<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D. C. 20549
                            ------------------------

                                   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, 1999; 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)

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

                                  508-588-1220
              (Registrant's Telephone Number, Including Area Code)

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

<TABLE>
<S>                                            <C>
             TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
                     NONE                                           NONE
</TABLE>

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

                          COMMON STOCK, $.10 PAR VALUE
                                (Title of Class)

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 of the Common Stock held by nonaffiliates of the
Company was $64,401,098, based on the price at which the stock was sold over the
counter on the Nasdaq National Market, as reported at the close of business on
February 29, 2000.

     The number of shares of Registrant's Common Stock outstanding on December
31, 1999 was 9,616,235.
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<PAGE>   2

DOCUMENTS INCORPORATED BY REFERENCE

     The Company intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
1999. The following sections of such definitive proxy statement are hereby
incorporated by reference into Items 10, 11, 12 and 13 of Part III of this Form
10-K: "Common Stock Ownership of Certain Beneficial Owners and Management;"
"Election of Directors;" "Executive Compensation" (other than the Board
Compensation Committee Report on Executive Compensation and the Performance
Chart); and "Compliance with Section 16(a) of the Securities Exchange Act of
1934."
<PAGE>   3

                                     PART I

ITEM 1.  BUSINESS

     The First Years Inc. (the "Company") is a leading developer and worldwide
marketer of a broad line of products for infants and toddlers. Major channels
through which the Company sells its products include mass merchants,
supermarkets, drug stores, department stores, wholesale clubs, convenience
stores, specialty stores, internet-based retailers, mail-order catalogs and
catalog showrooms.

     The Company was incorporated in 1952 in Massachusetts under the name Kiddie
Products, Inc. The Company changed its name to The First Years Inc. in May,
1995, and is headquartered in Avon, Massachusetts. The Company also has a
wholly-owned subsidiary, the First Years Inc., which is incorporated in Delaware
and headquartered in California.

     Except as expressly indicated or unless the context otherwise requires, as
used in this report, the "Company" means The First Years Inc. a Massachusetts
corporation, and its subsidiaries.

  Products

     The Company's product line, which contains approximately 250 items that
range in retail price from approximately $0.99 to $69.99, is categorized and
marketed into five distinct product categories as follows:

     Feeding & Soothing.  The Feeding & Soothing category is comprised of
bottles and accessories, nipples, pacifiers, teethers, bowls, drinking cups,
dishes, flatware, bibs, breast-feeding accessories and feeding sets. This
category includes the TumbleMates line of training cups, bowls, plates and
utensils, designed for serving, storing and transporting drinks and snacks, and
which features a system of interchangeable cups and lids. This category also
includes the Natural Feeding System of nipples and bottles, and the new
Reclining 3-Stage Feeding Seat.

     Play & Discover.  The Play & Discover category consists of an extensive
line of entertaining, skill-developing toys for infants and toddlers including
crib toys, floor toys, hand-held toys, and large play items. This category
includes the Company's Washables line of 100% washable, dishwasher-safe toys. In
1999, the Company introduced the 3-in-1 Tummy Play set.

     Care & Safety.  The Care & Safety category consists of a broad line of
bathing and grooming accessories, home safety and monitoring products such as
door and cabinet latches, toilet-training products and products appropriate for
the health and hygiene needs of infants. This category includes the Crisp &
Clear Plus 900MHz Nursery Monitor and the new Hands-Free Gate, a foot-pedal
operated gate.

     Winnie the Pooh.  The Winnie the Pooh category consists of numerous basic
products including teethers, rattles, bibs, bottles, bathing accessories and
gift sets featuring Winnie the Pooh characters. In 1999, the Company introduced
numerous additional items in this category including a 2-in-1 Bathtub and Color
Change Bathseat.

     Sesame Street.  The Sesame Street category consists of numerous basic
products including teethers, pacifiers, bottles, drinking cups, dishes,
flatware, healthcare products, car sun shade, hooded towels, rattles and a
toilet trainer. In 1999, the Company introduced a new Fold-Down Bed Rail.
                            ------------------------

     THE FIRST YEARS(R) Ideas Inspired by Parents(R), TumbleMates(R),
Firstronics(R), and Washables(R) are registered trademarks of The First Years
Inc. Crisp & Clear Plus(TM) and ComforTemp(TM) are trademarks of The First Years
Inc. SESAME STREET is a registered trademark of Children's Television Workshop.
WINNIE THE POOH(R) and POOH(R) are registered trademarks of Disney Enterprises,
Inc.

FINANCIAL INFORMATION ABOUT SEGMENTS

     The Company has one operating segment. It engages in a single line of
business of developing and marketing one class of similar products for infants
and toddlers through the same retail channels. For financial information
regarding such single operating segment, please see Item 14(a).1. "Consolidated
Financial Statements."

                                       I-1
<PAGE>   4

PRODUCT DESIGN, DEVELOPMENT AND MARKETING

     The Company devotes substantial resources to product development. The
Company employs a staff of professionals engaged in the creation of new products
and uses a diverse group of outside designers and developers. For the past 19
years the Company's product line also has been designed in consultation with Dr.
T. Berry Brazelton, the well-known pediatrician and authority on child
development, and staff members of the Child Development Unit at Children's
Hospital in Boston, Massachusetts (the "CDU"), of which Dr. Brazelton is founder
and Director Emeritus.

     The Company spent approximately $3.8, $3.3 and $2.6 million on new product
development in 1999, 1998, and 1997, respectively. Most of the Company's new
products are shown at the Juvenile Products Manufacturers Association Trade
Show, in Dallas, Texas in the fall of each year, and a variety of other national
and international toy and baby fairs.

SALES

     The Company's products are sold nationally and internationally to a broad
spectrum of customers including 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. The Company sells its products in a large number of
countries throughout the world. Major customers include Wal*Mart, Toys "R" Us,
Target, Kmart, Kroger, Sears, Eckerd Drugs, Rite Aid, Albertsons, and J.C.
Penney.

     The Company's products are sold in the United States and Canada primarily
through the Company's internal sales staff and a large network of independent
sales representatives. The Company's sales staff is responsible for supervising
and training the sales representatives. Such training is conducted at the
Company's headquarters and throughout the United States.

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

     In Europe and the Middle East, the Company's products are sold by the
Company's internal staff at its sales office in Cirencester, England, which is
headed by the Vice President -- International Sales/Europe. This staff manages a
network of foreign distributors and independent sales representatives. In
Central and South America and the Pacific Rim, the Company's products are sold
by its internal sales staff which manages a network of foreign distributors and
independent sales representatives in such areas.

     During 1999, Wal*Mart, Toys "R" Us, and Target accounted for approximately
28%, 19%, and 14% of the Company's net sales, respectively. A significant
reduction in purchases by any one of these customers could have a material
adverse effect on the Company's business.

     Backlog is not a significant and material aspect of the Company's business.
Customers place orders on an as needed basis. As the Company's sales have
increased, the amount of unfilled orders at any time has not been indicative of
future results.

LICENSED CHARACTER PRODUCTS

     Since 1996, the Company has entered into and renewed various agreements
which provide for the payment of royalties on certain of the Company's products
featuring licensed cartoon characters. The agreements have various terms and
require minimum royalty payments of $6,007,000 during the terms of these
agreements. A major licensing agreement was renewed in 1999 and will expire at
the end of 2000. Sales of products licensed under this major license agreement
amounted to 34% of the Company's total net sales for the year ended December 31,
1999. 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 (see Exhibit 99 to this Report, "Important Factors That May Affect
Future Results" and "Notes to Consolidated Financial Statements," Numbers 6 and
8).

                                       I-2
<PAGE>   5

MANUFACTURING AND SOURCES OF SUPPLY

     The Company does not own or operate its own manufacturing facilities. In
1999, all of the Company's products were manufactured either using the Company's
custom tools (molds and dies) or to the Company's specifications by
approximately 25 manufacturers located in the United States, Canada, China,
Taiwan, Thailand, and Mexico. Approximately 54% of all of its products sold in
1999 were manufactured in Asia, primarily in China. A large percentage of the
Company's furnishings and other large products were manufactured in 1999 by
suppliers in the United States and Canada because of the significantly higher
shipping costs from the Far East.

     Generally the Company uses one manufacturer to make each product from its
supplier base in Asia, Canada, and the United States. Due to the high cost of
developing duplicate tooling (predominantly molds and dies), most of the
Company's products are made using one set of tools; however, the Company has
developed duplicate tools for several of its key and high-volume products. In
December, 1996, the Company entered into an agreement with Exergen Corporation
to jointly design and develop the Company's ComforTemp thermometer. The
ComforTemp is an instant underarm thermometer which uses an infrared
temperature-taking technology developed and patented by Exergen. The Company is
dependent on Exergen for Exergen's technology and proprietary components. The
Company introduced the Comfortemp to the market in 1997. There can be no
assurance that the Company will continue to obtain such proprietary components
from Exergen or that the ComforTemp thermometer, will result in substantial
sales. The Company believes it has alternative manufacturing sources available
for all of its other products. Because it owns its tools, it could shift its
sources of manufacturing for such other products to an alternative supplier.

     In 1999, the Company's largest supplier, which is based in the United
States, accounted for products that represented approximately 12% of its sales
in 1999. Other than as described above, the Company has not entered into
long-term contractual arrangements with any of its suppliers.

     The principal raw materials used in the production and sale of the
Company's products are plastic, paperboard and cloth. Raw materials are
purchased by the manufacturers who deliver completed products to the Company.
Because the primary source used in manufactured plastic is petroleum, the cost
and availability of plastic for use in the Company's products varies to a great
extent with the price of petroleum. The inability of the Company's suppliers to
acquire sufficient plastic and paperboard at a reasonable price could have a
material adverse effect on the Company's profitability. The Company did not
experience any difficulties in obtaining materials in 1999.

     The Company purchases its products from its suppliers primarily in the U.S.
dollar and the Hong Kong dollar which is currently pegged to the U.S. dollar.
The Company also purchases a small percentage of its products in Canadian
dollars from one supplier. Generally, the Company's suppliers ship the products
on the basis of open credit terms or upon the acceptance of products by the
Company. The Company also enters into foreign exchange contracts. (See "Notes to
Consolidated Financial Statements," Numbers 1 and 5).

     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. Enactment of
legislation or the imposition of restrictive regulations conditioning or
revoking China's Normal Trade Relations ("NTR") trading status could have a
material adverse effect upon the Company's business because products originating
from China could be subjected to substantially higher rates of duty. China's NTR
trading status has been extended through July 3, 2000. Unless Congress takes
action to override this decision, China will continue to enjoy NTR treatment
during this period. The European Community (the "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.

     The Company, because of its substantial reliance on suppliers in foreign
countries, is required to order products further in advance of customer orders
than would generally be the case if such products were

                                       I-3
<PAGE>   6

produced in the United States. As a result, the Company is required to carry
significant amounts of inventory to meet rapid delivery requirements of
customers and to assure itself of continuous allotment of goods from suppliers.

WORKING CAPITAL ITEMS

     See Item 7, "Management Discussion and Analysis of Financial Condition and
Results of Operation."

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 the Company. The Company
competes with a number of different competitors, depending on the product
category, and it competes against no single company across all product
categories. Its competition includes large, diversified health care product
companies, specialty infant products makers, toy makers and specialty health
care products companies. The Company competes principally on the basis of brand
name recognition and price/value relationship. In addition, the Company believes
that it competes favorably with respect to product quality, customer service and
breadth of product line.

DISTRIBUTION

     The Company distributes its products in the United States from its
warehouse facility in Avon, Massachusetts and from a public warehouse in
Fontana, California. The Company distributes its products in Canada from a
public warehouse in Toronto, Ontario. In Europe, the Company distributes its
products from a public warehouse in Ghent, Belgium. Warehouse services at the
various public warehouses are performed by warehouse operators unaffiliated with
the Company.

TRADEMARKS, PATENTS AND COPYRIGHTS

     The Company's principal trademark THE FIRST YEARS and design, is registered
in the United States and in a number of foreign countries. The Company also uses
other trademarks for certain of its products and product categories, some of
which are registered in the United States and in various foreign countries.

     The Company, also owns patents, design patents and design registrations, as
well as pending applications in the United States and certain foreign countries.
Although the Company believes such are important to its business, it does not
believe that any single patent, design patent, or design registration, including
any which may be issued on a pending application, is material to its business.
There can be no assurance that such patents, design patents, or design
registrations, including those that may be issued on pending applications, will
offer any significant competitive advantage for the Company's products.

     The Company, also owns copyrights, some of which are registered in the
United States. The Company does not believe that any single copyright is
material to its business. There can be no assurance that such copyrights will
offer any significant competitive advantage for the Company's products.

EMPLOYEES

     As of December 31, 1999, the Company employed 150 full-time and 5 part-time
employees, of whom 4 are senior executive officers and all of the other
employees of the Company are in sales, marketing and product development,
materials, purchasing, quality assurance, data processing, finance,
administration and clerical, and warehousing positions. None of the Company's
employees is represented by a union, and the Company has not experienced any
work stoppages. The Company believes that relations with employees are good.

GOVERNMENT REGULATIONS

     The Company's products are subject to the provisions of the Federal
Consumer Product Safety Act, the Federal Hazardous Substances Act, as amended,
the Federal Flammable Fabrics Act, and the Child Safety Protection Act, and the
regulations promulgated thereunder (the "Acts"). The Company's nursery monitors
are subject to regulations of the Federal Communications Commission. The
Company's medical devices and

                                       I-4
<PAGE>   7

drug products are subject to the regulations of the Food and Drug
Administration. The Acts enable the Consumer Product Safety Commission (the
"CPSC") to protect children from hazardous toys and other articles. The CPSC has
the authority to exclude from the market certain consumer products which are
found to be hazardous. The CPSC's determination is subject to court review. The
CPSC can require the repurchase by the manufacturer of articles which are
banned. The Federal Flammable Fabrics Act enables the CPSC to regulate and
enforce flammability standards for fabrics used in consumer products. Similar
laws exist in some states and cities and in various international markets. The
Company designs and tests its products to ensure compliance with the various
federal, state and international requirements. Any recall of a product could
have a material adverse effect on the Company, depending on the particular
product.

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

     The Company's domestic sales in 1999, 1998 and 1997 were approximately
$122.2, $116, and $104.5 million, respectively, and accounted for approximately
89.4%, 87.4% and 86.5% of the Company's total net sales in 1999, 1998, and 1997,
respectively. The Company's international sales (primarily in Europe, Canada,
South America and the Pacific Rim) were approximately $14.5, $16.7, and $16.2
million, respectively, and accounted for approximately 10.6%, 12.6% and 13.5% of
the Company's total net sales in 1999, 1998, and 1997, respectively. (See "Notes
to Consolidated Financial Statements", Number 8.)

     For information regarding the Company's long-lived assets in the U.S.A. and
foreign countries, please see the Company's "Consolidated Balance Sheet as of
December 31, 1999 and 1998" and "Notes to Consolidated Financial Statements",
Number 12.

     For information regarding the risks attendant to the Company's
international sales and operations, please see "Manufacturing and Sources of
Supply" on Page I-3 and "Competition" on Page I-4.

EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY

     The names of the Company's Executive Officers and Directors and certain
information about them are set forth below. Officers have served in the capacity
indicated in the table below for at least five years, unless otherwise indicated
in the notes.

<TABLE>
<CAPTION>
                                                                                               OFFICER OR
                                                                                                DIRECTOR
                   NAME                     AGE                    POSITION                      SINCE
                   ----                     ---                    --------                    ----------
<S>                                         <C>   <C>                                          <C>
Ronald J. Sidman..........................  53    President, Chairman of the Board of
                                                  Directors, and Chief Executive Officer          1975
Jerome M. Karp............................  72    Director                                        1969
Benjamin Peltz............................  60    Director                                        1975
Evelyn Sidman.............................  86    Clerk and Director                              1979
Fred T. Page..............................  53    Director                                        1988
Kenneth R. Sidman.........................  54    Director                                        1998
Lewis M. Weston...........................  73    Director                                        1998
Walker J. Wallace.........................  55    Director                                        1999
John R. Beals.............................  45    Treasurer, Senior Vice President -- Finance
                                                  and Chief Financial Officer                     1990
Wayne Shea................................  45    Senior Vice President -- Worldwide Sales
                                                  and Merchandising                               1991
Bruce Baron...............................  39    Senior Vice President -- Operations             1997
</TABLE>

---------------

     Mr. Sidman has been the President of the Company since January 1989 and
Chairman of the Board of Directors and Chief Executive Officer since March 1995.

     Mr. Karp served as Vice Chairman of the Board of the Company from January,
1989 until his retirement from the Company in August, 1999.

     Mr. Peltz served as the Treasurer of the Company from May, 1970 to January,
1998 and as the Senior Vice President of the Company from January 1980 until
June 30, 1997 when he retired from the Company.

                                       I-5
<PAGE>   8

     Mr. Page was with Southern New England Telecommunications Corporation
("SNET"), a subsidiary of Southwestern Bell, for thirty years from 1969 to 1999.
From January, 1994 to March, 1999 he served as President -- Network Services of
SNET.

     Kenneth R. Sidman has been Vice President, Business & Technology
Development, at Saint-Gobain Performance Plastics Corp., Wayne, NJ, (formerly
Norton Performance Plastics Corp.), since 1997. Mr. Sidman joined Saint-Gobain
Performance Plastics Corp. in 1984 as Director, New Business Development, and
from 1992 to 1997, was Vice President, Marketing & New Business Development.

     Mr. Lewis M. Weston is a Retired Partner of Goldman, Sachs & Co. and was a
Limited Partner of Goldman Sachs from 1978 to 1999. He had been with Goldman
Sachs since 1951 and was made a General Partner in 1967. He was Partner in
charge of the Syndicate Department from 1969 to 1978, a period during which he
was also active with the National Association of Securities Dealers (NASD),
serving three years as a member of the NASD's Board of Governors. Currently, Mr.
Weston is a board member of South East Asia Venture Investment Company (SEAVIC)
and SEAVIC, III, Singapore, and the Thai Prime Fund, Singapore, as well as a
member of the International Advisory Board of Banco Finantia, Lisbon, Portugal.
He also serves on the Investors Representative Committee of the China Dynamic
Investment Fund.

     Walker J. Wallace was with Proctor & Gamble for 30 years, from 1967 to
1997. He was made a Vice President of Proctor & Gamble in 1991 and served as
Vice President -- Worldwide Strategic Planning for various core product
categories (laundry and cleaning products, paper products, diapers) from 1993 to
1997. Mr. Wallace is on the Board of the Student Loan Funding Resources in
Cincinnati, Ohio.

     Mr. Beals has been Senior Vice President -- Finance since March, 1998 and
Treasurer of the Company since January, 1998. He has been Chief Financial
Officer of the Company since July, 1997. From July, 1997 to March, 1998 he was
Vice President -- Finance of the Company and from January, 1990 to June, 1997,
he was the Assistant Treasurer and Controller of the Company.

     Mr. Shea has been Senior Vice President of Worldwide Sales & Merchandising
since July, 1997. From January, 1995 to June, 1997, Mr. Shea was Vice President
Worldwide Sales & Merchandising and from July, 1991 to December, 1994, Mr. Shea
was Vice President of Service and Merchandising of the Company.

     Mr. Baron has been Senior Vice President -- Operations since August, 1997.
Prior to that time, Mr. Baron was Vice President of Operations at Crabtree &
Evelyn from 1988 to July, 1997.

ITEM 2.  PROPERTIES

     The Company owns its executive and administrative offices and principal
warehouse which are located in a 124,000 square-foot building at One Kiddie
Drive, Avon, Massachusetts. The Company also has sales offices in leased
premises in Cirencester, England. The Company's subsidiary, TFY-Delaware has
sales offices in leased premises in Missouri, Arkansas and California.

     The Company also uses public warehouses located in Toronto, Canada;
Fontana, California; and in Ghent, Belgium.

     The Company believes that its properties (owned and leased) are in good
condition and adequate for its current needs.

ITEM 3.  LEGAL PROCEEDINGS

     The Company is involved in legal proceedings which have arisen in the
ordinary course of business. The Company believes that there are no claims or
litigation pending, the outcome of which could have a material adverse effect on
the Company's financial condition or operating results. (See also "Notes to
Consolidated Financial Statements," Number 11).

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 security holders of the Company.

                                       I-6
<PAGE>   9

                                    PART II

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

(a)  MARKET INFORMATION

     The Company's Common Stock is traded on the Nasdaq National Market. Below
is a summary of the actual high and low sales prices of the Company's Common
Stock for each quarter of 1999 and 1998 as reported by Nasdaq and retroactively
adjusted to reflect the Company's 2-for-1 stock split effected on June 29, 1998.

                                      1999

<TABLE>
<CAPTION>
                          QUARTER                              LOW         HIGH
                          -------                              ---         ----
<S>                                                           <C>         <C>
First.......................................................  $12 3/4     $18
Second......................................................   13 5/8      17 3/4
Third.......................................................    9 1/4      15
Fourth......................................................    6 3/4      10 1/2
</TABLE>

                                      1998

<TABLE>
<CAPTION>
                          QUARTER                              LOW         HIGH
                          -------                              ---         ----
<S>                                                           <C>         <C>
First.......................................................  $10 1/2     $18 1/8
Second......................................................   15 1/4      20
Third.......................................................   12          19 1/2
Fourth......................................................    9          18 1/4
</TABLE>

(b)  APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS

<TABLE>
<CAPTION>
                                                                APPROXIMATE NUMBER
                                                                 OF RECORD HOLDERS
                       TITLE OF CLASS                        (AS OF DECEMBER 31, 1999)
                       --------------                        -------------------------
<S>                                                          <C>
Common Stock, $.10 Par Value                                            169
</TABLE>

(c)  DIVIDEND POLICY

     In 1998 and 1999, the Company paid cash dividends on its Common Stock of
$0.06 per share, which were paid on June 29, 1998 and June 15, 1999,
respectively. The Company currently expects that comparable cash dividends will
continue to be paid in the future. However, the declaration and payment of any
such cash dividends in the future will depend upon the Company's earnings,
financial condition, capital needs, and other factors deemed relevant by the
Board of Directors. There can be no assurance that the Company will continue to
pay dividends in the future.

     The Company's Board of Directors declared on May 8, 1998, a 2-for-1 stock
split effected in the form of a 100% stock dividend payable on June 29, 1998 to
holders of record on May 29, 1998.

                                      II-1
<PAGE>   10

ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                   1999           1998           1997          1996          1995
                               ------------   ------------   ------------   -----------   -----------
<S>                            <C>            <C>            <C>            <C>           <C>
SELECTED INCOME STATEMENT
  DATA:
Net sales....................  $136,651,751   $132,716,379   $120,695,988   $93,110,361   $75,757,322
Cost of products sold........    79,645,326     80,737,193     71,185,634    55,463,255    45,108,546
Selling, general and
  administrative expenses....    42,303,932     39,011,893     37,165,878    28,580,039    23,961,206
Interest expense.............            --             --         27,709       358,637       186,338
Interest income..............       582,640        590,822        168,922        27,349        16,718
Offering expenses............            --             --             --            --       310,457
Income before income taxes...    15,285,133     13,558,115     12,485,689     8,735,779     6,207,493
Provision for income taxes...     6,190,500      5,545,300      5,040,900     3,494,300     2,483,000
Net income...................     9,094,633      8,012,815      7,444,789     5,241,479     3,724,493
Basic earnings per share**...         $0.89          $0.78          $0.75         $0.55         $0.41
Diluted earnings per
  share**....................         $0.87          $0.75          $0.71         $0.53         $0.40
Dividends paid per share*....         $0.06          $0.06          $0.05         $0.05         $0.05
Basic weighted average number
  of shares outstanding**....    10,226,470     10,338,857     10,003,774     9,466,356     9,014,116
Diluted weighted average
  number of shares
  outstanding**..............    10,402,297     10,669,503     10,453,062     9,891,982     9,326,982
SELECTED BALANCE SHEET DATA:
Total assets.................  $ 67,913,856   $ 69,275,895   $ 60,571,561   $47,049,537   $41,712,080
Long-term debt...............            --             --             --            --       100,001
Stockholders' equity.........    51,702,426     52,647,404     44,009,004    35,866,440    25,763,259
Stockholders' equity per
  share**....................         $4.97          $4.93          $4.21         $3.63         $2.76
</TABLE>

---------------
*  Adjusted to reflect the two-for-one stock split effected on June 29, 1998 and
   December 29, 1995, respectively.

** Adjusted to reflect the two-for-one stock split effected on June 29, 1998 and
   December 29, 1995, respectively and restated to reflect adoption of Statement
   of Financial Accounting Standard No. 128 in the fourth quarter of 1997.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

STATEMENT OF FORWARD LOOKING INFORMATION:

     Statements in this Report on Form 10-K that are not strictly historical are
"forward looking" statements, as defined in the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are typically identified by the
words: believe, expect, anticipate, intend, are confident, estimate and similar
expressions which by their nature refer to future events. Actual future results
may differ materially from those anticipated depending on a variety of factors
which include but are not limited to the Company's need for continued innovative
product development, and timely product introductions; the Company's reliance on
sales of licensed products, consumer preferences, major customers and foreign
manufacturers; changes in the retail industry; competition in the juvenile
products market; cost and availability of certain materials; risks related to
inventory, international sales, products liability, the Company's intellectual
property and litigation; importance of brand recognition; currency fluctuation
risks; impact of government regulations; and the dependence on, and need for,
key personnel. Information with respect to risk factors are contained in Exhibit
99 of this Annual Report on Form 10-K, and quarterly reports on Form 10-Q as
filed with the Securities and Exchange Commission. Readers are cautioned not to
place undo reliance on these forward-looking statements, which

                                      II-2
<PAGE>   11

speak only as of the date hereof. The Company assumes no obligation to update
the information contained in this press release.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

     Net sales in 1999 were $136.7 million, an increase of $4.0 million or 3.0%,
as compared to $132.7 million in 1998. The increase was due to increased demand
for the First Years brand products which was partially offset by decreased
demand for licensed products in domestic and foreign markets. As a percentage of
sales, sales of licensed products decreased to 39.6% in 1999 from 48.4% in 1998
as consumer demand for licensed products lessened, particularly for several
items that had been selling well in 1998. Sales of the First Years brand
products increased to 60.4% in 1999 from 51.6% in 1998 due primarily to new
product introductions. The Company anticipates that the percent of the First
Years branded products to total sales will continue to increase as a result of
recent trends. An additional factor affecting net sales in 1999 and 1998 was the
accounting for sales returns of certain products containing diisononyl
phthalate, ("DINP"). As fully disclosed in Note 10 of the Company's financial
statements, 1998 net sales reflect a charge of $3.0 million for an accrual of
sales returns and 1999 net sales reflect an increase of $0.4 million for a
reversal of a portion of the 1998 accrual. As a percent of sales, net sales to
foreign markets decreased to 10.6% in 1999 from 12.6% in 1998 as reduced sales
in Latin America and Europe were partially offset by sales increases in Canada
and the Pacific Rim. The Company currently believes that substantial long term
opportunity exists in the foreign markets and will continue to pursue increased
sales potential in those markets.

     Cost of products sold in 1999 was $79.6 million, a decrease of $1.1 million
or (1.4)%, as compared to $80.7 million in 1998. As a percentage of net sales,
cost of products sold in 1999 decreased to 58.3% from 60.8% in the comparable
period of 1998. The decrease was primarily due to the lower than expected
inventory writeoffs of certain products containing DINP for which a charge was
previously recorded in the fourth quarter of 1998 as well as lower costs
associated with the increased percentage of sales of non-licensed higher margin
products in 1999.

     Selling general and administrative expenses in 1999 were $42.3 million, an
increase of $3.3 million, or 8.4%, as compared to $39.0 million of such expenses
in 1998. The increase was primarily due to costs related to the settlement of a
patent lawsuit, legal expenses related to the lawsuit, and market research
expenses. As a percentage of net sales, selling, general, and administrative
expenses increased to 31.0% in 1999 from 29.4% in the comparable period of 1998.
The increase reflects the costs associated with the lawsuit issue as selling,
general and administrative expenses as a percent of net sales would be
consistent with 1998 if the related costs were excluded.

     Income tax expense as a percentage of pretax income decreased to 40.5% in
1999 from 40.9% in 1998 as the Company's taxable income was subject to a
slightly lower aggregate effective rate on the state level.

YEAR 2000 ISSUE

     The "Year 2000 Issue" (Y2K) related to potential problems resulting from
the incorrect processing of information using dates or date sensitive data by
computers and other machines utilizing embedded microprocessors. The problem is
attributable to the computer or software recognizing the year as a two digit
number "00" as opposed to the Year "2000". The Company was adequately prepared
for Y2K and did not experience any meaningful disruptions related to the
Company's information technology (IT) and non-IT systems. Additionally, the
Company did not encounter any disruptions in service or communications with its
mission critical service vendors, suppliers of products, logistics vendors or
it's customers.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

     Net sales in 1998 were $132.7 million, an increase of $12.0 million, or
10.0%, as compared to $120.7 million in 1997. The increase was due to new
product introductions and expanded retail distribution in domestic and foreign
markets. An additional factor affecting sales was a charge of $3.0 million
relating to

                                      II-3
<PAGE>   12

expected sales returns of certain products containing diisononyl phthalate
("DINP"), a plastic softener. As a percent of sales, net sales to foreign
markets decreased to 12.6% in 1998 from 13.5% in 1997 as sales increases in
Europe were partially offset by reduced sales in Latin America and the Pacific
Rim due to poor economic conditions. The Company currently believes economic
conditions in Latin America and the Pacific Rim may negatively affect sales
potential during the short to medium term but that in the long term substantial
opportunity exists. As a percentage of net sales, sales of licensed products
increased to 48.4% in 1998 from 43.1% in 1997. The Company derives a significant
portion of its sales from products under license. A major licensing agreement,
which was to expire at the end of 1998, had been extended through March 31,
1999. Sales of products licensed under the agreement amounted to 42% of the
Company's total sales for the year ended December 31, 1998.

     Cost of products sold in 1998 was $80.7 million, an increase of $9.5
million or 13.4%, as compared to $71.2 million in 1997. As a percentage of net
sales, cost of products sold in 1998 increased to 60.8% from 59.0% in the
comparable period of 1997. The increase was primarily due to a charge of $1.1
million relating to write-off of inventory of certain products containing DINP.
Without the charge related to DINP, cost of products sold would have remained
consistent at 58.9% in 1998 and 59.0% in 1997, respectively.

     Selling general and administrative expenses in 1998 were $39.0 million, an
increase of $1.8 million, or 5.0%, as compared to $37.2 million of such expenses
in 1997. The increase was primarily due to costs related to increased sales
volume and payroll and payroll related costs. As a percentage of net sales,
selling, general, and administrative expenses decreased to 29.4% in 1998 from
30.8% in the comparable period of 1997. The decrease reflects a reduction in
advertising expenses in 1998 as well as the continued effective management of
selling, general, and administrative expenses.

     Income tax expense as a percentage of pretax income increased to 40.9% in
1998 from 40.4% in 1997 as a portion of the Company's taxable income was taxed
at a higher statutory rate.

LIQUIDITY AND CAPITAL RESOURCES

     Net working capital decreased by $2.5 million to $43.0 million at December
31, 1999 from $45.5 million at December 31, 1998 primarily due to decreases in
cash. Cash decreased by $6.4 million primarily as a result of the purchase of
$10.0 million of treasury shares under the stock repurchase program and
purchases of property, plant and equipment associated with the new warehouse
computer and racking systems at the Company's Avon facility. The decrease in
cash was partially offset by profitable operations.

     An unsecured line of credit of $10 million which is subject to annual
renewal in August of 2000, is available from a bank. Amounts outstanding under
the line are payable upon demand by the bank. During 1999 and 1998, the Company
had no borrowings under the line of credit. As of December 31, 1999 and 1998 no
balances were outstanding.

     The Company paid a cash dividend of $0.06 per share of Common Stock in June
of 1999 and 1998, respectively.

     The Company expects cash flow from operations and availability under the
Company's lines of credit to be sufficient to meet cash needs for working
capital expenditures for the next two years.

INFLATION AND FOREIGN CURRENCY FLUCTUATIONS

     Inflation has not had a material effect on the Company's operating results
over the past three years.

     The Company enters into forward exchange contracts to minimize the impact
of fluctuations in currency exchange rates on future cash flows emanating from
sales denominated in foreign currencies. The Company does not purchase such
contracts for trading purposes. During 1999, the Company entered into forward
exchange contracts with a bank whereby the Company is committed to deliver
foreign currency at predetermined rates. The contracts expire within one year.
The Company's commitment under these contracts approximated $3.8 million as of
December 31, 1999. At December 31, 1999, the exchange rates for such currencies
covered by the contracts approximated the predetermined rates included therein.
The Company

                                      II-4
<PAGE>   13

routinely assesses the financial strength of the bank which is counterparty to
the forward exchange contracts. As of December 31, 1999, management believes it
had no significant exposure to credit risk relative to such contracts.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The statement, as amended, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2001. Management of the
Company are currently evaluating the effect of implementing SFAS No. 133 on the
consolidated financial statements.

     Effective January 1, 1999, the Company adopted the AICPA Statement of
Position 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The adoption of this statement resulted in no
changes to the consolidated financial statements.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     See discussion in second paragraph of Item 7, "Inflation and Foreign
Currency Fluctuations", for required quantitative and qualitative disclosure
about primary exposure to market risk.

     The foreign currencies to which the Company has the most significant
exchange rate exposure is the British pound. Based on a hypothetical ten percent
adverse movement in foreign currency exchange rates, the potential losses in
future earnings, fair value of risk-sensitive instruments, and cash flows are
immaterial, although the actual effects may differ materially from the
hypothetical analysis.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Financial Statements listed under Item 14.(a) 1. are included in Part IV.

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

     There is nothing to report relating to this Item.

                                      II-5
<PAGE>   14

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item is included in the Registrant's
definitive proxy statement for the 2000 Annual Meeting of Stockholders and is
incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

     The information required by this item is included in the Registrant's
definitive proxy statement for the 2000 Annual Meeting of Stockholders, except
that the sections in said definitive proxy statement entitled "Board
Compensation Committee Report on Executive Compensation" and the "Stock
Performance Chart" shall not be deemed incorporated herein by reference to this
10-K Report.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item is included in the Registrant's
definitive proxy statement for the 2000 Annual Meeting of Stockholders.

                                      III-1
<PAGE>   15

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, 1999 and 1998

         Consolidated Statements of Income for the Years Ended December 31,
           1999, 1998 and 1997

         Consolidated Statements of Stockholders' Equity for the Years Ended
           December 31, 1999, 1998 and 1997

         Consolidated Statements of Cash Flows for the Years Ended December 31,
           1999, 1998 and 1997

   (a) 2.  SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED
           DECEMBER 31, 1999, 1998 AND 1997

           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

     The following are either (i) filed herewith as exhibits to this 10-K Report
or (ii) have been filed as exhibits to filings under the Securities Act of 1933
or the Securities Exchange Act of 1934 and are incorporated herein by reference
as exhibits to this 10-K Report.

<TABLE>
<CAPTION>
                                                                         PAGE
                                                                         ----
<S>       <C>                                                            <C>
(3)(i)    Restated Articles of Organization as currently in effect
          (filed as Exhibit (3.1) to Amendment No. 1 to Form S-1
          Registration Statement filed with the Commission on October
          5, 1995 and incorporated herein by reference).
(3)(ii)   By-laws of the Company as currently in effect.                 IV-19
(10)(a)   Agreement with Disney Enterprises, Inc. regarding the
          licensing of Winnie the Pooh characters dated as of November
          16, 1998 (filed as Exhibit (10)(r) on Form 10-Q for the
          quarter ended June 30, 1999 and incorporated herein by
          reference; certain portions of such Agreement are subject to
          confidential treatment).
(10)(b)   Agreement with Disney Enterprises, Inc. dated as of November
          16, 1998 regarding the licensing of Disney standard
          characters, Disney classic cartoon characters and Disney
          Babies (filed as Exhibit 10(s) on Form 10-Q for the quarter
          ended June 30, 1999 and incorporated herein by reference;
          certain portions of such Agreement are subject to
          confidential treatment).
(10)(c)   Agreement with the Children's Television Workshop dated July
          1, 1996 regarding the licensing of Sesame Street characters
          (filed as Exhibit (10)(g) on Form 10-K for the year ended
          December 31, 1996 and incorporated herein by reference;
          certain portions of such Agreement are subject to
          confidential treatment).
(10)(d)   Letter Agreement with Children's Television Workshop dated
          as of July 1, 1999 regarding the renewal of the licensing of
          Sesame Street characters (certain portions of which are
          subject to confidential treatment).                            IV-19

  Management Contracts and Compensatory Plans

(10)(e)   The First Years Inc. 1993 Equity Incentive Plan, as amended
          through May 20, 1999 (filed as Exhibit (10)(t) on Form 10-Q
          for the quarter ended September 30, 1999 and incorporated
          herein by reference).
(10)(f)   The First Years Inc. 1993 Stock Option Plan for Directors,
          as amended through October 1, 1999.                            IV-19
(10)(g)   Letter Agreement between The First Years Inc. and Jerome M.
          Karp dated August 8, 1999 (filed as Exhibit 10(v) on Form
          10-Q for the quarter ended September 30, 1999, and
          incorporated herein by reference).
</TABLE>

                                      IV-1
<PAGE>   16

<TABLE>
<CAPTION>
                                                                         PAGE
                                                                         ----
<S>       <C>                                                            <C>
(10)(h)   Employment Agreement between The First Years Inc. and Ronald
          J. Sidman, dated September 30, 1999 (filed as Exhibit 10(u)
          on Form 10-Q for the quarter ended September 30, 1999 and
          incorporated herein by reference).
(10)(i)   The First Years Inc., a Massachusetts Corporation, and
          Affiliates -- 1998 Annual Incentive Plan, effective as of
          January 1, 1998 (filed as Exhibit 10(n) on Form 10-K for the
          year ended December 31, 1998 and incorporated herein by
          reference).
(10)(j)   Agreement between The First Years Inc. and Wayne Shea dated
          August 12, 1997 (filed as Exhibit (10)(o) on Form 10-K for
          the year ended December 31, 1997 and incorporated herein by
          reference).
(10)(k)   Agreement between The First Years Inc. and Bruce Baron dated
          July 10, 1997 (filed as Exhibit 10(p) on Form 10-K for the
          year ended December 31, 1998 and incorporated herein by
          reference).
(10)(l)   Agreement between The First Years Inc. and James N. Turner
          dated June 15, 1998 (filed as Exhibit 10(q) on Form 10-K for
          the year ended December 31, 1998 and incorporated herein by
          reference).
------------------------------------------------------------------------------

(21)      List of Subsidiaries of the Registrant.                        IV-19
(23)      Consent of Deloitte & Touche LLP dated March 30, 2000.         IV-19
(27)      Financial Data Schedule -- 12/31/99                            IV-19
(99)      Important Factors That May Affect Future Results.              IV-19
</TABLE>

14.(b)  REPORT ON FORM 8-K

     The Company filed one report on Form 8-K with the Securities and Exchange
Commission during the quarter ended December 31, 1999. The report on Form 8-K
was filed on December 29, 1999 to report the settlement of a patent infringement
lawsuit.

                                      IV-2
<PAGE>   17

                                   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 16, 2000
                                            By:      /s/ JOHN R. BEALS
                                              .................................
                                                 JOHN R. BEALS, TREASURER AND
                                                    SENIOR VICE PRESIDENT --
                                               FINANCE(CHIEF FINANCIAL OFFICER
                                                           AND CHIEF
                                                     ACCOUNTING OFFICER)
                                            Date:  March 16, 2000

     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 16, 2000.

<TABLE>
<CAPTION>
                     SIGNATURE                                     TITLE                      DATE
                     ---------                                     -----                      ----
<C>                                                  <S>                                 <C>
               /s/ RONALD J. SIDMAN                  Chief Executive Officer Chairman    March 16, 2000
     ........................................        of the Board of Directors and
                 RONALD J. SIDMAN                    President

                /s/ JEROME M. KARP                   Director                            March 16, 2000
     ........................................
                  JEROME M. KARP

                 /s/ EVELYN SIDMAN                   Director                            March 16, 2000
     ........................................
                   EVELYN SIDMAN

                /s/ BENJAMIN PELTZ                   Director                            March 16, 2000
     ........................................
                  BENJAMIN PELTZ

                 /s/ FRED T. PAGE                    Director                            March 16, 2000
     ........................................
                   FRED T. PAGE

               /s/ KENNETH R. SIDMAN                 Director                            March 16, 2000
     ........................................
                 KENNETH R. SIDMAN

                /s/ LEWIS M. WESTON                  Director                            March 16, 2000
     ........................................
                  LEWIS M. WESTON

               /s/ WALKER J. WALLACE                 Director                            March 16, 2000
     ........................................
                 WALKER J. WALLACE
</TABLE>

                                      IV-3
<PAGE>   18

                              THE FIRST YEARS INC.

                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
                          FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
                                                                PAGE
                                                              --------
<S>                                                           <C>
Independent Auditors' Report................................  IV-5
Consolidated Financial Statements:
     Consolidated Balance Sheets as of December 31, 1999 and
      1998..................................................  IV-6
     Consolidated Statements of Income for the Years Ended
      December 31, 1999, 1998, and 1997.....................  IV-7
     Consolidated Statements of Stockholders' Equity for the
      Years Ended December 31, 1999, 1998, and 1997.........  IV-8
     Consolidated Statements of Cash Flows for the Years
      Ended December 31, 1999, 1998, and 1997...............  IV-9
     Notes to Consolidated Financial Statements.............  IV-10-17
Financial Statement Schedule II -- Valuation and Qualifying
  Accounts for the Years Ended December 31, 1999, 1998, and
  1997......................................................  IV-18
</TABLE>

                                      IV-4
<PAGE>   19

                          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. as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the accompanying index. 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. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 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.

DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 2, 2000

                                      IV-5
<PAGE>   20

                              THE FIRST YEARS INC.

                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1999 AND 1998

<TABLE>
<CAPTION>
                                                                 1999           1998
                                                                 ----           ----
<S>                                                           <C>            <C>
                                         ASSETS
Current Assets:
     Cash and cash equivalents (Notes 1 and 8)..............  $13,400,728    $19,776,897
     Accounts receivable (less allowance for doubtful
      accounts of $270,000 in 1999 and 1998) (Note 8).......   21,587,886     19,013,127
     Inventories (Note 1)...................................   20,352,845     18,520,023
     Prepaid expenses and other assets......................    1,308,974      2,638,634
     Deferred tax asset (Notes 1 and 3).....................    1,675,000      1,424,500
                                                              -----------    -----------
          Total current assets..............................   58,325,433     61,373,181
                                                              -----------    -----------
Property, Plant, and Equipment (Note 1):
     Land...................................................      167,266        167,266
     Building...............................................    5,154,845      4,199,790
     Machinery and molds....................................    7,536,378      7,878,103
     Furniture and equipment................................    4,820,691      4,571,636
                                                              -----------    -----------
          Total.............................................   17,679,180     16,816,795
     Less accumulated depreciation..........................    8,090,757      8,914,081
                                                              -----------    -----------
          Property, plant, and equipment -- net.............    9,588,423      7,902,714
                                                              -----------    -----------
          Total Assets......................................  $67,913,856    $69,275,895
                                                              ===========    ===========

                          LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
     Accounts payable.......................................  $10,329,899    $ 9,400,966
     Accrued royalty expense (Note 6).......................    1,792,475      2,130,027
     Accrued payroll expenses...............................      113,409      1,200,966
     Accrued selling expenses...............................    3,048,547      3,098,232
                                                              -----------    -----------
          Total current liabilities.........................   15,284,330     15,830,191
                                                              -----------    -----------
Deferred Tax Liability (Notes 1 and 3)......................      927,100        798,300
                                                              -----------    -----------
Commitments and Contingencies (Notes 5, 6 and 8)
Stockholders' Equity (Notes 4, 7, and 9):
Common stock -- authorized, 15,000,000 shares; issued
  10,570,329 and 10,461,408; outstanding, 9,616,235 and
  10,440,014 as of December 31, 1999 and 1998,
  respectively..............................................    1,057,033      1,046,141
Paid-in-capital.............................................    8,052,623      7,472,398
Retained earnings...........................................   52,907,819     44,438,589
Less treasury stock at cost, 954,094 and 21,394 shares as of
  December 31, 1999 and 1998, respectively..................  (10,315,049)      (309,724)
                                                              -----------    -----------
          Total stockholders' equity........................   51,702,426     52,647,404
                                                              -----------    -----------
          Total Liabilities and Stockholders' Equity........  $67,913,856    $69,275,895
                                                              ===========    ===========
</TABLE>

                See notes to consolidated financial statements.
                                      IV-6
<PAGE>   21

                              THE FIRST YEARS INC.

                       CONSOLIDATED STATEMENTS OF INCOME
                 YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997

<TABLE>
<CAPTION>
                                                       1999            1998            1997
                                                   ------------    ------------    ------------
<S>                                                <C>             <C>             <C>
Net Sales (Notes 1, 6, 8 and 10).................  $136,651,751    $132,716,379    $120,695,988
Cost of Products Sold (Notes 1 and 10)...........    79,645,326      80,737,193      71,185,634
                                                   ------------    ------------    ------------
Gross Profit.....................................    57,006,425      51,979,186      49,510,354
Selling, General, and Administrative Expenses
  (Notes 1, 7 and 11)............................    42,303,932      39,011,893      37,165,878
                                                   ------------    ------------    ------------
Operating Income.................................    14,702,493      12,967,293      12,344,476
Other Income (Expense):
  Interest expense...............................            --              --         (27,709)
  Interest income................................       582,640         590,822         168,922
                                                   ------------    ------------    ------------
Income Before Income Taxes.......................    15,285,133      13,558,115      12,485,689
Provision for Income Taxes (Notes 1 and 3).......     6,190,500       5,545,300       5,040,900
                                                   ------------    ------------    ------------
Net Income (Note 10).............................  $  9,094,633    $  8,012,815    $  7,444,789
                                                   ============    ============    ============
Basic Earnings Per Share (Notes 1 and 9).........         $0.89           $0.78           $0.75
                                                          =====           =====           =====
Diluted Earnings Per Share (Notes 1 and 9).......         $0.87           $0.75           $0.71
                                                          =====           =====           =====
</TABLE>

                See notes to consolidated financial statements.
                                      IV-7
<PAGE>   22

                              THE FIRST YEARS INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997

<TABLE>
<CAPTION>
                                         COMMON STOCK
                                   ------------------------    PAID-IN      RETAINED       TREASURY
                                     SHARES      PAR VALUE     CAPITAL      EARNINGS        STOCK
                                   -----------   ----------   ----------   -----------   ------------
<S>                                <C>           <C>          <C>          <C>           <C>
Balance, January 1, 1997.........    4,948,980   $  494,898   $5,271,875   $30,099,667   $         --
  Stock issued under stock option
     plans (Note 7)..............      139,020       13,902      804,433            --             --
  Tax benefit derived from option
     compensation deduction......           --           --      458,000            --             --
  Dividends paid.................           --           --           --      (496,747)            --
  Repurchase of 3,409 shares for
     treasury....................       (3,409)          --           --            --        (81,813)
  Net income.....................           --           --           --     7,444,789             --
                                   -----------   ----------   ----------   -----------   ------------
Balance, December 31, 1997.......    5,084,591      508,800    6,534,308    37,047,709        (81,813)
  Stock issued under stock option
     plans (Note 7)..............      183,205       18,321      916,510            --             --
  Tax benefit derived from option
     compensation deduction......           --           --      540,600            --             --
  Dividends paid.................           --           --           --      (621,935)
  Repurchase of 10,576 shares for
     treasury....................      (10,576)          --           --            --       (227,911)
  Stock split, two-for-one (Note
     4)..........................    5,182,794      519,020     (519,020)           --             --
  Net income.....................           --           --           --     8,012,815             --
                                   -----------   ----------   ----------   -----------   ------------
Balance, December 31, 1998.......   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)
                                   ===========   ==========   ==========   ===========   ============
</TABLE>

                See notes to consolidated financial statements.
                                      IV-8
<PAGE>   23

                              THE FIRST YEARS INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                 YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997

<TABLE>
<CAPTION>
                                                             1999          1998          1997
                                                         ------------   -----------   -----------
<S>                                                      <C>            <C>           <C>
Cash Flows from Operating Activities:
  Net income...........................................  $  9,094,633   $ 8,012,815   $ 7,444,789
  Adjustments to reconcile net income to net cash
     provided by (used for) operating activities:
     Depreciation......................................     1,679,252     1,415,525     1,397,078
     Provision for doubtful accounts...................        78,968       176,034       147,541
     Loss on disposal of equipment.....................     1,232,322       548,469       617,693
     Increase (decrease) arising from working capital
       items:
       Accounts receivable.............................    (2,653,727)      773,065    (4,180,302)
       Inventories.....................................    (1,832,822)    5,852,858    (5,784,837)
       Prepaid expenses and other assets...............     1,452,160    (1,683,270)      (39,447)
       Accounts payable................................       928,933      (762,878)    3,652,730
       Accrued royalty expense.........................      (337,552)       78,306     1,203,050
       Accrued payroll expenses........................    (1,087,557)       57,903        55,761
       Accrued selling expenses........................       (49,685)      711,203       981,020
     Change in deferred income taxes...................      (121,700)     (164,100)     (287,700)
                                                         ------------   -----------   -----------
          Net cash provided by operating activities....     8,383,225    15,015,930     5,207,376
                                                         ------------   -----------   -----------
Cash Flows from Investing Activities
Purchase of property, plant, and equipment.............    (4,597,283)   (3,021,058)   (1,814,698)
                                                         ------------   -----------   -----------
Cash Flows from Financing Activities:
  Repayment of industrial revenue bonds................            --            --      (100,000)
  Dividends paid.......................................      (625,403)     (621,935)     (496,747)
  Purchase of treasury stock...........................   (10,005,325)     (227,911)      (81,813)
  Common stock issued under stock option plans.........       468,617       934,831       818,335
                                                         ------------   -----------   -----------
          Net cash (used for) provided by financing
            activities.................................   (10,162,111)       84,985       139,775
                                                         ------------   -----------   -----------
Increase (decrease) in Cash and Cash Equivalents.......    (6,376,169)   12,079,857     3,532,453

Cash and Cash Equivalents, Beginning of Year...........    19,776,897     7,697,040     4,164,587
                                                         ------------   -----------   -----------
Cash and Cash Equivalents, End of Year.................  $ 13,400,728   $19,776,897   $ 7,697,040
                                                         ============   ===========   ===========
Supplemental Disclosures of Cash Flow Information
       Cash paid during the year for:
       Interest........................................  $          0   $         0   $    27,709
                                                         ============   ===========   ===========
       Income taxes....................................  $  5,292,295   $ 7,584,400   $ 4,684,690
                                                         ============   ===========   ===========
  Non-cash transactions:
       Tax benefit of stock option exercises...........  $    122,500   $   540,600   $   458,000
                                                         ============   ===========   ===========
</TABLE>

                See notes to consolidated financial statements.
                                      IV-9
<PAGE>   24

                              THE FIRST YEARS INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Business -- The First Years Inc. (the "Company") is a developer, marketer,
and distributor of certain basic accessory 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 all the Company's wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.

     Revenue Recognition -- Revenue is recognized when products are shipped.

     Cash Equivalents -- Highly liquid investments with a maturity of three
months or less when purchased have been classified as cash equivalents in the
accompanying financial statements. 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 to
account for employee stock-based compensation plans.

     Earnings Per Share -- In 1997, the Company adopted SFAS No. 128 "Earnings
Per Share." All earnings per share amounts for all periods presented have been
restated to conform to the requirements of SFAS No. 128.

     Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the 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 and
obsolete inventories and estimates related to the DINP charges (See footnote
10). Actual results could differ from those estimates.

     Research and Development Costs -- Research and development costs are
expensed as incurred. During 1999, 1998, and 1997, research and development
costs approximated $3,780,000, $3,320,000, and $2,584,000, respectively.

     Foreign Currency Translation -- The Company's functional currency is the
U.S. dollar. Accordingly, monetary assets and liabilities of the Company's
foreign operations are translated from the respective local currency to the U.S.
dollar using year-end exchange rates while nonmonetary items are translated at
historical rates. Income and expense accounts are translated at the average
rates in effect during the year. Accordingly, translation adjustments and
transaction gains and losses are recognized as income in the year of occurrence
and are recorded as a component of cost of sales.

     Foreign Exchange Contracts -- The Company enters into forward exchange
contracts to minimize the impact of fluctuations in currency exchange rates on
future cash flows emanating from sales denominated in foreign currencies. The
Company does not purchase such contracts for trading purposes. Gains and losses
related to foreign exchange contracts which qualify as accounting hedges of firm
commitments are deferred
                                      IV-10
<PAGE>   25
                              THE FIRST YEARS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and recognized in income when the hedged transaction occurs. Gains and losses
related to foreign exchange contracts which do not qualify for hedge accounting
are marked to market currently and recognized as a foreign currency transaction
gain or loss.

     Fair Value of Financial Instruments -- The fair value of the Company's
assets and liabilities which constitute financial instruments as defined in 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.

     Reporting Comprehensive Income -- Effective January 1, 1998, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income," which requires businesses to disclose Comprehensive
income and its components in their general-purpose financial statements.
Comprehensive income was equal to net income for the years ended December 31,
1999 and 1998.

  New Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The statement, as amended, is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2001. Management of the Company are currently
evaluating the effect of implementing SFAS No. 133 on the consolidated financial
statements.

     Effective January 1, 1999, the Company adopted the AICPA Statement of
Position 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The adoption of this statement resulted in no
changes to the consolidated financial statements.

2.  DEBT

     During 1999 and 1998, the Company had available an unsecured line of credit
totaling $10,000,000 with one bank. The line is subject to annual renewal 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 1999 or 1998. As of December 31, 1999 and 1998 no balance was
outstanding. The line of credit will expire in August of 2000.

3.  INCOME TAXES

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

<TABLE>
<CAPTION>
                                                           1999         1998
                                                        ----------   ----------
<S>                                                     <C>          <C>
Deferred tax assets:
     Reserves not currently deductible................  $  417,800   $  411,400
     Capitalized packaging costs not currently
       deductible.....................................     643,900      586,500
     Capitalized inventory costs not currently
       deductible.....................................     519,800      393,700
     Other............................................      93,500       32,900
                                                        ----------   ----------
                                                         1,675,000    1,424,500
                                                        ----------   ----------
Deferred tax liabilities:
     Excess tax depreciation over financial reporting
       depreciation...................................     927,100      793,800
     Other............................................           0        4,500
                                                        ----------   ----------
                                                           927,100      798,300
                                                        ----------   ----------
Net deferred tax asset................................  $  747,900   $  626,200
                                                        ==========   ==========
</TABLE>

                                      IV-11
<PAGE>   26
                              THE FIRST YEARS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     There was no valuation allowance for the years ended December 31, 1999,
1998, and 1997.

     The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
                                            1999          1998          1997
                                         ----------    ----------    ----------
<S>                                      <C>           <C>           <C>
Federal:
  Current..............................  $4,985,600    $4,318,600    $4,157,200
  Deferred.............................    (121,700)     (164,100)     (287,700)
                                         ----------    ----------    ----------
          Total federal................   4,863,900     4,154,500     3,869,500
State..................................   1,326,600     1,390,800     1,171,400
                                         ----------    ----------    ----------
Provision for income taxes.............  $6,190,500    $5,545,300    $5,040,900
                                         ==========    ==========    ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                                         1999    1998    1997
                                                         ----    ----    ----
<S>                                                      <C>     <C>     <C>
Statutory rate.........................................  35.0%   35.0%   34.0%
State income taxes, net of federal income tax
  benefit..............................................   5.9     6.5     6.4
Other..................................................  (0.4)   (0.6)     --
                                                         ----    ----    ----
Effective tax rate.....................................  40.5%   40.9%   40.4%
                                                         ====    ====    ====
</TABLE>

4.  COMMON STOCK

     In May 1998, the Company's Board of Directors (the Board) declared a
two-for-one split of the Company's common stock. The 1998 stock split, effected
in the form of a stock dividend, was distributed on June 29, 1998 (to
stockholders of record on May 29, 1998). Earnings per share amounts shown in the
accompanying financial statements have been retroactively adjusted to reflect
the 1998 stock split.

5.  COMMITMENTS AND CONTINGENCIES

     Forward Exchange Contracts -- During 1999 and 1998, the Company entered
into forward exchange contracts with a bank whereby the Company is committed to
deliver foreign currency at predetermined rates. The contracts expire within one
year. The Company's future commitment under these contracts approximated
$3,817,000 and $494,000 as of December 31, 1999 and 1998, respectively. At
December 31, 1999 and 1998, the fair market value of the contracts approximated
their carrying amount.

     Other Commitments -- At December 31, 1999 and 1998, letters of credit
outstanding aggregated approximately $33,000.

     During 1999, the Company entered into an employment agreement with an
executive officer which provides for annual base salary of $364,000 thru
September 30, 2004, subject to any increases established 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.

     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. The agreements have terms

                                      IV-12
<PAGE>   27
                              THE FIRST YEARS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ranging from one to fifteen years and require minimum royalty payments of
$10,127,000 and $1,363,000 for agreements signed during 1999 and 1998,
respectively. At December 31, 1999 and 1998 future outstanding minimum royalty
commitments under all agreements amounted to $6,057,000 and $289,000,
respectively. Royalty expense aggregated $7,909,000, $8,311,000, and $6,356,000
in 1999, 1998 and 1997, respectively.

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 $599,000, $566,000, and $545,000 in 1999, 1998, and 1997,
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 (the "plans") which cover
employees and directors of the Company. The Board has reserved 2,680,000 shares
for issuance under the plans (all share amounts adjusted to reflect the
two-for-one stock split effected on June 29, 1998.) The exercise price for the
options granted may not be less than the fair market value of the optioned stock
at the date of grant, 110% of fair market value in the case of options granted
to a 10% stockholder.

     Under the 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 8,400 and
14,576 shares of its common stock for the years ended December 31, 1999 and
1998, respectively, through the exercise of employee stock options.

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

                                      IV-13
<PAGE>   28
                              THE FIRST YEARS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of activity (all years adjusted to reflect the two-for-one stock
split effected on June 29, 1998) of stock options granted under the plans is as
follows:

<TABLE>
<CAPTION>
                                                             WEIGHTED
                                                             AVERAGE
                                                             EXERCISE                   NUMBER OF
                                                              PRICE       NUMBER OF      OPTIONS
                                                               PER         OPTIONS      AVAILABLE
                                                              SHARE      OUTSTANDING    FOR GRANT
                                                             --------    -----------    ---------
<S>                                                          <C>         <C>            <C>
January 1, 1997............................................   $ 3.69       875,576        399,504

  Granted..................................................     9.16       194,140       (194,140)
  Canceled.................................................     7.11       (56,610)        56,610
  Exercised................................................     2.96      (278,040)            --
                                                                          --------      ---------
December 31, 1997..........................................     5.16       735,066        261,974

  Authorized...............................................                     --      1,340,000
  Granted..................................................    14.51       258,029       (258,029)
  Canceled.................................................     9.96       (13,131)        13,131
  Exercised................................................     3.27      (285,408)            --
                                                                          --------      ---------
December 31, 1998..........................................     9.30       694,556      1,357,076

  Granted..................................................    14.24       244,896       (244,896)
  Canceled.................................................    12.97       (45,909)        45,909
  Exercised................................................     4.30      (108,921)            --
  Expired..................................................    11.44       (18,000)            --
                                                                          --------      ---------
December 31, 1999..........................................   $11.27       766,622      1,158,089
                                                                          ========      =========
  Exercisable at December 31, 1997.........................   $ 3.66       465,712
  Exercisable at December 31, 1998.........................   $ 5.88       341,902
  Exercisable at December 31, 1999.........................   $ 9.46       428,615
</TABLE>

     The grant date fair value for options granted in 1999, 1998 and 1997 was
$8.24, $7.43 and $4.80, respectively.

     The following table sets forth information regarding stock options
outstanding at December 31, 1999 under the Stock Option Plans as described
above:

<TABLE>
<CAPTION>
                                                                                        NUMBER        AVERAGE
  NUMBER                                                       WEIGHTED   WEIGHTED     CURRENTLY     EXERCISE
OF OPTIONS                                      RANGE OF       AVERAGE     AVERAGE    EXERCISABLE    PRICE FOR
OUTSTANDING                                     EXERCISE       EXERCISE   REMAINING       AT          OPTIONS
AT 12/31/99                                      PRICES         PRICE       LIFE       12/31/99     EXERCISABLE
-----------                                  ---------------   --------   ---------   -----------   -----------
<S>         <C>                              <C>               <C>        <C>         <C>           <C>
 12,000     ...............................  $ 2.75 - $ 4.13    $ 2.78      3.92         12,000       $ 2.52
137,182     ...............................    4.13 -   6.19      4.97      1.63        137,182         4.97
129,167     ...............................    6.19 -   9.28      7.96      6.17         99,445         8.14
350,327     ...............................    9.28 -  13.92     13.62      8.71        113,097        12.55
137,946     ...............................   13.92 -  20.88     15.39      9.13         66,891        15.54
-----------                                                     ------      ----        -------       ------
766,622     ...............................                     $11.27      7.01        428,615       $10.37
===========                                                     ======      ====        =======       ======
</TABLE>

                                      IV-14
<PAGE>   29
                              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 stock option plans.
Accordingly, no compensation cost has been recognized for its stock option
plans. Had compensation cost been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of FASB
Statement 123, the Company's net income and earnings per share for the years
ended December 31, 1999, 1998 and 1997 would have been as follows:

<TABLE>
<CAPTION>
                                                1999         1998         1997
                                             ----------   ----------   ----------
<S>                                          <C>          <C>          <C>
Net income.................................  $7,597,937   $7,233,876   $7,023,195
Basic earnings per share...................       $0.74        $0.70        $0.70
Diluted earnings per share.................       $0.73        $0.68        $0.67
</TABLE>

     For purposes of the pro forma disclosures, the fair value of the options
granted under the Company's stock option plans during 1999, 1998 and 1997 was
estimated on the date of grant using the Binomial option pricing model. Key
assumptions used to apply this pricing model are as follows:

<TABLE>
<CAPTION>
                                                  1999         1998        1997
                                               ----------   ----------   ---------
<S>                                            <C>          <C>          <C>
Risk free interest rate......................       5.09%        5.49%       6.41%
Expected life of option grants...............  8.47 years   7.85 years   9.5 years
Expected volatility of underlying stock......      44.82%       38.40%      35.27%
Expected dividend payment rate...............       0.85%        0.85%       0.85%
</TABLE>

     The pro forma disclosures include the effects of options granted in 1999,
1998, 1997 and 1996.

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 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 62% and 57% of the trade receivables outstanding
at December 31, 1999 and 1998, respectively. The Company routinely assesses the
financial strength of its customers and purchases credit insurance to limit its
potential exposure to 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, 1999, management believes it had
no significant exposure to credit risks.

     Major Customers and Export Sales -- The Company derived 10% or more of its
sales from its three largest customers. The Company's largest customer accounted
for sales of $40,600,000, $42,622,000, and $33,643,000 in 1999, 1998, and 1997,
respectively. The Company's second largest customer accounted for sales of
$26,688,000, $24,413,000, and $23,075,000 in 1999, 1998, and 1997, respectively.
The Company's third largest customer accounted for sales of $20,026,000,
$15,706,000 and 13,315,000 in 1999, 1998, and 1997. No other customer accounted
for 10% or more of the Company's sales. Export sales, primarily to Europe,
Canada, South America and the Pacific Rim, were approximately $14,459,000,
$16,735,000 and $16,250,000 in 1999, 1998, and 1997, respectively.

     Reliance on Licensed Products -- The Company derives a significant portion
of its sales from products under license. A major licensing agreement (see Note
6), will expire at the end of 2000. Sales of products licensed under a major
licensing agreement amount to 34% and 42% of the Company's total sales for the
years ended December 31, 1999 and 1998, respectively. While management currently
anticipates negotiating a

                                      IV-15
<PAGE>   30
                              THE FIRST YEARS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

renewal of the agreement, non-renewal of the agreement or, renewal on terms not
favorable to the Company could have a materially adverse affect on the Company's
business.

     Reliance on Foreign Manufacturers -- The Company does not own or operate
its own manufacturing facilities. In 1999, 1998, and 1997, the Company derived
approximately 54%, 65%, and 60%, respectively, of its sales from products
manufactured by others in the Far East, mainly 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 are as follows:

<TABLE>
<CAPTION>
                                                             1999          1998          1997
                                                          -----------   -----------   -----------
<S>                                                       <C>           <C>           <C>
Average shares outstanding..............................   10,226,470    10,338,857    10,003,774
Effect of dilutive shares...............................      175,827       330,646       449,288
                                                          -----------   -----------   -----------
Average diluted shares outstanding......................   10,402,297    10,669,503    10,453,062
                                                          ===========   ===========   ===========
Net Income..............................................  $ 9,094,633   $ 8,012,815   $ 7,444,789
                                                          ===========   ===========   ===========
Basic earnings per share................................        $0.89         $0.78         $0.75
                                                                -----         -----         -----
                                                                -----         -----         -----
Diluted earnings per share..............................        $0.87         $0.75         $0.71
                                                                -----         -----         -----
                                                                -----         -----         -----
</TABLE>

     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.

     As of December 31, 1998, options to purchase 130,254 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 2003 to 2008, had exercise prices ranging from 15 to 17
 3/4 per share. The options were still outstanding at the end of 1998.

     As of December 31, 1997, options to purchase 30,000 shares of common stock
at $13 1/2 per share 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, were still outstanding at the end of
1997.

10.  DIISONONYL PHTHALATE MATTER

     During the fourth quarter of 1998, the Company incurred 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 writeoffs of certain products

                                      IV-16
<PAGE>   31
                              THE FIRST YEARS INC.

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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(C) valved drinking cups infringed
U.S. Patent 5,186,347. 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 wrong doing 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 new
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 has identified one operating segment as it engages in a single
line of business of developing and marketing one class of similar products for
infants and toddlers distributed through the same channels.

     The Company has $1,629,126 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 and export sales.

                                  * * * * * *

                                      IV-17
<PAGE>   32

                                                                     SCHEDULE II

                              THE FIRST YEARS INC.
                       VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

<TABLE>
<CAPTION>
                                                           ADDITIONS
                                             BALANCE,       CHARGED
                                            BEGINNING     TO COSTS AND                    BALANCE
               DESCRIPTION                   OF YEAR        EXPENSES      DEDUCTIONS    END OF YEAR
               -----------                  ---------     ------------    ----------    -----------
<S>                                         <C>           <C>             <C>           <C>
Valuations Accounts Deducted from Assets
  to which they Apply --
     Allowance for doubtful accounts:
          1999............................  $  270,000     $   78,967     $   78,967(1) $  270,000
                                            ==========     ==========     ==========    ==========
          1998............................  $  185,000     $  261,034     $  176,034(1) $  270,000
                                            ==========     ==========     ==========    ==========
          1997............................  $  185,000     $  147,541     $  147,541(1) $  185,000
                                            ==========     ==========     ==========    ==========
     Allowance for obsolete inventory:
          1999............................  $  250,000     $  140,000     $        0    $  390,000
                                            ==========     ==========     ==========    ==========
          1998............................  $  250,000     $        0     $        0    $  250,000
                                            ==========     ==========     ==========    ==========
          1997............................  $        0     $  250,000     $        0    $  250,000
                                            ==========     ==========     ==========    ==========
     Allowance for Diisononyl Phthalate
       product returns:
          1999............................  $2,874,000     $        0     $2,874,000(2) $        0
                                            ==========     ==========     ==========    ==========
          1998............................  $        0     $3,000,000     $  126,000    $2,874,000
                                            ==========     ==========     ==========    ==========
</TABLE>

---------------
(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.

                                      IV-18
<PAGE>   33

                              THE FIRST YEARS INC.
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 EXHIBIT                           DESCRIPTION
 -------                           -----------
<S>        <C>

(3)(ii)    By-Laws of the Company, as currently in effect.

10(d)      Letter Agreement with Children's Television Workshop dated
           as of July 1, 1999 regarding the renewal of the licensing of
           Sesame Street characters (certain portions of which are
           subject to confidential treatment).

10(f)      The First Years Inc. 1993 Stock Option Plan for Directors,
           as amended through October 1, 1999.

21         List of Subsidiaries of the Registrant.

23         Consent of Deloitte & Touche LLP dated March 27, 2000.

27         Financial Data Schedule -- 12/31/99.

99         Important Factors That May Affect Future Results.
</TABLE>

                                      IV-19