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

                                    FORM 10-K
(Mark One)

    [X]    Annual Report Pursuant To Section 13 Or 15(d) Of  
           The Securities Exchange Act Of 1934 [FEE REQUIRED]
           For the fiscal year ended JULY 31, 1996

    [ ]    Transition Report Pursuant To Section 13 or 15(d) Of 
           The Securities Exchange Act Of 1934 [NO FEE REQUIRED]
           For the transition period from _________ to _________

                         Commission file number 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 October 24, 1996, 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
$23,208,701. (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 October 24, 1996 was 4,841,100.

                                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.
<PAGE>
                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                  PAGE
 PART I
<S>                                                                                                <C>
ITEM 1.  Business ..............................................................................    2
            General ............................................................................    2
            Business History ...................................................................    2
            Disposition ........................................................................    3
            Acquisition ........................................................................    3
            Business Strategy ..................................................................    4
            Products ...........................................................................    5
            Licensed Products ..................................................................    6
            Non-Licensed Products ..............................................................   11
            Licensing ..........................................................................   11
            Sales, Marketing and Distribution ..................................................   12
            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 ..........................................................................   16
            New Accounting Standards ...........................................................   17
            Seasonality ........................................................................   17
            Risk Factors .......................................................................   17
  ITEM 2.  Properties ..........................................................................   22
  ITEM 3.  Legal Proceedings ...................................................................   22
  ITEM 4.  Submission of Matters to a Vote of Security Holders .................................   22

PART II
  ITEM 5.  Market for Registrant's Common Equity and Related Shareholder Matters ...............   23
            Market Information .................................................................   23
            Dividends and Distributions ........................................................   23
  ITEM 6.  Selected Consolidated Financial Data ................................................   24
  ITEM 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations   25
            General ............................................................................   25
            Results of Operations ..............................................................   27
            Liquidity and Capital Resources ....................................................   29
            Seasonality ........................................................................   31
            Inflation ..........................................................................   31
  ITEM 8.  Financial Statements and Supplementary Data .........................................   31
  ITEM 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure    31

PART III
  ITEM 10.  Directors and Executive Officers of the Registrant .................................   32
  ITEM 11.  Executive Compensation .............................................................   32
  ITEM 12.  Security Ownership of Certain Beneficial Owners and Management .....................   32
  ITEM 13.  Certain Relationships and Related Transactions .....................................   32

PART IV
  ITEM 14  Exhibits, Financial Statement Schedules, and Reports on Form 8-K ....................   32
  SIGNATURES ...................................................................................   33
  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
      STATEMENT SCHEDULE .......................................................................   F-1
  INDEX TO EXHIBITS ............................................................................   E-1
</TABLE>
                                        1
<PAGE>
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 SUCCESSFUL INTEGRATION OF
THE OPERATIONS OF ACE NOVELTY CO., INC. ("ACE"), THE ASSETS OF WHICH WERE
ACQUIRED BY THE COMPANY IN JUNE 1996, COMPETITIVE AND ECONOMIC FACTORS, PRICE
CHANGES BY COMPETITORS, RELATIONSHIPS WITH LICENSORS, ABILITY TO MANAGE GROWTH,
ABILITY TO SOURCE PRODUCTS, INTERNATIONAL TRADE RELATIONS, MANAGEMENT OF QUARTER
TO QUARTER RESULTS, INCREASES IN COSTS OF RAW MATERIALS, TIMING OF TECHNOLOGICAL
ADVANCES BY THE COMPANY AND ITS COMPETITORS, LACK OF ACCEPTANCE BY CONSUMERS OF
NEW PRODUCTS, AND THE OTHER FACTORS DISCUSSED BELOW IN "RISK FACTORS", ELSEWHERE
HEREIN. UPDATED INFORMATION WILL BE PERIODICALLY PROVIDED BY THE COMPANY AS
REQUIRED BY THE SECURITIES EXCHANGE ACT OF 1934.

        Play-By-Play Toys & Novelties, Inc. (the "Company") designs, develops,
markets and distributes stuffed toys and sculpted toy pillows based upon its
licenses for children's entertainment characters and corporate trademarks, and
non-licensed stuffed toys. The Company also markets and distributes a broad line
of novelty items. The Company markets and distributes its products in both
amusement and retail markets and is the leading supplier of stuffed toys and
novelty items to the 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

        During the first fiscal quarter of 1995, the Company commenced selling
its originally developed Play-Faces(R) line of sculpted toy pillows shaped in
the facial likenesses of licensed animated characters. The Play-Faces(R) line is
based upon popular, classic characters, including The Walt Disney Company's
animated characters, Time Warner Entertainment Company, L.P.'s LOONEY TUNES,
ANIMANIACS, and SPACE JAM THE MOTION PICTURE, Childrens Television Workshop's
SESAME STREET CHARACTERS, Paws, Incorporated's GARFIELD(TM) and new characters
developed and introduced by leading entertainment companies, such as the ones
presented in The Walt Disney Company's animated films TOY STORY, THE HUNCHBACK
OF NOTRE DAME, and 101 DALMATIANS. Play-Faces(R) are sold primarily to retail
customers. The Company believes its Play-Faces(R) line is a distinct product
category which enhances its ability to acquire additional character and
trademark licenses. Play-Faces(R) products accounted for approximately 25.7% of
the Company's net sales for fiscal 1996.

        The Company develops its licensed stuffed toys based principally on
popular, classic characters such as Time Warner Entertainment Company, L.P.'s
LOONEY TUNES, ANIMANIACS, and characters featured in SPACE JAM THE MOTION
PICTURE, Hanna-Barbera's THE FLINTSTONES(TM) and THe Hearst Corporation's King
Features' POPEYE(TM) and on popular, classic trademark licenses such As The
Coca-Cola Company's COCA-COLA(R) brand Plush Toys, including the COCA-COLA POLAR
BEAR, anD Harley-Davidson Motor Company's HARLEY HOG(TM). The Company develops a
licensed stuffed toy By identifying a character or trademark license, designing
the product and a prototype, and manufacturing the products through third party
manufacturers following approval by the licensor. 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's non-licensed products
include traditional stuffed toys in various sizes and novelty items such as
low-priced plastic toys and games used primarily as redemption prizes by its
amusement customers. For fiscal 1996, net sales of licensed products (including
Play-Faces(R)) and non-licensed products accounted for approximately 58.2% and
37.0%, respectively, of the Company's net sales. In addition, the Company has
vending operations, which accounted for approximately 4.6% of net sales during
the same period.

                                       2
<PAGE>
        The Company has a diversified base of customers within the amusement and
retail distribution channels. Amusement customers, which accounted for
approximately 63.9% of net sales for fiscal 1996, include theme parks such as
Six Flags, Busch Gardens and SeaWorld, family entertainment centers such as Tilt
and Namco, and carnivals and state fairs. Retail customers, which accounted for
approximately 31.3% of net sales for the same period, include mass merchandisers
such as Wal-Mart, Kmart and Target, and specialty retailers such as Toys "R" Us
and Kay Bee Toy. No one customer accounted for more than 10% of net sales for
fiscal 1996.

DISPOSITION

        In March 1996, the Company sold all of the stock of Restaurants
Universal Espana, S.A. ("Restaurants Universal"), its European subsidiary that
operated two restaurants in Spain, to an unrelated third party, for 205,000,000
Spanish pesetas, or approximately U.S. $1.6 million. The sale resulted in a
non-cash, non-recurring charge against earnings of approximately $239,000 and a
loss from discontinued operations of approximately $145,000, for a total loss
from discontinued operations of $384,000 in fiscal 1996. The Consolidated
Statements of Operations for the years ended July 31, 1994 and 1995 have been
restated to include the Company's former restaurant business as discontinued
operations. The buyer paid approximately $80,000 in cash, and the Company
financed the balance of the sales price of approximately $1.5 million with the
acceptance of a non-interest bearing note from the buyer which calls for monthly
principal payments based on the greater of six percent of net annual sales of
certain of the buyer's restaurants, including the restaurants sold by the
Company, or a series of minimum monthly payments over a period of eight years.
The note balance, net of imputed interest of approximately $450,000 calculated
at a rate of 10%. In the event that the buyer of the stock of Restaurants
Universal fails to meet three months of agreed-upon installment payments,
whether alternated or consecutive, the Company may cancel the contract, with all
of the stock reverting back to the Company.

ACQUISITION

        In June 1996, the Company acquired substantially all of the operating
assets, business operations and facilities (the "Acquisition") of Ace. The
purchase price of approximately $45.1 million consists of approximately $39.6
million in cash, $2.9 million in subordinated debt, approximately $2.4 million
in related direct costs, and approximately $0.2 million in the form of warrants
issued by the Company to the former owners of Ace ("Sellers") to purchase up to
35,000 shares of the Company's Common Stock, commencing one year from the date
of acquisition. The Acquisition has been accounted for using the purchase
method. The Company recorded approximately $8.9 million of goodwill, which is
the excess of the total purchase price plus related direct costs over the fair
value of net assets acquired. Included in the calculation of net assets is
approximately $3.3 million in certain trade payables and accrued liabilities,
which the Company assumed. This goodwill is being amortized on a straight-line
basis over a 40-year period. The final determination of the purchase price and
all prorations and adjustments between the Company and the Sellers have not be
resolved to date.

        The debt incurred by the Company in connection with the Acquisition
consisted of (i) approximately $34.0 million in revolving credit and term loans
under the Revolving Credit Term Loan with Letter of Credit Facility dated June
20, 1996, which has a maximum aggregate commitment of $65 million among The
Chase Manhattan Bank, formerly Chemical Bank, (the "Bank") as agent, Heller
Financial, Inc. and Texas Commerce Bank N.A. (the "Lenders"), with the Company,
Ace Novelty Acquisition Co., Inc. ("ANAC") and Newco Novelty, Inc., a wholly
owned subsidiary of ANAC, as borrowers (ii) a $3.0 million subordinated loan
from the Company's Chairman of the Board and Chief Executive Officer, Arturo
Torres, and (iii) a $2.9 million subordinated loan from Sellers. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liability and Capital Resources."

                                       3
<PAGE>
        Included in the Acquisition was substantially all of Ace's accounts
receivable, inventory, property, equipment, real estate, intellectual property
and certain other assets. The real estate acquired by the Company in connection
with the acquisition included the land and building that comprise Ace's
warehouse and distribution center in Chicago, Illinois, and an undivided 51%
interest in the land and building which comprised Ace's warehouse and
distribution center in Los Angeles, California. The Company has leased the
remaining undivided 49% interest in the Los Angeles facility as well as the
Bellevue, Washington warehouse and distribution center from affiliates of the
Sellers. The lease on Burnaby, British Columbia, Canada warehouse and
distribution center, as well as leases on certain other properties situated
throughout the United States previously operated by the Sellers, were assigned
to and assumed by the Company in connection with the Acquisition. The Company
intends to use such facilities and equipment substantially in the same manner as
they were used by Ace. The intellectual property acquired from Ace consisted
principally of the trademarks and logos of "Ace" and "Acme." As a condition of
closing, Ace was required to obtain consents to assignment from Warner Bros.
relative to LOONEY TUNES licenses for the mass market, amusement industry and
the SPACE JAM THE MOTION PICTURE, an animated/live action motion picture
starring basketball superstar Michael Jordan and the LOONEY TUNES characters. In
addition, Ace agreed to use its reasonable best efforts to obtain consents to
assignment covering the remaining licenses and other contracts acquired from Ace
in connection with the Acquisition.

BUSINESS STRATEGY

        The Company believes its principal strengths include its (i) diverse
customer base, (ii) lack of dependence upon any one product, license or
distribution channel, (iii) position as the leading supplier to the amusement
industry, (iv) emphasis on licenses for popular, classic characters and
trademarks and new characters introduced by leading entertainment companies, and
(v) demonstrated ability to develop new licensed products such as the
COCA-COLA(R) brand Plush Toys, including the COCA-COLA POLAR BEAR, and
Harley-Davidson Motor Company's HARLEY HOG(TM) and new product categories such
as PLAY-FACES(R).

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 longer life cycles than products developed by many traditional
toy companies. 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 licensed product line prevents it from becoming overly dependent on a
single product or customer.

DEVELOPMENT OF PLAY-FACES(R) AND OTHER PRODUCT CATEGORIES. The Company believes
that its PLAY-FACES(R) product line represents a distinct product category which
enhances 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 which are unique, have broad
end-consumer appeal, are competitively priced and which are anticipated to have
longer life cycles by identifying previously undeveloped or under developed
products or product categories which it then endeavors to match with popular,
classic licensed characters and/or trademarks. The Company believes it has
successfully implemented this approach with PLAY-FACES(R) and Harley-Davidson
Motor Company's HARLEY HOG(TM).

INTERNATIONAL EXPANSION. The Company plans to increase its international sales,
primarily in Western Europe, in both the amusement and retail channels through
the Company's European distribution facility and independent distributors. The
Company believes that markets outside the United States present significant
opportunities and are generally less competitive than the United States market.
The Company commenced toy distribution and sales operations in Europe in August
1993.

                                       4
<PAGE>
RETAIL MARKET PENETRATION. The Company intends to broaden its retail
distribution both domestically and internationally. Through its licensing and
new product development strategies, the Company plans to further penetrate the
retail market by developing and introducing new products and product categories.

AMUSEMENT MARKET PENETRATION. With the acquisition of Ace, the Company believes
that it has become the leading supplier of stuffed toys and novelty items to the
amusement market. The Company believes that this market is less susceptible to
changing consumer preferences than the retail market. The Company believes that
its broad and continually updated line of licensed and non-licensed stuffed toys
and novelty items, its purchasing power and its reputation as a leading
amusement supplier provide the Company with a competitive advantage over many
other suppliers to this market.

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:

                                                      Year Ended July 31,
                                               --------------------------------
                                                1994         1995         1996
                                               ------       ------       ------
                                                         (In millions)
Licensed products
    Stuffed toys ........................      $ 10.4       $ 14.6       $ 24.2
    Play-Faces(R) .......................        --            7.6         19.0
                                               ------       ------       ------
                                                 10.4         22.2         43.2
                                               ------       ------       ------
Non-licensed products
     Stuffed toys .......................        16.4         17.6         22.1
     Novelty items ......................         1.2          3.8          5.4
                                               ------       ------       ------
                                                 17.6         21.4         27.5
                                               ------       ------       ------
        Total ...........................      $ 28.0       $ 43.6       $ 70.7
                                               ======       ======       ======

                                              (As a percentage of net toy sales)
Licensed products
    Stuffed toys ........................        37.0%        33.5%        34.2%
    Play-Faces(R) .......................         0.0%        17.5%        26.9%
                                               ------       ------       ------
                                                 37.0%        51.0%        61.1%

Non-licensed products
     Stuffed toys .......................        58.6%        40.3%        31.2%
     Novelty items ......................         4.4%         8.7%         7.7%
                                               ------       ------       ------
                                                 63.0%        49.0%        38.9%
                                               ------       ------       ------
        Total ...........................       100.0%       100.0%       100.0%
                                               ======       ======       ======

                                       5
<PAGE>
LICENSED PRODUCTS

        In developing its licensed products, the Company seeks to take advantage
of media exposure and goodwill accompanying its licensed characters and
trademarks as well as the advertising and promotional expenses incurred by its
licensors. Net sales of licensed products were approximately $22.2 million and
approximately $43.2 million (46.6% and 58.2% of net sales) during fiscal 1995
and 1996, respectively. The following chart sets forth certain of the Company's
character and trademark licenses:
<TABLE>
<CAPTION>
LICENSOR                                CHARACTER OR TRADEMARK LICENSE        PRODUCT; LICENSED AREA
--------                                ------------------------------        ----------------------
<S>                                     <C>                                   <C>
THE WALT DISNEY COMPANY                 DISNEY STANDARD CHARACTERS (MICKEY    PLAY-FACES(R) AND      
                                        MOUSE, MINNIE MOUSE, DONALD DUCK,     BOOKENDS; UNITED STATES
                                        DAISY DUCK, HUEY, DUEY, LOUIE, PLUTO  CANADA AND SPAIN/      
                                        AND GOOFY)                            EUROPEAN UNION         
                                                                              ("E.U.").              
                                                                              STUFFED TOYS AND       
                                                                              BACKPACKS; SPAIN AND   
                                                                              PORTUGAL               
                                                                                                     
                                        DISNEY'S WINNIE THE POOH (WINNIE THE  PLAY-FACES(R);         
                                        POOH, TIGGER, PIGLET AND EEYORE)      UNITED STATES, CANADA  
                                                                              AND SPAIN/E.U.         
                                                                              STUFFED TOYS AND       
                                                                              BACKPACKS; SPAIN AND   
                                                                              PORTUGAL               
                                                                                                     
                                        THAT'S DONALD                         PLAY-FACES(R);         
                                                                              SPAIN/E.U.             
                                                                              STUFFED TOYS AND       
                                                                              BACKPACKS; SPAIN AND   
                                                                              PORTUGAL               
                                                                                                     
                                        101 DALMATIANS                        PLAY-FACES(R) AND WALL 
                                                                              HOOKS; UNITED STATES   
                                                                              STUFFED TOYS, AND      
                                                                              BACKPACKS; UNITED      
                                                                              STATES, CANADA,        
                                                                              SPAIN AND PORTUGAL.    
                                                                                                     
                                        TOY STORY                             PLAY-FACES(R);         
                                                                              UNITED STATES AND      
                                                                              CANADA                 
                                                                                                     
                                        THE HUNCHBACK OF NOTRE DAME           PLAY-FACES(R);         
                                                                              UNITED STATES AND      
                                                                              CANADA                 
</TABLE>

                                       6
<PAGE>
<TABLE>
<CAPTION>
LICENSOR                                 CHARACTER OR TRADEMARK LICENSE                PRODUCT; LICENSED AREA
--------                                 ------------------------------                ----------------------
<S>                                      <C>                                           <C>
TIME WARNER ENTERTAINMENT COMPANY,       LOONEY TUNES (BUGS BUNNY(TM),                 PLAY-FACES(R), STUFFED        
L.P.                                     SYLVESTER(TM), TWEETY(TM), PORKY PIG(TM),     TOYS, BOOKENDS,               
                                         DAFFY DUCK(TM), SPEEDY GONZALES(TM), WILE     INFLATABLE FURNITURE      
                                         E. COYOTE(TM), ROAD RUNNER(TM), ELMER         AND NOVELTY ITEMS;            
                                         FUDD(TM), YOSEMITE SAM(TM), MARVIN THE        UNITED STATES, CANADA,        
                                         MARTIAN(TM), TASMANIAN DEVIL(TM)  AND PEPE    MEXICO, ARGENTINA,            
                                         LE PEW(TM))                                   BRAZIL, CHILE AND             
                                                                                       WESTERN EUROPE.            
                                                                                       BACKPACKS, FULL BODY          
                                                                                       TAFFETA AND HIP-PACKS;        
                                                                                       WESTERN EUROPE.               
                                                                                       STUFFED TOYS; SPAIN AND       
                                                                                       WESTERN EUROPE.               
                                                                                       HAPPY ENDINGS,                
                                                                                       INFLATE-A-PALS, AND           
                                                                                       HOOKS;                        
                                                                                       WESTERN EUROPE, AFRICA,       
                                                                                       MIDDLE EAST, AND ISRAEL       
                                                                                                                     
                                         ANIMANIACS                                    PLAY-FACES(R) AND STUFFED     
                                                                                       TOYS;                         
                                                                                       UNITED STATES, MEXICO,     
                                                                                       ARGENTINA, BRAZIL,            
                                                                                       CHILE AND WESTERN             
                                                                                       EUROPE.                       
                                                                                       PLAY-FACES(R), BACKPACKS,     
                                                                                       FULL BODY TAFFETA AND         
                                                                                       HIP-PACKS; WESTERN            
                                                                                       EUROPE.                    
                                                                                       INFLATABLES, BASKETBALLS      
                                                                                       AND VINYL BALLS; UNITED       
                                                                                       STATES                        
                                                                                                                     
                                        BATMAN(C) DC COMICS 1995                       PLAY-FACES(R) AND STUFFED     
                                                                                       TOYS; UNITED STATES AND       
                                                                                       WESTERN EUROPE.            
                                                                                       BACKPACKS, FULL BODY          
                                                                                       TAFFETA AND HIP-PACKS;        
                                                                                       WESTERN EUROPE             
                                                                                                                  
                                         SPACE JAM THE MOTION PICTURE                  PLAY-FACES(R) AND STUFFED  
                                                                                       TOYS AND NOVELTY ITEMS;    
                                                                                       UNITED STATES AND          
                                                                                       CANADA.                    
                                                                                       STUFFED TOYS; SPAIN AND    
                                                                                       PORTUGAL                   
                                                                                                                  
                                         SUPERMAN                                      PLAY-FACES(R);             
                                                                                       EUROPE                     
</TABLE>

                                       7
<PAGE>
<TABLE>
<CAPTION>
 LICENSOR                               CHARACTER OR TRADEMARK LICENSE        PRODUCT; LICENSED AREA
 --------                               ------------------------------        ----------------------  
<S>                                     <C>                                   <C>
 HARLEY-DAVIDSON MOTOR COMPANY          HARLEY-DAVIDSON(R) AND HARLEY HOG(TM) STUFFED TOYS; UNITED
                                                                              STATES AND CANADA

 THE COCA-COLA COMPANY                  COCA-COLA(R) AND COKE(R)              PLAY-FACES(R),
                                                                              INFLATABLE FURNITURE
                                                                              AND STUFFED
                                                                              TOYS; UNITED STATES,
                                                                              U.S. TERRITORIES AND
                                                                              POSSESSIONS, ARGENTINA,
                                                                              BRAZIL, AUSTRALIA,
                                                                              CANADA, NEW ZEALAND
                                                                              AND EUROPE.
                                                                              NOVELTY ITEMS,
                                                                              INFLATE-A-PALS, HAPPY
                                                                              ENDINGS,
                                                                              BOOKENDS, BACKPACKS
                                                                              AND HOOKS; EUROPE

TURNER HOME ENTERTAINMENT, INC.         THE FLINTSTONES(TM), YOGI BEAR(TM),   STUFFED TOYS
                                        SCOOBY-DOO(TM), TOP CAT(TM), MAGILLA  AND NOVELTY ITEMS;
                                        GORILLA(TM), HUCKLEBERRY HOUND(TM)    UNITED STATES, CANADA,
                                        AND QUICK DRAW MCGRAW(TM)             MEXICO, LATIN AMERICA
                                                                              AND WESTERN EUROPE

                                        TOM AND JERRY                         PLAY-FACES(R); STUFFED
                                                                              TOYS AND BOOK ENDS;
                                                                              WESTERN EUROPE.
                                                                              HOOKS AND
                                                                              INFLATE-A-PALS;
                                                                              SPAIN

PAWS, INCORPORATED                       THE GARFIELD(TM) FAMILY(GARFIELD(TM) PLAY-FACES(R) ; UNITED
                                         AND ODIE(TM))                        STATES, CANADA, U.S.
                                                                              TERRITORIES AND
                                                                              POSSESSIONS AND WESTERN
                                                                              EUROPE.
                                                                              BACKPACKS;
                                                                              UNITED STATES AND
                                                                              CANADA.
                                                                              STUFFED TOYS, HAPPY
                                                                              ENDINGS,
                                                                              INFLATE-A-PALS, HOOKS
                                                                              AND FULL
                                                                              BODY TAFFETA; EUROPE
</TABLE>
                                       8
<PAGE>
<TABLE>
<CAPTION>
LICENSOR                                CHARACTER OR TRADEMARK LICENSE        PRODUCT; LICENSED AREA
--------                                ------------------------------        ----------------------
<S>                                     <C>                                   <C>
THE HEARST CORPORATION                  BETTY BOOP(TM) AND POPEYE(TM)         PLAY-FACES(R), STUFFED
                                                                              TOYS AND NOVELTY ITEMS;
                                                                              UNITED STATES, MEXICO,
                                                                              CANADA, CHILE,
                                                                              ARGENTINA, BRAZIL AND
                                                                              WESTERN EUROPE

CHILDREN'S TELEVISION WORKSHOP          SESAME STREET CHARACTERS              PLAY-FACES(R),
                                                                              BOOKENDS, INFLATABLE
                                                                              FURNITURE AND WALL
                                                                              HOOKS; UNITED STATES

                                        BIG BAG CHARACTERS                    PLAY-FACES(R);
                                                                              UNITED STATES

SCHOLASTIC PRODUCTIONS, INC.            GOOSEBUMPS                            PLAY-FACES(R),
                                                                              ROOM DECOR AND NOVELTY
                                                                              ITEMS; UNITED STATES

JIM HENSON PRODUCTIONS, INC.            CLASS MUPPETS, MUPPETS TONIGHT        PLAY-FACES(R);
                                                                              UNITED STATES

MGM/UA LICENSING AND MERCHANDISING,     PINK PANTHER(TM)                      PLAY-FACES(R), STUFFED
A DIVISION OF METRO-GOLDWYN-MAYER                                             TOYS AND NOVELTY ITEMS;
INC.                                                                          UNITED STATES AND
                                                                              CANADA

PROMO VIP, S.A.                         PINK PANTHER(TM)                      PLAY-FACES(R);
                                                                              WESTERN EUROPE

INFORMATICA SERVICIOS Y PRODUCTOS, S.A. REAL MADRID CLUB DE FUTBOL(R)         STUFFED TOYS; UNLIMITED
                                                                              LICENSE AREA

INFORMATICA SERVICIOS Y PRODUCTOS, S.A. REAL MADRID CLUB DE FUTBOL(R)         STUFFED TOYS;
                                                                              EUROPE

REAL OVIEDO S.A.D.                      REAL OVIEDO S.A.D                     STUFFED TOYS;
                                                                              EUROPE

VALENCIA CLUB DE FUTBOL, S.A.D.         VALENCIA CLUB DE FUTBOL(R)            STUFFED TOYS;
                                                                              EUROPE

REAL BETIS BALOMPIE S.A.D.              REAL BETIS BALOMPIE(R)                STUFFED TOYS;
                                                                              EUROPE
</TABLE>
                                       9
<PAGE>
<TABLE>
<CAPTION>
LICENSOR                                CHARACTER OR TRADEMARK LICENSE        PRODUCT; LICENSED AREA
--------                                ------------------------------        ----------------------    
<S>                                     <C>                                   <C>
BRB INTERNACIONAL, S.A.                 MORT AND PHIL                         STUFFED TOYS;
                                                                              EUROPE

                                        REAL ZARAGOZA, S.A.D.                 STUFFED TOYS;
                                                                              EUROPE

SEVILLA FUTBOL CLUB, S.A.D.             SEVILLA FUTBOL CLUB(R)                STUFFED TOYS; 
                                                                              EUROPE      
                                                                                            
REAL CLUB DEPORTIVO DE LA CORUNA,       DEPORTIVO DE LA CORUNA                STUFFED TOYS; 
S.A.D.                                                                        EUROPE        
                                                                                           
REAL SOCIEDAD, S.A.D.                   REAL SOCIEDAD                         STUFFED TOYS; 
                                                                              EUROPE        
                                                                                            
REAL SPORTING DE GIJON, S.A.D.          SPORTING DE GIJON CLUB                STUFFED TOYS;
                                                                              EUROPE        
                                                                                            
ATLETICO DE MADRID, S.A.D.              ATLETICO DE MADRID                    STUFFED TOYS; 
                                                                              EUROPE        
                                                                                           
ESPANYOL DE BARCELONA, S.A.D.           R.C.D. ESPANYOL                       STUFFED TOYS; 
                                                                              EUROPE        
</TABLE>
        STUFFED TOYS. The Company designs, develops, markets and distributes  
over 650 different stuffed toys based upon its licenses for children's
entertainment characters and corporate trademarks. Generally, 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 newly-acquired licenses for
commercially established characters and trademarks. To date, the Company's most
successful licensed stuffed toy products have been the Coca-Cola(r) brand
product line, which includes the Coca-Cola(r) Plush Polar Bear. 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 $20. The Company's products based on
trademarks licensed by the Coca-Cola Company, accounted for approximately 12.0%,
16.5% and 13.8% of net sales during fiscal 1994, 1995 and 1996, respectively. In
addition, the licensed products for LOONEY TUNES' CHARACTERS and Disney
characters accounted for 16.4% and 11.4% of the Company's net sales in fiscal
1996.

        PLAY-FACES (R). During the first quarter of fiscal 1995, the Company
began selling its PLAY-FACES(R) line of sculpted toy pillows shaped in the
facial likenesses of licensed animated characters. PLAY-FACES(R) are sold
primarily to retail customers and have a suggested retail price of under $20.
The Company believes its PLAY-FACES(R) line is a distinct product category which
has enhanced its ability to acquire additional character and trademark licenses.
The Company has expanded its PLAY-FACES(R) line by adding different sizes of
PLAY-FACES(R) products and securing additional character licenses. PLAY-FACES(R)
products accounted for approximately 25.7% of the Company's net sales for fiscal
1996. The Company's initial introduction of the PLAY-FACES(R) line, incorporated
relatively few character licenses. based on the positive response of its
customers to the PLAY-FACES(R) line, the Company has secured additional
character licenses including licenses from the Walt Disney Company and Warner
Brothers' LOONEY TUNES, Children's Television Workshop, which includes the
Sesame Street Characters, and Jim Henson Productions, Inc., which includes the
Class Muppets and Muppets Tonight characters.

                                       10
<PAGE>
NON-LICENSED PRODUCTS

        The Company markets and distributes a broad line of non-licensed
products, including stuffed toys and novelty items. The Company's non-licensed
product line includes stuffed toys designed and developed by the Company,
stuffed toy product lines selected and assembled by the company from the product
lines of third party manufacturers and novelty items purchased from third party
manufacturers. Net sales of non-licensed products were approximately $21.4
million and $27.5 million (approximately 42.5% and 37.0% of net sales) during
fiscal 1995 and 1996, respectively.

        STUFFED TOYS. The Company designs, develops, markets and distributes a
broad line of non-licensed stuffed toys, consisting principally of generic
animal characters and a broad variety of seasonal and holiday characters. The
Company's non-licensed stuffed toys are principally marketed to the amusement
market as redemption prizes. The Company frequently redesigns, by color and
otherwise, its product line. In recent periods, sales of non-licensed stuffed
toys have decreased as a percentage of total net toy sales primarily due to the
Company's decision to focus its working capital on the growth of its licensed
products and novelty item sales. No single non-licensed stuffed toy accounted
for more than 10% of the Company's net sales during fiscal 1995 or 1996.

        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 principally 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.
For example, in response to changing customer demand, the Company is now
supplying hard candy to amusement customers for use as redemption prizes. For
the fiscal year ended July 31, 1996, sales of candy were not significant. 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 1996.

LICENSING

        Approximately 31.9%, 46.6% and 58.2% of the Company's net sales in
fiscal 1994, 1995 and 1996, respectively, were derived from product lines based
on entertainment character or corporate trademark licenses. Of the net sales in
fiscal 1996, the Company's products based on trademarks licensed by the
Coca-Cola Company accounted for 13.8%, licensed products for LOONEY TUNES'
characters accounted for 16.4% and Disney characters accounted for 11.4%. The
Company's licenses generally have terms of one to three years and permit sales
only in certain geographic territories. The Company's licenses restrict the sale
of licensed products to certain markets such as retail, amusement or gift. All
of the Company's material licenses are non-exclusive. The Company emphasizes
licenses that permit the Company to market toys based on characters or
trademarks which develop their own popular identity, often through exposure in
television programs, movies, cartoons and comic books and, in the case of
popular, classic characters, often through exposure over many years. Generally,
each of the Company's license agreements requires the Company to obtain approval
of the Company's third party manufacturer and approval of the product from the
licensor. Certain of the company's license agreements also require the Company
to carry specified types and amounts of insurance; however, such insurance
requirements are within the limits carried by the Company in the ordinary course
of business and, therefore, the Company incurs no significant incremental cost
to comply with such insurance requirements. Certain of the Company's license
agreements require licensor approval prior to merger, reorganization, certain
stock sales, certain management changes or any assignment of the license.

        The acquisition of licenses typically requires the payment of
non-refundable advances and/or guaranteed minimum royalties, which typically
range from 7% to 20% of sales of the related product. As of July 31, 1996,
minimum future guaranteed payments by the Company under license agreements
aggregated approximately $7.2 million. At July 31, 1996, guaranteed payments
remaining under any individual license

                                       11
<PAGE>
agreement did not account for more than 15% of the aggregate payments at such
date. 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. The Company believes that it maintains
good working relationships with its licensors.

        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 character in a timely manner. A determination to acquire a
character license 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, the success of the Company's character licensing program is dependent
upon the ability of management to acquire licenses and to develop the
corresponding products in a timely manner.

SALES, MARKETING AND DISTRIBUTION

        The Company markets and distributes its products domestically and
internationally to a diverse customer base within the amusement and retail toy
markets. The following table sets forth information concerning the Company's
domestic and international net toy sales (which do not include vending sales) by
distribution channel. Sales by the domestic division, including export sales,
are considered domestic sales. The export sales for fiscal 1994, 1995 and 1996
were approximately $1.1 million, $2.0 million, and $3.7 million, respectively.
Sales by the Spanish toy subsidiary are considered international sales.

                                                       Year Ended July 31,
                                                   ----------------------------
                                                    1994       1995       1996 
                                                   ------     ------     ------
                                                           (In millions)
Domestic toy sales:
     Retail ...................................    $  3.2     $ 10.4     $ 20.8
     Amusement ................................      22.9       26.8       40.8
                                                   ------     ------     ------
                                                     26.1       37.2       61.6
                                                   ------     ------     ------
International toy sales:
     Retail ...................................       0.7        1.6        2.4
     Amusement ................................       1.2        4.8        6.7
                                                   ------     ------     ------
                                                      1.9        6.4        9.1
                                                   ------     ------     ------
        Total .................................    $ 28.0     $ 43.6     $ 70.7
                                                   ======     ======     ======

                                              (As a percentage of net toy sales)
Domestic toy sales:
     Retail ...................................      11.4%      23.9%      29.4%
     Amusement ................................      81.8%      61.4%      57.7%
                                                   ------     ------     ------
                                                     93.2%      85.3%      87.1%
                                                   ------     ------     ------
International toy sales:
     Retail ...................................       2.5%       3.8%       3.4%
     Amusement ................................       4.3%      10.9%       9.5%
                                                   ------     ------     ------
                                                      6.8%      14.7%      12.9%
                                                   ------     ------     ------
        Total .................................     100.0%     100.0%     100.0%
                                                   ======     ======     ======

        DOMESTIC SALES. The Company's domestic sales are to (i) amusement
customers including theme parks such as Six Flags, Busch Gardens and SeaWorld,
family entertainment centers such as Tilt and Namco, carnivals, state fairs and
arcade operations, and (ii) retail customers including mass merchandisers such
as Wal-Mart, Kmart and Target and specialty retailers such as Toys "R" Us and
Kay Bee Toy. During fiscal 1994, 1995 and 1996, no domestic customer accounted
for more than 10% of net sales to domestic customers.

                                       12
<PAGE>
        The Company markets its products to amusement and retail customers in
the United States through 65 salaried and commissioned in-house salespersons and
through 12 commissioned independent sales representatives. The Company's
in-house and independent sales representatives generally utilize product
samples, catalogs, brochures and other promotional materials to market the
Company's products at trade shows, through on-site visits to customers and
through customer visits to the Company's showrooms. The Company maintains
domestic product showrooms in San Antonio, Texas; New York, New York; Bellevue,
Washington; and Miami, Florida; where it displays its amusement and retail
product lines. The Company's product catalogs and brochures are designed and
developed in-house. Senior management of the Company 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 1996.

        The Company distributes its products from its San Antonio, Texas; Los
Angeles, California; Brooklyn, New York; Chicago, Illinois; Miami, Florida;
Bellevue, Washington; and Burnaby, British Columbia, Canada distribution
facilities and arranges direct shipment from the Far East to its larger retail
customers. During the third quarter of fiscal 1996, the Company established an
office in Hong Kong to enhance its product development and purchasing
capabilities, centralize quality control and expand its vendor base in the Far
East. The Company currently has four employees and one independent consultant at
the Hong Kong office. The Company's retail customers are among the largest toy
retailers in the United States. Due to their purchasing volumes and desire to
minimize inventory risk, these retailers are increasingly requiring suppliers,
including the Company, to maintain more of the inventory on hand domestically.
Accordingly, the Company is participating in the electronic data interchange
("EDI") programs with Wal-Mart, Target, Sears and Toys "R" Us and is testing the
EDI programs with Kmart and Spencer Gifts. The Company plans to participate in
EDI programs of several of its other major retail customers. The Company has
acquired the necessary software programs to participate in EDI programs with its
customers. To participate with additional customers, the Company notifies the
customer(s) of its desire to participate, and, upon the successful exchange of
test data, the Company seeks approval to become an EDI participant with the
customer. No fees or other commitments are required to participate. The Company
believes that this participation will allow the Company to monitor store
inventory levels, schedule production to meet anticipated reorders and maintain
sufficient inventory levels to both serve its customers and better manage its
inventory. 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.

        Generally, the Company does not sell any of its products on consignment
and accepts returns only for defective merchandise. In certain instances, where
retailers are unable to resell the quantity of products which they have ordered
from the Company, the Company may, in accordance with industry practice, assist
retailers to enable them in selling such excess inventory by offering discounts
and other concessions. Returns, concessions and canceled orders have
historically been immaterial.

        INTERNATIONAL SALES. The Company began its international expansion with
the opening of its distribution facility in Spain in August 1993. The Company's
principal international customers are located in Spain, the United Kingdom,
France, Benelux, Italy, Germany, Portugal, Israel, Scandinavia, Ireland and
Greece. The Company has also commenced distribution to Eastern European
countries. Amusement customers include theme parks such as Port Aventura and
Monte Tibidabo in Spain and Alton Towers, H. B. Leisure and Chessington Park in
the United Kingdom, and carnivals, fairs and arcade operations. Retail customers
include mass merchandisers such as J-Sainsbury, Tecto, British Homes Stores,
Aucham, Alcamp, Toys "R" Us, El Corte Ingles, Hipercor and Pryca and specialty
retailers.

        The Company markets its products to amusement and retail customers in
Europe through twelve independent commissioned sales representatives located in
Spain and through thirteen independent distributors located in the United
Kingdom, France, Benelux, Italy, Germany, Portugal, Malta, Ireland and Greece,
each of which markets products principally within the country in which it is
located. Foreign 

                                       13
<PAGE>
independent distributors typically retain their own sales representatives. The
Company maintains a product showroom in Valencia, Spain to display its European
product line and the Company's independent distributors maintain product
showrooms to display the Company's products.

        The Company distributes its amusement and retail products to European
customers through its Company-operated facility in Spain and through independent
distributors' facilities located in the United Kingdom, Benelux, Italy, Germany,
Belgium, Hungary, Israel and Portugal. The Company's international product line
generally includes its products offered in the United States. The Company also
offers products based upon licenses from domestic licensors which are exclusive
to the European market and licenses from foreign licensors such as certain major
professional soccer teams in Europe.

DESIGN AND DEVELOPMENT

        The Company relies on its senior management personnel and its marketing
department to target licensing opportunities and its product development
department to design and develop additions to its product line. The Company
typically drafts initial product drawings or produces toy concept models
in-house and currently works with designers and artists employed by various
third party manufacturers to create renderings of its products. The Company
anticipates relocating its sample design department from Bellevue, Washington to
San Antonio, Texas in the near future. This relocation will enable the Company
to expedite the approval of licensed products from licensors by performing
in-house the creation of certain product renderings. Licensors usually retain
the right to approve the licensed products being marketed by the Company. To
date, the Company has experienced little difficulty in obtaining licensor
approval of these products. The Company's marketing department also designs
product packaging and promotional materials. To minimize some of the risk
associated with introducing new products, the Company normally solicits the
reactions of select customers to working models 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, to manufacture its stuffed
toy products and Play-Faces(R) products. The Company's novelty items are
manufactured by third parties located in China, Taiwan and Hong Kong. The
Company's senior management negotiates the majority of its manufacturing
contracts without using agents. During the third quarter of fiscal 1996, the
Company established an office in Hong Kong to enhance the Company's product
development and purchasing capabilities, centralize quality control and expand
its vendor base in the Far East. The Far East is the largest and most widely
used manufacturing center of toys in the world. Decisions related to the choice
of manufacturer are based on price, quality of merchandise, reliability and the
ability of a manufacturer to meet the Company's timing requirements for
delivery. 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 a single product. The majority of the Company's manufacturing is
arranged directly by the Company with the manufacturing facilities. No
manufacturer accounted for more than 10% of the Company's purchases of toy
products during fiscal 1996, with the exception of Tri-State Manufacturing
(China), Ltd. ("Tri-S"), which accounted for approximately 24.5% of such
purchases during fiscal 1996. During such period, Tri-S manufactured
Play-Faces(R) and the COCA-COLA(R) brand Plush POLAR BEAR products. Tri-S is
currently one of severaL manufacturers of these products for the Company. While
the Company believes that it is not dependent on any single manufacturer in the
Far East, the Company could be materially, adversely affected by political or
economic disruptions affecting the business or operations of third party
manufacturers located in the Far East. See "Risk Factors - Dependence on Third
Party Manufacturers; International Relations."

        The principal materials used in the production and sale of the Company's
products are taffeta, polyester, polystyrene, acrylic textiles, plastics and
polyvinyl chloride. These materials are generally purchased by the manufacturers
who deliver completed or partially completed products to the Company. In order
to reduce transportation costs, the Company typically will import certain large
toys as skins and stuff

                                       14
<PAGE>
them with either polystyrene or polyester at its warehouse facilities in the
United States or Europe. The Company believes that an adequate supply of raw
materials used in the manufacture of its products is readily available from
existing and alternative sources at reasonable prices.

ADVERTISING

        The Company has not incurred significant expenses for advertising and
promotion, relying instead on the market identification that exists for many of
its licensed characters and trademarks. The Company believes its licensed
products benefit from favorable media exposure such as television programs,
movies, commercials, cartoons and comic books, and by advertising, promotional
and other media events generated by its licensors. The Company's advertising
expenses were approximately $244,000, $519,000 and $688,000 during fiscal years
1994, 1995 and 1996, respectively. Advertising expenses consist primarily of
costs incurred in the design, development, printing and shipping of Company
catalogs and a limited number of advertisements in trade publications such as
THE TOY BOOK(TM), AMUSEMENT BUSINESS(TM) and REPLAY MAGAZINE(TM).

VENDING OPERATIONS

        The Company owns and operates approximately 1,496 coin-operated
amusement game machines (crane machines, compact disc juke boxes and video game
machines) located in Texas, of which approximately 873 are month-to-month basis
under terms similar to the Company's contract with Pizza Hut(R) which expired on
June 1, 1995. The other approximately 623 coin-operated amusemenT game machines
are generally operated under month-to-month arrangements with numerous other
small businesses. The Company believes that operating crane machines improves
its ability to serve its amusement customers. The Company shares machine
revenues with the owners of locations where the machines are placed.
Approximately 11.7%, 7.9% and 4.6% of the Company's net sales in fiscal 1994,
1995 and 1996, respectively, were derived from the Company's vending operations.
The Company currently intends to maintain its present level of vending
operations. However, the Company anticipates that its vending revenues will
continue to decrease as a percentage of net sales due to the Company's decision
to focus its working capital on the growth of its licensed product sales.

COMPETITION

        The Company faces vigorous competition in the sale of its products.
Competitive factors include new product development, the procurement of
licenses, timely shipment of products, price, product appeal and the
availability of retail shelf space. The toy industry is highly fragmented with
several hundred domestic and international toy companies, importers and
distributors. The Company competes with many larger, better capitalized
companies, including the Company's licensors, in the design, development,
marketing, and distribution of toys, and the procurement of licenses. The
Company's principal competitors in the retail industry include all major toy
companies. Certain of the Company's licensors, including The Walt Disney
Company, Time Warner Entertainment Company, L.P., Harley-Davidson Motor Company
and The Coca-Cola Company, distribute competing products through proprietary
retail outlets and amusement parks. In addition, due to the relatively low
barriers to entry, the Company 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 has never been and is
not currently a defendant in any product liability lawsuit; however, there can
be no assurance that such claims will not arise in the future based on past,
present or future products which are designed, developed or sold by the Company.
The Company currently maintains product liability insurance coverage in the
amount of $1.0 million per occurrence, with a $5.0 million umbrella liability
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.

                                       15
<PAGE>
Moreover, even if the Company maintains adequate insurance, any successful claim
could materially and adversely affect the reputation and prospects of the
Company.

GOVERNMENT REGULATION

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

        The sale of franchises is regulated by the Federal Trade Commission and
by certain state agencies located in jurisdictions where Company has
franchisees. Principally, these regulations require certain written disclosures
be made prior to the offer for sale of a franchise. The disclosure documents are
subject to state review and registration requirements and must be periodically
updated, not less frequently than annually. In addition, some states have
relationship laws which prescribe the basis for terminating a franchisees'
rights and regulate both the Company's and its franchisee's post-termination
rights and obligations.

TARIFFS AND DUTIES

        In December 1994, the United States approved a trade agreement pursuant
to which import duties on toys, games, dolls and other specified items were
eliminated effective January 1, 1995, from products manufactured in all Most
Favored Nation ("MFN") countries (including China). Increases in quotas, duties,
tariffs or other changes or trade restrictions which may be imposed in the
future could have a material adverse effect on the Company's financial
condition, operating results or ability to import products. In particular, the
Company's costs could be increased if China's MFN status is revoked. The loss of
MFN status for China would result in substantial duties on the cost of toy
products manufactured in China and imported into the United States. Currently
there is no duty on the import of these products.

        The Company could attempt to mitigate the effects of an increase in duty
by shifting its manufacturing to 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.

TRADEMARKS

        The Company has registered trademarks for PlayoByoPlay(R) and
Play-Faces(R) in the UniTeD States and in Spain. The Company believes it has the
right to use these marks for the product categories on which they are currently
used.

EMPLOYEES

        As of July 31, 1996, the Company employed 532 people in its toy
operations and 21 people in its vending operation. Of the 532 employees in the
toy operations, 340 are engaged in warehousing and distribution, 90 are engaged
in finance and administration, 89 are engaged primarily in sales and marketing,
and 13 are engaged in product development. Some of the Company's employees at
the Chicago, Illinois facility are represented by a union. In Spain, the Company
is subject to various governmental regulations 

                                       16
<PAGE>
relative to its employees, and has standard national employment contracts with
all of its Spanish employees. The Company believes its relationship with its
employees is satisfactory.

NEW ACCOUNTING STANDARDS

        Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock options
and other equity instruments to employees based on new fair value accounting
rules. Although expense recognition for employee stock based compensation is not
mandatory, SFAS 123 requires companies that choose not to adopt the new fair
value accounting to disclose pro-forma net income and earnings per share under
the new method. This new accounting principle is effective for the Company's
fiscal year ending July 31, 1997. The Company believes that adoption will not
have a material impact on its financial condition as the Company will not adopt
the fair value accounting, but will instead comply with the disclosure
requirements.

SEASONALITY; WEATHER

        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 first and second 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 quarters. The Company's working capital needs and
borrowings to fund those needs have been highest during the third and fourth
fiscal quarters. The Company's international and domestic operations are also
subject to risks due to inclement weather. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

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 SUCCESSFUL INTEGRATION OF
ACE, COMPETITIVE AND ECONOMIC FACTORS, PRICE CHANGES BY COMPETITORS,
RELATIONSHIPS WITH LICENSORS, ABILITY TO MANAGE GROWTH, ABILITY TO SOURCE
PRODUCTS, INTERNATIONAL TRADE RELATIONS, MANAGEMENT OF QUARTER TO QUARTER
RESULTS, INCREASES IN COSTS OF RAW MATERIALS, TIMING OF TECHNOLOGICAL ADVANCES
BY THE COMPANY AND ITS COMPETITORS, LACK OF ACCEPTANCE BY CONSUMERS OF NEW
PRODUCTS, AND THE OTHER FACTORS DISCUSSED IN THIS SECTION AND ELSEWHERE HEREIN.
UPDATED INFORMATION WILL BE PERIODICALLY PROVIDED BY THE COMPANY AS REQUIRED BY
THE SECURITIES EXCHANGE ACT OF 1934.

        RELIANCE ON LICENSE AGREEMENTS. Sales of licensed products accounted for
approximately 58.2% of the Company's net sales during fiscal 1996. Sales of
products developed and sold under the Company's licenses from The Coca-Cola
Company accounted for approximately 13.8%, those from LOONEY TUNES' characters
accounted for approximately 16.4% and those from Disney characters accounted for
approximately 11.4% of the Company's net sales during fiscal 1996. The Company's
existing license agreements generally have terms ranging from one to two years,
and approximately 69% and 31% of such licenses terminate during fiscal 1997 and
1998, respectively. In the past, the Company has been successful in renewing its
material licenses and none of its material licenses has been terminated;
however, there can be no assurance that the Company will be able to procure new
license agreements, renew existing license agreements, or that existing licenses
will not be terminated. In addition, as a result of increased competition for
licenses, the Company has in certain instances been required, and anticipates a
continued requirement in the future, to pay higher royalties and higher minimum
guaranty payments to obtain or renew licenses. There can be no assurance that
the Company will be able to obtain additional or renew existing licenses for
characters or trademarks on commercially reasonable terms. The Company's license
agreements limit both the products that can be manufactured thereunder and the
territory and market in which such products may be marketed. Certain of the
Company's license agreements require licensor approval before merger,
reorganization, certain stock sales,

                                       17
<PAGE>
certain management changes or assignment of the license, which restrictions
could affect the growth of the Company. In addition, the Company's licensors
typically have the right to approve, in 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. All of the Company's material
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. See "Business Licensing."

        INTEGRATION OF ACE ACQUISITION. In June 1996, the Company acquired Ace
from an unrelated party. The Company acquired substantially all of the operating
assets, business operations and facilities, including four warehouse and
distribution centers. There can be no assurance that the Company will be able to
successfully integrate and operate Ace, nor that the resulting integration
expense will not have a materially adverse effect upon the Company's operating
results. See "Business - Acquisition."

        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. The Company introduced
its Play-Faces(R) product line during the first quarter oF 1995 and has since
expanded the product line. There can be no assurance that this product line will
continue to be successful or that any new products or product lines will be
successful. The Company's retail toy products compete with other toy products
for retail shelf space. There can be no assurance that shelf space in retail
stores will be available to support the Company's existing products or the
expansion of the Company's products and product lines. See "Business."

        LIMITED OPERATING HISTORY; RAPID GROWTH. The Company commenced
operations in May 1992 and, as a result, has a limited operating history upon
which investors may base their evaluation of the Company's performance. The
Company experienced significant growth in net sales and net income in fiscal
1995 and in 1996. As a result of the Company's limited operating history and
sales and income growth, period-to-period comparisons of operating results may
not be meaningful and results of operations from prior periods may not be
indicative of future results. There can be no assurance that the Company will
continue to experience growth in, or maintain its present level of, net sales or
net income. See "Management's Discussion and Analysis of 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, Mark A. Gawlik, President and Chief Operating
Officer, Juanita E. Lozano, Chief Financial Officer and Treasurer, Saul Gamoran,
Executive Vice President, General Counsel and Secretary, and Francisco Saez
Moya, Vice President - European Operations. Although Mr. Torres is actively
involved in the management of the affairs of the Company, he is also involved in
various private business endeavors. Other than an employment agreement with Mr.
Gamoran, the Company has neither 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 material adverse effect upon the Company. The Company's success is also
dependent upon 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.
See "Management."

        DEPENDENCE ON THIRD PARTY MANUFACTURERS; INTERNATIONAL RELATIONS. To
date, substantially all 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
believes that it could arrange alternate sources of manufacturing outside of
China if the need arose, the Company has made no plans for securing alternate
sources in the event its present arrangements with Chinese manufacturers prove
impossible to maintain and there can be no assurance that there would be
sufficient alternate manufacturing facilities to meet the increased demand for
production which would likely result from a 

                                       18
<PAGE>
disruption of manufacturing sources in China. Furthermore, such 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.

        Foreign manufacturing is 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 governmental
policies, restrictions on the transfer of funds and fluctuations of the United
States dollar against foreign currencies. While the Company to date has not
experienced any material adverse effects due to foreign manufacturing, there can
be no assurance that such events will not occur in the future and any growth of
the Company's international operations will subject it to greater exposure to
risks of foreign manufacturing. The occurrence of any such event, particularly
one affecting the Company's business with Chinese manufacturers, would have a
material adverse effect on the Company.

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

        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 governmental policies, delays in and restrictions on the transfer of funds
and currency fluctuations. For example, when the Company's toy subsidiary in
Spain purchases inventory from its suppliers in the Far East, the Company
experiences currency risk to the extent that there are fluctuations in the
exchange rate between the United States dollar and the Spanish peseta. Certain
of the Company's and that subsidiary's license agreements call for payment of
royalties in a currency different from their functional currencies, thereby
subjecting 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. While the Company to date has not
experienced any material adverse effects due to its foreign operations, there
can be no assurance that such events will not occur in the future and any growth
of the Company's international operations will subject it to greater exposure to
risks of foreign operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

        COMPETITION. The toy industry is highly competitive. Many of the
Company's competitors have longer operating histories, broader product lines and
greater financial resources and advertising budgets than the Company. In
addition, the toy industry has nominal barriers to entry. Competition is based
primarily on the ability to design and develop new toys, procure licenses for
popular characters and trademarks, and successfully market products. Many of the
Company's competitors, including the Company's licensors, offer similar products
or alternatives to the Company's products. 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. Certain of the
Company's licensors, including The Walt Disney Company, Time Warner
Entertainment Company, L.P., Harley-Davidson Motor Company and The Coca-Cola
Company, distribute competing products through proprietary retail outlets and
amusement parks. The Company has not in the past and does not in the immediate
future plan to devote any material amount of its capital resources to
advertising. There can be no assurance that the Company will be able to continue
to compete effectively in this marketplace. See "Business - Competition."

        CONTROL BY INSIDERS. As of the date of this report, the directors and
executive officers of the Company beneficially own approximately 45.2% of the
outstanding Common Stock of the Company and may be in a position collectively to
elect all of the Company's directors and officers and, thereby, to control the

                                       19
<PAGE>
policies and operations of the Company, and determine the outcome of corporate
transactions or other matters submitted for shareholder approval. These matters
include, without limitation, mergers, consolidations, the sale of all or
substantially all of the Company's assets and a change in control of the
Company. See "Principal Shareholders." In addition, the Play-By-Play Toys &
Novelties, Inc. 1994 Incentive Plan (the "Incentive Plan") authorizes the
issuance of up to 700,000 shares of Common Stock, pursuant to stock options and
restricted stock that may be awarded to officers and other employees of the
Company. The Company has granted options to purchase 441,500 shares of Common
Stock under the Incentive Plan, 428,500 of which were still outstanding as of
July 31, 1996. The issuance of additional shares of Common Stock to management
pursuant to the Incentive Plan would increase the number of shares held by
insiders of the Company. In addition to stock options granted pursuant to the
Incentive Plan, the Company has granted nonqualified stock options to purchase
62,000 shares of Common Stock to three outside directors and an independent
agent of the Company, and anticipates granting additional nonqualified stock
options to outside directors in the future.
See "Management."

        SHARES ELIGIBLE FOR FUTURE SALE. The Company has outstanding 4,841,100
shares of Common Stock. Of these shares, 2,652,423 shares are tradable without
restrictions unless they are purchased by affiliates of the Company. 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 also (i) 700,000 shares of Common Stock reserved for
issuance under the Incentive Plan (of which options to purchase 428,500 shares
of Common Stock have been granted to date and remain outstanding), (ii) 62,000
shares of Common Stock subject to outstanding nonqualified stock options, (iii)
82,000 shares of Common Stock which are subject to warrants issued to the
underwriters of the Company's initial public offering, and (iv) 35,000 shares of
Common Stock subject to warrants issued to the Sellers of Ace. 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. The sale of substantial amounts of Common Stock, or the perception
that such sales could occur, could adversely affect the prevailing market price
for the Common Stock.

        GROWTH STRATEGY. The Company's growth strategy provides for further
development and diversification of the Company's retail and amusement toy
business, including expansion into international markets, primarily Western
Europe. Implementation of the strategy is subject to risks beyond the Company's
control, including competition, lack of market acceptance of new products,
changes in economic conditions, the inability to obtain or renew licenses on
commercially reasonable terms and the inability to finance the increased levels
of accounts receivable and inventory necessary to support sales growth, if any.
There can be no assurance that the expansion of the Company's business will be
successfully implemented. 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 has never been and is not currently a defendant in any
product liability lawsuit; however, there can be no assurance that such claims
will not arise in the future based on past, present or future products which are
designed, developed and/or sold by the Company. The Company currently maintains
product liability insurance coverage in the amount of $1.0 million per
occurrence, with a $5.0 million umbrella policy. The Company's license
agreements require the Company to carry specified types and amounts of
insurance. There can be no assurance that the Company will be able to maintain
such coverage or obtain additional coverage on acceptable terms, or that such
insurance will provide adequate coverage against any potential claims. Moreover,
even if the Company maintains adequate insurance, any successful claim could
materially and adversely affect the reputation and prospects of the Company. The
Company believes that its products meet all applicable safety standards. See
"Business - Licensing," "Product Liability" and "-Legal Proceedings."

                                       20
<PAGE>
        DIVIDEND POLICY. The Company has never paid any cash dividends. For the
foreseeable future, the Company expects to retain earnings to finance the
expansion and development of its business. Any future payment of cash dividends
will be within the discretion of the Company's Board of Directors, which is
controlled by the present shareholders, and will depend, among other factors, on
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
facility to which the Company is or may become a party. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

        ANTI-TAKEOVER PROVISIONS. The Company's Articles of Incorporation and
Bylaws contain, among other things, provisions establishing a classified Board
of Directors, authorizing shares of preferred stock with respect to which the
Board of Directors of the Company has the power to fix the rights, preferences,
privileges and restrictions without any further vote or action by the
shareholders, and requiring a two-thirds vote of shareholders in order to remove
directors, amend the Bylaws and 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 that some or a majority of the Company's
shareholders might consider to be in their best interest, including offers or
attempted takeovers that might otherwise result in such 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. Markets prices for the Common Stock
may be influenced by a number of factors, including the Company's operating
results, its successful integration of the Acquisition of Ace and other factors
affecting the Company specifically and the toy industry and the financial
markets generally, as well as the depth and liquidity of the market for the
Common Stock. The Company believes that the market price of its Common Stock
will reflect expectations that the Company will be able to continue to operate
and grow its business profitability, including the successful integration of the
acquisition. If the Company is unable to do so at a pace that reflects the
expectations of the market, investors could sell shares of the Common Stock at
or after the time that it becomes apparent that such expectations may not be
realized, resulting in a decrease in the market price of the Common Stock. In
recent years the stock market has experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to their operating
performance.

                                       21
<PAGE>
ITEM 2.  PROPERTIES

        The Company's principal executive offices, principal warehouse and
showroom are located at 4400 Tejasco, San Antonio, Texas, where the Company
occupies approximately 15,100 square feet of office space, 3,500 square feet of
showroom space and 211,000 square feet of warehouse space, pursuant to lease
agreements that expire during January and December 2003.

        The Company owns the property and building comprising the offices,
showroom, distribution center, warehouse and manufacturing facility located in
Chicago, Illinois. The Company has 51% ownership interest in the property and
building comprising the offices, showroom, distribution center, warehouse and
manufacturing facility located in Los Angeles, California. The remaining 49%
interest in the Los Angeles, California facility is owned by and leased from the
Sellers. (See "Business-Acquisition.")

        The Company also leases the space occupied by its other offices,
warehouses, distribution centers manufacturing facilities and showrooms. The
following table summarizes these leases.
                                                              APPROXIMATE
LOCATION                    TYPE OF FACILITY                SQUARE FOOTAGE
--------                    ----------------                --------------
New York, New York          Showroom                              2,200

Los Angeles, California     Warehouse                            28,000
                            Warehouse                            25,000
                            Warehouse                            26,000
                            Warehouse                            62,000
                            Office                               17,000

Brooklyn, New York          Warehouse/Stuffing Operations       100,000

Miami, Florida              Showroom/Warehouse                   27,000

Bellevue, Washington        Office/Warehouse/
                            Distribution Center                  85,000

Burnaby, British Columbia,  Warehouse/Distribution Center        15,700
Canada and Mississauga,
Ontario

Valencia, Spain             Office/Showroom/Warehouse            70,000

        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.

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 material adverse effect on its financial condition.

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

        None.

                                       22
<PAGE>
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." For the period commencing on July 19, 1995, (the
date of the Company's initial public offering) through July 31, 1995, high and
low closing sale prices for the Common Stock as reported by the Nasdaq National
Market System were $14.00 and $12.25, respectively. Prior to the initial public
offering, there was no public market for the Company's Common Stock.

        The table sets forth, for the periods indicated, the reported high and
low close sale prices of the Company's Common Stock, as reported on the Nasdaq
National Market System:

        1996 FISCAL QUARTER                      HIGH BID        LOW BID
        -------------------                      --------        -------  
        First Quarter                              14.50         10.75
        Second Quarter                             16.38         10.75
        Third Quarter                              13.88         12.00
        Fourth Quarter                             16.00          8.00

        According to the records of the Company's transfer agent, the Company
had 77 holders of record of the Common Stock as of October 24, 1996. The Company
believes that a substantially larger number of beneficial owners hold such
shares in depository or nominee form.

DIVIDENDS AND DISTRIBUTIONS

        The Company has never declared nor paid cash dividends to date on its
Common Stock and does not anticipate paying any cash dividends on its Common
Stock in the near future. 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 is prohibited from paying dividends 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
future earnings, capital requirements, the financial condition and prospects of
the Company and any restrictions under credit agreements existing from time to
time as well as such other factors as the Board may deem relevant. There can be
no assurance that the Company will pay dividends in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

                                       23
<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 period from inception, May 18, 1992, through
July 31, 1992, and for the four years ended July 31, 1993, 1994, 1995 and 1996,
and as of July 31, 1993, 1994, 1995, and 1996, have been derived from the
audited Consolidated Financial Statements of the Company which are included
elsewhere in this Form 10-K. The information set forth below is not necessarily
indicative of results of future operations. On March 31, 1996, the Company sold
Restaurants Universal Espana, S.A. ("Restaurants Universal"), its European
subsidiary that operated two restaurants in Spain. The historical financial data
for Restaurants Universal has been reported as discontinued operations and
accordingly the historical financial data for all prior years presented has been
restated. This data should be read in conjunction with, and is qualified in its
entirety by, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the Company's Consolidated Financial Statements and the
Notes thereto, which appear elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
                                                PERIOD FROM   
                                                MAY 18, 1992            YEAR ENDED JULY 31,
                                                (INCEPTION) TO ---------------------------------------
                                                JULY 31, 1992    1993       1994      1995      1996
                                               -------------------------------------------------------
                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA (1):
<S>                                              <C>        <C>         <C>       <C>         <C>     
Net sales (2) ................................   $ 6,875    $ 26,649    $32,568   $ 47,730    $ 74,197
Income (loss) from continuing operations .....       161        (694)       880      1,898       4,052
Income (loss) from discontinued operations (2)        61        (597)       125       (259)       (384)
Income (loss) before minority interest .......       222      (1,291)     1,005      1,639       3,668
Minority interest in net loss (income) of
subsidiaries .................................        (6)         60         69       --          --
                                                 -----------------------------------------------------
Net income (loss) ............................   $   216    $ (1,231)   $ 1,074   $  1,639    $  3,668
                                                 =====================================================
Earnings (loss) per share from continuing
operations ...................................   $  0.06    $  (0.26)   $  0.38   $   0.73    $   0.84
Earnings (loss) per share from discontinued
operations ...................................      0.03       (0.24)      0.05      (0.10)      (0.08)
                                                 -----------------------------------------------------
Net income (loss) per share ..................   $  0.09    $  (0.50)   $  0.43   $   0.63    $   0.76
                                                 =====================================================
Weighted average shares outstanding (3) ......     2,460       2,460      2,519      2,612       4,841
                                                 =====================================================

                                                          JULY 31,
                                          ------------------------------------------
                                             1993       1994      1995      1996
                                          ------------------------------------------
BALANCE SHEET DATA (1):

Working capital ........................   $ 3,926   $ 3,927   $26,159   $ 24,272

Total assets ...........................    20,580    25,785    47,300    103,913

Long-term debt, including capital leases       481       913       463     15,994

Total liabilities ......................    12,563    16,675    15,273     65,213

Shareholders' equity ...................     7,800     9,110    32,027     38,700
</TABLE>
(1)     In June 1996, the Company acquired Ace Novelty Co., Inc. ("Ace"), which
        was accounted for as a purchase. Ace 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 the period
        subsequent to the acquisition are not comparative to prior periods. See
        "Business - Acquisition".
(2)     In fiscal 1993, the Company discontinued its clothing business and sold
        its manufacturing facility in Mexico. The amounts shown are net of
        income tax benefit (provision) of $(32) and $146 in fiscal 1992 and
        1993, respectively. Fiscal years 1992, 1993, 1994 and 1995 have been
        restated to reflect the disposition of 100% of the stock of Restaurants
        Universal Espana, which was sold during the third quarter of fiscal
        1996. See Note 4 to the Company's Consolidated Financial Statements.
(3)     The weighted average shares outstanding reflect the retroactive effect
        given for a 2-for-1 stock split, effected in October 1994, and a
        0.82-for-1 reverse stock split effected in April 1995.

                                       24
<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 SUCCESSFUL INTEGRATION OF
ACE, COMPETITIVE AND ECONOMIC FACTORS, PRICE CHANGES BY COMPETITORS,
RELATIONSHIPS WITH LICENSORS, ABILITY TO MANAGE GROWTH, ABILITY TO SOURCE
PRODUCTS, INTERNATIONAL TRADE RELATIONS, MANAGEMENT OF QUARTER TO QUARTER
RESULTS, INCREASES IN COSTS OF RAW MATERIALS, TIMING OF TECHNOLOGICAL ADVANCES
BY THE COMPANY AND ITS COMPETITORS, LACK OF ACCEPTANCE BY CONSUMERS OF NEW
PRODUCTS, AND THE OTHER FACTORS DISCUSSED IN "RISK FACTORS", AND ELSEWHERE
HEREIN. 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 was formed in January 1992 and acquired certain assets from
Pizza Management, Inc. on May 18, 1992. The Company's principal business is to
design, develop, market and distribute stuffed toys and sculpted toy pillows and
to market and distribute a broad line of novelty items. The Company sells these
products to customers in the amusement and retail markets. The Company's toy
operations accounted for approximately 95.2% of net sales from continuing
operations for fiscal 1996. In addition, the Company owns and operates
approximately 1,496 coin-operated amusement game machines in Texas. Net sales
from continuing operations derived from vending operations accounted for
approximately 4.6% of the Company's net sales for fiscal 1996. Net sales from
continuing operations derived from vending operations as a percentage of net
sales has declined in recent periods as the Company has emphasized its toy
operations, and the Company anticipates that such trend will continue.

        In March 1996, the Company sold all of the stock of Restaurants
Universal Espana, its European subsidiary that operated two restaurants in
Spain, to an unrelated third party, for 205,000,000 Spanish pesetas or
approximately U.S. $1.6 million. The sale resulted in a non-cash, non-recurring
charge against earnings of approximately $239,000 and a loss from discontinued
operations of approximately $145,000, for a total loss from discontinued
operations of $384,000 in fiscal 1996. The buyer paid approximately $80,000 in
cash, and the Company financed the balance of the sales price of approximately
$1.5 million with the acceptance of a non-interest bearing note from the
purchaser which calls for monthly principal payments based on the greater of six
percent of net annual sales of certain of the buyer's restaurants, including the
restaurants sold by the Company, or a series of minimum monthly payments over a
period of eight years. The note balance is net of imputed interest of
approximately $450,000 calculated at a rate of 10%. In the event that the buyer
of the stock of Restaurants Universal fails to meet three months of agreed-upon
installment payments, whether alternated or consecutive, the Company may cancel
the contract, with all of the stock reverting back to the Company.

        In June 1996, the Company acquired substantially all of the operating
assets, business operations and facilities (the "Acquisition") of Ace. The
purchase price of approximately $45.1 million consists of approximately $39.6
million in cash, $2.9 million in subordinated debt, approximately $2.4 million
in related direct costs, and approximately $0.2 million in the form of warrants
issued by the Company to the former owners of Ace ("Sellers") to purchase up to
35,000 shares of the Company's Common Stock, commencing one year from the date
of acquisition. The Acquisition has been accounted for using the purchase
method. The Company recorded approximately $8.9 million of goodwill, which is
the excess of the total purchase price plus related direct costs over the fair
value of net assets acquired. Included in the calculation of net assets is
approximately $3.3 million in certain trade payables and accrued liabilities,
which the Company assumed. This goodwill is being amortized on a straight-line
basis over a 40-year period. The final determination of the purchase price and
all prorations and adjustments between the Company and the Sellers have not be
resolved to date.

                                       25
<PAGE>
        Net toy sales to amusement customers accounted for approximately 63.9%
of the Company's net sales for fiscal 1996. The Company sells both licensed and
non-licensed products to its amusement customers for use principally as
redemption prizes. Sales to amusement customers generally result in higher gross
margins than sales to retail customers, with gross margins from the sale of
licensed products to amusement customers generally exceeding those of
non-licensed products. Although the Company has continued to increase sales to
amusement customers, sales to these customers as a percentage of net sales
declined during fiscal 1996 due to the greater percentage increase in net sales
to retail customers. As a result of the acquisition of Ace and due to Ace's
historic position in the amusement market, the Company does not anticipate this
trend to continue.

        Net toy sales to retail customers accounted for approximately 31.3% of
the Company's net sales for fiscal 1996. To date, substantially all of the
Company's sales to retail customers have involved licensed products. Since the
beginning of fiscal 1994, the Company has expanded its product offering of
licensed stuffed toys through the addition of several licensed characters and
trademarks. In addition, the Company commenced selling its Play-Faces(R) product
line to retail customers during the first quarter of fiscal 1995. During fiscal
1996, the Company experienced larger percentage increases in sales to retail
customers than to amusement customers. As a result of the Acquisition, the
Company does not anticipate this trend to continue during fiscal 1997. Due to
the higher volume purchasing power enjoyed by many of the larger retail
customers, sales to retail customers typically involve larger dollar amounts but
lower gross margins than the Company's sales to amusement customers. However,
the lower gross margins have been partially offset by lower marketing and
distribution costs associated with the sales to the larger retail customers.

        The Company began its international expansion of its toy sales with the
opening of its distribution facility in Spain in August 1993. Since that time,
the Company has experienced significant sales growth in its international
operations, particularly in Western Europe. International toy operations
accounted for 12.3% of net sales, and 18.3% of consolidated income from
operations for fiscal 1996. A significant portion of the Company's international
toy sales were generated by sales to the amusement market. The Company
anticipates continued growth in international sales to both the amusement market
and the retail markets. In addition, the Company anticipates an increase in
sales of licensed products in international markets. The Company generally sells
the same non-licensed products in Europe as in the United States. The Company
sells certain licensed products exclusively in certain international countries
while others are sold both domestically and internationally. The Company's
European toy sales have generally resulted in higher gross margins than domestic
toy sales.

        The Company's international and domestic operations are subject to risks
such as manufacturing and transportation delays or interruptions, political and
economic disruptions, weather, trade restrictions and fluctuations in foreign
currencies. While the Company's operating results have not been materially
impacted by such risks to date, there can be no assurance that such risks will
not adversely impact the Company's operations in the future.

        The Company's international toy sales are made primarily to European
Union countries through the Company's Spanish toy subsidiary. To date, all
direct shipment sales from third-party manufacturers to the Company's customers
(and the Company's cost of such goods) made by such subsidiary 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 subsidiary are transacted in Spanish
pesetas, the functional currency, and have no currency risk. Purchases of raw
materials by the Company's Spanish toy subsidiary for its stuffing operations
from vendors in Spain are transacted in Spanish pesetas; therefore, there is no
currency risk associated with those purchases. However, when the Company's
Spanish toy subsidiary purchases inventory from its suppliers in the Far East,
all such purchases are made in United States dollars and the Company experiences
currency risk to the extent that the exchange rate between the United States
dollar and the Spanish peseta fluctuates from the date the Company's subsidiary
is notified that merchandise is shipped until the date it pays for the goods in
United States dollars.

                                       26
<PAGE>
        Pursuant to the terms of the Company's license agreements with The Walt
Disney Company, Time Warner Entertainment Company, L.P. and MGM/UA Licensing and
Merchandising, A Division of Metro-Goldwyn-Mayer, Inc. for the sale of
Play-Faces(R) in Canada, the Company must pay royalties in Canadian dollars. The
Company's Spanish toy subsidiary also has a license agreement with The Coca-Cola
Company for the sale of stuffed toys in certain Western European countries which
requires the subsidiary to pay 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.

        Historically, no attempt has been made to minimize, by means of hedging
or derivatives, the risk of potential currency fluctuations, since the currency
risk has not been significant. The total unhedged exposure related to currency
risk at July 31, 1996 was approximately $2,236,000.

        The Company commenced operations in May 1992 and, as a result, has a
limited operating history upon which investors may base their evaluation of the
Company's performance. The Company experienced significant growth in net sales
and net income in fiscal 1994, 1995 and 1996. As a result of the Company's
limited operating history and sales and income growth, period-to-period
comparisons of operating results may not be meaningful and results of operations
from prior periods may not be indicative of future results. The following
discussion and analysis should be read in conjunction with "Selected
Consolidated Financial Data" and the Company's Consolidated Financial Statements
and the notes thereto.

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,
                                              ----------------------------------
                                                  1994       1995       1996
                                              ----------------------------------
Net sales ..................................     100.0%   100.0%    100.0%
Cost of sales ..............................      65.4     65.0      67.5
Gross profit ...............................      34.6     35.0      32.5
Selling, general and administrative expenses      27.9     26.6      23.5
Operating income ...........................       6.7      8.5       9.0
Interest expense ...........................       1.9      2.2        .9
Other income, net ..........................       --        .1        .9
Income from continuing operations ..........       2.7      4.0       5.5
Income (loss) from discontinued operations .        .4      (.6)      (.6)
Net income .................................       3.3      3.4       4.9

 YEARS ENDED JULY 31, 1996 AND 1995

        The comparison between fiscal 1996 and 1995 was affected by the Ace
Novelty Co., Inc. acquisition, which occurred on June 20, 1996. Fiscal 1996
results of operations includes five weeks and five days of Ace.

        NET SALES. Net sales for the fiscal year ended July 31, 1996 increased
approximately 55.5% or $26.5 million to approximately $74.2 million from
approximately $47.7 million in the comparable period in fiscal 1995. Net sales
from the Ace acquisition accounted for approximately 9.7% or $7.2 million of the
Company net sales for fiscal 1996. Net sales derived from vending operations
accounted for approximately 4.6% or approximately $3.4 million of the Company's
net sales for fiscal 1996 as compared to approximately 7.9% or $3.8 million of
the Company's net sales for fiscal 1995. Domestic net toy sales for fiscal 1996
increased 

                                       27
<PAGE>
approximately 65.6% or $24.4 million, and international net toy sales increased
approximately 42.2% or $2.7 million from fiscal 1995.

        Net sales of licensed products for fiscal 1996 increased approximately
94.1% or $21.0 million to approximately $43.2 million, including $3.7 million
related to Ace sales, from approximately $22.2 million in the comparable period
in fiscal year 1995. Within licensed products for fiscal 1996, sales of
Play-Faces(R) increased approximately 150.0% or $11.4 million, to approximately
$19.0 million, from approximately $7.6 million in fiscal 1995. Net sales of
non-licensed products increased approximately 28.6% or $6.1 million to
approximately $27.5 million, including $3.5 million related to Ace sales, from
approximately $21.4 million in fiscal 1995. Within non-licensed products,
Acquisition sales accounted for approximately 12.6% or $3.5 million. Within
non-licensed products, net sales of novelty items increased approximately 43.7%
or $1.6 million to approximately $5.4 million, from approximately $3.8 million
in fiscal 1995. Net sales of non-licensed stuffed toys increased approximately
25.4% or $4.5 million to approximately $22.1 million, from approximately $17.6
million in fiscal 1995.

        Net toy sales to retail customers for fiscal 1996 and 1995 accounted for
approximately 31.3% or approximately $23.2 million and approximately 25.2% or
approximately $12.0 million, respectively, of the Company's net sales. The
approximate 92.7% increase in sales to retail customers from fiscal 1995 to the
fiscal 1996 is primarily attributable to the continued growth in sales of the
Play-Faces(R) line. To date, substantially all sales to retail customers have
been comprised of licensed merchandise, primarily Play-Faces(R).

        Net toy sales to amusement customers for fiscal 1996 and 1995 accounted
for approximately 63.9% or approximately $47.4 million, including $7.2 million
related to Ace and approximately 66.1% or approximately $31.6 million,
respectively, of the Company's net sales. The approximate 50.4% increase in
sales volume is primarily attributable to the continued growth in the Company's
sales to amusement park and arcade customers and the acquisition of Ace. The
Company sells both licensed and non-licensed products to its amusement customers
for use principally as redemption prizes. Sales to amusement customers generally
result in higher gross margins than sales to retail customers, with gross
margins from the sale of licensed products to amusement customers generally
exceeding those of non-licensed products.

        GROSS PROFIT. Gross profit increased approximately 44.5% to
approximately $24.1 million, including $2.4 million related to Ace, in fiscal
1996 from approximately $16.7 million in fiscal 1995, due primarily to the
overall increase in the Company's net sales. Of that increase, 9.8% or $2.4
million is due to the Ace acquisition. Gross profit as a percentage of net sales
decreased approximately 2.5% from approximately 35.0% for fiscal 1995 to
approximately 32.5% for fiscal 1996 due to the increase in sales of licensed
products to the retail market and competitive pressures relating to non-licensed
products in the amusement market.

        SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately 37.8% to approximately $17.5
million in fiscal 1996, from approximately $12.7 million in fiscal 1995. This
increase is primarily attributable to increased selling expenses, including
payroll-related costs, sales commissions associated with the increase in the
Company's sales, increased costs associated with the development of new products
and product lines, increased costs related to the production of merchandise
catalogs, increased travel and entertainment expenses related to the Company's
expanded presence at toy industry tradeshows, and increased occupancy costs
relative to the establishment of a distribution facility in Miami, Florida, the
opening of an office in Hong Kong, and the expansion of the Company's
distribution facility in Europe. As a percentage of net sales, the selling,
general and administrative expenses decreased to approximately 23.5% from
approximately 26.6%, due primarily to the Company's ability to service a greater
volume of sales without a corresponding increase in selling, general and
administrative expenses. The Company anticipates that selling, general and
administrative expenses will continue to increase in future periods as a result
of the above referenced factors as well as from the expansion of the Company's
headquarters facility, among other things. Of the increase, $1.5 million is
related to the Ace acquisition, primarily a result of approximately $1.0 million
of increased salaries related to the Ace personnel added on June 20, 1996.

                                       28
<PAGE>
        INTEREST EXPENSE AND OTHER INCOME. Interest expense decreased
approximately 37.3% to approximately $660,000 for fiscal 1996, from
approximately $1.1 million in fiscal 1995 due to the retirement of the Company's
notes payable and substantially all long-term debt during the fourth quarter of
fiscal 1995 and the first quarter of fiscal 1996 using the net proceeds from the
Company's initial public offering. Certain proceeds from the initial public
offering were invested in interest bearing accounts and short-term securities
earning interest income of approximately $656,000 during fiscal 1996. The
Company anticipates interest expense to increase in future periods as a result
of the financing of the acquisition of Ace.

YEARS ENDED JULY 31, 1995 AND 1994

        NET SALES. Net sales for the fiscal year ended July 31, 1995 increased
approximately $15.1 million, or 46.6%, to approximately $47.7 million from
approximately $32.6 million in fiscal 1994. Net sales of licensed products
increased approximately $11.8 million or 114.4%, primarily due to the growth of
sales of the Company's licensed products to both retail and amusement customers.
Within licensed products, approximately $7.6 million of net sales was
attributable to the introduction of Play-Faces(R) into the retail market. Net
sales of non-licensed products increased approximately $3.8 million, or 20.9%,
for the fiscal year ended July 31, 1995. Within non-licensed products, net sales
of novelty items increased by approximately $2.6 million while net sales of
non-licensed stuffed toys increased by approximately $1.2 million. Domestic net
toy sales for the fiscal year ended July 31, 1995 increased approximately $11.1
million, or 42.5%, and international toy sales increased approximately $4.5
million, or 228.1%, from fiscal 1994. The Company anticipates that domestic and
international sales of licensed products and domestic sales of novelty items
will continue to increase, while non-licensed stuffed toy sales and non-toy
sales will continue to decrease in significance as a percentage of net sales
through at least fiscal 1996.

        GROSS PROFIT. Gross profit increased approximately 48.3% to
approximately $16.7 million for the fiscal year ended 1995 from approximately
$11.3 million in fiscal 1994 due to the overall increase in the Company's net
sales. Gross profit as a percentage of net sales increased approximately 0.4%
from 34.6% to 35.0% for the fiscal year ended July 31, 1994 and 1995,
respectively. This increase is primarily attributable to a change in sales mix
which resulted in increased sales of higher-margin licensed products.

        SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately 39.6% to approximately $12.7
million for fiscal 1995 from approximately $9.1 million in fiscal 1994. This
increase is primarily attributable to selling expenses, such as payroll related
costs, sales commissions and warehousing expenses associated with increased
sales volume. As a percentage of net sales, these expenses decreased to
approximately 26.6% from 27.9% due primarily to the Company's increased retail
sales which have less selling and administrative costs as a percentage of sales.

        INTEREST EXPENSE. Interest expense increased approximately 73.4% to
approximately $1.1 million for the fiscal year ended July 31, 1995 from
approximately $606,000 in fiscal 1994 due to an increase in borrowings to
finance the growth and expansion of the Company's business, coupled with
increased borrowing costs associated with the increases in interest rates.

LIQUIDITY AND CAPITAL RESOURCES

        At July 31, 1996, the Company's working capital was approximately $25.2
million, compared to approximately $26.1 million at July 31, 1995. This decrease
was primarily attributable to the financing of the acquisition of Ace. On June
20, 1996, the Company entered into a $34.0 million revolving credit and term
loan under Revolving Credit Term Loan with Letter of Credit Facility, which has
a maximum aggregate commitment of $65 million (the "$65 million Credit
Facility") among The Chase Manhattan Bank, formerly Chemical Bank, (the "Bank ")
as agent, Heller Financial, Inc. and Texas Commerce Bank N.A. (the "Lenders"), a
$3.0 million subordinated loan from the Company's Chairman of the Board and
Chief Executive Officer, Arturo Torres, and a $2.9 million subordinated loan
from the Ace Sellers. The $65 million Credit Facility provides for a $53 million
revolving line of credit commitment, subject to availability 

                                       29
<PAGE>
under a borrowing base calculated by reference to the level of eligible accounts
receivable and inventory, and includes a $15 million sublimit for the issuance
of letters of credit. The revolving credit facility matures on June 20, 1998.
The $65 million Credit Facility also includes a $12 million acquisition term
loan which requires 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.

        Interest on borrowings outstanding under the revolving credit facility
is payable monthly at an annual rate equal to, at the Company's option, (a) the
Bank's Alternate Base Rate plus 0.50% or (b) the LIBOR rate plus 2.50%. For
amounts outstanding under the term loans, interest is payable monthly in arrears
at an annual rate equal to, at the Company's option, (a) the Bank's Alternate
Base Rate plus 0.75% or (b) the LIBOR rate plus 2.75%. The Bank's "Alternate
Base Rate," means, as of any day of determination thereof, a rate per annum
equal to the greater of (a) the Prime Rate in effect on such day, (b) the
Federal Funds Effective Rate (as defined in the $65 million Credit Facility) in
effect for such day plus 0.50% (c) the Base CD Rate in effect for such day plus
1.00%.

        The $65 million Credit Facility replaced the Company's $10 million
Revolving Credit and Term Loan Agreement with Letter of Credit Facility with
NationsBank of Texas, N.A (the "$10 Million Credit Facility").

        The Company satisfies its capital requirements and seasonal liquidity
shortfalls with cash flow primarily from borrowings and secondarily from
operations. The Company's primary capital needs have consisted of the
acquisition of Ace, acquisition of inventory, financing customer receivables,
obtaining letters of credit, acquisition of licenses and international
expansion.

        The Company's operating activities used net cash of approximately $8.3
million in fiscal 1996, provided net cash of approximately $2.2 million in
fiscal 1995 and used net cash of approximately $505,000 in fiscal 1994. The cash
flow from operations for 1996 was primarily affected by net income and changes
in accounts and notes receivable, accounts payable, inventories, prepaids and
other assets.

        Net cash used in investing activities in fiscal 1996, 1995 and 1994 was
approximately $40.3 million, $2.1 million and $1.9 million, respectively. For
fiscal 1996, net cash used in investing activities consisted principally of
approximately $39.6 million for the acquisition of Ace and $1.8 million of
expenditures related to the purchase of property and equipment. For fiscal 1995,
net cash used in investing activities consisted of capital expenditures of
approximately $1.2 million and the purchase of approximately $973,000 of
short-term investments. For fiscal 1994, net cash used in investing activities
consisted of capital expenditures for the purchase of property and equipment
related primarily to the Company's vending operations of approximately $1.2
million and the completion of construction of a restaurant in Spain by
Restaurants Universal at a cost of approximately $284,000. The Company intends
to maintain its current level of vending operations, which the Company expects
will require an annual capital outlay of approximately $100,000. The Company
intends to incur such capital outlays only to the extent the cash flow from the
vending operations can fund the anticipated expenditures.

        Net cash provided by financing activities in fiscal 1996, 1995 and 1994
was approximately $34.2 million, $14.8 million and $2.0 million, respectively.
In fiscal 1996, cash provided by financing activities consisted primarily of net
borrowings under the $65 million Credit Facility and from Mr. Torres and cash
provided from the over-allotment option by the underwriters from the Company's
initial public offering of common stock. In fiscal 1995, cash provided by
financing activities consisted primarily of net proceeds from the issuance of
common stock in the initial public offering, net of repayments of borrowings and
capital lease obligations. In fiscal 1994, cash provided by financing activities
consisted of net borrowings from Mr. Torres and the $10 million Credit Facility.

        As of July 31, 1996, the Company had approximately $21.9 million
outstanding borrowings under the $65 million Credit Facility and approximately
$5.7 million in outstanding irrevocable letters of credit 

                                       30
<PAGE>
and bankers' acceptances. Based on the level of the Company's eligible accounts
receivable and inventory at July 31, 1996, the Company had approximately $12.9
million of additional borrowing capacity available under the $65 million Credit
Facility, all of which could be used to support borrowings under the revolving
of credit line or additional letters of credit.

        As of July 31, 1996, the Company's Spanish toy subsidiary had
approximately $336,000 outstanding in irrevocable letters of credit under a
letter of credit facility from Banco Del Comercio, Valencia, Spain, for the
purchase of inventory.

        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. Such undistributed earnings of
foreign subsidiaries and intercompany obligations were approximately $1.8
million and $868,000, respectively, at July 31, 1996. 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.

        During fiscal 1997, the Company anticipates capital expenditures and
working capital requirements of approximately $1.7 million. Such requirements
include approximately $200,000 for expanding, relocating and upgrading domestic
and international warehouse and distribution facilities, approximately $200,000
for acquiring additional character and trademark licenses and inventories, and
approximately $1.3 million for other working capital and general corporate
purposes. The Company believes that the net cash provided by operating
activities and borrowings under the $65 million Credit Facility will be
sufficient to meet the Company's current cash requirements for current
operations through fiscal 1997.

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 first and second 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 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 acquisition of Ace, a leading
supplier to the amusement market, the Company anticipates that its sale,
collections and borrowings to fund working capital needs may become more
significant in the third and fourth quarters.

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.

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 Coopers &
Lybrand L.L.P. dated October 21, 1996.

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

        None.

                                       31
<PAGE>
PART III

The information required by Part III (Items 10 through 13) is incorporated by
reference to the captions "Principal Shareholders," "Election of Directors,"
"Management" and "Certain Relationships and Related Transactions" in the
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. A current report was filed on July 5, 1996 with
       respect to the acquisition of Ace Novelty Co., Inc.

       REPORTS ON FORM 8-K/A An amendment to the 8-K was filed on September 3,
       1996 with respect to the acquisition of Ace Novelty Co., Inc.

                                       32
<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 29th
day of October 1996.

                                    PLAY BY PLAY TOYS & NOVELTIES, INC.

                                    By:  /s/ JUANITA E. LOZANO
                                             Juanita E. Lozano
                                             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      October 29, 1996 
        Arturo G. Torres                       Executive Officer
                                          (Principal Executive Officer)        

By: /s/ MARK A. GAWLIK                   President, Chief Operating Officer    October 29, 1996
        Mark A. Gawlik                           and Director                 

By: /s/ JUANITA E. LOZANO                   Chief Financial Officer, and       October 29, 1996 
        Juanita E. Lozano                           Treasurer
                                         (Principal Financial and Accounting
                                                     Officer)                   

By: /s/ SAUL GAMORAN                      Executive Vice President, General    October 29, 1996 
        Saul Gamoran                       Counsel and Corporate Secretary       

By: /s/ FRANCISCO SAEZ MOYA                    Vice President - European       October 29, 1996 
        Francisco Saez Moya                         Operations                  

By: /s/ TOMAS DURAN                                  Director                  October 29, 1996
        Tomas Duran                             
</TABLE>
                                       33
<PAGE>
     SIGNATURE                          TITLE                        DATE
     ---------                          -----                        ----
By: /s/ JAMES F. PLACE                 Director                 October 29, 1996
        James F. Place               

By: /s/ STEVEN K. C. LIAO              Director                 October 29, 1996
        Steven K. C. Liao            

By: /s/ OTTIS W. BYERS                 Director                 October 29, 1996
        Ottis W. Byers               

By: /s/ BERTO GUERRA, JR.              Director                 October 29, 1996
        Berto Guerra, Jr.                        

                                       34
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE
                                                                    PAGE
                                                                    ----
        Consolidated Financial Statements:

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

          Consolidated Balance Sheets as of July
            31, 1995 and 1996 .................................      F-3

          Consolidated Statements of Income for the Years Ended
            July 31, 1994, 1995 and 1996 ......................      F-4

          Consolidated Statements of Shareholders'
            Equity for the Years Ended
            July 31, 1994, 1995 and 1996 ......................      F-5

          Consolidated Statements of Cash Flows for
            the Years Ended July 31, 1994, 1995 and 1996 ......      F-6

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

        Financial Statement Schedule:

          Schedule II - Valuation and Qualifying Accounts .....      S-1

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

                                      F-1
<PAGE>
                        REPORT OF INDEPENDENT ACCOUNTANTS

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

        We have audited the consolidated financial statements and the financial
statement schedule of Play By Play Toys & Novelties, Inc. and Subsidiaries
listed in the index on page F-1 of this Form 10-K. 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 the financial statement schedule based on our audits.

        We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Play By
Play Toys & Novelties, Inc. and Subsidiaries as of July 31, 1995 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended July 31, 1996 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.

                                             COOPERS & LYBRAND L.L.P.

Austin, Texas
October 21, 1996

                                       F-2
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                      July 31,                 
                                                            -----------------------------
                                                                1995               1996 
                                                            ------------    -------------
<S>                                                         <C>             <C>          
Current assets:
     Cash and cash equivalents ..........................   $ 15,569,051    $     531,040
     Short-term investments .............................        973,168             --   
     Accounts and notes receivable, less allowance for
       doubtful accounts of $946,466 and $1,621,603 .....      9,900,927       29,306,584
     Inventories ........................................     13,892,990       44,437,694
     Other current assets ...............................        782,102        3,734,009
                                                            ------------    -------------
          Total current assets ..........................     41,118,238       78,009,327
Property and equipment, net .............................      5,805,653       15,130,186
Goodwill, less accumulated amortization of $17,943
  at July 31, 1996 ......................................           --          8,852,712
Other assets ............................................        376,259        1,920,689
                                                            ------------    -------------
          Total assets ..................................   $ 47,300,150    $ 103,912,914
                                                            ============    =============
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Bank overdraft .....................................    $      --       $   2,357,436
     Note payable to shareholder ........................      2,500,000        3,000,000
     Notes payable to banks and others ..................           --         21,775,809
     Current maturities of long-term debt ...............        153,111        4,518,411
     Current obligations under capital leases ...........        162,050          379,534
     Accounts payable, trade ............................      9,863,342       15,334,237
     Other accrued liabilities ..........................      1,186,652        4,371,357
     Income taxes payable ...............................        582,338        1,776,737
     Deferred income tax payable ........................        511,285          223,459
                                                            ------------    -------------
          Total current liabilities .....................     14,958,778       53,736,980
                                                            ------------    -------------
Long-term liabilities:
     Long-term debt, net of current maturities ..........           --         10,434,378
     Obligations under capital leases ...................        147,853          661,826
     Deferred income tax payable ........................        166,748          379,661
                                                            ------------    -------------
          Total liabilities .............................     15,273,379       65,212,845
                                                            ------------    -------------
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; 4,565,700 and 4,841,100 shares issued          1,000            1,000
     Additional paid-in capital .........................     30,171,150       33,746,597
     Cumulative foreign currency translation adjustments         205,920         (414,306)
     Retained earnings ..................................      1,698,701        5,366,778
                                                            ------------    -------------
                                                              32,076,771       38,700,069
      Less cost of stock in treasury - 24,600 shares
        at July 31, 1995 ................................        (50,000)            --   
                                                            ------------    -------------
          Total shareholders' equity ....................     32,026,771       38,700,069
                                                            ------------    -------------
          Total liabilities & shareholders' equity ......   $ 47,300,150    $ 103,912,914
                                                            ============    =============
</TABLE>
                     The accompanying notes are an integral
                 part of the consolidated financial statements.

                                      F-3
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
                                                                                              Year Ended July 31,
                                                                           --------------------------------------------------------
                                                                               1994                  1995                  1996
                                                                           ------------          ------------          ------------
<S>                                                                        <C>                   <C>                   <C>         
Net sales ........................................................         $ 32,568,256          $ 47,730,510          $ 74,197,301
Cost of sales ....................................................           21,293,716            31,015,788            50,049,224
                                                                           ------------          ------------          ------------
    Gross profit .................................................           11,274,540            16,714,722            24,148,077
Selling, general and administrative expenses .....................            9,079,956            12,678,196            17,471,966
                                                                           ------------          ------------          ------------
    Operating income .............................................            2,194,584             4,036,526             6,676,111
Interest expense .................................................             (606,218)           (1,051,209)             (660,135)
Interest income ..................................................                1,825                21,438               547,807
Other income .....................................................                 --                    --                 107,981
                                                                           ------------          ------------          ------------
    Income from continuing operations
      before income tax ..........................................            1,590,191             3,006,755             6,671,764
Income tax provision .............................................             (709,996)           (1,108,157)           (2,619,649)
                                                                           ------------          ------------          ------------
Income from continuing operations ................................              880,195             1,898,598             4,052,115
Discontinued operations:
    Income (loss) from discontinued operations ...................              124,618              (259,361)             (145,036)
    Loss on disposal of discontinued operations ..................                 --                    --                (239,002)
                                                                           ------------          ------------          ------------
Income before minority interest ..................................            1,004,813             1,639,237             3,668,077
Minority interest in net loss of subsidiaries ....................               69,180                  --                    --   
                                                                           ------------          ------------          ------------
    Net income ...................................................         $  1,073,993          $  1,639,237          $  3,668,077
                                                                           ============          ============          ============
Income (loss) per share:
    Continuing operations ........................................         $       0.38          $       0.73          $       0.84
    Discontinued operations ......................................                 0.05                 (0.10)                (0.08)
                                                                           ------------          ------------          ------------
Net income per share .............................................         $       0.43          $       0.63          $       0.76
                                                                           ============          ============          ============
Weighted average shares outstanding ..............................            2,519,383             2,612,333             4,841,100
                                                                           ============          ============          ============
</TABLE>
                     The accompanying notes are an integral
                 part of the consolidated financial statements.

                                      F-4
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                 Cumulative                 
                                          Common Stock                            Foreign       Retained      
                                    --------------------------     Additional     Currency      Earnings                   Total
                                      Shares                        Paid-In      Translation  (Accumulated  Treasury  Shareholders'
                                    Outstanding      Amount          Capital     Adjustments     Deficit)     Stock       Equity
                                    ----------    ------------    ------------    ---------    -----------   -------   ------------
<S>                                  <C>          <C>             <C>             <C>          <C>                      <C>        
Balance, August 1, 1994 .........    2,460,000    $      1,000    $  9,210,205    $(396,555)   $(1,014,529)     --      $ 7,800,121
Net income ......................                                                                1,073,993                1,073,993
Stock issued to acquire
   minority interest in
   subsidiary ...................       78,720                          72,711                                               72,711
Purchase of treasury stock ......      (24,600)                                                             $(50,000)       (50,000)
Foreign currency translation
   adjustments ..................                                                   212,687                                 212,687
                                    ----------    ------------    ------------    ---------    -----------   -------    -----------
Balance, July 31, 1994 ..........    2,514,120           1,000       9,282,916     (183,868)        59,464   (50,000)     9,109,512
Net income ......................                                                                1,639,237                1,639,237
Stock distributed as
   compensation .................       26,980                          14,915                                               14,915
Foreign currency translation ....                                                                                              --   
   adjustments ..................                                                   389,788                                 389,788
Stock issued in initial public ..                                                                                              --   
   offering .....................    2,000,000                      20,873,319                                           20,873,319
                                    ----------    ------------    ------------    ---------    -----------   -------    -----------
Balance, July 31, 1995 ..........    4,541,100           1,000      30,171,150      205,920      1,698,701   (50,000)    32,026,771
Net income ......................                                                                3,668,077                3,668,077
Warrants issued .................                                      245,350                                              245,350
Foreign currency translation
   adjustments ..................                                                  (620,226)                               (620,226)
Stock issued for exercise of
   over-allotment option of IPO .      300,000                       3,380,097                                            3,380,097
Retirement of treasury stock ....                                      (50,000)                               50,000           --   
                                    ----------    ------------    ------------    ---------    -----------   -------    -----------
Balance, July 31, 1996 ..........    4,841,100    $      1,000    $ 33,746,597    $(414,306)   $ 5,366,778   $  --      $38,700,069
                                    ==========    ============    ============    =========    ===========   =======    ===========
</TABLE>
                     The accompanying notes are an integral
                 part of the consolidated financial statements.

                                      F-5
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                              Year Ended July 31,
                                                                 -------------------------------------------
                                                                    1994            1995            1996
                                                                 -----------    ------------    ------------
<S>                                                              <C>            <C>             <C>         
Cash flows from operating activities:
  Net income .................................................   $ 1,073,993    $  1,639,237    $  3,668,077
  Adjustments to reconcile net income to
   net cash provided by (used in) operating activities:
     Depreciation and amortization ...........................       620,774         735,327         806,860
     Provision for doubtful accounts receivable ..............       353,353         660,569       1,163,346
     Deferred income tax provision (benefit) .................        83,116        (100,007)        (74,913)
     Minority interest in net loss of subsidiaries ...........       (69,180)           --              --   
     Gain on sale of property and equipment ..................       (49,263)        (33,800)         (3,718)
     Loss from discontinued operations .......................          --              --           159,359
     Stock distributed as compensation .......................          --            14,915            --   
     Change in operating assets and liabilities:
       Accounts and notes receivable .........................    (2,899,438)     (3,500,808)     (7,030,009)
       Inventories ...........................................    (1,493,896)     (2,051,931)    (13,325,525)
       Prepaids and other assets .............................        (3,016)        150,026      (2,488,704)
       Accounts payable and accrued liabilities ..............     1,948,079       4,317,955       7,675,770
       Net liabilities of discontinued operations ............      (139,025)           --              --   
       Income taxes payable ..................................        69,396         336,141       1,190,791
                                                                 -----------    ------------    ------------
          Net cash provided by (used in) operating
           activities ........................................      (505,107)      2,167,624      (8,258,666)
                                                                 -----------    ------------    ------------
Cash flows from investing activities:
  Purchase of property and equipment .........................    (1,966,067)     (1,176,147)     (1,770,244)
  Proceeds from sale of property and equipment ...............        74,220         112,487           7,794
  Proceeds from sale of restaurants ..........................          --              --            79,643
  Purchase of Ace, net of cash acquired ......................          --              --       (39,610,662)
  Maturity (purchase) of short-term investments ..............          --          (973,168)        973,168
  Payments for intangible assets .............................       (50,453)        (27,860)        (45,919)
                                                                 -----------    ------------    ------------
          Net cash used in investing activities ..............    (1,942,300)     (2,064,688)    (40,366,220)
                                                                 -----------    ------------    ------------
Cash flows from financing activities:
  Proceeds from public offering of common stock, net .........          --        20,873,319       3,380,097
  Net borrowings (repayments) under Revolving Credit Agreement     1,905,799      (5,505,799)     19,342,177
  Costs related to issuance of debt ..........................          --              --          (755,115)
  Proceeds from long-term debt ...............................       832,193         121,090      14,900,000
  Repayment of long-term debt ................................      (543,253)       (537,088)        (99,869)
  Repayment of capital lease obligations .....................       (54,704)       (198,997)       (202,753)
  Purchase of minority interest ..............................       (75,000)           --              --   
  Purchase of treasury stock .................................       (50,000)           --              --   
  Increase in bank overdraft .................................          --              --        (2,357,436)
                                                                 -----------    ------------    ------------
          Net cash provided by financing activities ..........     2,015,035      14,752,525      34,207,101
                                                                 -----------    ------------    ------------
Effect of foreign currency exchange rates ....................       212,687         389,788        (620,226)
                                                                 -----------    ------------    ------------
Increase (decrease) in cash and cash equivalents .............      (219,685)     15,245,249     (15,038,011)
                                                                 -----------    ------------    ------------
Cash and cash equivalents at beginning of period .............       543,487         323,802      15,569,051
                                                                 -----------    ------------    ------------
Cash and cash equivalents at end of period ...................   $   323,802    $ 15,569,051    $    531,040
                                                                 ===========    ============    ============
</TABLE>
                     The accompanying notes are an integral
                 part of the consolidated financial statements.

                                      F-6
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.        FORMATION

        Play By Play Toys & Novelties, Inc. ("PBP") was organized in January
1992 by four former employees of Pizza Management, Inc. ("PMI"), for the purpose
of purchasing from PMI certain assets and assuming certain liabilities.
Effective May 18, 1992, PBP purchased these assets with a carryover basis of
approximately $8.7 million, for $5.3 million consisting of $5.0 million cash and
a $260,000 note payable. Approximately $4.8 million of the cash portion of the
purchase was funded by a loan from former majority shareholders of PMI (the
"Loan Pool") to the four PBP shareholders. All accrued interest and principal
was paid in May 1994. PBP commenced operations as of the acquisition date, May
18, 1992, and the transaction has been accounted for in accordance with FASB
Emerging Issues Task Force Issue No. 88-16 "Basis in Leveraged Buyout
Transactions," utilizing carryover basis of assets and liabilities.

        Effective April 1, 1993, the Loan Pool acquired approximately 2,362,000
of the 2,460,000 outstanding shares from the PBP shareholders for the
forgiveness of the note principal and accrued interest aggregating approximately
$5.1 million. The former majority shareholder of PMI, who had a 94% interest in
the Loan Pool, simultaneously distributed approximately 736,000 of such shares
back to the original shareholders which has been reported as compensation. Based
on a stock valuation study performed by an independent appraiser as of April 1,
1993, PBP reported compensation expense of $519,949 in the year ended July 31,
1993.

        In February 1994, the Company acquired the 30% minority interest of a
subsidiary from a related party for $147,711, consisting of cash of $75,000 and
78,720 shares of the Company's stock valued at $72,711. This transaction was
accounted for using the purchase method of accounting. Accordingly, the
purchased net assets, consisting principally of restaurant equipment and
improvements utilized in the operations of two restaurants in Spain, were
recorded at their estimated fair value, which approximated their book value at
the date of the acquisition. Additionally, the Company sold its 50% interest in
another foreign subsidiary in the year ended July 31, 1994 for approximately
$15,000, resulting in a gain of approximately $125,000 which is reported in
income from operations.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

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

PERVASIVENESS OF ESTIMATES

        The preparation of financial statements in conformity with generally
accepted accounting principles requires management to makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the 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

                                       F-7
<PAGE>
              PLAY BY PLAY TOYS & NOVELTIES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 operating
income. The foreign currency transaction gain was not material for fiscal 1994
and 1995 and was $108,000 for fiscal 1996. Transaction gains and losses occur
primarily from sales in Europe.

        Pursuant to the terms of certain of the Company's license agreements,
the Company must pay royalties on these licenses in Canadian dollars. The
Company's subsidiary in Spain also has a license agreement that requires the
subsidiary to pay 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.

        Historically, no attempt has been made to minimize, by means of hedging
or derivatives, the risk of potential currency fluctuations, since the currency
risk has not been significant. The total unhedged exposure related to currency
risk at July 31, 1996 was approximately $2,236,000.

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.

CONCENTRATIONS OF 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. The Company's trade
receivables result primarily from its retail and amusement operations and
reflect a broad customer base. The Company generally requires no collateral from
its customers; however, it routinely assesses the financial strength of its
customers. No customer accounted for more than 10% of the Company's net sales in
fiscal 1994, 1995 and 1996.

        The Company's products based on trademarks licensed by The Coca-Cola
Company accounted for approximately 16.5% and 13.8% of the Company's net sales
in fiscal 1995 and 1996, respectively. In addition, the licensed products for
LOONEY TUNES' characters and Disney Characters accounted for 16.4% and 11.4%,
respectively, of the Company's net sales in fiscal 1996.

        The majority of the Company's manufacturing is arranged directly by the
Company with the manufacturing facilities. No manufacturer accounted for more
than 10% of the Company's purchases of toy products during fiscal 1996, with the
exception of Tri-State Manufacturing (China), Ltd. ("Tri-S"), which accounted
for approximately 25.6% and 24.5% of such purchases during fiscal 1995 and 1996,
respectively. During such period, Tri-S manufactured Play-Faces(R) and the
COCA-COLA(R) brand Plush POLAR BEAR products. Tri-S is currently one of several
manufacturers of these products for the Company. While the Company is not
dependent on any single manufacturer in the Far East, the Company could be
materially, adversely affected by political or economic disruptions affecting
the business or operations of third party manufacturers located in the Far East.

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

SHORT-TERM INVESTMENTS

        The Company accounts for investments in debt and equity securities in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The Company
considers short-term investments to be investments in high quality debt
securities with initial maturities between three months and one year. In
accordance with SFAS 115, the Company classifies its short-term investments as
held to maturity, as the Company has positive intent and ability to hold the
securities to maturity. Securities classified as held to maturity are reported
at amortized cost, which approximates fair value.

INVENTORIES

        Inventories are stated at the lower of cost or market. Cost of Play By
Play inventory is primarily determined using the last-in, first-out (LIFO)
method. Operating supplies and Ace inventory are determined by the first-in,
first-out (FIFO) method, and 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.

        Property and equipment is depreciated and amortized as follows:

                                                    TERM
                                                    ----
Building                                           20 years
Equipment                                          10 years
Vehicles                                           3 years
Computer hardware and software                     7 years
Leasehold improvements                 life of the lease (5-20 years)

INTANGIBLE ASSETS

        Goodwill related to the acquisition (see Note 3) represents the excess
purchase price plus related direct costs over the fair value of net assets
acquired and is amortized over 40 years from the date of acquisition using the
straight line method.

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

IMPAIRMENT OF LONG-LIVED ASSETS

        In the event that facts and circumstances indicate that the cost of
long-lived assets other than financial instruments and deferred tax assets may
be impaired, an evaluation of recoverability would be performed. If an
evaluation of impairment is 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.

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

        The carrying amount report in the balance sheet of cash and cash
equivalents, short-term investments, accounts and notes receivable, accounts
payable, and long term debt approximates its fair value. The Company estimates
the fair value of notes receivable and long term debt by discounting the future
cash flows of the instrument, using the Company's incremental rate of borrowing
for a similar instrument.

REVENUE RECOGNITION

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

INCOME TAXES

        Income taxes are provided in accordance with Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes." Accordingly,
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.

        The Company does not provide U.S. Federal income taxes on undistributed
earnings of its foreign subsidiaries as such earnings are intended to be
permanently reinvested in those operations.

EARNINGS PER SHARE

        Earnings per share is calculated using the weighted average number of
common shares and common share equivalents outstanding during the period. All of
the Company's common share equivalents were either not material or anti-dilutive
for all periods presented, and were not included in the computation of earnings
per share.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

        Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock options
and other equity instruments to employees based on new fair value accounting
rules. Although expense recognition for employee stock based compensation is not
mandatory, SFAS 123 requires companies that choose not to adopt the new fair
value accounting to disclose pro-forma net income and earnings per share under
the new method. This new accounting principle is effective for the Company's
fiscal year ending July 31, 1997. The Company believes that adoption will not
have a material impact on its financial condition as the Company will not adopt
the fair value accounting, but will instead comply with the disclosure
requirements.

3.  ACQUISITION

        In June 1996, the Company acquired substantially all of the operating
assets, business operations and facilities (the "Acquisition") of Ace. The
purchase price of approximately $45.1 million consists of approximately $39.6
million in cash, $2.9 million in subordinated debt, approximately $2.4 million
in related direct costs, and approximately $0.2 million in the form of warrants
issued by the Company to the former owners of Ace ("Sellers") to purchase up to
35,000 shares of the Company's Common Stock, commencing one year from the date
of acquisition. The Acquisition has been accounted for using the purchase
method. The Company recorded approximately $8.9 million of goodwill, which is
the excess of the total purchase price plus related direct costs over the fair
value of net assets acquired. Included in the calculation of net assets is
approximately $3.3 million in certain trade payables and accrued liabilities,
which the Company assumed.

                                      F-10
<PAGE>
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

This goodwill is being amortized on a straight-line basis over a 40-year period.
The final determination of the purchase price and all prorations and adjustments
between the Company and the Sellers have not be resolved to date.

        The debt incurred by the Company in connection with the Acquisition
consisted of (i) approximately $34.0 million in revolving credit and term loans
under the Revolving Credit Term Loan with Letter of Credit Facility dated June
20, 1996, which has a maximum aggregate commitment of $65 million among The
Chase Manhattan Bank, formerly Chemical Bank, (the "Bank") as agent, Heller
Financial, Inc. and Texas Commerce Bank N.A. (the "Lenders"), and the Company,
Ace Novelty Acquisition Co., Inc. ("ANAC") and Newco Novelty, Inc., a wholly
owned subsidiary of ANAC, as borrowers (see Note 8) (ii) a $3.0 million
subordinated loan from the Company's Chairman of the Board and Chief Executive
Officer, Arturo Torres, and (iii) a $2.9 million subordinated loan from Sellers.

        The following is a summary of the Ace assets acquired and liabilities
assumed, at the date of Acquisition (in thousands of dollars):

                    Current assets ............      $30,782
                    Property and equipment, net        8,737
                    Goodwill ..................        8,871
                                                     -------
                        Total assets ..........      $48,390
                                                     -------
                    Current liabilities .......      $ 3,259
                                                     =======

        The operating results of the Acquisition are included in the Company's
consolidated results of operations from the date of acquisition. The following
unaudited pro forma financial statement information assumes the Acquisition
occurred at the beginning of fiscal year 1995. These results have been prepared
for comparative purposes only and do not purport to be indicative of result that
would have occurred had the Acquisition been made at the beginning of the
periods presented, or of the results which may occur in the future.

                                               YEAR ENDED           YEAR ENDED
                                              JULY 31, 1995       JULY 31, 1996
                                              -------------       -------------
Net sales ..............................      $ 119,101,000       $ 126,163,000
Operating income (loss) ................         (3,954,000)          9,180,000
Income (loss) from continuing operations         (5,432,000)          6,510,000
Net income (loss) ......................      $  (5,691,000)      $   6,126,000
Earnings (loss) per share:
  Continuing operations ................      $       (1.12)      $        1.34
  Discontinued operations ..............              (0.05)              (0.08)
  Net earnings (loss) per share ........      $       (1.17)      $        1.26

                                      F-11
<PAGE>
4.  DISCONTINUED OPERATIONS

        In March 1996, the Company sold all of the stock of Restaurants
Universal Espana, S.A. ("Restaurants Universal"), its European subsidiary that
operated two restaurants in Spain, to an unrelated third party, for 205,000,000
Spanish pesetas, which was approximately U.S. $1.6 million at the date of the
sale. The sale resulted in a non-cash, non-recurring charge against earnings of
approximately $239,000 and a loss from discontinued operations of approximately
$145,000, for a total loss from discontinued operations of $384,000 in fiscal
year 1996. The Consolidated Statements of Operations for the years ended July
31, 1994 and 1995 have been restated to include the Company's former restaurant
business as discontinued operations.

The buyer paid approximately $80,000 in cash, and the Company financed the
balance of the sales price of approximately $1.5 million with the acceptance of
a non-interest bearing note from the purchaser which calls for monthly principal
payments based on the greater of six percent of net annual sales of specific
restaurants, including the restaurants sold by the Company, or a series of
minimum monthly payments over a period of eight years. The note balance, net of
imputed interest of approximately $450,000 calculated at a rate of 10%, is
included in accounts and notes receivable on the Consolidated Balance Sheet. In
the event that the buyer of the stock of Restaurants Universal fails to meet
three months of the agreed-upon installment payments, whether alternate or
consecutive, the Company may cancel the contract, with all of the stock
reverting back to the Company.

        The operating results and the loss on the sale of the restaurants have
been reported separately as a component of discontinued operations in the
Consolidated Statements of Income for the twelve months ended July 31, 1994,
1995 and 1996. The Company realized no tax benefit from the loss on the sale of
Restaurants Universal. Further, the Company had not previously recorded a tax
benefit on the operating losses of Restaurants Universal. Summarized results of
operations for Restaurants Universal are as follows:

                                              YEAR ENDED JULY 31,
                                -----------------------------------------------
                                  1994              1995               1996
                                ----------       -----------        -----------
Net sales ...............       $2,850,971       $ 2,531,857        $ 1,516,791
Cost and expenses .......        2,600,733         2,053,722          1,630,501
Net income (loss) .......          124,618          (259,361)          (145,036)

5.  INITIAL PUBLIC OFFERING

        On July 19, 1995, the Company sold 2,000,000 shares of its common stock
in an initial public offering at a price of $12.25 per share. The net proceeds
from the issuance and sale of common stock amounted to approximately $20.9
million after deducting underwriter discounts and issuer expenses. Portions of
the net proceeds were used to repay outstanding bank debt of approximately $3.3
million plus accrued interest, and debt to the principal shareholder of
approximately $2.6 million plus accrued interest.

        On August 1, 1995, the underwriters of the Company's initial public
offering purchased an additional 300,000 shares of the Company's common stock at
$12.25 per share by exercising their over-allotment option. The net proceeds
from the issuance and sale of the common stock amounted to approximately $3.4
million after deducting underwriters' discounts and issuer expenses. The
remaining outstanding debt to the principal shareholder of approximately $2.5
million plus accrued interest was retired in August 1, 1995 with a portion of
the net proceeds.

                                      F-12
<PAGE>
6.  INVENTORIES

        Inventories consist of the following:

                                                            JULY 31,
                                               ---------------------------------
                                                  1995                   1996
                                               -----------           -----------
Purchased for resale ...............           $13,659,003           $44,294,109
Operating supplies .................               233,987               143,585
                                               ===========           ===========
     Total .........................           $13,892,990           $44,437,694
                                               ===========           ===========

        Replacement cost of inventories approximates LIFO cost at each of the
balance sheet dates. At July 31, 1995 and 1996 inventories in the amount of
approximately $2.3 million and $22.3 million, respectively, were valued using
the FIFO and specific identification methods. The excess current cost over the
LIFO value of inventories was approximately $50,000 and $215,000 at July 31,
1995 and 1996, respectively.

7.  PROPERTY AND EQUIPMENT

        Property and equipment consists of the following:

                                                      JULY 31,
                                          -------------------------------
                                              1995               1996
                                          ------------       ------------
      Building .....................      $       --         $  4,583,842
      Equipment ....................         6,467,806         10,511,198
      Vehicles .....................           207,152            300,668
      Computer hardware and software           280,860            571,312
      Leasehold improvements .......           413,577            974,194
                                          ------------       ------------
                                             7,369,395         16,941,214
      Accumulated depreciation
        and amortization ...........        (1,563,742)        (1,811,028)
                                          ============       ============
                                          $  5,805,653       $ 15,130,186
                                          ============       ============

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

                                                  JULY 31,
                                        -----------------------------
                                            1995             1996
                                        -----------       -----------
          Equipment ..............      $   553,835       $ 1,307,407

          Accumulated amortization         (154,115)         (239,562)
                                        ===========       ===========
                                        $   399,720       $ 1,067,845
                                        ===========       ===========

                                      F-13
<PAGE>
8.  Notes Payable and Long-Term Debt

    Notes payable and long-term debt consist of the following:
<TABLE>
<CAPTION>
                                                                                   July 31,
                                                                          ---------------------------
                                                                             1995            1996
                                                                          ----------      -----------
<S>                                                                       <C>                      
Collateralized demand note payable to principal
  shareholder; interest payable monthly at prime
  plus 1.5% ........................................................      $2,500,000             --

Unsecured note payable to principal shareholder
   due on demand; interest payable monthly (see
   below).  Balance of principal and accrued interest
   payable no later than June, 1998 ................................            --        $ 3,000,000
                                                                          ----------      -----------
                                                                          $2,500,000      $ 3,000,000
                                                                          ==========      ===========
Subordinated loan of which first installment is due within two
   business days following the determination of the final balance
   sheet in accordance with the Asset Purchase Agreement, and
   accrues interest at 8.0% per annum. Second installment due and
   payable on December, 1996, third installment due and payable on
   June, 1998, is payable monthly in arrears at a rate of 12.0% per
   annum during the first six months and 10.0% per annum thereafter
   except with the payment due on June, 1998, which will continue to
   bear interest at 12.0% per annum ................................            --        $ 2,900,000

Term loan due in equal monthly principal payments
   of $200,000 plus accrued interest beginning August, 1996; the
   last payment due and payable on June, 2001. For amounts
   outstanding under the term loans, interest is payable monthly in
   arrears at an annual rate equal to, or at Company's option, (i)
   the Bank's Alternate Base Rate
   plus 0.75% or (ii) the LIBOR rate plus 2.75% ....................            --         12,000,000

Revolving line of credit; interest payable monthly
   at an annual rate equal to, or at the Company's
   option (i) the Bank's Alternate Base Rate plus
   0.50% or (ii) the LIBOR rate plus 2.50%.  The
   revolving credit facility matures in June, 1998 .................            --         21,775,993

Notes payable to banks and financing companies
   due in monthly installments with interest rates
   ranging from 7.4% to 12.03% collaterized by
   equipment .......................................................      $  153,111           52,605
                                                                          ==========      ===========
</TABLE>
                                      F-14
<PAGE>
8.  NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)

        In February 1995, the Company entered into a $10 million Revolving
Credit and Term Loan Agreement with letter of credit facility with NationsBank
of Texas, N.A. (the "$10 million Credit Facility") which replaced a $3 million
revolving credit facility and a $2.6 million letter of credit facility existing
at July 31, 1994. The $10 million Credit Facility provided for borrowings or the
issuance of letters of credit for an amount up to $10 million based on eligible
accounts receivable and inventory balances. The $10 million Credit Facility
expired in April 1996.

        The $65 million Credit Facility (see Note 3) replaced the Company's $10
million Credit Facility. The $65 million Credit Facility includes 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
revolving credit facility matures on June 20, 1998. The $65 million Credit
Facility also includes a $12 million term loan, which requires 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.

        Interest on borrowings outstanding under the revolving line of credit is
payable monthly at an annual rate equal to, at the Company's option, (i) the
Bank's Alternate Base Rate plus 0.50% or (ii) the LIBOR rate plus 2.50%. On July
31, 1996 the interest rate was 8.09%. For amounts outstanding under the term
loans, interest is payable monthly in arrears at an annual rate equal to, at the
Company's option, (i) the Bank's Alternate Base Rate plus 0.75% or (ii) the
LIBOR rate determination thereof, a rate per annum equal to the sum of (a) the
greater of (i) the Prime Rate (as defined in the credit agreement related to the
$65 million Credit Facility ( the "Credit Agreement")) in effect on a such day,
(ii) the Federal Funds Effective Rate (as defined in the Credit Agreement) in
effect for such a day plus 1/2 of 1.0%, and (iii) the Base CD Rate (as defined
in the Credit Agreement) in effect for such a day plus 1.0%. On July 31, 1996
the interest rate was 8.38%. The Company incurred approximately $755,000 in
costs related to obtaining the $65 million Credit Facility, which is being
amortized on a straight-line basis over the five year term of such $65 million
Credit Facility. Further, the $65 million Credit Facility is subject to an
annual fee, payable quarterly, of 0.50% of the unused portion of the revolving
credit commitment, a fee of 2.0% of the face amount of letters of credit when
issued and an annual administrative fee equal to $100,000.

        The $65 million Credit Facility is collateralized by a first lien on
substantially all of the Company's assets, including 65% of the issued and
outstanding stock of its foreign subsidiaries. The $65 million Credit Facility
excludes the assets of the Company's foreign subsidiaries.

        As of July 31, 1996, the Company had approximately $21.9 million
outstanding borrowings under the $65 million Credit Facility and approximately
$5.7 million in outstanding irrevocable letters of credit and bankers'
acceptances. Based on the level of the Company's eligible accounts receivable
and inventory at July 31, 1996, the Company had approximately $12.9 million of
additional borrowing capacity available under the $65 million Credit Facility,
all of which could be used to support borrowings under the revolving of credit
line or additional letters of credit.

        The Credit Agreement contains certain restrictive covenants and
conditions among which are a prohibition from paying 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 but not limited to a maximum total
debt ratio and minimum interest expense coverage. In addition, the Credit
Agreement prohibits Mr. Torres from significantly reducing his ownership in the
Company below specified levels.

                                      F-15
<PAGE>
8.  NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)

        As of July 31, 1996, the Company's Spanish toy subsidiary had
approximately $336,000 outstanding in irrevocable letters of credit under a
letter of credit facility from Banco Del Comercio, Valencia, Spain, for the
purchase of inventory.

        To partially finance the Acquisition, Mr. Torres provided a $3.0 million
unsecured demand loan. Interest on this loan is payable monthly at a per annum
rate equal to the lesser of the Credit Agreement's Alternate Base Rate or the
Maximum Lawful Rate. Repayment of the note is subordinated to payment of the
Credit Facility pursuant to the terms of a Subordination Agreement dated June
20, 1996, by and among Mr. Torres, the Company and the Bank. Outstanding and
unpaid principal and interest on the Torres loan is payable no later than June
21, 1998; however, earlier repayment of the note is permissible.

        As part of the consideration for the Acquisition, the Sellers (see Note
3) received a $2.9 million note (the "Ace Note") from the Company. The first
installment on the Ace note in the amount of $600,000 is due and payable two
business days following the determination of the final balance sheet of Ace and
accrues interest at 8.0% per annum. The second installment on the Ace Note in
the amount of $1.0 million is due and payable on December 20, 1996, of which
$500,000 is subject to offset against any claims by the Company against the
Sellers. The third installment on the Ace Note in the amount of $500,000 is due
June 20, 1997 and is also subject to offset against any claims by the Company
against the Sellers. The fourth installment on the Ace Note is due and payable
on June 21, 1998 and is also subject to offset against any claims by the Company
against the Sellers. Interest on the Ace Note, other than with respect to the
first installment of $600,000, is payable monthly in arrears at a rate of 12.0%
per annum during the first six months and 10.0% per annum thereafter, except
with respect to the $800,000 payment due June 21, 1998, which will continue to
bear interest at 12.0% per annum. Payment of all obligations under the Ace Note
is subordinate to payment of the $65 million Credit Facility. The Ace Note is
collateralized by certain assets of the Company, claims on which are also
subordinate to the $65 million Credit Facility.

The following is a summary of short-term borrowings under the $65 million Credit
Facility and other notes payable:

                                                     YEAR ENDED JULY 31,
                                             ----------------------------------
                                                  1995               1996
                                             --------------      --------------
Month-end maximum loan balance
  during the period ......................   $    8,345,000      $   24,775,993

Weighted average interest rate
  at period-end ..........................            10.25%               8.20%

The aggregate amount of maturities on long-term borrowings as of July 31, 1996
were as follows:

                Year ended July 31:
                             1997           $ 4,518,411
                             1998             3,234,378
                             1999             2,400,000
                             2000             2,400,000
                             2001             2,400,000
                                             -----------
                                             $14,952,789
                                             ===========
                                    
                                      F-16
<PAGE>
9.  COMMITMENTS AND CONTINGENCIES

CONTRACT

        The Company owns and operates amusement game machines having an
identifiable net book value approximating $2.6 million at July 31, 1996 on a
month-to-month basis pursuant to terms similar to those of an agreement that
expired in June 1995. The Company's portion of revenues during the term of the
expired agreement approximated $1.4 million, $1.4 million and $2.5 million in
the years ended July 31, 1994, 1995 and 1996, respectively. Management is unable
to determine the impact, if any, on future operations of the Company if the
relationship is not continued or if it is continued under terms less favorable
than those of the expired contract.

CAPITAL LEASES

        The Company leases equipment under capital lease agreements which expire
at various dates through 1999. 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, 1996, are
as follows:

          Year ended July 31:
                       1997 ........................      $   450,016
                       1998 ........................          415,163
                       1999 ........................          297,609
                                                          -----------
          Total minimum lease payments .............        1,162,788
          Less amounts representing interest .......         (121,428)
                                                          -----------
                                                            1,041,360
          Less current portion .....................         (379,534)
                                                          ===========
          Long-term obligations under capital leases      $   661,826
                                                          ===========

OPERATING LEASES

        The Company leases its operating facilities, consisting primarily of
warehouse, distribution and office space, under operating leases expiring at
various dates through 2003. The lease agreements generally provide renewal
options and require the Company to pay property taxes, utilities and insurance.
Rent expense under operating leases was $1.5 million, $1.7 million and $1.5
million for the years ended July 31, 1994, 1995 and 1996, respectively.

        Minimum rental payments required under operating leases that have
initial or remaining non-cancellable lease terms in excess of one year at July
31, 1996 are as follows:

              Year ended July 31:
                           x1997 .................      $2,001,341
                           x1998 .................       1,382,697
                           x1999 .................       1,154,673
                           x2000 .................         653,512
                           x2001 .................         656,887
              Thereafter .........................       1,273,847
                                                        ----------
                      Total minimum lease payments      $7,122,957
                                                        ==========

                                      F-17
<PAGE>
9.  COMMITMENTS AND CONTINGENCIES (CONTINUED)

ROYALTIES

        The Company licenses entertainment characters and trademarks and pays
associated royalties based on sales of the related products. Substantially all
of the license agreements are for periods of one to three years and include
guaranteed minimum royalty payments over the life of the agreements. Prepaid
royalties are amortized as a charge against earnings based on the greater of
straight-line amortization over the agreement period or royalties owed as a
percentage of sales per the related agreement. Royalty expenses are reported as
cost of sales in the statements of operations.

        Future guaranteed minimum royalty obligations by year end and in the
aggregate under license agreements consist of the following at July 31, 1996:

             Year ended July 31:
                      1997 ........................      $3,899,911
                      1998 ........................       2,364,486
                      1999 ........................         941,586
                                                         ----------
                     Total minimum royalty payments      $7,205,983
                                                         ==========

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 $7.1 million at July 31, 1996, 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.

10.  ADVERTISING EXPENSES

        Advertising expenses consist primarily of costs incurred in the design,
development, printing and shipping of Company catalogs and a limited number of
advertisements in trade publications. The Company expenses all advertising
expenses as incurred. The Company's advertising expenses were approximately
$244,000, $519,000 and $688,000 during fiscal 1994, 1995 and 1996, respectively.

11.  INCOME TAX

        Income tax provision (benefit) is as follows:

                                                  YEAR ENDED JULY 31,
                                        ---------------------------------------
Federal:                                  1994          1995           1996
                                        --------    -----------     -----------
      Current provision ............    $446,775    $   782,053     $ 1,987,531
      Deferred provision (benefit) .      83,116       (100,007)        (74,913)
                                        --------    -----------     -----------
          Total Federal ............     529,891        682,046       1,912,618
                                        --------    -----------     -----------
State - current ....................      62,737         79,613         323,007
                                        --------    -----------     -----------
Foreign - current ..................     117,368        346,498         384,024
                                        --------    -----------     -----------
      Net provision for income taxes    $709,996    $ 1,108,157     $ 2,619,649
                                        ========    ===========     ===========

                                      F-18
<PAGE>
11.  INCOME TAX (CONTINUED)

        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,
                                          -------------------------------------
                                            1994         1995          1996
                                          --------    ----------    -----------
Income taxes computed at Federal
  statutory rates ....................    $583,035       934,114    $ 2,137,659
Foreign tax differentials ............      21,989       105,653        172,097
Valuation allowance on capital
  loss carryover .....................        --            --          135,693
State tax provision ..................      62,737        52,545        213,185
Other - net ..........................      42,235        15,845        (38,985)
                                          --------    ----------    -----------
     Total provision .................    $709,996    $1,108,157    $ 2,619,649
                                          ========    ==========    ===========

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

                                                     YEAR ENDED JULY 31,
                                          -------------------------------------
                                             1994         1995         1996
                                          ----------   ----------   -----------
Assets:
   Current:
      Alternative minimum tax
        credit carryforward ...........   $  424,465   $     --     $      --
      Accounts receivable .............      121,934      218,984       406,011
      Capital loss carryover ..........         --           --         135,693
      Other - net .....................       20,917      123,112        86,514
      Valuation allowance .............         --           --        (135,693)
                                          ----------   ----------   -----------
        Gross deferred tax assets .....      567,316      342,096       492,525
                                          ----------   ----------   -----------
Liabilities:
   Current - LIFO inventory valuation .    1,319,564      853,381       715,984
   Non-current - basis of property
     and equipment ....................       25,792      166,748       379,661
                                          ----------   ----------   -----------
        Gross deferred tax liabilities     1,345,356    1,020,129     1,095,645
                                          ----------   ----------   -----------
        Net deferred tax liabilities ..   $  778,040   $  678,033   $   603,120
                                          ==========   ==========   ===========

        The Company recorded a valuation allowance on the capital loss carryover
as management cannot be assured that the Company will be able to realize the
benefit in future periods. Management believes it is more likely than not that
the benefit of the remaining deferred tax assets will be realized, and thus has
not recorded a valuation allowance on these amounts.

        Income taxes are not provided on undistributed earnings of foreign
subsidiaries as those earnings are intended to be permanently reinvested in
those operations. The amount of such earnings is insignificant at July 31, 1996.
These earnings could become subject to additional tax upon distribution in the
form of dividends or otherwise. It is not practicable to estimate the amount of
additional U.S. tax that might be payable on the foreign earnings; however, the
Company believes that U.S. foreign tax credits would largely eliminate any U.S.
tax.

                                      F-19
<PAGE>
12.  SHAREHOLDERS' EQUITY

COMMON STOCK

        During October 1994 and April 1995, the Company effected a 2-for-1 stock
split and a 0.82-for-1 reverse stock split, respectively. All share information
included in the accompanying consolidated financial statements and notes thereto
has been retroactively adjusted to reflect the stock split and reverse stock
split.

STOCK OPTIONS

        In August 1994, the Board approved the Play By Play Toys & Novelties,
Inc. 1994 Incentive Plan (the "Incentive Plan"), reserving 300,000 shares of the
Company's stock for awards thereunder. On October 17, 1995, the Board approved a
resolution to fund the Incentive Plan with an additional 400,000 shares of the
Company's common stock. Under the Incentive Plan and at the discretion of the
Board, 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 under the Incentive Plan 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. No options were granted pursuant to the above shares. During
fiscal 1996, certain of the Company's outside directors and an agent of the
Company were awarded 50,000 non-qualified stock options for shares exercisable
at a price of $14.58 per share (40,000 shares) and $14.03 per share (10,000
shares), pursuant to the terms of separate compensation agreements. No options
were exercisable as of July 31, 1996.

Transactions under the Incentive Plan are summarized as follows:

                                               NUMBER               OPTION
                                             OF OPTIONS            PRICE PER
                                             FOR SHARES           OPTION SHARE
                                      ------------------------- ---------------
                                      QUALIFIED   NON-QUALIFIED
                                      ---------   ------------- ---------------
Options outstanding July 31, 1994 ...      --           --        --
Granted .............................   130,000       12,000    $13.48
Exercised ...........................      --           --        --
                                       --------       ------   
Options outstanding July 31, 1995 ...   130,000       12,000    $13.48
                                       --------       ------   
Granted .............................   311,500       50,000    $ 9.75 to $15.95
Cancelled ...........................   (13,000)        --        --
                                       --------       ------   
Options outstanding July 31, 1996 ...   428,500       62,000    $ 9.75 to $15.95
                                       --------       ------   

WARRANTS

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

        In addition to the cash paid to the Sellers of Ace (see Note 3), the
Company issued to the Sellers a warrant to purchase up to 35,000 common shares
of the Company's common stock at a price per share equal to $14.90. The warrant
is excercisable after one year from June 20, 1996, or earlier if the Company
effects certain registrations of its common stock. The estimated value of the
warrant of $245,350 has been recorded as an increase in goodwill, with an
offsetting increase in additional paid-in capital.

                                      F-20
<PAGE>
12.  SHAREHOLDERS' EQUITY (CONTINUED)

PREFERRED STOCK

        Pursuant to the Company's Articles of Incorporation, the Board is
authorized to issue from time to time up to 10,000,000 shares of Preferred
Stock, in one or more series, and the Board is authorized to fix the dividend
rights, dividend rates, any conversion rights or right of exchange, any voting
right, any rights and terms of redemption (including sinking fund provisions),
the redemption rights or prices, the liquidation preferences and any other
rights, preferences, privileges and restrictions of any series of Preferred
Stock and the number of shares constituting such series and the designation
thereof. There were no shares of Preferred Stock outstanding as of July 31,
1996.

13.  TRANSACTIONS WITH RELATED PARTIES

        The accompanying statements of operations include the following amounts
related to construction services provided to the principal shareholder:

                                                       YEAR ENDED JULY 31,
                                              ----------------------------------
                                                1994         1995         1996
                                              --------     --------     --------

Net sales ...............................     $499,785     $162,119     $   --
Selling, general and administrative
  expenses ..............................      434,596      140,973      106,650

        The principal shareholder leases seven land and building packages to a
third party. The Company incurred costs of approximately $1.0 million, $1.0
million and $0.9 million in the years ended July 31, 1994, 1995 and 1996,
respectively, for revenue sharing arrangements with the third party in
connection with the Company's vending operations. The Company incurred costs of
approximately $123,000, $108,000 and $103,000 for revenue sharing arrangements
in the years ended July 31, 1994, 1995 and 1996, respectively, in connection
with its vending operations with an entity related to another shareholder who is
also a director of the Company.

        During fiscal 1996, the Company's subsidiary in Spain subcontracted
certain work to a company whose major shareholder is the Company's Executive
Vice President of European Operations, and is that subsidiary's president. The
Company was invoiced $392,030 for work performed in the year ended July 31,
1996.

        Interest expense on notes payable to related parties approximated
$496,000, $550,000 and $30,000 for the years ended July 31, 1994, 1995 and 1996,
respectively. Fees incurred under guaranty agreements with the principal
shareholder were $27,500, $76,905 and zero in the years ended July 31, 1994,
1995 and 1996, respectively.

14.  SUPPLEMENTAL CASH FLOW DISCLOSURES

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

                                               YEAR ENDED JULY 31,
                                      ------------------------------------------
                                        1994            1995            1996
                                      --------       ----------       ----------
Interest paid .................       $747,990       $1,083,520       $  422,948
Income taxes paid .............        557,484          675,562        1,594,078

                                      F-21
<PAGE>
14.  SUPPLEMENTAL CASH FLOW DISCLOSURES (CONTINUED)

        The Company incurred capital lease obligations of $198,193, $164,827 and
$966,979 in the years ended July 31, 1994, 1995 and 1996, respectively.

        During fiscal 1996 the Company retired all of the 24,600 shares of
Treasury Stock outstanding by reducing additional paid-in capital by the $50,000
cost of those shares. The Company issued a note payable for $2,900,000 and
warrants to purchase up to 35,000 shares of the Company's Common Stock to the
Sellers of Ace to partially finance the Acquisition. The warrants were valued at
$245,350 (see Note 3). The Company recorded a note receivable for 195,000,000
pesetas, or approximately $1.5 million, from the Buyers of the stock of
Restaurants Universal (see Note 4).

        In the year ended July 31, 1994, the Company issued stock with a value
of $72,711 as payment of a portion of the purchase price to acquire the 30%
minority interest of a subsidiary from a related party.

15.  INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION

        The Company operates primarily in one industry segment, the sale of
stuffed toys and novelty items, primarily to customers in the retail and
amusement markets both domestically through its U.S. operations and in Europe
through a Spanish subsidiary. There were no material amounts of sales or
transfers among geographic areas and no material amounts of U.S. export sales.

        Information by geographic location is as indicated below. The toys and
novelties industry segment includes sales of toy products and vending operations
for each of the periods presented.

                                                YEAR ENDED JULY 31,
                                   ---------------------------------------------
                                      1994             1995             1996
                                   -----------     ------------     ------------
Net sales:
   United States .............     $30,612,572     $ 41,313,956     $ 65,096,521
   Europe ....................       1,955,684        6,416,554        9,100,780
                                   ===========     ============     ============
                                   $32,568,256     $ 47,730,510     $ 74,197,301
                                   ===========     ============     ============
Income from operations:
   United States .............     $ 2,000,622     $  2,761,995     $  5,453,622
   Europe ....................         193,962        1,274,531        1,217,489
                                   ===========     ============     ============
                                   $ 2,194,584     $  4,036,526     $  6,671,111
                                   ===========     ============     ============
Identifiable assets:
   United States .............     $21,131,074     $ 36,046,163     $ 91,948,711
   Europe ....................       2,678,027        9,210,074       11,964,203
                                   ===========     ============     ============
                                   $23,809,101     $ 45,256,237     $103,912,914
                                   ===========     ============     ============

                                      F-22
<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, File No. 33-07031),
        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, File No. 33-07031) 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       Play By Play Toys & Novelties, Inc. Warrant to Purchase Common Stock
        (filed as Exhibit 2.1 to Form 8-K, File No. 33-07031), 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.

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    Revolving Credit and Term Loan Agreement (With Letter of Credit
        Facility), dated February 14, 1995, among the Company, as borrower,
        Arturo G. Torres, as guarantor, and NationsBank of Texas, N.A., as
        lender (filed as Exhibit 10.2 to the Registration Statement on Form S-1,
        File No. 33-92204), incorporated herein by reference.

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

EXHIBIT
NUMBER                      DESCRIPTION OF EXHIBITS
-------                     -----------------------
10.3    Articles of Dissolution of Coast to Coast Apparel, Inc. dated December
        30, 1994 (filed as Exhibit 10.3 to the Registration Statement on Form
        S-1, File No. 33-92204), incorporated herein by reference.

10.4    Articles of Merger of Subsidiary Corporations into Parent Corporation,
        dated November 14, 1994, merging Laramie Interests, Inc., Val Verde
        Vending, Inc. and Play By Play Toys and Novelties, Inc., with and into
        the Company (filed as Exhibit 10.4 to the Registration Statement on Form
        S-1, File No. 33-92204), incorporated herein by reference.

10.5    License Agreement, dated March 30, 1995, by and among The Coca-Cola
        Company, Coca-Cola, Ltd. and the Company (filed as Exhibit 10.5 to the
        Registration Statement on Form S-1, File No. 33-92204), incorporated
        herein by reference.

10.6    License Agreement, dated June 28, 1994, by and between Harley-Davidson,
        Inc. and the Company (filed as Exhibit 10.6 to the Registration
        Statement on Form S-1, File No. 33-92204), incorporated herein by
        reference.

10.7    Retail License, dated April 13, 1994, by and between Warner Bros., a
        division of Time Warner Entertainment Company, L.P. and the Company
        (filed as Exhibit 10.7 to the Registration Statement on Form S-1, File
        No. 33-92204), incorporated herein by reference.

10.8    Loan Agreement dated April 1, 1993, by and between Arturo G. Torres and
        the Company (filed as Exhibit 10.8 to the Registration Statement on Form
        S-1, File No. 33-92204), incorporated herein by reference.

10.9    Letter Agreement dated April 26, 1995, by and between Arturo G. Torres
        and the Company relative to the Loan Agreement set forth in Exhibit 10.8
        (filed as Exhibit 10.9 to the Registration Statement on Form S-1, File
        No. 33-92204), incorporated herein by reference.

10.10   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 2.1 to Form 8-K, File No. 33-07031),
        incorporated herein by reference.

10.11   Promissory Note dated June 20, 1996, of Play By Play Toys & Novelties,
        Inc. payable to the order of Arturo G. Torres in the principal sum of
        $3,000,000 (filed as Exhibit 2.1 to Form 8-K, File No. 33-07031),
        incorporated herein by reference.

10.12   Subordination Agreement dated June 20, 1996, by and among Arturo G.
        Torres, Play By Play Toys & Novelties, Inc. and Chemical Bank (filed as
        Exhibit 2.1 to Form 8-K, File No. 33-07031), incorporated herein by
        reference.

10.13   Loan Agreement dated June 20, 1996, by and between Arturo G. Torres and
        Play By Play Toys & Novelties, Inc. (filed as Exhibit 2.1 to Form 8-K,
        File No. 33-07031), incorporated herein by reference.

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

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

10.14   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 2.1 to Form 8-K, File No. 33-07031),
        incorporated herein by reference.

21      Subsidiaries of the Company.

23.1    Consent of Coopers & Lybrand L.L.P.

24      Powers of Attorney (filed as Exhibit 24 to the Registration Statement on
        Form S-1, File No. 33-92204), incorporated herein by reference.

27      Financial Data Schedule

                                      E-3
<PAGE>
                       PLAY BY PLAY TOYS & NOVELTIES, INC.
                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, 1994 ....   $178,395      $  353,353         $173,120      $  358,628
   Year ended July 31, 1995 ....    358,628         660,569           72,731         946,466
   Year ended July 31, 1996 ....    946,466       1,163,346          488,209       1,621,603
</TABLE>
----------------                    
* Net of recoveries of  $64,457 and $28,704 in 1995 and 1996, respectively.

                                      S-1