280,760         3,165,141        10,377,672
Year ended July 31, 2000 ...................................        10,377,672           828,470         3,556,343         7,649,799


--------------------------------------------------------------------------------------
*Net of recoveries of $4,175, $30,000, and $56,987 in fiscal 2000, 1999, and 1998, respectively.



Reserves for slow moving inventory:
Year ended July 31, 1998 ...................................   $     1,711,090    $      200,000   $     1,207,350   $       703,740
Year ended July 31, 1999 ...................................           703,740         4,483,128           292,622         4,894,246
Year ended July 31, 2000 ...................................         4,894,247           576,389         2,524,316         2,946,320
</TABLE>

                                      S-1