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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549




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Form 10-K



|    |                                                                                      
|--- | -------------------------------------------------------------------------------------
|[X] | Annual Report pursuant to Section 13 or
	15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31,
2001;

or



|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|[ ] | Transition report pursuant to Section 13
	or 15(d) of the Securities Exchange Act of 1934

For the transition period
from                     to

Commission file number 0-7024

THE FIRST YEARS INC.

(Exact Name of Registrant as Specified in its
Charter)


|                                                                |  |                                      
|--------------------------------------------------------------- |  | -------------------------------------
|MASSACHUSETTS                                                   |  | 04-2149581                           
|(State or Other Jurisdiction of
	Incorporation or Organization) |  | (I.R.S. Employer
	Identification No.)
|                                                               
|ONE KIDDIE DRIVE,
	AVON, MASSACHUSETTS                          |  | 02322                                
|(Address of Principal Executive
	Offices)                       |  | (Zip Code)                           

508-588-1220

(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                |  | None                                      

Securities registered pursuant to
Section 12(g) of the Act:

COMMON STOCK, $.10 PAR VALUE:

(AND ASSOCIATED COMMON STOCK PURCHASE
RIGHTS)


(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 twelve 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.     [X]

The aggregate market value, based upon the
closing sale price of the shares as reported by the Nasdaq
National Market, of voting stock held by non-affiliates as of
February 28, 2002 was $76,313,988 (excludes shares held by
executive officers, directors, and beneficial owners of more
than 10% of the Companys common stock). Exclusion of
shares held by any person should not be construed to indicate
that such person possesses the power, direct or indirect, to
direct or cause the direction of management or policies of the
registrant or that such person is controlled by or under common
control with the registrant.

The number of shares of Registrants Common
Stock outstanding on February 28, 2002 was 8,175,182.

Portions of the Registrants Definitive
Proxy Statement for its 2002 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Report.



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TABLE OF CONTENTS



|                                                                            |                                                                                               |  |  |  |  |  |  | 
|--------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                                     
|                                                                            | Item 1. Business                                                                             
|                                                                            | Item 2. Properties                                                                           
|                                                                            | Item 3. Legal Proceedings                                                                    
|                                                                            | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                                                    
|                                                                            | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                                                            | Item 6. Selected Financial Data                                                              
|                                                                            | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                                            | Item 7A. Quantitative and Qualitative Disclosure about Market Risk                           
|                                                                            | Item 8. Financial Statements and Supplementary Data                                          
|                                                                            | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                                                   
|                                                                            | Item 10. Directors and Executive Officers of the Registrant                                  
|                                                                            | Item 11. Executive Compensation                                                              
|                                                                            | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                                            | Item 13. Certain Relationships and Related Transactions                                      
|PART IV                                                                    
|                                                                            | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES                                                                 
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
|INDEPENDENT AUDITORS REPORT                                               
|THE FIRST YEARS INC.                                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                 
|EX-10.3 LETTER AGREEEMENT WITH SESAME WORKSHOP                             
|EX-10.14 PROMISSORY NOTE AND AGREEMENT                                     
|EX-21.1 LIST OF SUBSIDIARIES                                               
|EX-23.1 CONSENT OF DELOITTE AND TOUCHE LLP                                 



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TABLE OF CONTENTS

|         |  |                                                                                       |  |      |       | 
|-------- |  | ------------------------------------------------------------------------------------- |  | ---- | ----- | 
|Item     |  | Description                                                                           |  | Page
|         |  |                                                                                       |  |     
|Part I  
|1        |  | Business                                                                              |  |      | I-1   | 
|2        |  | Properties                                                                            |  |      | I-5   | 
|3        |  | Legal Proceedings                                                                     |  |      | I-5   | 
|4        |  | Submission of Matters to a Vote of Security
	Holders                                  |  |      | I-5   | 
|Part II 
|5        |  | Market for Registrants Common Equity and
	Related Shareholder Matters                |  |      | II-1  | 
|6        |  | Selected Financial Data                                                               |  |      | II-2  | 
|7        |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operation |  |      | II-2  | 
|7A       |  | Quantitative and Qualitative Disclosure about
	Market Risk                            |  |      | II-11 | 
|8        |  | Financial Statements and Supplementary Data                                           |  |      | II-11 | 
|9        |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure |  |      | II-11 | 
|Part III
|10       |  | Directors and Executive Officers of the Registrant                                    |  |      | III-1 | 
|11       |  | Executive Compensation                                                                |  |      | III-1 | 
|12       |  | Security Ownership of Certain Beneficial Owners
	and Management                       |  |      | III-1 | 
|13       |  | Certain Relationships and Related Transactions                                        |  |      | III-1 | 
|Part IV 
|14       |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                      |  |      | IV-1  | 



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PART I




Item 1.     Business

General

The First Years Inc. (The First Years
or the Company) is a leading worldwide marketer of
innovative products for infants and toddlers. Incorporated in
1952 as Kiddie Products, Inc. and adopting its new name in 1995,
The First Years is dedicated to delivering products that
out-perform the competition through an in-depth understanding of
parenting and child development. Working in consultation with
Dr. T. Berry Brazelton, Dr. Edward Tronick, and their
staff at the Child Development Unit, Childrens Hospital,
Boston, as well as the Companys own worldwide Parents
Council, The First Years develops products that make the first
three years of life happier, healthier and easier for babies and
the parents who love them.

Information about The First Years, our products
and operations is also available on our website at
www.thefirstyears.com.

Products

Our product line, which contains more than 300
items ranging in retail price from approximately $0.96 to
$59.99, is marketed under The First Years® brand and
several licensed brands, including Disney Baby® and Sesame
Street®.

Leveraging these brands, we market a broad range
of products in three categories.

|                   |  |                                                                                                                                                                                                             
|------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product Categories |  | Products                                                                                                                                                                                                    
|                   |  |                                                                                                                                                                                                             
|Feeding & Soothing |  |  Bottles, bottle brushes, bowls,
	breast pumps and other nursing accessories, drinking cups,
	dishes, flatware, bibs, booster seats, mealtime totes, bottle
	warmers, feeding organizers, and drying racks.
|Play & Discover    |  |  Toys, teethers, bath toys, books,
	stroller toys and rattles.                                                                                                                                             
|Care & Safety      |  |  Bathing and grooming products,
	including bathtubs, washcloths, hooded towels, nail clippers,
	toothbrushes, comb and brush sets, and baby scissors.                                                      
|                   |  |  Home safety products, including
	monitors, safety gates, cabinet locks, sunscreens, bed rails,
	spout guards and step stools.                                                                             
|                   |  |  Health and hygiene products,
	including thermometers, toilet-trainers, medicine dispensers,
	health care kits, no scratch mits, and diapering accessories.                                                

We had several innovative product introductions
in 2001 including a high-speed digital thermometer crib CD
player, and bottle warmer. In 2002 we are offering a number of
new products, including semi-disposable spill proof cups,
newborn-to-toddler tub, a voice-recording picture frame,
tub-side bath seat, hardware-mounted stair gate, and numerous
licensed and specialty product creations.

Product Design and Development

The First Years is actively engaged in the design
and development of new products and enhancements to our current
product line. During 2001, 2000, and 1999, we spent
approximately $5.0, $4.2, and $3.8 million, respectively,
on new product development. We continue to invest in product
development across all product lines. Our product development
efforts are centered on aggressively developing new areas within
the foregoing categories in which we can differentiate our
products and add value to the parenting process.

The following is an overview of our
differentiated product design and development process that
contributes to the success of our products.



| |    |                                                                                                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------
| | 1. | Our unique parenting expertise combined with the
	latest technology inspires product concepts that solve unmet
	needs of parents.

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| |    |                                                                                                                                                                                                                                                                                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | New product concepts are presented to The First
	Years Parents Council, a global network composed mainly of
	expectant and new parents, to solicit feedback on purchase
	interest and suggestions for refinement.                                                                                                                                     
|
| | 3. | Product models are designed in consultation with
	Dr. Brazelton and his staff of specialists at The Child
	Development Unit, Childrens Hospital, Boston, to elicit
	developmental information and guidance. In addition,
	cross-functional product development teams review and evaluate
	each model prior to pre-testing by children and/or parents.
|
| | 4. | The product is tooled for manufacturing and
	pre-production samples are sent to parents for home use testing
	along with the competitive product. Our goal is to have our
	product out-perform the competition before manufacturing is
	authorized.                                                                                                   

Marketing and Sales Distribution

We market our products under three distinctive
brands. Products are marketed under our name, The First
Years® and we license Disney Baby® including Winnie
the Pooh® and Mickey Mouse® and other related
characters from Disney Enterprises, Inc. and Sesame Street®
from Sesame Workshop.

Our products are sold to a broad range of
customers (approximately 800 in total) in more than 40
countries. Our customer base includes mass merchants, national
variety and drug stores, supermarkets, wholesale clubs,
convenience stores, toy specialty stores, wholesale
distributors, department stores, internet-based retailers, mail
order catalogs and catalog stores. Major customers include
Wal*Mart, Toys R Us, Target, Kmart, Sears,
Albertsons, J.C. Penney, Baby Depot at Burlington Coat
Factory, Rite Aid, Eckerd Drug, Walgreens, Safeway, Mothercare
UK Ltd., Argos, Zellers, Wakefern Food, Kohls, Ahold, and CVS.

Products sold in the United States and Canada are
marketed through our sales organization comprised of an internal
sales staff and a network of independent sales representatives.
Our sales management is responsible for the development and
training of independent sales representatives. Training is
conducted at our headquarters and throughout the United States.

Our wholly owned subsidiary, The First Years
Inc., a Delaware corporation (TFY-Delaware), manages sales
distribution for the western part of the United States.
TFY-Delaware has sales offices in Missouri, Arkansas and
California, and is our exclusive sales agent for certain states
in the western part of the United States.

In Europe and the Middle East, our internal sales
staff sells our products from our sales office in Cirencester,
England, which is headed by our Vice President & General
Manager  Europe, Africa, Middle East. This staff manages a
network of foreign distributors and independent sales
representatives. In Central and South America, Australia and the
Pacific Rim, our internal sales staff sells our products through
a network of foreign distributors and independent sales
representatives.

Our domestic net sales in 2001, 2000, and 1999
were approximately $116.5, $118.5, and $121.9 million,
respectively, and accounted for approximately 88.2%, 88.8%, and
89.4% of our total net sales in 2001, 2000, and 1999,
respectively. Our international net sales, primarily in Europe,
Canada, South America, and the Pacific Rim were approximately
$15.6, $15.0, and $14.5 million, respectively, and
accounted for approximately 11.8%, 11.2%, and 10.6% of our total
net sales in 2001, 2000, and 1999, respectively. In 2001, we
worked closely with key retailers overseas introducing them to
our category management concept, which we expect will continue
to strengthen relationships with these customers and expand our
distribution in principal international markets.

During 2001, Wal*Mart, Toys R Us, and
Target accounted for approximately 23%, 20%, and 15% of our net
sales, respectively. A significant reduction in purchases by any
one of these customers could have a material adverse effect on
our business. Additionally, our top ten customers collectively
accounted for 73% of net sales.

In accordance with industry practice, we grant
credit to our customers at the time of purchase. Our practice is
not to accept returned goods unless authorized by management of
our sales organization. Returns

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result primarily from damage or shipping
discrepancies. Returns are reflected as a reduction of sales and
accounts receivable. In addition to actual returns, an estimate
of future returns is made based upon historical trends.


We ship products according to the delivery
schedules specified by our customers. Orders are subject to
cancellation or change any time prior to shipment. The size of
our order backlog is not a material aspect of our business. The
dollar amount of current backlog is not considered to be a
reliable indicator of future sales volume.

Licensed Character Products

We have entered into and renewed various
agreements which provide for the payment of royalties on certain
of our products featuring licensed characters. Existing
agreements have various terms and require minimum royalty
payments of $4,439,000 during the terms of these agreements. We
renewed a major licensing agreement in 2000, which will expire
at the end of 2002. Sales of products licensed under this major
license agreement amounted to 27% of our total net sales for the
year ended December 31, 2001. While management currently
anticipates negotiating a renewal of the license, non-renewal of
this licensing agreement or, renewal on terms not favorable to
the Company, could have a material adverse affect on the
Companys business.

Manufacturing and Sources of Supply

We do not own or operate our own manufacturing
facilities. In 2001, all of our products were manufactured using
either our custom tools (molds and dies) or to our
specifications by approximately 25 manufacturers located in the
United States, Canada, China, Taiwan, and Thailand.
Approximately 69% of all of our products sold in 2001 were
manufactured in Asia, primarily in China. A large percentage of
our furnishings and other large products were manufactured in
2001 by suppliers in the United States and Canada because of the
significantly higher shipping costs from the Far East.

Generally, to make each product we use one
manufacturer from our supplier base. Due to the high cost of
developing duplicate tooling (predominantly molds and dies),
most of our products are made using one set of tools; however,
we have developed duplicate tools for several of our key and
high-volume products.

In 2001, our largest supplier, located in Taiwan
with operations in China, manufactured products that represented
approximately 13% of our net sales. We have not entered into
long-term contractual arrangements with any of our suppliers.

The principal raw materials used in the
production and sale of our products are resin-based plastics and
certain natural materials, including paperboard and cloth. The
manufacturers who deliver completed products to us purchase the
raw materials. Because the primary source used in many
manufactured plastics is petroleum, the cost of plastic for use
in our products varies to a great extent with the price of
petroleum. While all raw materials are purchased from outside
sources, we are not dependent upon a single supplier in any of
our operations for any material essential to our business or not
otherwise commercially available to us. We have been able to
obtain an adequate supply of raw materials, and no shortage of
any materials is anticipated.

We purchase our products from suppliers primarily
in U.S. dollars and Hong Kong dollars, which are currently
pegged to the U.S. dollar. We also purchase a small
percentage of our products in Canadian dollars. Generally, our
suppliers ship the products on the basis of open credit terms or
upon our acceptance of the products.

Because of our substantial reliance on suppliers
in foreign countries, we must order products further in advance
of customer orders than would generally be the case if such
products were produced in the United States. As a result, we may
be required to carry significant amounts of inventory to meet
rapid delivery requirements of customers and to ensure a
continuous allotment of goods from suppliers.

Foreign manufacturing is subject to a number of
risks including transportation delays and interruptions, the
imposition of tariffs, quotas, and other import or export
controls, currency fluctuations, misappropriation of

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intellectual property, political and economic
disruptions, and changes in governmental policies. From time to
time, the United States Congress has attempted to impose
additional restrictions on trade with China. China gained
Permanent Normal Trade Relations (PNTR) with the United
States when it acceded to the World Trade Organization,
effective January 1, 2002. The United States imposes the
lowest applicable tariffs on exports from PNTR countries to the
United States. In order to maintain its WTO membership, China
has agreed to several requirements, including the elimination of
caps on foreign ownership of Chinese companies, lowering tariffs
and publicizing its laws. No assurance can be given that China
will meet these requirements and remain a member of the WTO, or
that its PNTR trading status will be maintained. If Chinas
WTO membership is withdrawn or if PNTR status for goods produced
in China were removed, there could be a substantial increase in
tariffs imposed on goods of Chinese origin entering the United
States, including those manufactured for us, which would
adversely impact our sales. The European Community (EC) has
enacted a quota and tariff system with respect to the
importation into the EC of certain toy products originating in
China. The Company, therefore, continues to evaluate alternative
sources of supply outside of China.


Facilities and Distribution

We distribute our products in the United States
from our warehouse facility in Avon, Massachusetts and from a
public warehouse in Ontario, California. Products distributed in
Canada are handled from a public warehouse in Mississauga,
Ontario. In Europe, we distribute our products from a public
warehouse in Ghent, Belgium. Warehouse services at the various
public warehouses are performed by warehouse operators
unaffiliated with us.

Seasonality

Our business is not subject to substantial
seasonal fluctuations.

Competition

The juvenile products industry is highly
competitive and includes numerous domestic and foreign
competitors, some of which are substantially larger and have
greater financial and other resources than we do. We compete
with a number of different competitors, depending on the product
category, and compete against no single company across all
product categories. Our competition includes large, diversified
health care product companies, specialty infant products makers,
toy makers, and specialty health care products companies. We
compete principally on the basis of brand name recognition and
price/value relationship. In addition, we believe that we
compete favorably with respect to product quality, customer
service, and breadth of product line.

Trademarks, Patents and Copyrights

The First Years believes that the intellectual
property it owns or licenses is an integral part of its business
and that it complements its design expertise, innovative
talents, and marketing capabilities across all product
categories. Our principal trademarks, THE FIRST YEARS® and
THE FIRST YEARS and Design®, are registered in the United
States and in a number of foreign countries. In total, we have
more than 300 registrations and pending applications for our
various trademarks. We also license other trademarks for certain
of our products and product categories, some of which are
registered in the United States and in various foreign countries.

We also own utility patents and design patents in
the United States and utility patents, design patents, and
design registrations in certain foreign countries, as well as
pending applications in the United States and foreign countries.
In total, we own in excess of 140 patents and applications.
Although we believe this property is important to our business,
we do not believe that any single patent, design patent, or
design registration, including any which may be issued on a
pending application, is material to our business. No assurance
can be made that our patents, design patents, or design
registrations, including those that may be issued on pending
applications, offer any significant competitive advantage for
our products.

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Employees

Our people  the employees of The First
Years who work with our customers, suppliers and other key
constituents  are critical to our success. As of
December 31, 2001, we employed 178 full-time employees, of
whom six are senior executive officers, and 7 part-time
employees. All employees are in general management, sales,
marketing, product development, materials, purchasing, quality
assurance, data processing, finance, legal, administration and
clerical, and warehousing positions. None of our employees are
represented by a union, and we have not experienced any work
stoppages. We believe that relations with employees are good.

Government Regulations

Our products are subject to various laws, rules
and regulations, including the Federal Consumer Product Safety
Act, the Federal Hazardous Substances Act, as amended, the
Federal Flammable Fabrics Act, the Child Safety Protection Act,
and the regulations promulgated under each such Act (the Acts).
In addition, our nursery monitors are subject to the regulations
of the Federal Communications Commission and our medical devices
and drug products are subject to the regulations of the Food and
Drug Administration (FDA). The Acts empower the Consumer Product
Safety Commission (CPSC) to protect children from hazardous
toys and other articles. The CPSC has the authority to exclude
from the market products that are found to be hazardous and to
require a manufacturer to repurchase such products under certain
circumstances. The CPSCs determination is subject to court
review. In addition, the Federal Flammable Fabrics Act empowers
the CPSC to regulate and enforce flammability standards for
fabrics used in consumer products. Similar laws and regulations
exist in various international markets in which our products may
be sold. While we oversee a quality control program designed to
ensure that our products comply with laws and regulations, no
assurance can be made that defects will not be found in our
products, resulting in product liability claims, recalls of a
product, loss of revenue, diversion of resources, damage to our
reputation or increased warranty costs, any of which could have
a material effect on our business, financial condition and
results of operation.






|        |           
|------- | ----------
|Item 2. | Properties

We own and manage our executive and
administrative offices and principal warehouse, located within a
124,000 square-foot facility at One Kiddie Drive, Avon,
Massachusetts. We lease from unrelated third parties our sales
offices in New Jersey, Missouri, Arkansas, California, and
Cirencester, England.

We use public warehouses in Mississauga, Canada,
Ontario, California, and in Ghent, Belgium for product
distribution.

All owned and leased properties are in good
condition and sufficient to handle current facility needs.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

We are involved in legal proceedings which have
arisen in the ordinary course of business. We believe that there
are no claims or litigation pending, the outcome of which could
have a material adverse effect on our financial condition or
operating results.






|        |                                                     
|------- | ----------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
	Holders

No matter was submitted during the fourth quarter
of the fiscal year covered by this report to a vote of our
security holders.

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PART II




Item 5.  Market for
Registrants Common Equity and Related Stockholder
Matters

Market Information

Our common stock is traded on the Nasdaq National
Market under the symbol KIDD. Below is a summary of
the high and low sales prices of our common stock for each
quarter of 2001 and 2000 as reported by Nasdaq.

2001

|        |  |     |       |      |  |   |        | 
|------- |  | --- | ----- | ---- |  | - | ------ | 
|Quarter |  | Low |       | High
|        |  |     |       |     
|First   |  | $   | 7.813 |      |  | $ | 10.250 | 
|Second  |  | $   | 9.500 |      |  | $ | 12.200 | 
|Third   |  | $   | 9.700 |      |  | $ | 11.600 | 
|Fourth  |  | $   | 8.240 |      |  | $ | 12.800 | 

2000

|        |  |     |       |      |  |   |        | 
|------- |  | --- | ----- | ---- |  | - | ------ | 
|Quarter |  | Low |       | High
|        |  |     |       |     
|First   |  | $   | 6.750 |      |  | $ | 11.250 | 
|Second  |  | $   | 7.063 |      |  | $ | 11.438 | 
|Third   |  | $   | 8.750 |      |  | $ | 12.375 | 
|Fourth  |  | $   | 7.938 |      |  | $ | 11.750 | 

These prices reflect high and low intraday sales
prices for our common stock each quarter. They represent
inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.

Dividend Policy

In 2001 and 2000, we paid cash dividends on our
common stock in the amount of $0.06 per share, which were paid
on June 15, 2001 and June 15, 2000, respectively. We
currently expect that we will pay comparable cash dividends in
the future. However, the declaration and payment of any such
cash dividends in the future will depend upon our earnings,
financial condition, capital needs, and other factors deemed
relevant by the Board of Directors.

Approximate Number of Equity Security
Holders

As of December 31, 2001, we had
approximately 165 holders of record of our common stock.

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Item 6.  Selected Financial
Data

|                                                        |  |      |             |      |  |      |             |      |  |      |             |  |  |   |             |  |  |   |             | 
|------------------------------------------------------- |  | ---- | ----------- | ---- |  | ---- | ----------- | ---- |  | ---- | ----------- |  |  | - | ----------- |  |  | - | ----------- | 
|                                                        |  | 2001 |             | 2000 |  | 1999 |             | 1998 |  | 1997
|                                                        |  |      |             |      |  |      |             |      |  |     
|Selected Income Statement Data:                         |  |      |             |      |  |      |             |      |  |      |             |  |  |   |             |  |  |   |             | 
|Net sales**                                             |  | $    | 132,122,581 |      |  | $    | 133,475,387 |      |  | $    | 136,417,312 |  |  | $ | 132,532,324 |  |  | $ | 120,553,578 | 
|Cost of products sold**                                 |  |      | 83,777,994  |      |  |      | 85,799,934  |      |  |      | 86,811,017  |  |  |   | 86,575,470  |  |  |   | 76,654,661  | 
|Selling, general and administrative expenses **         |  |      | 38,412,370  |      |  |      | 33,932,150  |      |  |      | 34,903,802  |  |  |   | 32,989,561  |  |  |   | 31,554,441  | 
|Interest expense                                        |  |      |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   | 27,709      | 
|Interest income                                         |  |      | 664,071     |      |  |      | 743,260     |      |  |      | 582,640     |  |  |   | 590,822     |  |  |   | 168,922     | 
|Income before income taxes                              |  |      | 10,596,288  |      |  |      | 14,486,563  |      |  |      | 15,285,133  |  |  |   | 13,558,115  |  |  |   | 12,485,689  | 
|Provision for income taxes                              |  |      | 4,344,500   |      |  |      | 5,835,600   |      |  |      | 6,190,500   |  |  |   | 5,545,300   |  |  |   | 5,040,900   | 
|Net income                                              |  |      | 6,251,788   |      |  |      | 8,650,963   |      |  |      | 9,094,633   |  |  |   | 8,012,815   |  |  |   | 7,444,789   | 
|Basic earnings per share*                               |  | $    | 0.68        |      |  | $    | 0.91        |      |  | $    | 0.89        |  |  | $ | 0.78        |  |  | $ | 0.75        | 
|Diluted earnings per share*                             |  | $    | 0.67        |      |  | $    | 0.90        |      |  | $    | 0.87        |  |  | $ | 0.75        |  |  | $ | 0.71        | 
|Dividends paid per share*                               |  | $    | 0.06        |      |  | $    | 0.06        |      |  | $    | 0.06        |  |  | $ | 0.06        |  |  | $ | 0.05        | 
|Basic weighted average number of shares
	outstanding*   |  |      | 9,151,540   |      |  |      | 9,500,726   |      |  |      | 10,226,470  |  |  |   | 10,338,857  |  |  |   | 10,003,774  | 
|Diluted weighted average number of shares
	outstanding* |  |      | 9,304,272   |      |  |      | 9,619,928   |      |  |      | 10,402,297  |  |  |   | 10,669,503  |  |  |   | 10,453,062  | 
|Selected Balance Sheet Data:                            |  |      |             |      |  |      |             |      |  |      |             |  |  |   |             |  |  |   |             | 
|Total assets                                            |  | $    | 65,275,761  |      |  | $    | 71,694,380  |      |  | $    | 67,913,856  |  |  | $ | 69,275,895  |  |  | $ | 60,571,561  | 
|Long-term debt                                          |  |      |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            | 
|Stockholders equity                                    |  |      | 47,228,403  |      |  |      | 54,902,789  |      |  |      | 51,702,426  |  |  |   | 52,647,404  |  |  |   | 44,009,004  | 
|Stockholders equity per share*                         |  | $    | 5.08        |      |  | $    | 5.71        |      |  | $    | 4.97        |  |  | $ | 4.93        |  |  | $ | 4.21        | 



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| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| | * | Adjusted to reflect the two-for-one stock split
	effected on June 29, 1998.



| |    |                                                                                                                                                          
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | ** | Prior year amounts adjusted to reflect certain
	reclassifications in order to conform with current year
	presentation. See New Accounting Pronouncements.






|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
	of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking
Statements

Included in this release are certain
forward-looking statements, involving risks and
uncertainty, which are covered by the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such
statements are based on managements current expectations
and are subject to certain factors, risks and uncertainties that
may cause actual results, events and performance to differ
materially from those referred to or implied by such statements.
In addition, actual future results may differ materially from
those anticipated, depending on a variety of factors, which
include, but are not limited to, the success of our market
research identifying new product opportunities, trends in sales
of The First Years® brand and licensed products, the
success of new enhancements to our brand image, continued
success of new Disney character refreshed graphics, successful
introduction of new products, continued product innovation,
growth in international sales, our ability to attract and retain
key personnel, conditions affecting the retail industry, our
relationship with our manufacturers, and sales and earnings
results. Information with respect to important factors that
should be considered is contained in the Factors That May
Affect Financial Condition and Future Results in this
Report on Form 10-K. Readers are cautioned not to place
undue reliance on these forward-looking statements,

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which speak only as of the date hereof. The
Company does not intend to update any of the forward-looking
statements after the date of this release to conform these
statements to actual results or to changes in its expectations,
except as may be required by law.


The First Years Inc. is a leading worldwide
marketer of innovative products for infants and toddlers.
Incorporated in 1952 as Kiddie Products, Inc. and adopting its
new name in 1995, The First Years is dedicated to delivering
products that out-perform the competition through an in-depth
understanding of parenting and child development. Working in
consultation with Dr. T. Berry Brazelton,
Dr. Edward Tronick, and their staff at the Child
Development Unit, Childrens Hospital, Boston, as well as
the Companys own worldwide Parents Council, The First
Years develops products that make the first three years of life
happier, healthier and easier for babies and parents who love
them.

Critical Accounting Policies and
Estimates

This discussion and analysis of our financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues,
expenses and related notes. Some of these estimates require
difficult, subjective and/or complex judgments about matters
that are inherently uncertain, and, as a result, actual results
may differ from those estimates. Due to the judgment and
estimation involved, the following summarized accounting
policies and their application are considered to be critical to
understanding the business operations, financial condition, and
results of operations of The First Years.

Revenue
Recognition We recognize
revenue when products are shipped to customers. Common to our
industry, customers may be authorized to return selected
products and the Company reduces sales and accounts receivable
for actual returns and estimates future returns based on
historical trends and information available to us, including the
pattern of returns immediately following the reporting period.
We also maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make
required payments. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required.

Inventories
Inventories, consisting of finished goods, unpackaged
components, and supplies, are stated at the lower of cost or
market with cost determined using the first-in, first-out
method. We make certain obsolescence and other assumptions to
adjust inventory based on historical experience and current
information. We write down inventory for estimated obsolete or
unmarketable inventory equal to the difference between the costs
of inventory and estimated market value, based upon assumptions
about future demand and market conditions. In the event of a
write down of inventory, we also review molds associated with
those products to determine whether there has been a significant
impairment to the carrying value of the asset. If the carrying
value of these assets is considered not to be recoverable, such
assets are written down as appropriate. These assumptions,
although consistently applied, can have a significant impact on
current and future operating results and financial position.

Sales
Incentives Sales
incentives offered to customers to promote the sales of our
products include costs related to cooperative advertising
programs, promotions, slotting fees or buydowns, and certain
rebates. In determining these costs, we reflect activity and
make estimates of certain costs of promotional activity based on
historical arrangements and information available to us.

Costs associated with sales incentives, currently
reflected as selling, general, and administrative expenses, are
expensed as incurred. In 2000 and 2001, the Emerging Issues Task
Force (EITF) issued EITF Issue No. 00-14,
Accounting for Certain Sales Incentives and Issue
No. 00-25, Vendor Income Statement Characterization
of Consideration from a Vendor to a Retailer. These Issues
require that certain sales incentives and consideration paid to
a retailer to promote the vendors products be
characterized as a reduction of revenue when recognized. We are
required to adopt the consensus in both EITF Issues
No. 00-14 and 00-25 no later than the first quarter of
fiscal year 2002. With the adoption of these EITF Issues, it is
estimated that sales incentives of approximately
$6.3 million and $4.7 million of sales incentives for
2001 and 2000 will be

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reclassified as a reduction to net sales and a
corresponding reduction to selling, general, and administrative
expenses in the consolidated statements of income. These
reclassifications have no impact on operating income or net
income.


For further information concerning accounting
policies refer to Note 1 of our Consolidated Financial
Statements.

Results of Operations

Year Ended December 31, 2001 Compared to
Year Ended December 31, 2000

We reported 2001 consolidated net sales of
$132.1 million, a decrease of $1.4 million or (1.0)%,
as compared to net sales of $133.5 million in 2000.
Overall, net sales were affected by general economic weakness,
private label programs by some large retailers, the impact of
the events of September 11th on consumers and retailers,
and inventory reduction adjustments made by certain major
customers. As a result, net sales of First Year brand products
were essentially flat. Net sales of licensed and specialty
products declined by 3.8%.

As a percentage of net sales, sales of licensed
and specialty products decreased to 33.2% in 2001 from
approximately 34% in 2000. Net sales of The First Years brand
products increased to 66.8% in 2001 from approximately 66% in
2000 due primarily to new product introductions. International
net sales as a percentage of total net sales increased to 11.8%
in 2001 from 11.2% in 2000 primarily due to weaker domestic
sales and improved European and Canadian sales programs.

Cost of products sold in 2001 was
$83.8 million, a decrease of $2.0 million or (2.3)%, as
compared to $85.8 million in 2000. As a percentage of net
sales, cost of products sold in 2001 decreased to 63.4% from
64.3% in 2000. The decrease was primarily due to product mix and
product cost reduction programs.

Selling, general, and administrative expenses in
2001 were $38.4 million, an increase of $4.5 million,
or 13.3%, as compared to $33.9 million in 2000. This
increase was primarily due to increased selling and marketing
expenditures and to salaries and related costs associated with
building our infrastructure for future growth and development,
and increased bad debt expenses related to the write-off of
Kmart receivables. As a percentage of net sales, selling,
general, and administrative expenses increased to 29% in 2001
from approximately 25% in 2000.

Income tax expense as a percentage of pretax
income increased to 41.0% in 2001 from 40.3% in 2000 due to
state-related tax increases.

Year Ended December 31, 2000 Compared to
Year Ended December 31, 1999

Net sales in 2000 were $133.5 million, a
decrease of $2.9 million or (2.1)%, as compared to net
sales of $136.4 million in 1999. The decrease was due
primarily to decreased demand for licensed products in domestic
and foreign markets which was partially offset by an 6.5%
increase in net sales from The First Years brand products
compared to 1999. As a percentage of net sales, sales of
licensed and specialty products decreased to 34.1% in 2000 from
39.5% in 1999 as consumer demand for licensed products lessened,
particularly for several products that sold well in 1999. Net
sales of The First Years brand products increased to 65.9% in
2000 from 60.5% in 1999 due primarily to new product
introductions. As a percentage of net sales, foreign net sales
increased to 11.2% in 2000 from 10.6% in 1999 as reduced sales
in Latin America and Europe were partially offset by sales
increases in Canada and the Pacific Rim.

Cost of products sold in 2000 was
$85.8 million, a decrease of $1.0 million or (1.2)%, as
compared to $86.8 million in 1999. As a percentage of net
sales, cost of products sold in 2000 increased to 64.3% from
63.6% in 1999. The increase was primarily due to the higher
costs associated with the increased percentage of sales of
non-licensed lower margin products in 2000.

Selling, general, and administrative expenses in
2000 were $33.9 million, a decrease of $1.0 million,
or (2.9)%, as compared to $34.9 million of such expenses in
1999. The decrease was primarily due to the absence in 2000 of
settlement and legal costs related to a patent lawsuit which
were incurred in 1999. The reduction in costs were partially
offset by increases in other expenses primarily payroll and
payroll related costs. As a percentage of net sales, selling,
general, and administrative expenses decreased to 25.4% in 2000
from 25.6% in 1999.

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Income tax expense as a percentage of pretax
income decreased slightly to 40.3% in 2000 from 40.5% in 1999
due to normal fluctuations in our taxable income.

Liquidity and Capital Resources

We believe our ability to generate cash from
operations to reinvest in our business is one of our fundamental
financial strengths. We anticipate that our operating activities
in 2002 will continue to provide us with cash flows to assist in
our business expansion and to meet our financial commitments.

Our cash and cash equivalents decreased to
$13.3 million at December 31, 2001, from
$21.2 million at December 31, 2000. The decrease
resulted primarily from $14.0 million and $3.4 million
used in financing and investing activities, respectively, offset
by $9.6 million provided by operating activities.

Net cash of $9.6 million provided by
operating activities consisted primarily of $10.2 million
from net income adjusted for non-cash items, offset by
$.6 million used in working capital and other activities.
Net cash used in working capital and other activities resulted
primarily from an increase in inventories, and prepaid expenses,
partly offset by a decrease in accounts receivables and an
increase in accounts payable. Days sales outstanding were 51 and
56 for 2001 and 2000, respectively. Inventory turns were 4.3 and
4.5 in 2001 and 2000, respectively.

Net cash of $3.4 million used in investing
activities resulted from capital expenditures, net of disposals.
Capital expenditures in 2001 consisted primarily of additions to
machinery and molds for new production molds and furniture and
equipment related to computer hardware and software.

Net cash of $14.0 million used in financing
activities consisted of common stock repurchases of
$13.8 million, including the completion of a modified
Dutch Auction tender offer to repurchase common
stock of $13.4 million, the payment of dividends to
stockholders of $.6 million, partially offset by the
proceeds on issuance of common stock under our stock option
plans. We expect to continue our standing share repurchase
program in 2002.

Estimated uses of cash in 2002 include capital
expenditures for building, machinery and molds, and equipment of
approximately $4  $5 million. We expect to
fund expenditures for capital requirements as well as liquidity
needs from a combination of available cash balances, internally
generated funds, and financing arrangements. We have an
unsecured line of credit of $10 million, which is subject
to annual renewal at the option of the bank. Any amounts
outstanding under the line are payable upon demand by the bank.
During 2001 and 2000, we had no borrowings under the line of
credit and as of December 31, 2001 there were no balances
outstanding. We believe we will be able to renew our line of
credit under similar terms.

Dividends

A cash dividend of $0.06 per share of common
stock was paid in June of 2001 and 2000, respectively. We
currently expect sufficient cash flow in 2002 to continue our
current dividend policy.

Special Purpose Entities

During the years ended December 31, 2001 and
2000, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities,
which would have the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
As such, we are not exposed to any financing, liquidity, market
or credit risk that could arise if we had engaged in such
relationships.

Inflation and Changing Prices

Inflation has not had a material effect on our
operating results during recent periods.

Recent Accounting Pronouncements

On January 1, 2001, the Company adopted the
provisions of Statement of Financial Accounting Standards
(SFAS) No.133, Accounting for Derivative Instruments
and Hedging Activities, as amended. This statement
establishes accounting and reporting standards for derivative
instruments. Specifically it requires that an entity recognize
all derivatives as either assets or liabilities on the balance
sheet at fair value.

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The accounting for changes in the fair value of a
derivative (that is unrealized gains or losses) will be recorded
as a component of an entitys net income or other
comprehensive income, depending upon designation of the
derivative for hedging purposes. The adoption of SFAS
No. 133 was not material to the Companys consolidated
financial statements.


The Company uses derivative financial instruments
in the form of foreign currency forward exchange contracts to
manage foreign currency risks on future cash flows emanating
from sales denominated in foreign currencies. Foreign currency
forward exchange contracts are used to offset changes in the
fair value of certain assets and liabilities resulting from
transactions with third parties denominated in foreign
currencies. It is the policy of the Company to execute such
instruments with creditworthy banks and not to enter into
derivative financial instruments for speculative purposes.

All foreign currency forward exchange contracts
are denominated in currencies of major industrial countries. All
of the foreign currency forward exchange contracts entered into
by the Company, although effective hedges from an economic
perspective, have not been designated as hedges for accounting
purposes. These contracts are recognized on the consolidated
balance sheet at fair value with the changes in the fair value
recognized in the consolidated statements of income as a
component of cost of products sold.

During 2000, the Emerging Issues Task Force
(EITF) issued EITF No. 00-10, Accounting
for Shipping and Handling Fees and Costs. EITF
No. 00-10 addresses the statement of earnings
classification of shipping and handling costs billed to
customers. The adoption of EITF No. 00-10 resulted in a
reclassification of certain prior year amounts. In 2001,
additional account balances were reclassified and prior year
amounts were presented on a comparable basis. These
reclassifications had no impact on operating income or net
income.

In January 2001, the EITF reached a consensus on
one item within Issue No. 00-22, Accounting for
Points and Certain Other Time-Based or Volume-Based
Sales Incentive Offers and Offers for Free Products or Services
to be Delivered in the Future. The consensus requires
certain cash rebates be recognized as a reduction of revenue
based on a systematic and rational allocation of the cost of
honoring the rebates to the underlying revenue transactions. As
a result of adopting this consensus the Company included
approximately $266,000 of sales incentives in the determination
of net sales for the year ended December 31, 2001 and
reclassified prior year amounts in order to conform with current
year presentation. Prior year reclassified amounts were not
material to the results of operations. Operating income and net
income were not affected by the implementation of this EITF.

In April 2001, the EITF reached consensus on
Issue No. 00-14, Accounting for Certain Sales
Incentives. The consensus in EITF No. 00-14 addresses
the recognition, measurement and income statement classification
for various types of sales incentives, including discounts,
consumer coupons, rebates and free products. The consensus
requires, among other things, certain refunds or rebates of the
selling price of a product be classified as a reduction of
revenue, versus a selling, general, and administrative expense.

In April 2001, the EITF reached consensus on
Issue 00-25, Vendor Income Statement Characterization of
Consideration from a Vendor to a Retailer. The consensus
in EITF No. 00-25 addresses the income statement
classification of slotting fees, cooperative
advertising arrangements and buydowns. The consensus
requires these customer promotional payments to be classified as
a reduction of revenue, versus a selling, general, and
administrative expense.

The Company is required to adopt the consensus in
both EITF Issue No. 00-14 and 00-25 no later than the first
quarter of fiscal year 2002. With the adoption of these EITF
Issues in 2002, it is estimated that approximately $6.3 million
and $4.7 million of sales incentives in 2001 and 2000
respectively, will be reclassified as a reduction to net sales
and a corresponding reduction to selling, general, and
administrative expenses in the consolidated statements of
income. These reclassifications have no impact on operating
income and net income.

In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141,
Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS 141
supersedes Accounting Principles Board (APB)
Opinion 16 Business Combinations and SFAS
No. 38 Accounting for Pre-acquisition
Contingencies and eliminates the pooling-of-interests
method of accounting for business

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combinations. SFAS No. 141 also includes
enhanced criteria for identifying intangible assets separately
from goodwill. The requirements of SFAS No. 141 were
effective for any business combination consummated by the
Company subsequent to June 30, 2001. The Company did not
consummate any acquisitions subsequent to June 30, 2001.
SFAS No. 142 is effective for the Company as of
January 1, 2002. SFAS No. 142, supersedes APB Opinion
no. 17, Intangible Assets, and requires that
goodwill and intangible assets with indefinite lives no longer
be amortized, but reviewed for impairment at least annually.
Intangible assets that are not deemed to have an indefinite life
will continue to be amortized over their useful lives. The
adoption of these statements did not have a material impact on
the Companys consolidated statements of income,
consolidated financial position or results of operations.


In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment of and
Disposal of Long-Lived Assets. This statement supersedes
SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
Of. The statement retains the previously existing
accounting requirements related to the recognition and
measurement of the impairment of long-lived assets to be held
and used while expanding the measurement requirements of
long-lived assets to be disposed of by sale to include
discontinued operations. It also expands the previously existing
reporting requirements for discontinued operations to include a
component of an entity that either has been disposed of or is
classified as held for sale. The Company implemented SAFS
No. 144 on January 1, 2002. The adoption of this
statement did not have a material impact on the Companys
consolidated financial position or results of operations.

Factors That May Affect Financial Condition
and Future Results

The assumptions, risks and uncertainties
included in this section are not exclusive. Other sections of
this report may include additional factors which could adversely
impact The First Years business and financial performance.
The First Years operates in a very competitive environment. New
risk factors emerge from time to time and management cannot
predict all such risk factors, nor can it assess the impact of
all such risk factors on The First Years business or the
extent to which any factor or combination of factors may cause
actual results to differ materially from those contained in any
forward-looking statements. See Cautionary Note Regarding
Forward-Looking Statements.

If we do not make timely introductions to the
market of new and innovative products, we may not be able to
maintain or improve our market share and keep pace with our
competitors.

Our growth depends upon our ability to create new
and innovative products and to introduce new products to the
market in a timely fashion. We may not continue to generate new
product ideas or successfully introduce such products to the
market in a timely fashion. Additionally, our new products may
not be well received by retailers or consumers. Our future
growth also depends, in part, on the successful introduction of
products that generate sufficient margins. We may not be able to
successfully develop and introduce such products. In addition,
we are under pressure to introduce new and innovative products
more often and more quickly because the life cycle of many
products has shortened over the last several years. This is due
partly to the ability of competitors to introduce similar
products that compete directly with our successful new products.
As a result, the inability to introduce products in a timely
fashion could have a material adverse impact on our sales.

We depend on sales of products featuring
licensed characters and if we lose all or a significant part of
the third party licenses, our revenues may decrease.

We derive a significant portion of our revenues
from sales of products featuring characters licensed from other
parties, including Winnie the Pooh® and Mickey Mouse®
and other related characters licensed from Disney Enterprises,
Inc., and Sesame Street characters licensed from Sesame
Workshop, in the United States and in various foreign countries.
These licenses have fixed terms and limit the type of products
that may be sold under the licenses. One of our significant
licensing agreements with Disney Enterprises, Inc. was renewed
in 2000 and will expire at the end of 2002. Sales of products
licensed under this license amounted to 27% of our total net
sales for the year ended December 31, 2001. While our
management expects this licensing agreement to be renewed at the
end of its term, non-renewal of this major licensing agreement
or renewal on terms not favorable to us could have a material
adverse effect on our business.

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If we do not enhance our brand recognition,
our product sales may decrease.

A companys brand recognition is very
important to consumers of juvenile products. Some of our
competitors have more recognizable brands than we do. We intend
to enhance our brand recognition, but we may not be able to do
so. If we cannot enhance our brand recognition, our sales could
be negatively impacted.

We must be able to identify and anticipate
changing consumer preferences in order to keep consumers
interested in our products.

The success of our business depends in part on
continued consumer demand for our products and our ability to
anticipate, gauge and respond to changing consumer demands for
juvenile products in a timely manner. From 1999 to 2001, we
experienced a continued slowdown in sales of our products
featuring characters licensed from third parties. Changes in
consumer preferences, such as consumers abandoning traditional
retailers, shopping on the internet, general economic decline,
or less favorable demographic trends related to childbirth,
among other factors, could have a material adverse effect on our
sales and earnings.

We depend heavily on three major customers,
the loss of which would have a material adverse effect on our
results of operations.

Our three largest customers, Wal-Mart, Toys
R Us, and Target, accounted for approximately 23%,
20% and 15% of net sales in 2001, respectively. Wal-Mart reduced
its purchases from the Company from 1999 to 2001. A significant
reduction of purchases by any one of these customers could have
a material adverse effect on our sales. Additionally, our
largest ten customers accounted for 73% of our net sales in
2001. There could also be a negative effect on our business if
any significant customer becomes insolvent or otherwise fails to
pay its debts. For example, in 2001 the write-off of certain
Kmart receivables as a result of the Kmart bankruptcy had a $.06
negative impact on our 2001 earnings per share.

Conditions affecting the retail industry
generally also affect our results of operations.

We could be materially adversely affected by
conditions in the retail industry in general, including the
continuing consolidation in the retail industry, the resulting
decline in the number of retailers and other cyclical economic
factors. Also, changes in the way retailers and mass
merchandisers do business, such as the creation of competing
private-label brands by retailers, could result in a significant
reduction of purchases of our products by those retailers, which
would have a material adverse effect on our sales and earnings.

We may be adversely affected by recent and
future terrorist attacks.

The recent terrorist attacks of
September 11, 2001 have had an adverse impact on various
regions of the United States and on a wide range of industries.
The terrorist attacks, the allied military response, and
subsequent developments may impact the global economy and may
adversely affect our future results of operations. We are unable
to determine at this time the extent of the impact and whether
these events will negatively affect our operations or our
profitability. In the future, fears of global recession, war and
additional acts of terrorism may continue to impact global
economies and financial markets and could adversely affect our
business.

The market for juvenile products is intensely
competitive and our competitors may be stronger than we are in
several areas.

We compete with many other companies, both
domestic and foreign, some of which have diversified product
lines, well-known brands and financial, distribution, and
marketing resources that are substantially greater than ours.
Other major factors that affect competition in the markets in
which we compete include prices for products and placement of
product with major retailers. Also, a major technological
breakthrough or marketing success by a competitor could
adversely affect our competitive position. In addition, in
countries where the juvenile products market is mature,
particularly in the United States, sales growth partly depends
on our ability to increase our market share at the expense of
our competitors. We may not be able to continue to compete
effectively in the juvenile products market.

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We do not own or operate our own manufacturing
facilities and any significant problems that we experience with
independent manufacturers could have a material adverse effect
on our results of operations.

We depend upon independent manufacturers to
produce high-quality products for us in a timely manner. We also
rely upon the availability of sufficient production capacity at
our existing manufacturers or the ability to utilize alternative
sources of supply. Timely product introductions are essential in
the juvenile products industry because our orders are cancelable
by customers and, in some cases, subject to monetary penalties
imposed by customers, if agreed-upon delivery dates are not met.
We may not be able to maintain sufficient inventory levels if
our independent manufacturers fail to provide the required
production capacity. A failure by one or more of our significant
manufacturers to meet established criteria for pricing, product
quality or timeliness could also negatively impact our sales and
profitability. We have no long-term manufacturing agreements
with our suppliers and we compete with other juvenile product
companies, including companies that are much larger than us, for
access to production facilities. In 2001, our largest supplier,
which is located in Taiwan, manufactured products that
represented approximately 13% of our sales. The loss of or
significant problems with this supplier could have a material
adverse impact on our results of operations.

Many of our products are manufactured in China
and we may experience difficulty or increased expense in
shipping these products back into the United States or
Europe.

A substantial portion of our products sold in
2001 was manufactured in Asia. Foreign manufacturing is subject
to a number of risks including transportation delays and
interruptions, the imposition of tariffs, quotas, and other
import or export controls, currency fluctuations,
misappropriation of intellectual property, political and
economic disruptions, and changes in governmental policies. From
time to time, the United States Congress has attempted to impose
additional restrictions on trade with China. China gained
Permanent Normal Trade Relations (PNTR) with the United
States when it acceded to the World Trade Organization,
effective January 1, 2002. The United States imposes the
lowest applicable tariffs on exports from PNTR countries to the
United States. In order to maintain its WTO membership, China
has agreed to several requirements, including the elimination of
caps on foreign ownership of Chinese companies, lowering tariffs
and publicizing its laws. No assurance can be given that China
will meet these requirements and remain a member of the WTO, or
that its PNTR trading status will be maintained. If Chinas
WTO membership is withdrawn or if PNTR status for goods produced
in China were removed, there could be a substantial increase in
tariffs imposed on goods of Chinese origin entering the United
States, including those manufactured by us, which could
adversely impact our business. The European Community
(EC) has enacted a quota and tariff system with respect to
the importation into the EC of certain toy products originating
in China. Although we continue to evaluate alternative sources
of supply outside of China, we may not be able to develop
alternative sources of supply in a timely and cost-effective
manner.

We may have difficulty obtaining sufficient
amounts of a particular product or disposing of excess inventory
if we miscalculate the amount of a product that we will be able
to sell.

Many of our products have relatively long lead
times for design and production of product or are manufactured
by suppliers in foreign countries. As a result, we must commit
to production tooling and to production in advance of orders. If
we fail to accurately forecast consumer demand or if there are
changes in consumer preferences or market demand after we have
made such production commitments, we may encounter difficulty in
filling customer orders or in liquidating excess inventory; may
find that retailers are canceling orders or returning product;
and may have to write off the cost of molds for certain
unsuccessful products, all of which may have a material adverse
effect on our sales, margins, profit, and brand image.

Both the raw materials used in our products
and the transportation of those products is expensive.

Plastic, paperboard, other materials, and
shipping and transportation costs for our products and packaging
constitute significant costs to us. The primary resource used in
most manufacturing plastics is petroleum, and the cost and
availability of plastic for use in our products varies with the
price of petroleum. The cost of transporting our products also
varies with the cost of oil. High transportation costs or the
inability of our suppliers to acquire sufficient plastic,
paperboard, and other materials at reasonable prices could
adversely affect our ability to sustain its gross profit.

II-9



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##### Table of Contents



We intend to increase our sales in
international markets, which are subject to a number of
risks.

Our international sales in 2001 accounted for
approximately 11.8% of our total net sales. In foreign markets,
particularly the U.K., France, Germany and Canada, we compete
against long-established companies with well-known brand names.
In countries where the juvenile products markets are mature, our
sales growth depends on our ability to increase our market share
at the expense of well-established local competitors.
International sales are also subject to downturns in the
economies and fluctuations in the currencies of foreign
countries, and changes in the economic conditions and buying
power of consumers in foreign markets, particularly in Asia,
Russia, and Latin and South America. Although at times we enter
into forward currency forward exchange contracts in order to
hedge our exposure to currency fluctuations, we may still
encounter unfavorable exchange rates in its transactions with
companies in foreign countries. We may not be successful in
expanding or sustaining our international sales operations.

Our products for small children and babies are
subject to stringent government regulations, which we must
comply with or face recalls of our products or fines.

Consumer products in general, and in particular
products for babies and infants, are subject to regulation both
domestically and internationally. In addition, consumer activist
groups put pressure on governments around the world to increase
their regulations regarding the safety of the materials used to
make products for babies and infants, such as certain kinds of
plastic. Our products are subject to the provisions of the
Federal Consumer Safety Act, the Federal Hazardous Substances
Act, the Federal Flammable Fabrics Act, and the Child Safety
Protection Act and the regulations promulgated thereunder. These
laws authorize the Consumer Product Safety Commission
(CPSC) to protect the public from products that present a
substantial risk of injury. The CPSC can require the repurchase
or recall by the manufacturer of articles that are found to be
defective, and impose fines or penalties on the manufacturer, or
recommend the recall of products containing chemicals or other
materials deemed by the CPSC to be harmful to children and
infants. Similar laws exist in some states and cities and in
other countries in which we markets our products. Any recall of
its products could have a material adverse effect on our
earnings, depending on the particular product.

If our products for small children and infants
are faulty, we may be subject to negative publicity and product
liability claims that exceed our insurance coverage.

Our juvenile products are developed for and used
by small children and infants. If our products have safety
problems that we are not aware of or the CPSC recalls a product,
we may experience negative publicity that could adversely impact
our reputation and our sales. Additionally, we could be subject
to product liability suits. We carry product liability insurance
in amounts which management deems adequate to cover risks
associated with this use; however, existing or future insurance
coverage may not be sufficient to cover all product liability
risks.

Our intellectual property is very important to
us and we may face litigation based on challenges to our
intellectual property.

We believe that our intellectual property has
significant value. To our knowledge, there are no pending
material challenges to our intellectual property. However, from
time to time, we have been, and in the future may be, the
subject of litigation challenging our ownership of certain
intellectual property. We may incur substantial costs in
defending such legal actions. The loss of our principal
trademark, The First Years, could have a serious impact on
our business. Because of the importance of our intellectual
property, our business is subject to the risk of claims for
intellectual property infringement.

We recently hired a number of new senior
executives and we must integrate them and also retain existing
executives in order to implement our business plans.

We depend upon the ability and experience of our
senior management team and other key employees. In 2000 and
2001, we hired a number of new key executives for our management
team. Competition for qualified personnel is intense. The loss
of the services of key personnel or the inability to attract and
retain additional qualified personnel could have an adverse
effect on our operations.

II-10



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##### Table of Contents






Item 7A.     Quantitative
and Qualitative Disclosure about Market Risk

The First Years is exposed to certain market
risks, which include changes in United States and international
interest rates as well as changes in currency exchange rates as
measured against the U.S. dollar and each other. We attempt to
reduce material risks by using foreign currency forward exchange
contracts and managing our working capital to minimize currency
and interest rate exposure.

Foreign Currency Market Risk

Our international operations are subject to
certain opportunities and risks, including currency
fluctuations. Our international sales in 2001 account for 11.8%
of total net sales and the value of the United States dollar
affects our financial results and changes in exchange rates may
affect our revenues, gross margins, operating expenses and
retained earnings as expressed in U.S. dollars. At times, we use
forward exchange contracts to hedge cash flows arising from
sales denominated in foreign currencies to limit the impact of
currency fluctuations. Principal currencies hedged include the
Euro, the British Pound, and the Canadian dollar. We also
attempt to minimize currency exposure risk through working
capital management. In 2001 and 2000, the impact of foreign
exchange gains or losses was not material. We had no outstanding
foreign currency forward exchange contracts as of
December 31, 2001 and 2000.

In January 1999, certain member countries of the
European Union established irrevocable, fixed conversion rates
between their currencies and European Unions common
currency, the Euro. The introduction of the Euro was phased in
over a period ended January 1, 2002, when Euro notes and
coins came into circulation. The replacement of legacy
currencies with the Euro did not have and is not expected to
have a material impact on our operations or Consolidated
Financial Statements.

Interest Rate Risks

Changes in interest rates affect interest income
earned on the Companys cash equivalents and short-term
investments, composed primarily of U.S. treasury obligations and
short-term money market instruments. We do not attempt to reduce
or eliminate our market exposure to changes in interest rates in
the U.S. or in international operations.




Item 8.  Financial
Statements and Supplementary Data

Financial Statements listed under
Item 14.(a) 1. are included in Part IV of this Annual
Report on Form 10-K.




Item 9.  Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure

None.

II-11



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##### Table of Contents






PART III






|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the
	Registrant

The information required by this item will be
included in our definitive proxy statement for the 2002 Annual
Meeting of Stockholders and is incorporated herein by reference.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item will be
included in our definitive proxy statement for the 2002 Annual
Meeting of Stockholders, except that the sections in the
definitive proxy statement entitled Board Compensation
Committee Report on Executive Compensation, Audit
Committee Report and the Stock Performance
Chart shall not be deemed incorporated herein by reference
to this Annual Report on Form 10-K.






|         |                                                                
|-------- | ---------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
	Owners and Management

The information required by this item will be
included in our definitive proxy statement for the 2002 Annual
Meeting of Stockholders and is incorporated herein by reference






|         |                                                
|-------- | -----------------------------------------------
|Item 13. | Certain Relationships and Related
	Transactions

The information required by this item will be
included in our definitive proxy statement for the 2002 Annual
Meeting of Stockholders and is incorporated herein by reference.

III-1



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##### Table of Contents






PART IV






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

14.(a) 1.  Consolidated
Financial Statements

Independent Auditors Report

Consolidated Balance Sheets as of
December 31, 2001 and 2000

Consolidated Statements of Income for the Years
Ended December 31, 2001, 2000, and 1999

Consolidated Statements of Stockholders
Equity for the Years Ended December 31, 2001, 2000, and 1999

Consolidated Statements of Cash Flows for the
Years Ended December 31, 2001, 2000, and 1999

Notes to Consolidated Financial Statements

(a) 2.  Schedule II  Valuation and Qualifying
Accounts for the Years Ended December 31, 2001, 2000, and
1999

Other schedules are omitted because of the
absence of conditions under which they are required or because
the required information is given in the financial statements or
notes thereto.

14.(a) 3.  Exhibits

|        |       |             |  |                                                                                                                                                                                                                                                                                                                            
|------- | ----- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | Description
|        |       |            
|        | 3.1   |             |  | Restated Articles of Organization of the Company.
	Filed as Exhibit 3.1 to the Companys Registration
	Statement on Form S-1 on October 5, 1995 (File
	No. 33-62673) and incorporated herein by reference.                                                                                                                 
|        | 3.2   |             |  | By-laws of the Company. Filed as
	Exhibit (3)(ii) to the Companys annual report on
	Form 10-K for the period ended December 31, 1999 and
	incorporated herein by reference.                                                                                                                                               
|        | 4.1   |             |  | Specimen certificate for shares of Common Stock
	of the Company. Filed as Exhibit 4.1 to the Companys
	Registration Statement on Form S-1
	(File No. 33-62673) and incorporated herein by
	reference.                                                                                                                     
|        | 4.2   |             |  | Rights Agreement, dated as of November 19,
	2001, between the Company and EquiServe Trust Company, N. A.
	Filed as Exhibit 4.1 to the Companys Registration
	Statement on Form 8-A on November 20, 2001 and
	incorporated herein by reference.                                                                            
|        | 10.1* |             |  | Agreement with the Childrens Television
	Workshop dated July 1, 1996 regarding the licensing of
	Sesame Street characters. Filed as Exhibit (10)(g) to the
	Companys annual report on Form 10-K for the period
	ended December 31, 1996 and incorporated herein by
	reference.                                           
|        | 10.2* |             |  | Letter agreement with Childrens Television
	Workshop dated as of July 1, 1999 regarding the renewal of
	licensing of Sesame Street characters. Filed as
	Exhibit (10)(d) to the Companys annual report on
	Form 10-K for the period ended December 31, 1999 and
	incorporated herein by reference.                       
|        | 10.3* | *           |  | Letter agreement with Sesame Workshop dated
	July 1, 2001 regarding the renewal of licensing Sesame
	Street characters. Filed herewith and incorporated herein by
	reference.                                                                                                                                              
|        | 10.4* |             |  | Agreement with Disney Enterprises, Inc. dated as
	of August 1, 2000 relating to the licensing of Winnie the
	Pooh, Disney Classics and Disney Standard characters. Filed as
	Exhibit (10)(w) to the Companys quarterly report on
	Form 10-Q for the period ended September 30, 2000 and
	incorporated herein by reference.
|        | 10.5  |             |  | The First Years Inc. 1993 Equity Incentive Plan,
	as amended through May 20, 1999. Filed as
	Exhibit (10)(t) to the Companys quarterly report on
	Form 10-Q for the period ended September 30, 1999 and
	incorporated herein by reference.                                                                                
|        | 10.6  |             |  | The First Years Inc. 1993 Stock Option Plan for
	Directors, as amended through October 1, 1999. Filed as
	Exhibit (10)(f) to the Companys Form 10-K for
	the period ended December 31, 1999 and incorporated herein
	by reference.                                                                                        
|        | 10.7  |             |  | Letter Agreement between The First Years Inc. and
	Jerome M. Karp dated August 8, 1999. Filed as
	Exhibit (10)(v) to the Companys quarterly report on
	Form 10-Q for the period ended September 30, 1999, and
	incorporated herein by reference.                                                                          

IV-1



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                        
|------- | ----- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | Description
|        |       |            
|        | 10.8  |             |  | Employment Agreement between The First Years Inc.
	and Ronald J. Sidman dated September 30, 1999. Filed
	as Exhibit (10)(u) to the Companys quarterly report
	on Form 10-Q for the period ended September 30, 1999,
	and incorporated herein by reference.            
|        | 10.9  |             |  | Agreement between The First Years Inc. and Wayne
	Shea dated August 12, 1997. Filed as Exhibit (10)(o)
	to the Companys annual report on Form 10-K for the
	period ended December 31, 1997, and incorporated herein by
	reference.                                    
|        | 10.10 |             |  | Agreement between The First Years Inc. and Bruce
	Baron dated July 10, 1997. Filed as Exhibit (10)(p) to
	the Companys annual report on Form 10-K for the
	period ended December 31, 1998, and incorporated herein by
	reference.                                     
|        | 10.11 |             |  | Non-Compete Agreement between The First Years
	Inc. and Richard F. Schaub Jr. dated August 29, 2000.
	Filed as Exhibit (10)(m) to the Companys annual
	report on Form 10-K for the period ended December 31,
	2000, and incorporated herein by reference.             
|        | 10.12 |             |  | Change of Control Agreement between The First
	Years Inc. and Richard F. Schaub Jr. dated August 29,
	2000. Filed as Exhibit (10)(n) to the Companys annual
	report on Form 10-K for the period ended December 31,
	2000, and incorporated herein by reference.       
|        | 10.13 |             |  | Promissory Note and Agreement between The First
	Years Inc. and Richard  F. Schaub Jr. dated
	September 28, 2000. Filed as Exhibit (10)(o) to the
	Companys annual report on Form 10-K for the period
	ended December 31, 2000, and incorporated herein by
	reference.
|        | 10.14 |             |  | Promissory Note and Agreement between The First
	Years Inc. and Richard F. Schaub Jr. dated March 21,
	2001. Filed herewith and incorporated by reference.                                                                                                             
|        | 10.15 |             |  | Agreement between The First Years Inc. and
	James A. Connors, Jr. dated May 8, 2000. Filed as
	Exhibit (10)(p) to the Companys annual report on
	Form 10-K for the period ended December 31, 2000, and
	incorporated herein by reference.                             
|        | 21.1  |             |  | List of Subsidiaries of the Registrant.                                                                                                                                                                                                                                
|        | 23.1  |             |  | Consent of Deloitte & Touche LLP dated March
	29, 2002.                                                                                                                                                                                                                



---



| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| | * | Confidential Treatment has been granted with
	respect to portions of this document by the Securities and
	Exchange Commission.



|   |                                                                                                                                                                                              
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Portions of this document were omitted and have
	been filed separately with the Securities and Exchange
	Commission pursuant to the Companys application requesting
	confidential treatment.

14.(b)  Report on
Form 8-K

We filed a Form 8-K on November 20,
2001 in conjunction with the adoption of our Common Stock Rights
Agreement.

IV-2



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##### Table of Contents






SIGNATURES

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



| |                                                     
| | ----------------------------------------------------
| | THE FIRST YEARS INC.                                
| | _______________________________________ (Registrant)



| |     |                     
| | --- | --------------------
| | By: | /s/ RONALD J. SIDMAN

| |                                                   
| | --------------------------------------------------
| |                                                   
| | Ronald J. Sidman, Chief Executive
	Officer,       
| | Chairman of the Board of Directors, and
	President
| | Date:  March 29, 2002                             

| |     |                  
| | --- | -----------------
| | By: | /s/ JOHN R. BEALS

| |                                                      
| | -----------------------------------------------------
| |                                                      
| | John R. Beals, Treasurer and Senior Vice
	President 
| | Finance(Chief Financial Officer and
	Chief           
| | Accounting Officer)                                  
| | Date:  March 29, 2002                                

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 indicated on March 29, 2002.

|                                       |  |                                                                            |  |               
|-------------------------------------- |  | -------------------------------------------------------------------------- |  | --------------
|Signature                              |  | Title                                                                      |  | Date          
|                                       |  |                                                                            |  |               
|/s/ RONALD J. SIDMANRonald J. Sidman   |  | Chief Executive Officer, Chairman of the Board of
	Directors and President |  | March 29, 2002
|/s/ JEROME M. KARPJerome M. Karp       |  | Director                                                                   |  | March 29, 2002
|/s/ EVELYN SIDMANEvelyn Sidman         |  | Director                                                                   |  | March 29, 2002
|/s/ BENJAMIN PELTZBenjamin Peltz       |  | Director                                                                   |  | March 29, 2002
|/s/ FRED T. PAGEFred T. Page           |  | Director                                                                   |  | March 29, 2002
|/s/ KENNETH R. SIDMANKenneth R. Sidman |  | Director                                                                   |  | March 29, 2002
|/s/ LEWIS M. WESTONLewis M. Weston     |  | Director                                                                   |  | March 29, 2002
|/s/ WALKER J. WALLACEWalker J. Wallace |  | Director                                                                   |  | March 29, 2002
|/s/ BETH J. KAPLANBeth J. Kaplan       |  | Director                                                                   |  | March 29, 2002
|/s/ RICHARD WENZRichard Wenz           |  | Director                                                                   |  | March 29, 2002

IV-3



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##### Table of Contents



THE FIRST YEARS INC.




INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND

FINANCIAL STATEMENT SCHEDULE


|                                                                                                                            |                                                                                                          |      |       |          | 
|--------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | ---- | ----- | -------- | 
|                                                                                                                            |                                                                                                          | Page
|                                                                                                                            |                                                                                                          |     
|Independent Auditors Report                                                                                                |                                                                                                          |      | IV-5  |         
|Consolidated Financial Statements:                                                                                          |                                                                                                          |      |       |         
|                                                                                                                            | Consolidated Balance Sheets as of
	December 31, 2001 and 2000.                                           |      |       | IV-6     | 
|                                                                                                                            | Consolidated Statements of Income for the Years
	Ended December 31, 2001, 2000, and 1999.                |      |       | IV-7     | 
|                                                                                                                            | Consolidated Statements of Stockholders
	Equity for the Years Ended December 31, 2001,
	2000, and 1999. |      |       | IV-8     | 
|                                                                                                                            | Consolidated Statements of Cash Flows for the
	Years Ended December 31, 2001, 2000, and 1999.            |      |       | IV-9     | 
|                                                                                                                            | Notes to Consolidated Financial Statements                                                               |      |       | IV-10-19 | 
|Financial Statement Schedule II 
	Valuation and Qualifying Accounts for the Years
	Ended December 31, 2001, 2000, and 1999 |                                                                                                          |      | IV-20 |         

IV-4



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##### Table of Contents






INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders of 
 The First Years Inc. 
 Avon, Massachusetts

We have audited the accompanying consolidated
balance sheets of The First Years Inc. and subsidiary as of
December 31, 2001 and 2000, and the related consolidated
statements of income, stockholders equity, and cash flows
for each of the three years in the period ended
December 31, 2001. Our audits also included the financial
statement schedule listed in the Index at Item 14. These
financial statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. 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, such consolidated financial
statements present fairly, in all material respects, the
financial position of The First Years Inc. and subsidiary as of
December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

/s/     DELOITTE
& TOUCHE LLPBoston, Massachusetts 
 March 7, 2002

IV-5



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##### Table of Contents



THE FIRST YEARS INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2001 AND 2000


|                                                                                                                                                                      |                                                                                                               |                                            |             |            |            |  |             |            |            | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------- | ---------- | ---------- |  | ----------- | ---------- | ---------- | 
|                                                                                                                                                                      |                                                                                                               | 2001                                       |             | 2000      
|                                                                                                                                                                      |                                                                                                               |                                            |             |           
|ASSETS                                                                                                                                                               
|Current Assets:                                                                                                                                                       |                                                                                                               |                                            |             |            |            |  |             |           
|                                                                                                                                                                      | Cash and cash equivalents (Notes 1 and 8)                                                                     |                                            | $           | 13,310,004 |            |  | $           | 21,180,242 |           
|                                                                                                                                                                      | Accounts receivable (less allowance for doubtful
	accounts of $250,000 in 2001 and $270,000 in 2000) (Note 8) |                                            |             | 17,318,497 |            |  |             | 19,527,429 |           
|                                                                                                                                                                      | Inventories (Note 1)                                                                                          |                                            |             | 20,331,823 |            |  |             | 18,443,713 |           
|                                                                                                                                                                      | Prepaid expenses and other assets                                                                             |                                            |             | 1,784,793  |            |  |             | 756,357    |           
|                                                                                                                                                                      | Deferred tax asset (Notes 1 and 3)                                                                            |                                            |             | 2,156,500  |            |  |             | 2,069,900  |           
|                                                                                                                                                                      |                                                                                                               |                                            |             |            |            |  |             |           
|                                                                                                                                                                      |                                                                                                               | Total current assets                       |             |            | 54,901,617 |  |             |            | 61,977,641 | 
|                                                                                                                                                                      |                                                                                                               |                                            |             |            |            |  |             |           
|Property, Plant, and Equipment (Note 1):                                                                                                                              |                                                                                                               |                                            |             |            |            |  |             |           
|                                                                                                                                                                      | Land                                                                                                          |                                            |             | 167,266    |            |  |             | 167,266    |           
|                                                                                                                                                                      | Building                                                                                                      |                                            |             | 5,309,915  |            |  |             | 5,254,150  |           
|                                                                                                                                                                      | Machinery and molds                                                                                           |                                            |             | 7,809,664  |            |  |             | 7,233,145  |           
|                                                                                                                                                                      | Furniture and equipment                                                                                       |                                            |             | 7,826,605  |            |  |             | 6,269,346  |           
|                                                                                                                                                                      |                                                                                                               |                                            |             |            |            |  |             |           
|                                                                                                                                                                      |                                                                                                               | Total                                      |             |            | 21,113,450 |  |             |            | 18,923,907 | 
|                                                                                                                                                                      | Less accumulated depreciation                                                                                 |                                            |             | 10,739,306 |            |  |             | 9,207,168  |           
|                                                                                                                                                                      |                                                                                                               |                                            |             |            |            |  |             |           
|                                                                                                                                                                      |                                                                                                               | Property, plant, and equipment  net       |             |            | 10,374,144 |  |             |            | 9,716,739  | 
|                                                                                                                                                                      |                                                                                                               |                                            |             |            |            |  |             |           
|                                                                                                                                                                      |                                                                                                               | Total Assets                               |             | $          | 65,275,761 |  |             | $          | 71,694,380 | 
|                                                                                                                                                                      |                                                                                                               |                                            |             |            |            |  |             |           
|LIABILITIES AND STOCKHOLDERS
	EQUITY                                                                                                                                
|Current Liabilities:                                                                                                                                                  |                                                                                                               |                                            |             |            |            |  |             |           
|                                                                                                                                                                      | Accounts payable and accrued expenses                                                                         |                                            | $           | 12,824,321 |            |  | $           | 11,605,240 |           
|                                                                                                                                                                      | Accrued royalty expense (Note 6)                                                                              |                                            |             | 819,286    |            |  |             | 946,623    |           
|                                                                                                                                                                      | Accrued selling expenses                                                                                      |                                            |             | 3,200,951  |            |  |             | 3,023,528  |           
|                                                                                                                                                                      |                                                                                                               |                                            |             |            |            |  |             |           
|                                                                                                                                                                      |                                                                                                               | Total current liabilities                  |             |            | 16,844,558 |  |             |            | 15,575,391 | 
|                                                                                                                                                                      |                                                                                                               |                                            |             |            |            |  |             |           
|Deferred Tax Liability (Notes 1 and 3)                                                                                                                                |                                                                                                               |                                            | 1,202,800   |            |            |  | 1,216,200   |           
|                                                                                                                                                                      |                                                                                                               |                                            |             |            |            |  |             |           
|Commitments and Contingencies (Notes 5, 6,
	and 8)                                                                                                                    |                                                                                                               |                                            |             |            |            |  |             |           
|Stockholders Equity (Notes 4, 7, and
	9):                                                                                                                            |                                                                                                               |                                            |             |            |            |  |             |           
|Common stock  authorized, 50,000,000
	shares; issued 10,748,404 and 10,679,337; outstanding, 8,173,867
	and 9,175,765 as of December 31, 2001 and 2000, respectively |                                                                                                               |                                            | 1,074,840   |            |            |  | 1,067,934   |           
|Paid-in-capital                                                                                                                                                       |                                                                                                               |                                            | 9,277,390   |            |            |  | 8,714,711   |           
|Retained earnings                                                                                                                                                     |                                                                                                               |                                            | 66,686,505  |            |            |  | 60,985,483  |           
|Less treasury stock at cost, 2,574,537 and
	1,503,572 shares as of December 31, 2001 and 2000,
	respectively                                                          |                                                                                                               |                                            | (29,810,332 | )          |            |  | (15,865,339 | )         
|                                                                                                                                                                      |                                                                                                               |                                            |             |            |            |  |             |           
|                                                                                                                                                                      |                                                                                                               | Total stockholders equity                 |             |            | 47,228,403 |  |             |            | 54,902,789 | 
|                                                                                                                                                                      |                                                                                                               |                                            |             |            |            |  |             |           
|                                                                                                                                                                      |                                                                                                               | Total Liabilities and Stockholders Equity |             | $          | 65,275,761 |  |             | $          | 71,694,380 | 
|                                                                                                                                                                      |                                                                                                               |                                            |             |            |            |  |             |           

See notes to consolidated financial statements.

IV-6



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##### Table of Contents



THE FIRST YEARS INC.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2001, 2000, AND
1999


|                                                                    |  |      |             |      |  |      |             |  |  |   |             | 
|------------------------------------------------------------------- |  | ---- | ----------- | ---- |  | ---- | ----------- |  |  | - | ----------- | 
|                                                                    |  | 2001 |             | 2000 |  | 1999
|                                                                    |  |      |             |      |  |     
|Net Sales (Notes 1, 6, 8, and 10)                                   |  | $    | 132,122,581 |      |  | $    | 133,475,387 |  |  | $ | 136,417,312 | 
|Cost of Products Sold (Notes 1 and 10)                              |  |      | 83,777,994  |      |  |      | 85,799,934  |  |  |   | 86,811,017  | 
|                                                                    |  |      |             |      |  |      |             |  |  |   |             | 
|Gross Profit                                                        |  |      | 48,344,587  |      |  |      | 47,675,453  |  |  |   | 49,606,295  | 
|Selling, General, and Administrative Expenses
	(Notes 1, 7, and 11) |  |      | 38,412,370  |      |  |      | 33,932,150  |  |  |   | 34,903,802  | 
|                                                                    |  |      |             |      |  |      |             |  |  |   |             | 
|Operating Income                                                    |  |      | 9,932,217   |      |  |      | 13,743,303  |  |  |   | 14,702,493  | 
|Interest Income                                                     |  |      | 664,071     |      |  |      | 743,260     |  |  |   | 582,640     | 
|                                                                    |  |      |             |      |  |      |             |  |  |   |             | 
|Income Before Income Taxes                                          |  |      | 10,596,288  |      |  |      | 14,486,563  |  |  |   | 15,285,133  | 
|Provision for Income Taxes (Notes 1 and 3)                          |  |      | 4,344,500   |      |  |      | 5,835,600   |  |  |   | 6,190,500   | 
|                                                                    |  |      |             |      |  |      |             |  |  |   |             | 
|Net Income (Note 10)                                                |  | $    | 6,251,788   |      |  | $    | 8,650,963   |  |  | $ | 9,094,633   | 
|                                                                    |  |      |             |      |  |      |             |  |  |   |             | 
|Basic Earnings Per Share (Notes 1 and 9)                            |  | $    | 0.68        |      |  | $    | 0.91        |  |  | $ | 0.89        | 
|                                                                    |  |      |             |      |  |      |             |  |  |   |             | 
|Diluted Earnings Per Share (Notes 1 and 9)                          |  | $    | 0.67        |      |  | $    | 0.90        |  |  | $ | 0.87        | 
|                                                                    |  |      |             |      |  |      |             |  |  |   |             | 

See notes to consolidated financial statements.

IV-7



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##### Table of Contents



THE FIRST YEARS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

YEARS ENDED DECEMBER 31, 2001, 2000, AND
1999


|                           |                                                              |              |            |            |   |          |           |          |  |                |           |         |  |   |            |           |   |   |             |             |  
|-------------------------- | ------------------------------------------------------------ | ------------ | ---------- | ---------- | - | -------- | --------- | -------- |  | -------------- | --------- | ------- |  | - | ---------- | --------- | - | - | ----------- | ----------- | -
|                           |                                                              |              |            |            |   |          |           |         
|                           |                                                              | Common Stock |            |            |   |          |           |         
|                           |                                                              |              |            | Paid-in    |   | Retained |           |         
|                           |                                                              | Shares       |            | Par Value  |   | Capital  |           | Earnings |  | Treasury Stock
|                           |                                                              |              |            |            |   |          |           |          |  |               
|Balance, January 1, 1999   |                                                              |              | 10,440,014 |            |   | $        | 1,046,141 |          |  | $              | 7,472,398 |         |  | $ | 44,438,589 |           |   | $ | (309,724    | )          
|                           | Stock issued under stock option plans
	(Note 7)              |              |            | 108,921    |   |          |           | 10,892   |  |                |           | 457,725 |  |   |            |          |   |   |             |            |  
|                           | Tax benefit derived from option compensation
	deduction      |              |            |           |   |          |           |         |  |                |           | 122,500 |  |   |            |          |   |   |             |            |  
|                           | Dividends paid                                               |              |            |           |   |          |           |         |  |                |           |        |  |   |            | (625,403  | ) |   |             |            |  
|                           | Repurchase of 932,700 shares for treasury                    |              |            | (932,700   | ) |          |           |         |  |                |           |        |  |   |            |          |   |   |             | (10,005,325 | )
|                           | Net income                                                   |              |            |           |   |          |           |         |  |                |           |        |  |   |            | 9,094,633 |   |   |             |            |  
|                           |                                                              |              |            |            |   |          |           |          |  |                |           |         |  |   |            |           |   |   |             |            
|Balance, December 31, 1999 |                                                              |              | 9,616,235  |            |   |          | 1,057,033 |          |  |                | 8,052,623 |         |  |   | 52,907,819 |           |   |   | (10,315,049 | )          
|                           | Stock issued under stock option plans
	(Note 7)              |              |            | 109,008    |   |          |           | 10,901   |  |                |           | 569,688 |  |   |            |          |   |   |             |            |  
|                           | Tax benefit derived from option compensation
	deduction      |              |            |           |   |          |           |         |  |                |           | 42,400  |  |   |            |          |   |   |             |            |  
|                           | Compensation charge related to grant of common
	stock option |              |            |           |   |          |           |         |  |                |           | 50,000  |  |   |            |          |   |   |             |            |  
|                           | Dividends paid                                               |              |            |           |   |          |           |         |  |                |           |        |  |   |            | (573,299  | ) |   |             |            |  
|                           | Repurchase of 549,478 shares for treasury                    |              |            | (549,478   | ) |          |           |         |  |                |           |        |  |   |            |          |   |   |             | (5,550,290  | )
|                           | Net income                                                   |              |            |           |   |          |           |         |  |                |           |        |  |   |            | 8,650,963 |   |   |             |            |  
|                           |                                                              |              |            |            |   |          |           |          |  |                |           |         |  |   |            |           |   |   |             |            
|Balance, December 31, 2000 |                                                              |              | 9,175,765  |            |   |          | 1,067,934 |          |  |                | 8,714,711 |         |  |   | 60,985,483 |           |   |   | (15,865,339 | )          
|                           | Stock issued under stock option plans (Note 7)               |              |            | 69,067     |   |          |           | 6,906    |  |                |           | 454,379 |  |   |            |          |   |   |             |            |  
|                           | Tax benefit derived from option compensation
	deduction      |              |            |           |   |          |           |         |  |                |           | 48,300  |  |   |            |          |   |   |             |            |  
|                           | Compensation charge related to grant of common
	stock option |              |            |           |   |          |           |         |  |                |           | 60,000  |  |   |            |          |   |   |             |            |  
|                           | Dividends paid                                               |              |            |           |   |          |           |         |  |                |           |        |  |   |            | (550,766  | ) |   |             |            |  
|                           | Repurchase of 1,070,965 shares for treasury                  |              |            | (1,070,965 | ) |          |           |         |  |                |           |        |  |   |            |          |   |   |             | (13,944,993 | )
|                           | Net income                                                   |              |            |           |   |          |           |         |  |                |           |        |  |   |            | 6,251,788 |   |   |             |            |  
|                           |                                                              |              |            |            |   |          |           |          |  |                |           |         |  |   |            |           |   |   |             |            
|Balance, December 31, 2001 |                                                              |              | 8,173,867  |            |   | $        | 1,074,840 |          |  | $              | 9,277,390 |         |  | $ | 66,686,505 |           |   | $ | (29,810,332 | )          
|                           |                                                              |              |            |            |   |          |           |          |  |                |           |         |  |   |            |           |   |   |             |            

See notes to consolidated financial statements.

IV-8



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##### Table of Contents



THE FIRST YEARS INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

YEARS ENDED DECEMBER 31, 2001, 2000, AND
1999


|                                                        |                                                                                    |                                                              |                                   |                                           |           |            |             |            |           |           |            |            |           |            |             |  
|------------------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------------------------------------------ | --------------------------------- | ----------------------------------------- | --------- | ---------- | ----------- | ---------- | --------- | --------- | ---------- | ---------- | --------- | ---------- | ----------- | -
|                                                        |                                                                                    | 2001                                                         |                                   | 2000                                      |           | 1999      
|                                                        |                                                                                    |                                                              |                                   |                                           |           |           
|Cash Flows from Operating Activities:                   |                                                                                    |                                                              |                                   |                                           |           |            |             |            |           |           |            |           
|                                                        | Net income                                                                         |                                                              | $                                 | 6,251,788                                 |           |            | $           | 8,650,963  |           |           | $          | 9,094,633  |          
|                                                        | Adjustments to reconcile net income to net cash
	provided by operating activities: |                                                              |                                   |                                           |           |            |             |            |           |           |            |            |          
|                                                        |                                                                                    | Depreciation                                                 |                                   |                                           | 2,227,389 |            |             |            | 2,019,279 |           |            |            | 1,679,252 |           
|                                                        |                                                                                    | Compensation charge related to grant of common
	stock option |                                   |                                           | 60,000    |            |             |            | 50,000    |           |            |            |          |           
|                                                        |                                                                                    | Provision for doubtful accounts                              |                                   |                                           | 1,217,405 |            |             |            | 87,324    |           |            |            | 78,968    |           
|                                                        |                                                                                    | Loss on disposal of equipment                                |                                   |                                           | 552,527   |            |             |            | 415,389   |           |            |            | 1,232,322 |           
|                                                        |                                                                                    | Change in deferred income taxes                              |                                   |                                           | (100,000  | )          |             |            | (105,800  | )         |            |            | (121,700  | )         
|                                                        |                                                                                    | Increase (decrease) arising from working
	capital items:     |                                   |                                           |           |            |             |            |           |           |            |            |           |           
|                                                        |                                                                                    |                                                              | Accounts receivable               |                                           |           | 991,527    |             |            |           | 1,973,133 |            |            |           | (2,653,727 | )          
|                                                        |                                                                                    |                                                              | Inventories                       |                                           |           | (1,888,110 | )           |            |           | 1,909,132 |            |            |           | (1,832,822 | )          
|                                                        |                                                                                    |                                                              | Prepaid expenses and other assets |                                           |           | (980,136   | )           |            |           | 595,017   |            |            |           | 1,452,160  |            
|                                                        |                                                                                    |                                                              | Accounts payable                  |                                           |           | 1,219,081  |             |            |           | 1,161,932 |            |            |           | (158,624   | )          
|                                                        |                                                                                    |                                                              | Accrued royalty expense           |                                           |           | (127,337   | )           |            |           | (845,852  | )          |            |           | (337,552   | )          
|                                                        |                                                                                    |                                                              | Accrued selling expenses          |                                           |           | 177,423    |             |            |           | (25,019   | )          |            |           | (49,685    | )          
|                                                        |                                                                                    |                                                              |                                   |                                           |           |            |             |            |           |           |            |           
|                                                        |                                                                                    |                                                              |                                   | Net cash provided by operating activities |           |            | 9,601,557   |            |           |           | 15,885,498 |            |           |            | 8,383,225   |  
|                                                        |                                                                                    |                                                              |                                   |                                           |           |            |             |            |           |           |            |           
|Cash Flows from Investing Activities:                   |                                                                                    |                                                              |                                   |                                           |           |            |             |            |           |           |            |           
|                                                        | Purchase of property, plant, and equipment                                         |                                                              |                                   | (3,437,321                                | )         |            |             | (2,562,984 | )         |           |            | (4,597,283 | )        
|                                                        |                                                                                    |                                                              |                                   |                                           |           |            |             |            |           |           |            |           
|Cash Flows from Financing Activities:                   |                                                                                    |                                                              |                                   |                                           |           |            |             |            |           |           |            |           
|                                                        | Dividends paid                                                                     |                                                              |                                   | (550,766                                  | )         |            |             | (573,299   | )         |           |            | (625,403   | )        
|                                                        | Purchase of treasury stock                                                         |                                                              |                                   | (13,812,486                               | )         |            |             | (5,550,290 | )         |           |            | (9,910,750 | )        
|                                                        | Common stock issued under stock option plans                                       |                                                              |                                   | 328,778                                   |           |            |             | 580,589    |           |           |            | 374,042    |          
|                                                        |                                                                                    |                                                              |                                   |                                           |           |            |             |            |           |           |            |           
|                                                        |                                                                                    |                                                              |                                   | Net cash used for financing activities    |           |            | (14,034,474 | )          |           |           | (5,543,000 | )          |           |            | (10,162,111 | )
|                                                        |                                                                                    |                                                              |                                   |                                           |           |            |             |            |           |           |            |           
|(Decrease) increase in Cash and Cash Equivalents        |                                                                                    |                                                              | (7,870,238                        | )                                         |           |            | 7,779,514   |            |           |           | (6,376,169 | )         
|                                                       
|Cash and Cash Equivalents, Beginning of Year            |                                                                                    |                                                              | 21,180,242                        |                                           |           |            | 13,400,728  |            |           |           | 19,776,897 |           
|                                                        |                                                                                    |                                                              |                                   |                                           |           |            |             |            |           |           |            |           
|Cash and Cash Equivalents, End of Year                  |                                                                                    | $                                                            | 13,310,004                        |                                           |           | $          | 21,180,242  |            |           | $         | 13,400,728 |           
|                                                        |                                                                                    |                                                              |                                   |                                           |           |            |             |            |           |           |            |           
|                                                       
|Supplemental Disclosures of Cash Flow Information       |                                                                                    |                                                              |                                   |                                           |           |            |             |            |           |           |            |           
|                                                        | Cash paid during the year for:                                                     |                                                              |                                   |                                           |           |            |             |            |           |           |            |            |          
|                                                        |                                                                                    |                                                              |                                   | Interest                                  |           | $          | 0           |            |           | $         | 0          |            |           | $          | 0           |  
|                                                        |                                                                                    |                                                              |                                   |                                           |           |            |             |            |           |           |            |           
|                                                        |                                                                                    |                                                              |                                   | Income taxes                              |           | $          | 4,848,491   |            |           | $         | 4,635,972  |            |           | $          | 5,292,295   |  
|                                                        |                                                                                    |                                                              |                                   |                                           |           |            |             |            |           |           |            |           
|                                                       
|Supplemental Schedule of Noncash Financing
	Activities: |                                                                                    |                                                              |                                   |                                           |           |            |             |            |           |           |            |           
|                                                        | Treasury stock transactions                                                        |                                                              | $                                 | 132,507                                   |           |            | $           | 0          |           |           | $          | 94,575     |          
|                                                        |                                                                                    |                                                              |                                   |                                           |           |            |             |            |           |           |            |           

See notes to consolidated financial statements.

IV-9



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##### Table of Contents






THE FIRST YEARS INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.  Summary of Significant
Accounting Policies

Business The First Years Inc., a Massachusetts
corporation, (the Company), is a developer,
marketer, and distributor of basic accessories and related
products for infants and toddlers. The Company was founded and
incorporated in 1952. Since its inception, the Company has
engaged in this single line of business, with one class of
similar products. The following is a summary of the
Companys significant accounting policies.

Basis of Reporting The consolidated financial statements
include the accounts of The First Years Inc. and the
Companys wholly owned subsidiary. All significant
intercompany accounts and transactions have been eliminated.

Revenue Recognition Revenue is recognized when products
are shipped to customers. Amounts billed to customers for
shipping and handling are included in net sales. Common to our
industry, customers may be authorized to return selected
products and the Company reduces sales and accounts receivables
for actual returns and estimates future returns based on
historical trends and information available to us, including the
pattern of returns immediately following the reporting period.

In 2000 the Company adopted Securities and
Exchange Commission Staff Accounting Bulletin 101, Revenue
Recognition in Financial Statements (SAB 101). No
accounting changes were required in connection with the adoption
of SAB 101 and, accordingly, the adoption had no effect on
the Companys financial position, results of operations,
stockholders equity, or cash flows.

Sales Incentives Costs associated with sales incentives
to promote the Companys products, including costs related
to cooperative advertising programs, slotting fees or buydowns,
and certain rebates, are reflected as selling, general, and
administrative expenses when incurred. See New Accounting
Pronouncements.

Cash and Cash Equivalents Highly liquid investments with a
maturity of three months or less when purchased have been
classified as cash and cash equivalents. Such investments are
carried at cost, which approximates market value.

Inventories Inventories are stated at the lower of
cost (first-in, first-out) or market. Inventories consist
principally of finished goods, unpackaged components, and
supplies.

Property, Plant, and Equipment Property, plant, and equipment is
stated at cost. Depreciation is provided based on the estimated
useful lives of the various classes of assets (building, 15 to
40 years; machinery and molds, 5 to 10 years;
furniture and equipment, 5 to 10 years) using the
straight-line method.

Income Taxes Deferred tax assets and liabilities
are determined based on the differences between the financial
statement and tax bases of assets and liabilities using enacted
tax rates.

Employee Stock-Based Compensation The Company uses the intrinsic
value-based method of Accounting Principles Board Opinion
(APB) No. 25 and related interpretations, to
account for employee stock-based compensation plans.

Earnings Per Share Basic earnings per share is computed
by dividing net income by the weighted-average number of shares
outstanding. Diluted earnings per share includes the dilutive
effect of stock options.

Use of Estimates The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. The primary estimates underlying the Companys
consolidated financial statements include allowances for
doubtful accounts, obsolete inventories, sales returns, and
estimates related to the DINP charges (see footnote 10).
Actual results could differ from those estimates.

Product Development Costs Product development costs are expensed
as incurred. During 2001, 2000, and 1999, product development
costs approximated $4,970,000, $4,246,000, and $3,780,000,
respectively.

IV-10



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##### Table of Contents



THE FIRST YEARS INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Foreign Currency Remeasurement The Companys functional currency
is the U.S. dollar. Accordingly, monetary assets and liabilities
of the Companys foreign operations are remeasured from the
respective local currency to the U.S. dollar using year-end
exchange rates while non-monetary items are remeasured at
historical rates. Income and expense accounts are remeasured at
the average rates in effect during the year. Accordingly,
remeasurement adjustments and transaction gains and losses are
recognized as income (loss) in the year of occurrence and
are recorded as a component of cost of products sold.

Fair Value of Financial
Instruments The fair value
of the Companys assets and liabilities which constitute
financial instruments as defined in Statement of Financial
Accounting Standards (SFAS) No. 107 approximate their
recorded value.

Reclassifications Certain reclassifications were made to
prior year amounts in order to conform with the current year
presentation. See New Accounting Pronouncements.

Reporting Comprehensive Income Comprehensive income was equal to net
income for the years ended December 31, 2001, 2000 and 1999.

New
Accounting Pronouncements

On January 1, 2001, the Company adopted the
provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. This
statement establishes accounting and reporting standards for
derivative instruments. Specifically it requires that an entity
recognize all derivatives as either assets or liabilities on the
balance sheet at fair value. The accounting for changes in the
fair value of a derivative (that is unrealized gains or losses)
will be recorded as a component of an entitys net income
or other comprehensive income, depending upon designation of the
derivative for hedging purposes. The adoption of SFAS
No. 133 was not material to the Companys consolidated
financial statements.

The Company uses derivative financial instruments
in the form of foreign currency forward exchange contracts to
manage foreign currency risks on future cash flows emanating
from sales denominated in foreign currencies. Foreign currency
forward exchange contracts are used to offset changes in the
fair value of certain assets and liabilities resulting from
transactions with third parties denominated in foreign
currencies. It is the policy of the Company to execute such
instruments with creditworthy banks and not to enter into
derivative financial instruments for speculative purposes.

All foreign currency forward exchange contracts
are denominated in currencies of major industrial countries. All
of the foreign currency forward exchange contracts entered into
by the Company, although effective hedges from an economic
perspective, have not been designated as hedges for accounting
purposes. These contracts are recognized on the consolidated
balance sheet at fair value with the changes in the fair value
recognized in the consolidated statements of income as a
component of cost of products sold.

During 2000, the Emerging Issues Task Force
(EITF) issued EITF No. 00-10, Accounting for
Shipping and Handling Fees and Costs. EITF No. 00-10
addresses the statement of earnings classification of shipping
and handling costs billed to customers. The adoption of EITF
No. 00-10 resulted in a reclassification of certain prior
year amounts. These reclassifications had no impact on operating
income or net income.

In January 2001, the EITF reached a consensus on
one item within Issue No. 00-22, Accounting for
Points and Certain Other Time-Based or Volume-Based
Sales Incentive Offers and Offers for Free Products or Services
to be Delivered in the Future. The consensus requires
certain cash rebates be recognized as a reduction of revenue
based on a systematic and rational allocation of the cost of
honoring the rebates to the underlying the determination of
revenue transactions. As a result of adopting this consensus the
Company included approximately $266,000 of sales incentives in
the determination of net sales for the year ended
December 31, 2001 and reclassified prior year amounts in
order to conform with current year presentation. Prior year
reclassified amounts were not material. Operating income and net
income were not affected by the implementation of this EITF.

IV-11



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##### Table of Contents



THE FIRST YEARS INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


In April 2001 the EITF reached consensus on Issue
No. 00-14, Accounting for Certain Sales
Incentives. The consensus in EITF No. 00-14 addresses
the recognition, measurement and income statement classification
for various types of sales incentives, including discounts,
consumer coupons, rebates and free products. The consensus
requires, among other things, certain refunds or rebates of the
selling price of a product be classified as a reduction of
revenue, versus a selling, general, and administrative expense.

In April of 2001 the EITF reached consensus on
Issue 00-25, Vendor Income Statement Characterization
of Consideration from a Vendor to a Retailer. The
consensus in EITF No. 00-25 addresses the income statement
classification of slotting fees, cooperative
advertising arrangements and buydowns. The consensus
requires these customer promotional payments to be classified as
a reduction of revenue, versus a selling, general, and
administrative expense.

The Company is required to adopt the consensus in
both EITF Issue No. 00-14 and 00-25 no later than the first
quarter of fiscal year 2002. With the adoption of these EITF
Issues in 2002, it is estimated that approximately $6.3 million
and $4.7 million of sales incentives in 2001 and 2000
respectively, will be reclassified as a reduction to net sales
and a corresponding reduction to selling, general, and
administrative expenses in the consolidated statements of
income. These reclassifications have no impact on operating
income and net income.

In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141,
Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS 141
supersedes Accounting Principles Board (APB) Opinion
16 Business Combinations and SFAS No. 38
Accounting for Pre-acquisition Contingencies and
eliminates the pooling-of-interests method of accounting for
business combinations. SFAS No. 141 also includes enhanced
criteria for identifying intangible assets separately from
goodwill. The requirements of SFAS No. 141 were effective
for any business combination consummated by the Company
subsequent to June 30, 2001. The Company did not consummate
any acquisitions subsequent to June 30, 2001. SFAS
No. 142 is effective for the Company as of January 1,
2002. SFAS No. 142, supersedes APB Opinion no. 17,
Intangible Assets, and requires that goodwill and
intangible assets with indefinite lives no longer be amortized,
but reviewed for impairment at least annually. Intangible assets
that are not deemed to have an indefinite life will continue to
be amortized over their useful lives. The adoption of these
statements did not have a material impact on the Companys
consolidated statements of income, consolidated financial
position or results of operations.

In August 2001, the FASB issued Statement
No. 144 (SFAS No. 144), Accounting for the
Impairment of and Disposal of Long-Lived Assets. This
statement supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. The statement retains the previously existing
accounting requirements related to the recognition and
measurement of the impairment of long-lived assets to be held
and used while expanding the measurement requirements of
long-lived assets to be disposed of by sale to include
discontinued operations. It also expands the previously existing
reporting requirements for discontinued operations to include a
component of an entity that either has been disposed of or is
classified as held for sale. The Company implemented SAFS
No. 144 on January 1, 2002. The adoption of this
statement did not have a material impact on the Companys
consolidated financial position or results of operations.

2.     Debt

During 2001 and 2000, the Company had available
an unsecured line of credit totaling $10,000,000 with a bank.
The line is subject to annual renewal at the option of the bank
and requires no compensating balances. The line bears interest
at the prime rate or the LIBOR rate plus 1.75%. No short-term
borrowings were incurred by the Company during 2001 or 2000. As
of December 31, 2001 and 2000, no balance was outstanding.
The line of credit will expire in October 2002.

IV-12



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##### Table of Contents



THE FIRST YEARS INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


3.     Income
Taxes

Components of the Companys net deferred tax
asset at December 31 are as follows:

|                          |                                                                |      |           |           |  |   |           |           | 
|------------------------- | -------------------------------------------------------------- | ---- | --------- | --------- |  | - | --------- | --------- | 
|                          |                                                                | 2001 |           | 2000     
|                          |                                                                |      |           |          
|Deferred tax assets:      |                                                                |      |           |           |  |   |           |          
|                          | Expenses not currently deductible                              |      | $         | 319,200   |  |   | $         | 547,900   | 
|                          | Capitalized packaging costs not currently
	deductible          |      |           | 936,300   |  |   |           | 828,800   | 
|                          | Capitalized inventory costs not currently
	deductible          |      |           | 660,800   |  |   |           | 545,000   | 
|                          | Other                                                          |      |           | 240,200   |  |   |           | 148,200   | 
|                          |                                                                |      |           |           |  |   |           |          
|                          |                                                                |      | 2,156,500 |           |  |   | 2,069,900 |          
|                          |                                                                |      |           |           |  |   |           |          
|Deferred tax liabilities: |                                                                |      |           |           |  |   |           |          
|                          | Excess tax depreciation over financial reporting
	depreciation |      |           | 1,202,800 |  |   |           | 1,216,200 | 
|                          |                                                                |      |           |           |  |   |           |          
|Net deferred tax asset    |                                                                | $    | 953,700   |           |  | $ | 853,700   |          
|                          |                                                                |      |           |           |  |   |           |          

There was no valuation allowance for the years
ended December 31, 2001, 2000, and 1999.

The provision for income taxes consists of the
following:

|                           |          |               |           |           |           |      |           |           |           |   |           |           |           | 
|-------------------------- | -------- | ------------- | --------- | --------- | --------- | ---- | --------- | --------- | --------- | - | --------- | --------- | --------- | 
|                           |          | 2001          |           | 2000      |           | 1999
|                           |          |               |           |           |           |     
|Federal:                   |          |               |           |           |           |      |           |           |           |   |           |          
|                           | Current  |               | $         | 3,273,600 |           |      | $         | 4,559,600 |           |   | $         | 4,985,600 |          
|                           | Deferred |               |           | (100,000  | )         |      |           | (105,800  | )         |   |           | (121,700  | )        
|                           |          |               |           |           |           |      |           |           |           |   |           |          
|                           |          | Total federal |           |           | 3,173,600 |      |           |           | 4,453,800 |   |           |           | 4,863,900 | 
|State                      |          |               | 1,170,900 |           |           |      | 1,381,800 |           |           |   | 1,326,600 |          
|                           |          |               |           |           |           |      |           |           |           |   |           |          
|Provision for income taxes |          | $             | 4,344,500 |           |           | $    | 5,835,600 |           |           | $ | 6,190,500 |          
|                           |          |               |           |           |           |      |           |           |           |   |           |          

A reconciliation of the statutory federal income
tax rate and the effective tax rate as a percentage of pretax
income is as follows:

|                                                       |  |      |      |      |  |      |      |   |  |  |      |  
|------------------------------------------------------ |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                                       |  | 2001 |      | 2000 |  | 1999
|                                                       |  |      |      |      |  |     
|Statutory rate                                         |  |      | 34.0 | %    |  |      | 35.0 | % |  |  | 35.0 | %
|State income taxes, net of federal income tax
	benefit |  |      | 6.1  |      |  |      | 6.1  |   |  |  | 5.9  |  
|Other                                                  |  |      | 0.9  |      |  |      | (0.8 | ) |  |  | (0.4 | )
|                                                       |  |      |      |      |  |      |      |   |  |  |      |  
|Effective tax rate                                     |  |      | 41.0 | %    |  |      | 40.3 | % |  |  | 40.5 | %
|                                                       |  |      |      |      |  |      |      |   |  |  |      |  

4.     Stockholders
Equity

In November 2001, the Board of Directors
authorized the Company to repurchase up to 900,000 shares of the
Companys common stock through a modified Dutch
Auction tender offer, and, in the event of an
over-subscription within a specified range, to accept shares on
a pro rata basis at a price range of $10.65 to $12.65. The
Company completed repurchases under this authorization during
2001 and purchased 1,014,498 shares of common stock,
representing approximately 11% of the shares outstanding prior
to the tender offer, at an aggregate purchase price of
$12,833,400. The costs associated with this transaction totaled
$562,211. In 2001, the Company also purchased 42,700 shares of
its common stock at an aggregate purchase price of $416,875
under its standing stock repurchase program.

5.     Commitments
and Contingencies

Forward Exchange Contracts During 2001 and 2000, the Company
entered into forward exchange contracts with a bank whereby the
Company is committed to deliver foreign currency at
predetermined rates.

IV-13



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##### Table of Contents



THE FIRST YEARS INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The contracts expire within one year. The Company
had no foreign currency forward exchange contracts outstanding
as of December 31, 2001 and 2000. Net gains or losses on
the settlement of foreign currency forward exchange contracts,
reported in cost of products sold in the consolidated statements
of income, were not material to the Companys operating
income or net income for the years ended December 31, 2001,
2000, or 1999.

Other Commitments At December 31, 2001 and 2000,
letters of credit outstanding aggregated approximately $0 and
$33,000, respectively.

During 1999, the Company entered into an
employment agreement with an executive officer which provides
for annual base salary of $364,000 through September 30,
2004, subject to any increases approved from time to time at the
discretion of the Compensation Committee of the Board of
Directors. In the event of termination, the agreement provides
for certain payments depending on the nature of the termination.

The Company has entered into employment
agreements with certain other executive officers. The various
agreements provide for payments related to change of control
events, agreements not to compete with the Company, and
severance payments depending on the nature of the
executives termination.

Contingencies The Company is involved in legal
proceedings which have arisen in the ordinary course of
business. Management believes the outcome of these proceedings
will not have a material adverse impact on the Companys
financial condition or operating results.

6.     Royalties

During the past several years, the Company
entered into various agreements which provide for the payment of
royalties on sales of certain character and patent licensed
products. Existing agreements have terms ranging from one to
three years and require total minimum royalty payments of
$4,439,000 and $4,998,000 as of December 31, 2001 and 2000,
respectively. Royalty expenses were $5,377,000, $6,387,000, and
$7,909,000 in 2001, 2000, and 1999, respectively, and are
reflected in cost of products sold in the accompanying
consolidated statements of income.

7.     Benefit
Plans

Defined Contribution Plans The Company has a defined contribution
trusteed benefit plan covering eligible employees, requiring
annual contributions based upon certain percentages of salaries
of employees. The Companys policy is to fund pension
expense as accrued. Pension expense aggregated $504,000,
$551,000, and $599,000 in 2001, 2000, and 1999, respectively.
The Company sponsors a 401(k) defined contribution plan covering
substantially all Company employees pursuant to which the
Company is obligated to match, up to specified amounts, employee
contributions. Company contributions to this plan were not
material for the periods presented.

Stock Option Plans In May 1993, the Companys
stockholders approved the adoption of The First Years Inc. 1993
Equity Incentive Plan and The First Years Inc. 1993 Stock Option
Plan for Non-employee Directors (collectively, the Option
Plans) which cover employees and non-employee directors of
the Company, respectively. The Board has reserved 2,980,000
shares for issuance under the Option Plans. As of
December 31, 2001, there are 838,607 options available for
future grant under the Option Plans. The exercise price for the
incentive stock options granted under the Option Plans may not
be less than the fair market value of the common stock at the
date of grant, 110% of fair market value in the case of options
granted to a 10% stockholder.

In 2001 and 2000, a director of the Company
received options to purchase 12,766 and 12,435 shares,
respectively, of the Companys Common Stock at an exercise
price of $8.25 and $7.625, respectively, per share as
compensation for consulting services. The Company recorded a
charge to operations of $60,000 and $50,000 in 2001 and 2000,
respectively, for the compensation expense related to the stock
option grants.

IV-14



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##### Table of Contents



THE FIRST YEARS INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Under the Option Plans, employees of the Company
may purchase stock on the exercise of their options through the
delivery of existing shares of the Companys common stock.
The shares delivered to the Company by the employee must have
been outstanding for at least six months. The Company acquired
13,767 shares of its common stock for the year ended
December 31, 2001 through the delivery of mature shares by
an employee for the exercise of stock options. The Company did
not acquire any shares for the year ended December 31,
2000. The Company acquired 8,400 shares for the year ended
December 31, 1999.

Options granted must be exercised within the
period prescribed by the Compensation Committee; the options
vest in accordance with the vesting provisions prescribed at the
time of grant.

A summary of activity of stock options granted
under the Option Plans is as follows:

|                  |           |           |       |             |  |             |           |             |   |  |         |  |  |   |       |  | 
|----------------- | --------- | --------- | ----- | ----------- |  | ----------- | --------- | ----------- | - |  | ------- |  |  | - | ----- |  | 
|                  |           |           |       |             |  |             |           | Weighted   
|                  |           | Weighted  |       |             |  |             |           | Average    
|                  |           | Average   |       |             |  |             |           | Exercise   
|                  |           | Exercise  |       | Number of   |  |             |           | Price for  
|                  |           | Price Per |       | Options     |  | Options     |           | Options    
|                  |           | Share     |       | Outstanding |  | Exercisable |           | Exercisable
|                  |           |           |       |             |  |             |           |            
|January 1, 1999   |           | $         | 9.30  |             |  |             | 694,556   |             |   |  | 341,902 |  |  | $ | 5.88  | 
|                  | Granted   |           |       | 14.24       |  |             |           | 244,896     |   |  |         |  |  |   |       |  | 
|                  | Canceled  |           |       | 12.97       |  |             |           | (45,909     | ) |  |         |  |  |   |       |  | 
|                  | Exercised |           |       | 4.30        |  |             |           | (108,921    | ) |  |         |  |  |   |       |  | 
|                  | Expired   |           |       | 11.44       |  |             |           | (18,000     | ) |  |         |  |  |   |       |  | 
|                  |           |           |       |             |  |             |           |             |   |  |         |  |  |   |       | 
|December 31, 1999 |           |           | 11.27 |             |  |             | 766,622   |             |   |  | 428,615 |  |  | $ | 9.46  | 
|                  | Granted   |           |       | 7.83        |  |             |           | 477,971     |   |  |         |  |  |   |       |  | 
|                  | Canceled  |           |       | 9.73        |  |             |           | (80,846     | ) |  |         |  |  |   |       |  | 
|                  | Exercised |           |       | 5.33        |  |             |           | (109,008    | ) |  |         |  |  |   |       |  | 
|                  |           |           |       |             |  |             |           |             |   |  |         |  |  |   |       | 
|December 31, 2000 |           |           | 10.43 |             |  |             | 1,054,739 |             |   |  | 532,601 |  |  | $ | 11.49 | 
|                  | Granted   |           |       | 9.22        |  |             |           | 292,322     |   |  |         |  |  |   |       |  | 
|                  | Canceled  |           |       | 9.71        |  |             |           | (69,965     | ) |  |         |  |  |   |       |  | 
|                  | Exercised |           |       | 6.71        |  |             |           | (69,067     | ) |  |         |  |  |   |       |  | 
|                  |           |           |       |             |  |             |           |             |   |  |         |  |  |   |       | 
|December 31, 2001 |           | $         | 10.39 |             |  |             | 1,208,029 |             |   |  | 726,338 |  |  | $ | 11.43 | 
|                  |           |           |       |             |  |             |           |             |   |  |         |  |  |   |       | 

The grant date fair value for options granted in
2001, 2000, and 1999 was $5.19, $4.74, and $8.24, respectively.

The following table sets forth information
regarding stock options outstanding at December 31, 2001
under the Stock Option Plans as described above:

|            |           |          |  |          |               |           |  |             |       |             |  |  |      |  |  |  |         |  |  |   |       | 
|----------- | --------- | -------- |  | -------- | ------------- | --------- |  | ----------- | ----- | ----------- |  |  | ---- |  |  |  | ------- |  |  | - | ----- | 
|            |           |          |  |          |               |           |  |             |       | Weighted   
|            |           |          |  |          |               |           |  | Number      |       | Average    
|Number      |           |          |  | Weighted |               | Weighted  |  | Currently   |       | Exercise   
|of Options  |           | Range of |  | Average  |               | Average   |  | Exercisable |       | Price for  
|Outstanding |           | Exercise |  | Exercise |               | Remaining |  | at          |       | Options    
|at 12/31/01 |           | Prices   |  | Price    |               | Life      |  | 12/31/01    |       | Exercisable
|            |           |          |  |          |               |           |  |             |       |            
|            | 12,000    |          |  |          | $2.75  $4.13 |           |  | $           | 2.78  |             |  |  | 1.92 |  |  |  | 12,000  |  |  | $ | 2.78  | 
|            | 26,000    |          |  |          | 4.13   6.19  |           |  |             | 4.63  |             |  |  | 3.42 |  |  |  | 26,000  |  |  |   | 4.63  | 
|            | 659,632   |          |  |          | 6.19   9.28  |           |  |             | 8.31  |             |  |  | 8.29 |  |  |  | 213,455 |  |  |   | 8.05  | 
|            | 372,451   |          |  |          | 9.28  13.92  |           |  |             | 12.89 |             |  |  | 7.12 |  |  |  | 339,361 |  |  |   | 12.80 | 
|            | 137,946   |          |  |          | 13.92  17.00 |           |  |             | 15.39 |             |  |  | 7.06 |  |  |  | 135,522 |  |  |   | 15.39 | 
|            |           |          |  |          |               |           |  |             |       |             |  |  |      |  |  |  |         |  |  |   |       | 
|            | 1,208,029 |          |  |          |               |           |  | $           | 10.39 |             |  |  | 7.62 |  |  |  | 726,338 |  |  | $ | 11.43 | 
|            |           |          |  |          |               |           |  |             |       |             |  |  |      |  |  |  |         |  |  |   |       | 

IV-15



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##### Table of Contents



THE FIRST YEARS INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Pro Forma Disclosures

As described in Note 1, the Company applies
the intrinsic value method of APB No. 25 and related
interpretations in accounting for its Option Plans. Accordingly,
no compensation cost has been recognized for options granted to
employees. Had compensation cost been determined based on the
fair value at the grant dates for awards under those plans
consistent with the method of SFAS 123, Accounting
for Stock-Based Compensation, the Companys net
income and earnings per share for the years ended
December 31, 2001, 2000, and 1999 would have been as
follows:

|                           |  |      |           |      |  |      |           |  |  |   |           | 
|-------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                           |  | 2001 |           | 2000 |  | 1999
|                           |  |      |           |      |  |     
|Net income                 |  | $    | 4,526,206 |      |  | $    | 6,976,525 |  |  | $ | 7,597,937 | 
|Basic earnings per share   |  |      | $0.50     |      |  | $    | 0.73      |  |  | $ | 0.74      | 
|Diluted earnings per share |  |      | $0.49     |      |  | $    | 0.73      |  |  | $ | 0.73      | 

For purposes of the pro forma disclosures, the
fair value of the options granted under the Companys stock
option plans during 2001, 2000, and 1999 was estimated on the
date of grant using the Binomial option-pricing model. Key
assumptions used to apply this pricing model are as follows:

|                                        |  |      |            |      |  |      |            |  |  |  |            | 
|--------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  |  | ---------- | 
|                                        |  | 2001 |            | 2000 |  | 1999
|                                        |  |      |            |      |  |     
|Risk free interest rate                 |  |      | 4.78%      |      |  |      | 6.35%      |  |  |  | 5.09%      | 
|Expected life of option grants          |  |      | 7.67 years |      |  |      | 7.65 years |  |  |  | 8.47 years | 
|Expected volatility of underlying stock |  |      | 43.45%     |      |  |      | 45.50%     |  |  |  | 44.82%     | 
|Expected dividend payment rate          |  |      | 0.85%      |      |  |      | 0.85%      |  |  |  | 0.85%      | 

The pro forma disclosures include the effects of
options granted in 2001, 2000, and 1999.

8.  Current Vulnerability Due to
Certain Concentrations

Concentrations of Credit Risk Financial instruments which
potentially subject the Company to concentrations of credit risk
consist principally of cash equivalents, trade receivables and
forward foreign currency exchange contracts (see Note 5).
The Companys cash equivalents consist of money market
funds placed with major banks and financial institutions. The
Companys trade receivables principally include amounts due
from retailers who are geographically dispersed. The
Companys three largest customers accounted for 61% and 60%
of the trade receivables outstanding at December 31, 2001
and 2000, respectively. The Company routinely assesses the
financial strength of its customers. The Company purchases
credit insurance for certain of its foreign customers to limit
its potential exposure to foreign trade receivable credit risks.
The Company routinely assesses the financial strength of the
bank which is the counterparty to the forward exchange
contracts. As of December 31, 2001, management believes it
had no significant exposure to credit risks.

Major Customers and Export Sales The Company derived 10% or more of its
net sales from its three largest customers. The Companys
largest customer accounted for net sales of approximately
$30,433,000, $32,847,000, and $38,760,000, in 2001, 2000, and
1999, respectively. The Companys second largest customer
accounted for net sales of approximately $26,556,000,
$26,580,000, and $25,645,000, in 2001, 2000, and 1999,
respectively. The Companys third largest customer
accounted for net sales of approximately $20,151,000,
$17,972,000, and $19,072,000 in 2001, 2000, and 1999. No other
customer accounted for 10% or more of the Companys sales.
Net export sales, primarily to Europe, Canada, South America,
and the Pacific Rim, were approximately $15,603,000,
$14,958,000, and $14,459,000 in 2001, 2000, and 1999,
respectively.

Reliance on Licensed Products The Company derives a significant
portion of its net sales from products under license. Net sales
of products licensed under our most significant licensing
agreement amount to approximately $35,907,000, $38,565,000, and
$46,587,000 or 27%, 29%, and 34% of the Companys total net
sales for the years ended December 31, 2001, 2000, and
1999, respectively. This licensing agreement was renewed in 2000
and will expire at the end of 2002. While management currently
anticipates negotiating a

IV-16



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##### Table of Contents



THE FIRST YEARS INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


renewal of the license, non-renewal of this
licensing agreement or, renewal on terms not favorable to the
Company, could have a material adverse affect on the
Companys business.

Reliance on Foreign Manufacturers The Company does not own or operate
its own manufacturing facilities. In 2001, 2000, and 1999, the
Company derived approximately 69%, 69%, and 54%, respectively,
of its net sales from products manufactured by others in the Far
East, primarily in China. A change in suppliers could cause a
delay in manufacturing and a possible loss of sales, which could
affect operating results adversely, depending on the particular
product.

9.  Computation of Earnings per
Share

Computation of the earnings per share
(EPS) in accordance with SFAS No. 128 is as
follows:

|                                            |  |      |           |      |  |      |           |  |  |   |            | 
|------------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | ---------- | 
|                                            |  | 2001 |           | 2000 |  | 1999
|                                            |  |      |           |      |  |     
|Weighted average shares outstanding         |  |      | 9,151,540 |      |  |      | 9,500,726 |  |  |   | 10,226,470 | 
|Effect of dilutive shares                   |  |      | 152,732   |      |  |      | 119,202   |  |  |   | 175,827    | 
|                                            |  |      |           |      |  |      |           |  |  |   |            | 
|Weighted average diluted shares outstanding |  |      | 9,304,272 |      |  |      | 9,619,928 |  |  |   | 10,402,297 | 
|                                            |  |      |           |      |  |      |           |  |  |   |            | 
|Net Income                                  |  | $    | 6,251,788 |      |  | $    | 8,650,963 |  |  | $ | 9,094,633  | 
|                                            |  |      |           |      |  |      |           |  |  |   |            | 
|Basic earnings per share                    |  |      | $0.68     |      |  | $    | 0.91      |  |  | $ | 0.89       | 
|                                            |  |      |           |      |  |      |           |  |  |   |            | 
|Diluted earnings per share                  |  |      | $0.67     |      |  | $    | 0.90      |  |  | $ | 0.87       | 
|                                            |  |      |           |      |  |      |           |  |  |   |            | 

As of December 31, 2001, options to purchase
426,487 shares of common stock were not included in the
computation of diluted EPS because the options exercise
price was greater than the average price of the common shares.
The options, which expire in 2004 to 2009, had exercise prices
ranging from $13 1/2 to $17 per share. The options were
still outstanding at the end of 2001.

As of December 31, 2000, options to purchase
498,865 shares of common stock were not included in the
computation of diluted EPS because the options exercise
price was greater than the average price of the common shares.
The options, which expire in 2007 to 2010, had exercise prices
ranging from $9 5/8 to $17 per share. The options were
still outstanding at the end of 2000.

As of December 31, 1999, options to purchase
518,840 shares of common stock were not included in the
computation of diluted EPS because the options exercise
price was greater than the average price of the common shares.
The options, which expire in 2002 to 2009, had exercise prices
ranging from $8 3/4 to $17 3/4 per share. The options
were still outstanding at the end of 1999.

10.  Diisononyl Phthalate
Matter

During the fourth quarter of 1998, the Company
recorded a charge relating to sales returns and the write-off of
inventory of certain products containing diisononyl phthalate
(DINP), a plastic softener. Although the results of
a study on DINP conducted by the U.S. Consumer Product Safety
Commission resulted in the Commission not recommending a ban on
products containing DINP, some retailers decided to return
certain products containing this material. Net sales for the
year ended December 31, 1998 reflect a charge of $3,000,000
related to the sales returns of certain DINP products. Cost of
sales for the year ended December 31, 1998 reflect a charge
of $1,100,000 related to the write-off of inventory of certain
products containing DINP. Net income for the year ended
December 31, 1998 reflects a total after-tax charge of
$2,400,000 related to the DINP matter.

During the third quarter of 1999, the Company
increased net sales by $384,000 and cost of sales were decreased
by $629,000 due to the lower than expected sales returns and
inventory write-offs of certain products containing DINP for
which a charge was previously recorded in the fourth quarter of
1998. Net income for the year ended December 31, 1999
reflects the total after-tax increase of $603,000 related to the
DINP matter.

IV-17



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##### Table of Contents



THE FIRST YEARS INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


11.  Legal
Settlement

On February 11, 1999, Mark A. Freeman
and Timothy K. Stringer brought a civil action against the
Company in the United States District Court for the District of
Kansas, Civil Action No. 99 2058 KHV. The complaint in the
civil action alleged that the Companys TumbleMates®
valved drinking cups infringed U.S. Patent 5,186,347. In 1999,
although the Company vigorously defended the action, it
negotiated a settlement of $1,450,000 to remove any
uncertainties of a trial and to avoid future legal costs. The
settlement reflects no wrongdoing on the part of the Company and
allows the Company to continue to sell the valved drinking cups
without restriction. The expense has been recorded as part of
the selling, general, and administrative costs in the
consolidated financial statements.

12.  Segment
Information

During 1998, the Company adopted SFAS
No. 131, Disclosures About Segments of an Enterprise
and Related Information. This statement establishes
standards for the definition and disclosure of information
pertaining to the Companys business segments. SFAS
No. 131 requires identification of segments based upon a
companys internal structure and reporting methodology.

The Company operates in one business segment. It
engages in the single line of business of developing and
marketing one class of similar products for infants and toddlers
distributed through the same channels. Within this operating
segment, the Company had net sales of approximately $88,273,000,
$87,896,000, and $82,493,000 related to The First Years brand
sales and approximately $43,850,000, $45,579,000, and
$53,924,000 related to licensed and specialty sales in 2001,
2000, and 1999, respectively.

For marketing purposes, the Companys
product line consists of three categories, Feeding &
Soothing, Play and Discover, and Care and Safety. Net sales by
product category for the year ended December 31 is as
follows (in thousands):

|                   |  |      |        |      |  |      |        |  |  |   |        | 
|------------------ |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|Product Category   |  | 2001 |        | 2000 |  | 1999
|                   |  |      |        |      |  |     
|Feeding & Soothing |  | $    | 46,874 |      |  | $    | 55,686 |  |  | $ | 60,418 | 
|Play & Discover    |  |      | 35,674 |      |  |      | 30,424 |  |  |   | 30,446 | 
|Care & Safety      |  |      | 49,575 |      |  |      | 47,365 |  |  |   | 45,553 | 

As of December 31, 2001 and 2000, the
Company has $1,554,726 and $1,341,882, respectively of molds
located in various foreign countries which are considered
long-lived assets under SFAS No. 131.

See footnote 8 for discussion of major
customers, export sales, and licensed product sales.

13.  Selected Quarterly Financial
Data (Unaudited)

Selected quarterly financial data for the years
ended December 31, 2001 and 2000 is as follows:

|                 |            |           |   |            |  |            |   |            |  |           |   |           |  |  |   |      |  |  |   |      | 
|---------------- | ---------- | --------- | - | ---------- |  | ---------- | - | ---------- |  | --------- | - | --------- |  |  | - | ---- |  |  | - | ---- | 
|                 |            |           |   |            |  |            |   | Basic      |  | Diluted  
|                 |            | Net       |   | Gross      |  | Net        |   | Earnings   |  | Earnings 
|Calendar Quarter |            | Sales (1) |   | Profit (1) |  | Income (2) |   | Per Share  |  | Per Share
|                 |            |           |   |            |  |            |   |            |  |          
|2001             |            |           |   |            |  |            |   |            |  |           |   |           |  |  |   |      |  |  |   |     
|                 | First      |           | $ | 33,785,140 |  |            | $ | 12,523,211 |  |           | $ | 2,376,915 |  |  | $ | 0.26 |  |  | $ | 0.26 | 
|                 | Second     |           |   | 33,508,669 |  |            |   | 11,966,316 |  |           |   | 1,496,380 |  |  |   | 0.16 |  |  |   | 0.16 | 
|                 | Third      |           |   | 36,402,060 |  |            |   | 13,022,460 |  |           |   | 2,053,482 |  |  |   | 0.22 |  |  |   | 0.22 | 
|                 | Fourth (2) |           |   | 28,426,712 |  |            |   | 10,832,600 |  |           |   | 325,011   |  |  |   | 0.04 |  |  |   | 0.04 | 
|2000             |            |           |   |            |  |            |   |            |  |           |   |           |  |  |   |      |  |  |   |     
|                 | First      |           | $ | 36,762,253 |  |            | $ | 13,124,207 |  |           | $ | 3,011,533 |  |  | $ | 0.31 |  |  | $ | 0.31 | 
|                 | Second     |           |   | 34,260,931 |  |            |   | 12,135,434 |  |           |   | 2,294,580 |  |  |   | 0.24 |  |  |   | 0.24 | 
|                 | Third      |           |   | 32,237,407 |  |            |   | 11,300,636 |  |           |   | 1,840,174 |  |  |   | 0.19 |  |  |   | 0.19 | 
|                 | Fourth     |           |   | 30,214,796 |  |            |   | 11,115,176 |  |           |   | 1,504,676 |  |  |   | 0.16 |  |  |   | 0.16 | 

IV-18



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##### Table of Contents



THE FIRST YEARS INC.




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Basic and diluted earnings per share are computed
independently for each of the periods presented. Accordingly,
the sum of the quarterly earnings per share amounts may not
agree to the total for the year.



---

(1)  Quarterly amounts adjusted to
reflect certain reclassifications.

|    |                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------
|(2) | During the 4th quarter of 2001, the Company
	recorded a specific charge for a bad debt write-off of
	approximately $952,000.

* * * * * *

IV-19



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##### Table of Contents



SCHEDULE II

THE FIRST YEARS INC.

VALUATION AND QUALIFYING ACCOUNTS

Years Ended December 31, 2001, 2000, and
1999


|                                                                |                                                      |              |  |            |           |            |  |             |           |     |  |   |           |        |  |   |         | 
|--------------------------------------------------------------- | ---------------------------------------------------- | ------------ |  | ---------- | --------- | ---------- |  | ----------- | --------- | --- |  | - | --------- | ------ |  | - | ------- | 
|                                                                |                                                      |              |  | Additions  |           |            |  |            
|                                                                |                                                      | Balance,     |  | Charged to |           |            |  |            
|                                                                |                                                      | Beginning of |  | Costs and  |           |            |  | Balance    
|Description                                                     |                                                      | Year         |  | Expenses   |           | Deductions |  | End of Year
|                                                                |                                                      |              |  |            |           |            |  |            
|Valuations Accounts Deducted from Assets to which
	they Apply  |                                                      |              |  |            |           |            |  |             |           |     |  |   |           |        |  |  
|                                                                | Allowance for doubtful accounts:                     |              |  |            |           |            |  |             |           |     |  |   |           |        |  |   |        
|                                                                |                                                      | 2001         |  | $          | 270,000   |            |  | $           | 1,217,405 | (3) |  | $ | 1,237,405 | (1, 3) |  | $ | 250,000 | 
|                                                                |                                                      |              |  |            |           |            |  |             |           |     |  |   |           |        |  |  
|                                                                |                                                      | 2000         |  | $          | 270,000   |            |  | $           | 87,324    |     |  | $ | 87,324    | (1)    |  | $ | 270,000 | 
|                                                                |                                                      |              |  |            |           |            |  |             |           |     |  |   |           |        |  |  
|                                                                |                                                      | 1999         |  | $          | 270,000   |            |  | $           | 78,967    |     |  | $ | 78,967    | (1)    |  | $ | 270,000 | 
|                                                                |                                                      |              |  |            |           |            |  |             |           |     |  |   |           |        |  |  
|                                                                | Allowance for obsolete inventory:                    |              |  |            |           |            |  |             |           |     |  |   |           |        |  |   |        
|                                                                |                                                      | 2001         |  | $          | 300,000   |            |  | $           | 0         |     |  | $ | 100,000   |        |  | $ | 200,000 | 
|                                                                |                                                      |              |  |            |           |            |  |             |           |     |  |   |           |        |  |  
|                                                                |                                                      | 2000         |  | $          | 390,000   |            |  | $           | 0         |     |  | $ | 90,000    |        |  | $ | 300,000 | 
|                                                                |                                                      |              |  |            |           |            |  |             |           |     |  |   |           |        |  |  
|                                                                |                                                      | 1999         |  | $          | 250,000   |            |  | $           | 140,000   |     |  | $ | 0         |        |  | $ | 390,000 | 
|                                                                |                                                      |              |  |            |           |            |  |             |           |     |  |   |           |        |  |  
|                                                                | Allowance for Diisononyl Phthalate product
	returns: |              |  |            |           |            |  |             |           |     |  |   |           |        |  |   |        
|                                                                |                                                      | 1999         |  | $          | 2,874,000 |            |  | $           | 0         |     |  | $ | 2,874,000 | (2)    |  | $ | 0       | 
|                                                                |                                                      |              |  |            |           |            |  |             |           |     |  |   |           |        |  |  



---



|    |                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net accounts written off.                                                                                                                               
|   
|(2) | Represents actual returns of $2,490,000 and a
	$384,000 reversal of allowance due to lower than expected sales
	returns related to the phthalate matter.
|   
|(3) | Includes write-off of certain Kmart receivables
	of approximately $952,000.                                                                             

IV-20



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##### Table of Contents



THE FIRST YEARS INC.

EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                                                                                            
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                            
|       
|3.1     |  | Restated Articles of Organization of the Company.
	Filed as Exhibit 3.1 to the Companys Registration
	Statement on Form S-1 on October 5, 1995 (File
	No. 33-62673) and incorporated herein by reference.                                                                                                                 
|3.2     |  | By-laws of the Company. Filed as
	Exhibit (3)(ii) to the Companys annual report on
	Form 10-K for the period ended December 31, 1999 and
	incorporated herein by reference.                                                                                                                                               
|4.1     |  | Specimen certificate for shares of Common Stock
	of the Company. Filed as Exhibit 4.1 to the Companys
	Registration Statement on Form S-1 (File No. 33-62673)
	and incorporated herein by reference.                                                                                                                      
|4.2     |  | Rights Agreement, dated as of November 19,
	2001, between the Company and EquiServe Trust Company, N.A.
	Filed as Exhibit 4.1 to the Companys Registration
	Statement on Form 8-A on November 20, 2001 and
	incorporated herein by reference.                                                                             
|10.1*   |  | Agreement with the Childrens Television
	Workshop dated July 1, 1996 regarding the licensing of
	Sesame Street characters. Filed as Exhibit (10)(g) to the
	Companys annual report on Form 10-K for the period
	ended December 31, 1996 and incorporated herein by
	reference.                                           
|10.2*   |  | Letter agreement with Childrens Television
	Workshop dated as of July 1, 1999 regarding the renewal of
	licensing of Sesame Street characters. Filed as
	Exhibit (10)(d) to the Companys annual report on
	Form 10-K for the period ended December 31, 1999 and
	incorporated herein by reference.                       
|10.3**  |  | Letter agreement with Sesame Workshop dated
	July 1, 2001 regarding the renewal of licensing Sesame
	Street characters. Filed herewith and incorporated herein by
	reference.                                                                                                                                              
|10.4*   |  | Agreement with Disney Enterprises, Inc. dated as
	of August 1, 2000 relating to the licensing of Winnie the
	Pooh, Disney Classics and Disney Standard characters. Filed as
	Exhibit (10)(w) to the Companys quarterly report on
	Form 10-Q for the period ended September 30, 2000 and
	incorporated herein by reference.
|10.5    |  | The First Years Inc. 1993 Equity Incentive Plan,
	as amended through May 20, 1999. Filed as
	Exhibit (10)(t) to the Companys quarterly report on
	Form 10-Q for the period ended September 30, 1999 and
	incorporated herein by reference.                                                                                
|10.6    |  | The First Years Inc. 1993 Stock Option Plan for
	Directors, as amended through October 1, 1999. Filed as
	Exhibit (10)(f) to the Companys Form 10-K for the
	period ended December 31, 1999 and incorporated herein by
	reference.                                                                                        
|10.7    |  | Letter Agreement between The First Years Inc. and
	Jerome M. Karp dated August 8, 1999. Filed as Exhibit
	(10)(v) to the Companys quarterly report on Form 10-Q
	for the period ended September 30, 1999, and incorporated
	herein by reference.                                                                          
|10.8    |  | Employment Agreement between The First Years Inc.
	and Ronald J. Sidman dated September 30, 1999. Filed as
	Exhibit (10)(u) to the Companys quarterly report on
	Form 10-Q for the period ended September 30, 1999, and
	incorporated herein by reference.                                                                
|10.9    |  | Agreement between The First Years Inc. and Wayne
	Shea dated August 12, 1997. Filed as Exhibit (10)(o) to the
	Companys annual report on Form 10-K for the period
	ended December 31, 1997, and incorporated herein by
	reference.                                                                                        
|10.10   |  | Agreement between The First Years Inc. and Bruce
	Baron dated July 10, 1997. Filed as Exhibit (10)(p) to the
	Companys annual report on Form 10-K for the period
	ended December 31, 1998, and incorporated herein by
	reference.                                                                                         
|10.11   |  | Non-Compete Agreement between The First Years
	Inc. and Richard F. Schaub Jr. dated August 29, 2000. Filed
	as Exhibit (10)(m) to the Companys annual report on
	Form 10-K for the period ended December 31, 2000, and
	incorporated herein by reference.                                                                 
|10.12   |  | Change of Control Agreement between The First
	Years Inc. and Richard F. Schaub Jr. dated August 29, 2000.
	Filed as Exhibit (10)(n) to the Companys annual
	report on Form 10-K for the period ended December 31,
	2000, and incorporated herein by reference.                                                           
|10.13   |  | Promissory Note and Agreement between The First
	Years Inc. and Richard F. Schaub Jr. dated September 28,
	2000. Filed as Exhibit (10)(o) to the Companys annual
	report on Form 10-K for the period ended December 31,
	2000, and incorporated herein by reference.                                                      

IV-21



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                           
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                           
|10.14   |  | Promissory Note and Agreement between The First
	Years Inc. and Richard F. Schaub Jr. dated March 21,
	2001. Filed herewith and incorporated by reference.                                                                                
|10.15   |  | Agreement between The First Years Inc. and
	James A. Connors, Jr. dated May 8, 2000. Filed as
	Exhibit (10)(p) to the Companys annual report on
	Form 10-K for the period ended December 31, 2000, and
	incorporated herein by reference.
|21.1    |  | List of Subsidiaries of the Registrant.                                                                                                                                                                                                   
|23.1    |  | Consent of Deloitte & Touche LLP dated
	March 29, 2002.                                                                                                                                                                                   



---



| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| | * |  Confidential Treatment has been
	granted with respect to portions of this document by the
	Securities and Exchange Commission.



|   |                                                                                                                                                                                                
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** |  Portions of this document were
	omitted and have been filed separately with the Securities and
	Exchange Commission pursuant to the Companys application
	requesting confidential treatment.

IV-22