<PAGE>   1


    AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 1999


                                                      REGISTRATION NO. 333-80131

                                                   REGISTRATION NO. 333-80131-01

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


                         PRE-EFFECTIVE AMENDMENT NO. 3

                                       TO

                                    FORM S-4
            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933


<TABLE>
<S>                                                     <C>
            Futech Interactive Products                              Futech Toys & Games, Inc.
                  (Delaware) Inc.                          (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS
   (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS                              CHARTER)
                       CHARTER)
                                                                               Nevada
                      Delaware                            (STATE OR OTHER JURISDICTION OF INCORPORATION OR
  (STATE OR OTHER JURISDICTION OF INCORPORATION OR                         ORGANIZATION)
                    ORGANIZATION)
                                                                                3944
                        3944                              (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE
  (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE                            NUMBER)
                       NUMBER)
                                                                             91-1980816
                     86-0957283                                 (I.R.S. EMPLOYER IDENTIFICATION NO.)
        (I.R.S. EMPLOYER IDENTIFICATION NO.)
                                                                     Futech Toys & Games, Inc.
    Futech Interactive Products (Delaware) Inc.                        c/o Fundex Games, Ltd.
         2999 North 44th Street, Suite 225                               2237 Directors Row
            Phoenix, Arizona 85018-7247                             Indianapolis, Indiana 46241
                   (602) 808-8765                                          (317) 248-1080
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,     (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
    INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL         INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL
                  EXECUTIVE OFFICE)                                      EXECUTIVE OFFICE)
</TABLE>


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

                           FREDERICK B. GRETSCH, SR.
                                   Secretary
                  Futech Interactive Products (Delaware) Inc.
                       2999 North 44th Street, Suite 225
                          Phoenix, Arizona 85018-7247
                                 (602) 808-8765
 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                             OF AGENT FOR SERVICE)

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

                                   COPIES TO:

                              P. ROBERT MOYA, ESQ.
                              QUARLES & BRADY LLP
                       ONE EAST CAMELBACK ROAD, SUITE 400
                          PHOENIX, ARIZONA 85012-1649
                           TELEPHONE: (602) 230-5500
                           FACSIMILE: (602) 230-5598

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

          APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after the effective date of this Registration
Statement.

     If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G. check the following box.  [ ]

     If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act Registration statement number of the earlier effective
registration statement for the same offering.  [ ]
---------------

     If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ]
---------------

                        CALCULATION OF REGISTRATION FEE

     The registration fee was previously calculated and paid with the filing on
June 7, 1999 of the Registrants' initial registration statement on Form S-4.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2


                  Subject to Completion, dated October 8, 1999


                  FUTECH INTERACTIVE PRODUCTS (DELAWARE) INC.

                           FUTECH TOYS & GAMES, INC.

                       FUTECH INTERACTIVE PRODUCTS, INC.
                           JANEX INTERNATIONAL, INC.
                               TRUDY CORPORATION
                               FUNDEX GAMES, LTD.
                                 DAMERT COMPANY

                           PROSPECTUS/PROXY STATEMENT


     This prospectus/proxy statement, together with the related prospectus/proxy
statement supplement for each of the merging companies identified below,
constitutes the prospectus of Futech Interactive Products (Delaware) Inc. ("New
Futech") and Futech Toys & Games, Inc., ("New Sub") in connection with the offer
and issuance of their securities pursuant to the merger agreement dated as of
June 7, 1999, by and among Janex International, Inc., Futech Interactive
Products, Inc., Trudy Corporation, Fundex Games, Ltd., DaMert Company, New
Futech and New Sub. Under the merger agreement, Futech will reincorporate in
Delaware by merging with New Futech and then Janex, Trudy, and DaMert will merge
with and into New Futech, which will survive the mergers, and Fundex will merge
into New Sub, which will be a wholly-owned subsidiary of New Futech. Each share
of outstanding stock of any of the merging companies immediately prior to the
mergers, other than dissenting shares, will be converted into the right to
receive a combination of cash, shares of New Futech stock and promissory notes
of New Futech or New Sub, each in amounts specified below, but subject to
changes in accordance with the elections and conditional rights described under
"Description of the Mergers and Merger Agreement" beginning at page      .



<TABLE>
<CAPTION>
                                                  AGGREGATE CONSIDERATION               APPROXIMATE PER SHARE
                                        -------------------------------------------         CONSIDERATION
                                                                   COMMON SHARES      --------------------------
               MERGING                                          -------------------                       COMMON
               COMPANY                    CASH       NOTES       NUMBER     PERCENT    CASH     NOTES     SHARES
               -------                  --------   ----------   ---------   -------   ------   --------   ------
<S>                                     <C>        <C>          <C>         <C>       <C>      <C>        <C>
Futech................................  $      0   $        0   3,767,337    67.3%    $    0   $      0    .0398
Janex.................................         0            0     159,735     2.9          0          0    .0333
Fundex................................         0    4,500,000     600,000    10.7          0     2.7696    .3693
Trudy.................................   456,330            0     400,000     7.1      .0012          0    .0011
DaMert................................   312,000    2,600,000     671,147    12.0     285.00   2,375.00   613.07
                                        --------   ----------   ---------    ----
Totals................................  $768,330   $7,100,000   5,598,219     100%
                                        ========   ==========   =========
</TABLE>



     This prospectus/proxy statement and the related prospectus/proxy statement
supplement for the applicable merging company also are being furnished to you
and the other stockholders of each merging company in connection with the
solicitation of proxies by your board of directors for use at the Special
Meeting of Stockholders at which your directors will ask you to consider and
vote upon a proposal to approve and adopt the merger agreement.



     The mergers cannot be consummated unless: (1) stockholders of Futech,
Janex, Trudy, Fundex and DaMert, voting separately at their respective meetings
of stockholders, each approve the mergers, and (2) other conditions included in
the merger agreement are either satisfied or waived. Because a majority of each
merging company's stock is owned by directors, officers and affiliates who have
indicated they intend to vote in favor of the merger, approval of the merger is
assured.



     This prospectus/proxy statement and the related prospectus/proxy statement
supplement are first being mailed to stockholders of Futech, Janex, Trudy,
Fundex and DaMert on or about October   , 1999.



     THESE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROSPECTUS/PROXY STATEMENT
AND THE RELATED PROSPECTUS/PROXY STATEMENT SUPPLEMENT. THE PROPOSED MERGERS ARE
COMPLEX TRANSACTIONS. WE STRONGLY URGE YOU TO READ AND CONSIDER CAREFULLY THIS
PROSPECTUS/PROXY STATEMENT AND THE RELATED PROSPECTUS/PROXY STATEMENT SUPPLEMENT
IN THEIR ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO UNDER "RISK FACTORS"
BEGINNING ON PAGE 6 OF THIS PROSPECTUS/PROXY STATEMENT.


     Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus/proxy statement or the accompanying prospectus/proxy statement
supplement is truthful or complete. Any representation to the contrary is a
criminal offense.

         The date of this prospectus/proxy statement is              , 1999.
<PAGE>   3

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS/PROXY STATEMENT AND THE ACCOMPANYING PROSPECTUS/PROXY
STATEMENT SUPPLEMENT. NEITHER NEW FUTECH NOR ANY OF THE MERGING COMPANIES HAS
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. NEW FUTECH AND NEW SUB ARE NOT MAKING AN OFFER TO SELL THESE SECURITIES IN
ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME
THAT THE INFORMATION APPEARING IN THIS PROSPECTUS PROXY/ STATEMENT AND THE
ACCOMPANYING PROSPECTUS/PROXY STATEMENT SUPPLEMENT IS ACCURATE ONLY AS OF THE
DATE ON THE FRONT OF THESE DOCUMENTS. THE BUSINESS, FINANCIAL CONDITION, RESULTS
OF OPERATIONS AND PROSPECTS OF NEW FUTECH OR OF ANY OF THE MERGING COMPANIES MAY
HAVE CHANGED SINCE THAT DATE.

                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Summary.....................................................   1
  Brief Description of Parties..............................   1
  New Futech's Business Strategy............................   3
  Summary Description of the Mergers and the Merger
     Agreement..............................................   3
  Conditions to the Mergers.................................   4
  Dissenters' Rights; Comparison of Stockholder Rights......   4
  Comparative Market Price and Dividend Information.........   4
  Restrictions on Resales by Affiliates of the Merging
     Companies..............................................   5
Risk Factors................................................   6
Description of the Mergers and the Merger Agreement.........  12
  Effective Time and Consequences...........................  12
  Basic Terms of Merger Agreement...........................  12
  Exchange of Shares........................................  15
  Background of the Mergers.................................  15
  Reasons for the Mergers...................................  18
  Special Arrangements Relating to New Sub and "Phase 10"
     Assets.................................................  19
  Employment Agreements with Affiliates.....................  20
  Other Aspects of the Merger Agreement; Covenants of the
     Merging Companies......................................  20
  Indemnification by New Futech and by Certain
     Stockholders...........................................  23
  Regulatory Matters........................................  23
  Conditions to Closing.....................................  23
  Dissenters' Rights........................................  24
  Termination of the Merger Agreement.......................  24
Unaudited Pro Forma Financial Data..........................  25
</TABLE>


                                        i
<PAGE>   4


<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
New Futech's Business.......................................  35
  General Development of Business...........................  35
  Company Overview..........................................  36
  Benefits Resulting From the Mergers.......................  38
  Business Strategy.........................................  38
  Sales Strategy............................................  39
  Marketing Strategy........................................  39
  Public Relations Strategy.................................  40
  Growth Strategy...........................................  40
  Description of Operating Units and Their Industries.......  43
  Licensing Technology and Other Rights to Other
     Companies..............................................  48
  Recent Acquisitions by Futech.............................  49
  Reasons for Mergers.......................................  49
  Specific Reasons for Previous Acquisitions and Proposed
     Mergers................................................  50
  Integration of Merging Companies' Facilities..............  51
  Integration of Management of Merging Companies............  52
  Strategy for Future Acquisitions..........................  53
  Product Design............................................  53
  Proprietary Product Lines.................................  54
  Strategy for Licensing Characters.........................  58
  Proprietary Technology and Patented Technology............  60
  Manufacturing.............................................  60
  Customer Base.............................................  61
  Markets...................................................  62
  Competition...............................................  62
  Research and Development..................................  64
  Distribution and Logistics................................  64
  Year 2000.................................................  65
  Employees.................................................  66
  Properties................................................  66
  Government Regulations....................................  67
  Legal Proceedings.........................................  67
New Futech's Management.....................................  68
  Directors and Executive Officers..........................  68
  Management Team...........................................  70
  Employment Agreements.....................................  71
  Executive Compensation....................................  73
  Compensation of Directors.................................  75
  1999 Stock Option Plan....................................  75
Certain Relationships and Related Transactions..............  78
</TABLE>


                                       ii
<PAGE>   5


<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
New Futech's Stockholders...................................  83
Description of New Futech Capital Stock.....................  86
Experts.....................................................  86
Legal Matters...............................................  87
Where You Can Find More Information.........................  87
Index to Financial Statements...............................  F-1
Appendices
  Appendix A -- Merger Agreement............................  A-1
  Appendix B -- Certificate of Incorporation of Futech
     Interactive Products (Delaware) Inc. ..................  B-1
</TABLE>


                                       iii
<PAGE>   6

                                    SUMMARY


     This summary should be read in conjunction with the more detailed
information appearing elsewhere in this prospectus/proxy statement and the
related prospectus/proxy statement supplement for each of the merging companies.
In the narrative portion of this document, but not in the F- pages, all
references to shares of stock are stated in quantities that reflect the exchange
ratio in the mergers, unless indicated otherwise.


BRIEF DESCRIPTION OF PARTIES


     FUTECH.  Futech designs, publishes, hires subcontractors to manufacture and
markets interactive, educational, promotional and entertainment products, such
as books, game boards with sound capabilities and specialty post cards, targeted
primarily towards children. Futech's patented technology utilizes specialized
conductive ink to print interactive touch points. These touch points trigger
speech, music and sound effects. Futech also distributes proprietary products,
as well as those of third party publishers, to warehouse clubs, mass market
retailers, national book chains, specialty and independent retailers and major
toy chains. Futech's address is:


     Futech Interactive Products, Inc.
     2999 North 44th Street, Suite 225
     Phoenix, Arizona 85018-7247
     (602) 808-8765

     JANEX.  Janex was incorporated in Colorado in 1986. Janex designs, hires
subcontractors to manufacture and markets children's toys, banks, flashlights
and battery operated toothbrushes marketed under the brand name Janex. Janex
incorporates licensed characters into many of its products, and sells its
products to United States mass merchant retailers, toy specialty stores and
department stores. Janex's address is:

     Janex International, Inc.
     c/o Futech Interactive Products, Inc.
     2999 North 44th Street, Suite 225
     Phoenix, Arizona 85018-7247
     (602) 808-8765

     TRUDY.  Trudy Corporation was initially organized as a Connecticut
corporation under the name "Norwest Manufacturing Corporation" in 1979. Trudy,
which does business under the name Soundprints, publishes juvenile story books
and audio-cassettes which are sold in conjunction with contract manufactured
educational toys to the retail and mail order markets. Trudy's address is:

     Trudy Corporation
     353 Main Avenue
     Norwalk, CT 06851-1552
     (203) 846-2274
                                        1
<PAGE>   7

     FUNDEX.  Fundex Games, Ltd. was originally incorporated in the State of
Indiana as "Third Quarter, Inc." in 1991. Fundex develops, markets, and
distributes a variety of games and toys for both children and adults, including:

     - card games, puzzles and board games, including the Phase 10 card game and
       its sister products;

     - skill and action games for children;

     - games, puzzles and toys featuring characters licensed from third parties;
       and

     - spring and summer toys for children, including jump ropes, water toys and
       water games.

     Fundex's address is:

     Fundex Games, Ltd.
     2237 Directors Row
     Indianapolis, Indiana 46241
     (317) 248-1080


     DAMERT.  DaMert Company was founded in 1973 and incorporated in 1979.
DaMert creates and produces toy and gift products with nature and science themes
targeted primarily to children ages 6-12. Presently, the product base includes
over 200 toys, gifts and puzzles which are sold through catalogs, museums,
department stores, specialty stores and toy stores nationwide. DaMert's address
is:


     DaMert Company
     1609 Fourth Street
     Berkeley, California 94710
     (510) 524-7400


     NEW FUTECH.  Futech Interactive Products (Delaware) Inc. ("New Futech") is
a newly-organized Delaware corporation that Futech formed to be the surviving
parent corporation under the merger agreement. New Futech has had no operations
prior to the date of this prospectus/proxy statement. As a part of the mergers,
New Futech will change its name to "Futech Interactive Products, Inc." New
Futech's address is:



     Futech Interactive Products, Inc.


     2999 North 44th Street, Suite 225


     Phoenix, Arizona 85018-7247


     (602) 808-8765



     NEW SUB.  Futech Toys & Games, Inc. ("New Sub") is a newly-organized Nevada
corporation that Futech formed to merge with Fundex and to be the surviving
subsidiary corporation of New Futech under the merger agreement. New Sub has had
no operations prior to the date of this prospectus/proxy statement. New Sub's
address is:



     Futech Toys & Games, Inc.


     c/o Fundex Games, Ltd.


     2237 Directors Row


     Indianapolis, Indiana 46241


     (317) 248-1080

                                        2
<PAGE>   8

NEW FUTECH'S BUSINESS STRATEGY


     Through the mergers, New Futech will become a diversified children's
product company that directly and through New Sub designs, develops and
distributes proprietary and other children's products such as books, games, toys
and stationery. Many of New Futech's products will incorporate its proprietary
interactive touchpoint technologies, which we expect will give us significant
competitive advantages when combined with the synergy of the five merging
companies.



     We expect to operate using an entrepreneurial style of management with five
separate business operating units. Each unit will have a vice president
responsible for its performance, including day-to-day operations, products and
sales. Corporate management and staff will be responsible for support, finance,
administration and coordination of the five business units.



     New Futech's objective is to become a significant designer, developer and
distributor of a variety of affordable children's and family books, games and
related products. While the mergers are a major step toward achieving this
objective, New Futech intends to expand product lines, enhance product brand
awareness, improve operational efficiencies and expand distribution.



     New Futech will begin with a diversified base of established retail
customers representing over 26,000 retail locations that we believe will allow
us to significantly expand sales, especially the distribution of our proprietary
products. With our experienced management team, we believe the mergers will
provide the opportunity to attain profitable growth into the future.



     On a pro forma basis, the combined companies in this merger have combined
recurring losses from operations, negative cash flows, and negative working
capital. As a result of the mergers and after the mergers, New Futech will have
substantial capital needs for which we will need to raise additional funds.
These capital needs include cash payments for acquisition of the companies in
the mergers, payment of debt acquired as a result of the mergers, lease
commitments, development of product lines, upgrade or replacement of computer
systems, development of internet services, research and development costs,
promotion and advertising costs, and working capital for continuing operations.
Presently, New Futech does not have financial resources to finance all these
needs. However we are in discussions and negotiations with commercial banks,
investment banks, and private investors to raise the necessary capital. On May
24, 1999, Futech retained Schroder & Co., Inc. to act as its financial advisor
to perform general investment banking services. Although there are no assurances
that we will be successful in our fund-raising activities, we believe the
necessary capital will be available for our financial needs.



SUMMARY DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT



     Under the merger agreement, Futech will reincorporate in Delaware by
merging with New Futech. Then, Janex, Trudy, and DaMert will merge with and into
New Futech. Fundex will become a wholly owned subsidiary of New Futech by
merging into New Sub. New Futech will be the surviving corporation and New Sub
will survive as a wholly-owned subsidiary of New Futech. Each share of
outstanding stock of any of the merging

                                        3
<PAGE>   9


companies immediately prior to the mergers, other than dissenting shares, will
be converted into the right to receive a combination of cash, shares of New
Futech stock, and promissory notes of New Futech or New Sub, each in specified
amounts for each merging company. See "Description of the Mergers and the Merger
Agreement."



CONDITIONS TO THE MERGERS



     The mergers cannot occur unless each class of outstanding voting stock of
each of the merging companies, by the affirmative vote of a majority of the
outstanding shares, votes to approve the mergers. However, because a majority of
each company's stock is owned by directors, officers and affiliates who have
agreed to vote in favor of the mergers, approval is assured. Futech has the
right to terminate the Merger Agreement if holders who are otherwise entitled to
receive 5% or more of the aggregate merger consideration payable to stockholders
of all of the merging companies combined, based on an assumed value of $7.50 per
share of New Futech common stock, exercise their dissenters' rights with respect
to the mergers. The mergers are also subject to a number of conditions of the
type that are customary in business combination transactions. See "Description
of the Mergers and the Merger Agreement."


DISSENTERS' RIGHTS; COMPARISON OF STOCKHOLDER RIGHTS


     Each stockholder of each of the merging companies will have the right to
dissent from the mergers and receive the fair value of his or her stock instead
of receiving the merger consideration described in the merger agreement. The
particular requirements applicable to the stockholders of each merging company
who may wish to dissent are described in the prospectus/proxy statement
supplement for that merging company. The prospectus/proxy statement supplement
also compares the rights of stockholders of the merging company under its
articles or certificate of incorporation, bylaws and applicable state law with
the rights of stockholders of New Futech under its certificate of incorporation,
bylaws and Delaware law. Copies of the supplements provided to the stockholders
of any other merging company will be provided without charge upon request to New
Futech by any stockholder of another merging company.



COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION



     There is no public trading market for the securities of New Futech, New
Sub, Futech, Fundex or DaMert. For purposes of the merger negotiations, the
parties valued New Futech stock at about $7.50 per share, although no appraisal
or other independent valuation was obtained. Janex common stock is traded on the
OTC Bulletin Board under the symbol "JANX." Janex Preferred Stock is not traded.
Trudy common stock is traded sporadically on the OTC Bulletin Board under the
symbol "TRDY." The following table sets forth the high and low bid prices per
share for the Janex common stock for each fiscal quarter from January 1, 1997,
through June 30, 1999, as reported by the National Association of Securities
Dealers and the OTC Bulletin Board and as adjusted to reflect the conversion of
shares of Janex stock not held by Futech into shares of common stock of New
Futech in the mergers. The historical quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and do not necessarily represent
actual

                                        4
<PAGE>   10


transactions. On June 4, 1999, the business day before the Merger Agreement was
signed, the closing price of the Janex common stock was $0.23 per share.



<TABLE>
<CAPTION>
                                                                    PRICE PER
                                                                    NEW FUTECH
                                                                SHARE RECEIVED IN
                                        HISTORICAL PRICES            MERGERS
                                        ------------------      ------------------
JANEX COMMON STOCK                       HIGH        LOW         HIGH        LOW
------------------                      ------      ------      ------      ------
<S>                                     <C>         <C>         <C>         <C>
Year Ended December 31, 1997
  1st Quarter.....................      $1.44       $0.56       $43.20      $16.80
  2nd Quarter.....................       0.75        0.31        22.50        9.30
  3rd Quarter.....................       0.67        0.05        20.10        1.50
  4th Quarter.....................       0.55        0.13        16.50        3.90
Year Ended December 31, 1998
  1st Quarter.....................       0.50        0.19        15.00        5.70
  2nd Quarter.....................       0.48        0.19        14.40        5.70
  3rd Quarter.....................       0.24        0.07         7.20        2.10
  4th Quarter.....................       0.39        0.12        11.70        3.60
Year Ending December 31, 1999
  1st Quarter.....................       0.35        0.17        10.50        5.10
  2nd Quarter.....................       0.27        0.16         8.10        4.80
  3rd Quarter.....................       0.19        0.08         5.70        2.40
</TABLE>



     As of September 15, 1999, there were approximately 780 stockholders of
record of Janex common stock and one stockholder of record of Janex preferred
stock, respectively, as shown on the records of its transfer agent. On the same
date, there were 61 record holders of Fundex common stock, 138 record holders of
Futech common stock, three record holders of Futech preferred stock, one record
holder of DaMert common stock and 1,491 holders of Trudy common stock.



     None of the merging companies has paid dividends on its common stock and
none of them anticipate paying dividends in the foreseeable future. However,
because DaMert is qualified under the internal revenue code as a subchapter S
corporation, it has made distributions to its shareholders to pay tax
liabilities associated with DaMert's income.



RESTRICTIONS ON RESALES BY AFFILIATES OF THE MERGING COMPANIES



     In connection with the mergers, we expect each affiliate of any of the
merging companies to agree not to sell shares of New Futech common stock
received in the mergers except in compliance with Rule 145 or otherwise in
compliance with the Securities Act.

                                        5
<PAGE>   11


                                  RISK FACTORS



     In addition to the other information included in this prospectus/proxy
statement and in the prospectus/proxy statement supplement applicable to you,
you should carefully consider the risks described below in determining whether
to approve the merger agreement. For clarity, we have grouped the risks that are
specific to New Futech precise factual circumstances, those associated with the
publishing, toy and game industries, those arising from the merger of the five
companies and those associated with New Futech's securities being issued in the
merger.



RISKS SPECIFIC TO NEW FUTECH



IF NEW FUTECH IS UNABLE TO OBTAIN ADDITIONAL DEBT AND EQUITY FUNDING, IT MAY BE
UNABLE TO CONTINUE IN BUSINESS.



     Based on the most recently available balance sheets of each of the merging
companies and the terms of the merger agreement, including the required payments
of cash and promissory notes to stockholders of the merging companies, after the
mergers New Futech's consolidated current assets will be about $17,000,000, its
consolidated current liabilities will be about $48,000,000, its total
consolidated liabilities will be about $66,000,000, and its consolidated net
worth will be a deficit of approximately $(13,000,000) and its consolidated
tangible net worth will be a deficit of approximately $(51,000,000). Thus, about
126% of New Futech's total consolidated capitalization will be from borrowings
and redeemable stock. Of this amount, $9,000,000 is under loan agreements that
are currently in default and will need to be replaced or renegotiated shortly
after the mergers. If we are unable to obtain the needed capital, we may be
required to sell some or all of our assets, and we may be unable to continue as
a going concern. The independent auditors' reports on the financial statements
of Futech, Janex and Trudy raise substantial doubt as to those companies'
ability to continue as going concerns.



IF NEW FUTECH IS UNABLE TO REDUCE ITS INDEBTEDNESS, EVEN RELATIVELY SMALL
REVENUE DECREASES OR EXPENSE INCREASES COULD CAUSE BIG INCREASES IN LOSSES.



     Assuming it continues as a going concern, New Futech's high level of
borrowing poses substantial risks to the company and its stockholders. High
interest expenses and required payments of principal and interest on the loans
will make New Futech vulnerable to anything that decreases revenues or increases
interest costs or other expenses, even by relatively small amounts.



IF NEW FUTECH DOES NOT QUICKLY INCREASE REVENUES AND EARNINGS, IT MAY BE UNABLE
TO STAY IN BUSINESS.



     Each of the merging companies has experienced increases in losses during
its most recent six months for which financial statements are available. If New
Futech is unable to quickly increase its combined revenues and earnings, it will
soon exhaust its borrowing capacity and other financial resources and may be
unable to continue in business.



IF NEW FUTECH LOSES KEY CUSTOMERS, THAT COULD GREATLY INCREASE LOSSES.



     New Futech and the merging companies have depended on a few key customers
for a large percentage of their sales. Futech received 51.5% of its 1998 net
revenues from Sam's Club and Costco Wholesale; Janex received 53% of its 1998
net revenues from Toys 'R Us and Target; Trudy received 28.8% of its fiscal 1999
revenues from Advanced Marketing


                                        6
<PAGE>   12


Services, Inc.; and Fundex received 18% of its 1998 revenue from Wal-Mart.
Although the revenue percentage for any one customer of New Futech is likely to
be somewhat smaller, the loss of any of these key customers could greatly
increase its losses and might jeopardize its ability to continue in business.



IF NEW FUTECH LOSES KEY LICENSING RELATIONSHIPS, THAT COULD GREATLY REDUCE
REVENUES AND INCREASE LOSSES.



     The merging companies depend upon key licensing arrangements with
inventors, publishers, authors and others. Many of these licensing arrangements
include minimum guaranteed royalties, without regard to associated revenues. If
New Futech is unable to meet these licensing commitments or loses key licenses
for any reason, sales could decline substantially and losses could increase.



IF NEW FUTECH LOSES A KEY CONTRACT MANUFACTURER IT WOULD BE UNABLE TO PRODUCE
KEY PRODUCTS.



     The manufacturing process of Futech's interactive talking pages technology
utilizes a specialized process and specialized equipment to print and cure
conductive ink and dielectric material to the structure of the pages in the book
or gameboard. A major printing company in Hong Kong and China is currently the
Company's sole manufacturer to perform the printing and binding process for
books that incorporate this technology. If New Futech was unable to use that
contract manufacturer for any reason, New Futech would be unable to produce
these products until a replacement could be developed. Futech could experience
serious delays and other costs during the transition.



IF THE U.S. DOLLAR WEAKENS OR IMPORTS FROM CHINA ARE RESTRICTED, NEW FUTECH WILL
INCUR HIGHER COSTS.



     Approximately 50 percent of the manufacturing and product sourcing
operations of the merging companies are based in China and elsewhere in the
Pacific Rim. See "Description of New Futech's Business." Any decrease in the
value of the U.S. Dollar compared with the local currency would tend to increase
the costs of obtaining products from these sources. Any political difficulties
that might prevent or restrict imports from these countries would also
materially interfere with New Futech's operations.



NEW FUTECH'S GEOGRAPHICALLY DISPERSED OPERATIONS WILL MAKE IT MORE DIFFICULT TO
SPOT PROBLEMS AND COORDINATE ACTIVITIES.



     New Futech will initially have operations in California, Wisconsin,
Indiana, Illinois, New Jersey and Connecticut, as well as in China through its
Hong Kong subsidiaries. Most of the contract manufacturers for its products are
in Asia. Its operations will be more diverse and geographically dispersed than
those of any individual merging company and more than most other companies of
comparable size. The dispersed operations may make it more difficult to quickly
identify both opportunities and operational difficulties and to respond to them
appropriately. It also creates logistical difficulties in assuring the timely
and efficient delivery of raw materials and components to the manufacturing
locations and finished products to our customers. Any of these difficulties
could lead to lost sales or customers, and result in lower earnings or greater
losses for New Futech.


                                        7
<PAGE>   13


IF NEW FUTECH OR ITS VENDORS, CUSTOMERS, SHIPPERS OR OTHERS EXPERIENCE YEAR 2000
DIFFICULTIES, IT COULD LOSE SALES.



     The Year 2000 problem could cause some computer systems and programs that
use two digits, rather than four, to define the applicable year of business
transactions, to malfunction. These programs may process data incorrectly or
stop processing data altogether. Each of the merging companies relies on vendor
supplied technology. If either New Futech's systems or those of its suppliers,
customers, shippers, sales agents or others experience substantial disruptions,
New Futech would probably lose sales and may become involved in expensive
litigation.



RISKS OF THE PUBLISHING AND TOY & GAME INDUSTRIES.



NEW FUTECH'S PRODUCTS COULD BECOME OBSOLETE OR COULD LOSE FAVOR WITH CONSUMERS.



     Consumer tastes and preferences can change rapidly in the toy & game and
publishing industries, especially in the children's products markets, and
competing products or new technologies that are created by competitors can be
introduced at any time. New Futech's success will depend upon our ability to
consistently develop or acquire licenses for products which consumers desire at
acceptable prices. The success of our products depends upon a number of factors,
including:



     - creating or obtaining the right product ideas,



     - completing an attractive and appropriate product design in a timely and
       efficient fashion,



     - arranging for the manufacture and assembly of the products in a timely
       and efficient manner,



     - designing and implementing effective sales and marketing strategies, and



     - delivering the product on time, on budget and in high quality.



     We cannot assure you that New Futech will succeed in designing and
producing products which consumers like, at the times they want those products
and at prices they are willing to pay. If we do not consistently succeed in each
of these respects, that failure will have adverse effects on the results of
operations and financial condition of the combined company.



NEW FUTECH'S PRODUCTS ARE IN HIGHLY COMPETITIVE MARKETS.



     The children's publishing and the toy & game industries are characterized
by having many competing companies and competing products, rapid innovation and
change, and quickly changing consumer fads and preferences. Many companies
compete with New Futech with respect to one or more of its products, and many of
those companies have greater financial resources than we do. Anticipated product
lines are also in highly competitive industries. To compete successfully, New
Futech's products must excel in technology, design, quality, price
competitiveness, durability and safety, and they must reach the consumer quickly
and through convenient and efficient distribution channels. We cannot assure you
that we will be able to meet each of these requirements better than our
competitors.


                                        8
<PAGE>   14


RISKS ARISING FROM THE MERGER.



THE MERGERS PLACE NEW DEMANDS ON NEW FUTECH'S MANAGEMENT.



     The merger of the five companies and the recent acquisitions and other
structural changes by several of those companies will fundamentally change the
nature of the combined enterprise by increasing its product diversity and
geographic dispersion and increasing its overall complexity. These changes
materially increase some risks like:



     - potential losses or inefficiencies from integrating new people and
       operations;



     - extra costs of making technical, operational and administrative changes;



     - extra efforts required for creating and preserving relationships with new
       suppliers and customers; and



     - higher costs of borrowing from outside sources for working capital.



     New Futech's officers and directors cannot be certain we will be successful
in managing these risks and minimizing these additional costs. Indeed, Janex's
revenues and operating results declined significantly in the first quarter
following Futech's acquisition of a controlling interest in that company, partly
for these reasons.



NEW FUTECH COULD LOSE KEY PERSONNEL.



     New Futech's success for the foreseeable future will depend upon the
efforts of all of its executive officers, many of whom are entrepreneurs who
have little experience working cooperatively within a management structure and
who have not had occasion to work cooperatively with each other in the past.
After the merger occurs, strains from these new relationships, as well as normal
attrition, could cause the loss of key personnel, which could lead to less
effective management and lower operating results. New Futech will not maintain
key person life insurance on the lives of any of its executive officers, and it
might be unable to prevent key people from leaving to work in other enterprises,
even competitive ones.



IF ANY OF THE MERGING COMPANIES HAS UNKNOWN OR UNDISCLOSED LIABILITIES OR OTHER
PROBLEMS, NEW FUTECH MAY BE HARMED.



     As the surviving corporations in the mergers, New Futech and New Sub will
be responsible for all liabilities and obligations of all of the merging
companies, whether or not they were known or disclosed to the other parties
prior to the mergers. However, New Futech and New Sub may have little or no
remedy from the former stockholders of a merging company that turns out to have
unanticipated liabilities or other costs.



NEW FUTECH COULD OWE ADDITIONAL STOCK OR NOTES IN THE MERGERS OR COULD LOSE THE
RIGHTS TO THE PHASE 10 LICENSE OR OTHER ASSETS.



     If New Sub fails to pay the promissory notes issued to the former
shareholders of Fundex when due, they could foreclose on the stock of New Sub
and effectively take back a substantial portion of New Futech's business. New
Futech plans to sell the Janex brand products through the New Sub subsidiary, so
profits from this product line will be retained by New Sub. If the former
stockholders of Fundex foreclose, the assets they receive could include profits
from the sale of Janex products. Additionally, the major asset of New Sub is the
Phase 10 license. The Phase 10 asset and its importance is discussed in detail
under "Special Arrangements Relating to New Sub and "Phase 10 Assets."


                                        9
<PAGE>   15


     Unless either (a) Futech or another party offers to buy, for at least $7.50
per share, the Futech stock acquired in the mergers by those Fundex stockholders
who do not elect the All Cash Alternative or (b) by the third anniversary of the
mergers the New Futech stock develops an active trading market at an average
price of $7.50 per share, those former Fundex stockholders will have the right
to exchange their New Futech stock for the license rights to the "Phase 10"
family of games. The Phase 10 games represented approximately $3,078,155 in 1998
revenues, which is 36% of Fundex's 1998 sales, and is the second largest selling
card game in the United States. Similarly, the former Trudy stockholders will
receive additional stock if and to the extent New Futech's initial public
trading price is less than $7.50 per share, and they will have the right to
exchange their New Futech stock for promissory notes if the New Futech stock is
not publicly traded within five years after the mergers. Thus, if New Futech's
business or stock price performs worse than the parties hope and expect, or if
New Futech is unable to create a public market for its stock, New Futech could
lose a valuable portion of its toys and games operations, or it could be
required to issue additional stock or promissory notes. Issuing additional stock
or notes would reduce the earnings per share for other shareholders and may
reduce the price of the securities on any trading market. No one can accurately
predict these matters.



RISKS ASSOCIATED WITH NEW FUTECH'S SECURITIES.



BECAUSE NEW FUTECH AND THE MERGING COMPANIES HAVE NO COMBINED OPERATING HISTORY,
THERE IS LITTLE BASIS FOR VALUING THEIR SECURITIES.



     Although this prospectus/proxy statement includes certain pro forma
operating statement and balance sheet information for the combined enterprise,
all of the merging companies are still operating more or less independently.
Stockholders should not assume actual operations would have matched the pro
forma information had the mergers occurred at the beginning of 1998 or 1999, or
that New Futech's future operations will do so. Combining the operations could
increase costs or reduce revenues, or both, and those and other factors could
adversely affect the value of New Futech's securities.



THERE HAS BEEN NO INDEPENDENT VALUATION OF THE NEW FUTECH SECURITIES.



     None of the companies participating in the mergers engaged an independent
financial advisor to provide an estimate of value of any of the merging
companies or of New Futech or an opinion concerning the fairness of the merger
consideration to be received by the stockholders. Even if an active market
develops for the New Futech common stock, we have no independent basis for any
prediction about the price levels at which it might be expected to trade.



STOCKHOLDERS MAY BE UNABLE TO TRADE THE NEW FUTECH SECURITIES.



     There is currently no public market for the common stock and other
securities of New Futech that stockholders will receive in the mergers. Although
New Futech has promised to use its best efforts to obtain a listing of the
common stock on a nationally recognized exchange or market at the earliest
practical opportunity, it cannot predict whether these securities will trade
actively. The promissory notes that New Futech will issue in the mergers will
not trade on any market.


                                       10
<PAGE>   16


NEW FUTECH'S CHARTER PROVISIONS MAY DISCOURAGE TAKE-OVER OFFERS.



     New Futech's directors are elected for three year terms and can be removed
from office during their terms only for "cause." In addition, as a Delaware
corporation, New Futech is subject to certain restrictions on "business
combinations" with "interested stockholders." These provisions may tend to
discourage take-over offers that are not supported by New Futech's current
management, even if those offers may be in the best interests of the
stockholders.



FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS



     This prospectus/proxy statement and each related prospectus/proxy statement
supplement contains or incorporates by reference forward-looking statements. The
risk factors identified above in this section are some of the important factors
that could cause New Futech's actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, New Futech
or any of the merging companies.



     Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, we caution that,
while such assumptions or bases are believed to be reasonable and are made in
good faith, assumed facts or bases almost always vary from actual results. The
differences between assumed facts or bases and actual results can be material,
depending upon the circumstances. We cannot promise that statements of
expectation or belief will be achieved or accomplished. The words "believe,"
"expect," and "anticipate" and similar expressions identify forward-looking
statements throughout these materials.


                                       11
<PAGE>   17

              DESCRIPTION OF THE MERGERS AND THE MERGER AGREEMENT

EFFECTIVE TIME AND CONSEQUENCES


     Provided that all conditions to the consummation of the mergers contained
in the merger agreement have been satisfied or waived, the mergers will become
effective at 11:59 p.m. on the date that the certificate of merger or other
appropriate documents are filed with the applicable government officer or
agencies in the states in which each of the merging companies is incorporated.
We expect that the effective time will occur on the date of closing of the
merger agreement. Assuming the stockholders of each of the merging companies
have approved the mergers at their respective stockholders' meetings, the
closing is expected to take place on or about November 23, 1999, although no
assurance can be given in this regard and the parties have the discretion to
agree upon a different date.



     As of the effective time:



     - first Futech and then Trudy, Janex and DaMert will merge with and into
       New Futech, with New Futech continuing in existence as the surviving
       corporation and changing its name to "Futech Interactive Products, Inc.";



     - Fundex will merge with and into New Sub, which will be the surviving
       corporation and a wholly-owned subsidiary of New Futech;



     - New Futech will possess all the properties, assets and rights of Futech,
       Trudy, Janex and DaMert and will become liable for all debts, liabilities
       and other obligations of Futech, Trudy, Janex and DaMert;



     - New Sub will possess all the properties, assets and rights of Fundex and
       will become liable for all debts, liabilities and other obligations of
       Fundex;



     - the board of directors and the executive officers of New Futech and New
       Sub will be the persons described under the heading "New Futech's
       Management";



     - some executive officers of the merging companies will become employees of
       the surviving corporation under revised job titles. See "Certain
       Relationships and Related Transactions;" and



     - the certificate of incorporation and bylaws of New Futech that are
       attached as Appendix B will be the certificate of incorporation and
       bylaws of New Futech without any amendment except the name change
       mentioned above.


BASIC TERMS OF MERGER AGREEMENT

CONVERSION OF OUTSTANDING STOCK INTO CASH, STOCK AND PROMISSORY NOTES OF NEW
FUTECH OR NEW SUB


     At the effective time of the mergers, and on the terms described in the
merger agreement, all of the issued and outstanding shares of common and
preferred stock of each of the merging companies, other than dissenting shares
and any shares held by another merging company or by New Futech or New Sub, all
of which shall be cancelled, will be converted into the right to receive the
consideration described in the table below.


                                       12
<PAGE>   18


     However, the merger agreement provides that the holders of up to
approximately 29% of the outstanding stock of Fundex may elect instead to
receive cash at the rate of $2.84 per Fundex share (the "All Cash Alternative").
In that case, the remaining Fundex stockholders will receive:


     - a one year promissory note in an aggregate amount equal to $4,500,000
       minus the amount paid to stockholders who elect the All Cash Alternative;
       plus

     - approximately .3693 shares of New Futech common stock per Fundex share;
       plus


     - their pro rata proportion, shared among all Fundex stockholders who do
       not elect the All Cash Alternative, of .184635 shares of New Futech for
       each of the Fundex shares as to which the All Cash Alternative is
       selected.



     In addition, if, at the time the New Futech common stock is first traded
and listed on a U.S. registered securities exchange, its average closing price
over a specified 15-day period is less than $7.50 per share, then the former
Trudy stockholders will receive additional shares of New Futech common stock in
an amount sufficient to cause the average market value of all of the stock
issued to them to equal $3,000,000. If by the fifth anniversary of the closing
the New Futech common stock is still not publicly traded as described above,
each former Trudy stockholder will have the right to exchange New Futech stock
for unsecured five year debentures bearing interest at prime and with a
principal amount equal to $7.50 per share exchanged.



     An aggregate of $10,000,000 of Futech indebtedness to three of its
stockholders will become indebtedness of New Futech after the mergers that will
be exchanged for 2,222,222 shares of New Futech Series A convertible preferred
stock with substantially similar terms and conditions as the Futech preferred
stock except that the New Futech Series A preferred stock will bear an annual
dividend equal to 10% of the original Futech indebtedness.



     The table below does not include options issued in connection with
employment agreements or options issued in exchange for outstanding options of
the merging companies except that it assumes that all outstanding options for
DaMert and Trudy common stock will be exercised prior to or in connection with
the mergers but no other currently outstanding options or warrants are exercised
prior to the mergers. If any outstanding options for Trudy common stock are not
exercised, the portion of the merger consideration allocable to those shares
will be reserved by New Futech pending their later exercise. The consideration
payable with respect to outstanding shares will not be affected. Options and
warrants for common stock of Futech or Janex will be converted into options for
New Futech stock in the ratio of one New Futech share for every 30 Janex or
Futech shares.



     Approximately 79% of the stock of Janex is owned by Futech. That fact is
reflected in the exchange ratio of Futech stock into New Futech stock.


                                       13
<PAGE>   19


     The table below also assumes that 42.10* shares of DaMert common stock will
be issued in exchange for outstanding stock appreciation rights immediately
before the mergers. A total of $200,000 in cash and 21,333 shares of New Futech
common stock will be paid by New Futech to the business broker of DaMert. An
additional $283,000 will be paid by New Futech to an investment banking firm, as
a transaction fee, for the inclusion of DaMert in this merger, and a total of
$43,670 in cash will be paid by New Futech to the business broker of Trudy.

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

* These share quantities do not reflect the exchange ratio in the mergers.


<TABLE>
<CAPTION>
                                                                    APPROXIMATE PER SHARE
                               AGGREGATE CONSIDERATION                  CONSIDERATION
                       ---------------------------------------   ----------------------------
                                                    COMMON                             COMMON
MERGING COMPANY           CASH        NOTES         SHARES        CASH       NOTES     SHARES
---------------        ----------   ----------   -------------   -------   ---------   ------
<S>                    <C>          <C>          <C>             <C>       <C>         <C>
Futech(1)............  $        0   $        0     3,767,337     $     0   $       0    .0398
Janex................           0            0       159,735           0           0    .0333
Fundex(2)............           0    4,500,000       600,000           0      2.7696    .3693
Trudy(3).............     456,330            0       400,000       .0012           0    .0011
DaMert(4)............     312,000    2,600,000       671,147      285.00    2,375.00   613.07
                       ----------   ----------     ---------
Totals...............  $  768,330   $7,100,000     5,598,219
                       ==========   ==========     =========
</TABLE>


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


(1) These shares exclude 477,889 shares that would have been issuable to Gary
    "Joe" Billings under the Purchase and Sale Agreement for XYZ Group, Inc.
    assets, no longer due based on a settlement agreement signed in September
    1999. See "Certain Relationships and Related Transactions."



(2) The notes to the former Fundex stockholders, which will be due one year
    after closing and bear interest at the rate of 10% per annum until due, will
    be issued by New Sub and secured by a subordinated pledge of its assets and
    a pledge of the New Sub stock. The notes will also be fully and
    unconditionally guaranteed by New Futech. The amounts shown assume that no
    Fundex stockholders elect the All Cash Alternative described above. If
    stockholders elect the All Cash Alternative with respect to approximately
    29% of Fundex's outstanding shares, which is the maximum possible amount
    under the Merger Agreement, they would receive $1,348,500 in cash. The
    remaining Fundex stockholders would receive an aggregate of $3,151,500 in
    Notes of New Sub, which is approximately $2.7404 per remaining Fundex share,
    and an aggregate of 512,331 common shares of New Futech, which is
    approximately .4455 New Futech shares per Fundex share. Substantial
    penalties will apply should New Futech default on its payment obligations on
    the promissory notes.


(3) The amounts shown in the "Aggregate Consideration" columns assume that all
    outstanding options for Trudy common stock are exercised prior to or in
    connection with the mergers. If any options are not exercised prior to the
    mergers the aggregate merger consideration will be proportionately reduced,
    but the consideration per outstanding Trudy share will not be affected.
    Trudy stockholders may in the future receive additional shares of New Futech
    common stock, or may obtain the right to exchange their New Futech common
    stock for a five-year debenture, all as described above.

                                       14
<PAGE>   20


(4) The notes of New Futech that are issued to the DaMert stockholders will be
    secured by a lien on the DaMert assets that is subordinated to DaMert's
    existing or refinanced bank debt. These notes are payable, without interest,
    $520,000 within 30 days after the closing and the remaining $2,080,000
    within seven months after the closing. Substantial penalties will apply
    should New Futech default on its payment obligations on the promissory
    notes, including the issuance of additional New Futech stock.


EXCHANGE OF SHARES


     At or before the effective time, New Futech will deposit with American
Securities Transfer & Trust, Inc., or another bank or trust company selected by
Futech, in its capacity as exchange agent under the merger agreement, the cash,
promissory notes, options and stock of New Futech payable pursuant to the terms
of the merger agreement.



     Promptly after the effective time, American Securities will mail to each
record holder of an outstanding certificate or certificates, which immediately
prior to the effective time represented outstanding shares of any of the merging
companies, a form letter of transmittal and instructions for use in effecting
the surrender of certificates in exchange for the corresponding portion of the
merger consideration. Stockholders should not surrender their certificates with
their proxy cards. Upon surrender to American Securities of a certificate,
together with the transmittal form and any other required documents, the holder
of the certificate will be entitled to receive the corresponding portion of the
merger consideration. No interest will be paid or accrued on the merger
consideration payable upon the surrender of the certificate. If payment is to be
made to a person other than the person in whose name the certificate surrendered
is registered, it will be a condition of payment that the certificate will be
properly endorsed and that the person requesting such payment will pay transfer
or other taxes required by reason of the payment to a person other than the
registered holder of the certificate surrendered or establish to the
satisfaction of American Securities that such tax has been paid or is not
applicable. Until so surrendered, each certificate, other than certificates
representing dissenting shares, will represent for all purposes solely the right
to receive the corresponding portion of the merger consideration, without any
interest. Any funds remaining with the Agent six months following the effective
time will be delivered to New Futech, after which time former stockholders of
the merging companies, subject to applicable law, will look only to New Futech
for payment of their claims for the merger consideration for their shares,
without interest.



     After the close of business on the day prior to the effective time, no
stock transfers will be permitted on the stock transfer books of any of the
merging companies. If, after the effective time, certificates are presented to
the surviving corporation, they will be canceled and exchanged as provided
above.


BACKGROUND OF THE MERGERS


APRIL 1998


     Mr. Vincent W. Goett, Chairman and CEO of Futech, telephoned Les Friedland,
President of Janex, to express interest in Janex and a possible merger of the
two companies.


AUGUST 1998


     Mr. Goett arranged for Janex's executives and counsel to visit Futech's
Phoenix, Arizona offices. During the meeting, the possibilities of a merger
between the two

                                       15
<PAGE>   21


companies were discussed as well as a review of the products and financial
condition of Janex. At the end of the meeting, a tentative agreement was reached
resulting in a proposed term sheet drafted by Futech's counsel. Subsequent to
the visit, negotiations continued regarding Futech's acquisition of shares and
debt from the large stockholders of Janex, who owned a majority of Janex's
common stock. The negotiations culminated in a letter of intent between Futech
and those Janex stockholders dated August 24, 1998. This letter discussed a
purchase by Futech of 52% of the outstanding stock of Janex and certain Janex
promissory notes, all held by 3 individuals. The total purchase price was to be
approximately $1,500,000 to be paid 1/2 by promissory note and 1/2 by Futech
preferred stock valued at $0.20 per share. Beginning August 30, 1998 and lasting
for approximately a week, members of Futech management and counsel visited the
offices of Janex to perform due diligence procedures.



SEPTEMBER 1998



     On September 3, 1998, Mr. Goett telephoned Chip Voigt, President of Fundex,
to express interest in working together on the development, marketing and
production of certain game products utilizing Futech's proprietary technology
and exploring additional business synergies between the companies. On September
11, 1998, Mr. Goett arranged for Fundex executives to visit the Futech offices
in Phoenix. During the meeting, they toured the Futech facilities and discussed
Futech's proprietary technologies, Fundex's proprietary products, Fundex's
distribution facility, Fundex's sales network, and the possibilities for a
merger between the two companies.



     On September 30, 1998, the Stock Purchase and Sale Agreement was signed
between the majority Janex stockholders and Futech. Pursuant to that agreement,
Futech acquired a controlling interest in Janex on December 11, 1998.



NOVEMBER 1998



     In early November, 1998, Mr. Goett, having become aware of Trudy's interest
in acquisition candidates, placed a telephone call to William W. Burnham,
Trudy's CEO. Trudy's CFO returned the call to Mr. Goett. After discussing
Futech's recent history and acquisition strategy, Mr. Goett expressed interest
in learning more about Trudy. A confidentiality agreement between the two
companies was signed on November 11, 1998. On November 16 and 17, 1998, at an
annual strategic planning retreat, Trudy management decided to continue merger
negotiations with Futech. On November 23 and 24, 1999, a meeting was held at
Futech's Phoenix offices between Futech management and Trudy management. Basic
terms of an agreement for Futech to acquire Trudy were agreed to at these
meetings. The preliminary agreement provided for Futech to acquire all
outstanding stock, plus shares subject to option, of Trudy Corporation, for a
total purchase price of $3,500,000. The purchase price was to be divided between
Futech stock ($3,000,000) and cash ($500,000). Futech also gave preliminary
indication that it would guarantee payment of $800,000 of certain officer loans
and promised to offer employment agreements to William Burnham and Elisabeth T.
Prial.



DECEMBER 1998



     On December 11, 1998, the terms pursuant to which Futech would acquire
Trudy were discussed at a special Trudy board of directors meeting. The terms
were unanimously approved. On December 18, 1998, a letter of intent was signed
by both Trudy and Futech with terms remaining the same as the letter of intent.


                                       16
<PAGE>   22


     On December 11, 1998, the basic terms of a merger of Futech with and into
Janex were approved by the board of directors of Janex, subject to approval of
the stockholders of both companies. The parties later agreed to revise this
agreement to include all of the merging companies as disclosed in the appendix
to this prospectus/proxy titled "Global Merger Agreement".



JANUARY 1999



     On January 7, 1999, Fundex's President, Chip Voigt, and Fundex's counsel
met with Mr. Goett, to discuss the structure of a possible merger of Futech and
Fundex.



     On January 16, 1999, DaMert's consultant was informed by a Futech
consultant that Futech was a prospective strategic buyer for DaMert. Futech's
consultant introduced DaMert's management to Mr. Goett, in a January 25, 1999
meeting, where Mr. Goett was provided detailed written information about DaMert.



FEBRUARY 1999



     On February 18, 1999, Mr. Goett discussed with DaMert's management Futech's
serious interest in a business combination that would include DaMert. Shortly
thereafter, DaMert sent product samples and financial information to Mr. Goett.



MARCH 1999



     On March 1, 1999, Trudy's board of directors held a special meeting to
review Trudy's proposed merger with Futech and, after discussion and
consideration, approved and authorized the execution of a merger agreement. Each
of Trudy and Futech signed and delivered this original merger agreement on March
3, 1999, subject to the approval of the stockholders of both companies. This
agreement was replaced by the merger agreement signed on June 7, 1999, when
Futech and Trudy agreed to revise their merger agreement to include all of the
merging companies.



     Over the two months beginning with their January 7, 1999 meeting, lengthy
negotiations continued between Fundex and Futech. The negotiations culminated in
a letter of intent between Futech and Fundex dated March 5, 1999. The primary
components of the letter of intent called for Futech to acquire all of the
outstanding stock of Fundex through a merger of Fundex into a newly formed
Futech subsidiary. The purchase price was originally $9,000,000, to be paid
$250,000 in cash, $4,250,000 in a 12-month promissory note and $4,500,000 in
Futech common stock. The letter of intent also discussed the "Phase 10" option,
which is described in "Description of the Mergers and the Merger
Agreement--Reasons for Mergers." After that time, both parties continued to
engage in extensive discussions to negotiate the final terms of the merger
agreement and conducted due diligence with regard to each other's business.



     DaMert's Chairman, Fred DaMert, along with an advisor, visited Futech in
Phoenix on March 4, 1999 and engaged in detailed negotiations with Mr. Goett and
other Futech executives. At this time, basic terms of an acquisition of DaMert
by Futech or its affiliate were agreed upon, subject to stockholder approval.
Fred DaMert and Gail DaMert, DaMert's CEO, visited Futech's offices the
following week. A letter of intent was signed on March 24, 1999. The DaMert
letter of intent provided for Futech to acquire all of the outstanding stock of
DaMert for total consideration of $8,000,000, of which $500,000 in cash was to
be paid at closing, $500,000 in cash was to be paid within 30 days of Futech's
SEC registration statement becoming effective, and $1,000,000 in cash was to be
paid within 7 months of the approval of a merger of Futech into Janex. The
remaining


                                       17
<PAGE>   23


$6,000,000 was to be paid with 24,000,000 shares of Futech common stock with an
agreed value of $0.25 per share. The letter of intent also called for three-year
employment agreements for Fred DaMert and Gail DaMert. Futech and DaMert then
engaged in due diligence, strategic planning, structural decisions, personnel
assignments and merger documentation.



APRIL 1999



     During the months of April and May, all five companies involved in the
mergers continued due diligence investigations of each other and continued
negotiations toward mutually acceptable terms for the mergers. The parties
determined that creating New Futech and New Sub for the purposes of effecting
the mergers was desirable because corporate law in the state of Delaware is
favorable and is also relatively predictable due to Delaware's extensive case
law on corporate law issues.



     Fundex is merging into a subsidiary because, for the time being, the
parties wanted to keep the assets acquired from Fundex, including the Phase 10
assets, separate from all the other assets acquired from the other companies in
the mergers. In accordance with the merger agreement, New Futech must meet
certain objectives and criteria, as discussed in "Special Arrangements Relating
to New Sub and 'Phase 10' Assets," following this section. If New Futech does
not meet the specified objectives, then the Fundex assets and business must be
returned to the former Fundex shareholders, and this can be accomplished more
easily if these assets and business are in a separate subsidiary corporation.



MAY 1999



     On May 24, 1999, the principals from all five companies involved in the
mergers met at the Futech offices in Phoenix, Arizona to negotiate remaining
issues in anticipation of signing the merger agreement.



     During the week of May 24, 1999, the respective boards of directors of
Futech, Janex, Trudy and DaMert approved the mergers and merger agreement.



JUNE 1999



     On June 7, 1999, Fundex's board of directors approved the mergers and
merger agreement and thereupon the merger agreement was signed and delivered by
all of the merging companies, subject to approval of their respective
stockholders and the other conditions specified in the merger agreement.


REASONS FOR MERGERS


     The merging parties believe this merger is a reasonable business decision
for improving revenues, product lines, and net profit, as well as reducing
overall operating costs. Once the decision was made for the 5 companies to
merge, the structure of the merger was discussed. The general strategy for the
5-company merger is for Futech to merge into New Futech (thus becoming a
Delaware corporation), and shortly after that, Janex, Trudy, and DaMert will
merge into New Futech, and Fundex will merger into New Sub.



     The parties also discussed the best way to present the newly formed company
to the investment community. They decided New Futech should be a Delaware
corporation because of comments received from investment bankers, who indicated
the investment community views a Delaware corporation as most desirable.


                                       18
<PAGE>   24


SPECIAL ARRANGEMENTS RELATING TO NEW SUB AND "PHASE 10" ASSETS



     While the other merging companies combine directly with New Futech, Fundex
will merge with and into New Sub.



     The one-year promissory notes issued by New Sub to the Fundex stockholders
who do not elect the All Cash Alternative in the mergers will be fully and
unconditionally guaranteed by New Futech and secured by a subordinated pledge of
New Sub's assets and by a pledge of all of the issued and outstanding stock of
New Sub. Because New Sub will manage the operations of Janex after the mergers
in exchange for a management fee expected to approximate Janex's net profit, any
profits from those operations will also effectively secure the promissory notes.
In addition, Fundex and Futech are parties to a loan and license agreement
permitting Fundex and New Sub to borrow up to $1,500,000 from Futech. Up to
$750,000 of those loans may be forfeited as a penalty if New Futech defaults on
its notes to the former Fundex stockholders and if they foreclose on the stock
of New Sub.



     In addition to receiving collateral for their promissory notes, the
stockholders of Fundex who do not elect the All Cash Alternative will receive a
limited form of price protection for the New Futech common stock that they
receive in the mergers. For a 60 day period beginning on the third anniversary
of the mergers, and assuming that the conditions described in the next paragraph
have not occurred, the former Fundex shareholders acting together can elect to
exchange their shares of New Futech common stock that they receive in the
mergers for all of New Sub's license rights in the "Phase 10" family of games
currently being sold by Fundex. The Merger Agreement requires New Futech to
preserve those license rights and to cause the Phase 10 licenses to be free of
any liens by the second anniversary of the mergers unless this right has been
previously terminated as described in the next paragraph.



     The right of the former Fundex stockholders to reacquire the Phase 10
license rights will expire early, and therefore cannot be exercised, if the
one-year promissory notes issued in the mergers to the Fundex stockholders are
paid in accordance with their terms and either of the following two conditions
is satisfied at any time before the former Fundex stockholders reacquire the
Phase 10 licenses:



     - after the expiration of any lockup agreement with underwriters that
       applies to the former Fundex stockholders, the average daily closing
       price of New Futech common stock on its principal trading market for any
       15 consecutive trading days equals or exceeds $7.50 per share, after
       adjustment for any stock splits, stock dividends or similar transactions,
       and the trading volume for New Futech common stock averages at least
       40,000 shares per trading day; or



     - New Futech offers to buy, or presents a bona fide third party offer to
       buy, all of the New Futech stock owned by the former Fundex stockholders,
       after adjustment for any stock splits, stock dividends or similar
       transactions, at a price of at least $7.50 per share, with a closing date
       not more than 60 days after the offer is made, whether or not the offer
       is accepted.



     The "Phase 10" assets consist of a license originally granted to Carl E.
Voigt III and Carl E. Voigt IV by K & K Enterprises. The license was assigned to
Fundex Games, Ltd. in August 1996. The license grants worldwide rights to
manufacture, distribute, market and sell the Phase 10 card game and its
derivatives. The Phase 10 product line is the core to the Fundex Games product
line and is very important to Fundex because (1) the product is distributed to
many retailers in the United States and (2) sales of Phase 10 comprised
approximately 34% of the Company's sales in 1998.


                                       19
<PAGE>   25


     The Merger Agreement provides that Carl E. "Chip" Voigt, IV, who is
currently the CEO of Fundex, will be a director and vice president of the
toys/games division of New Futech as well as a director and president of New
Sub. Carl E. "Pete" Voigt, III will be the vice president of New Sub. In
connection with these positions each of them will receive three year employment
contracts providing for a base salary of $150,000 per year and options for
33,333 shares of New Futech stock, vesting in three annual installments, with an
exercise price of $4.50 per share.


EMPLOYMENT AGREEMENTS WITH AFFILIATES


     The employment agreements with Carl E. Voigt, III and Carl E. Voigt, IV are
described in the preceding paragraph.


     Fred DaMert and Gail Patton DaMert, who are currently the owners and
principal executives of DaMert, will be employed by New Futech after the
mergers. Each will receive a three year employment agreement providing for a
base salary of $120,000 per year, without stock options.

     William W. Burnham, who is presently one of the principal stockholders and
executive officers of Trudy, will be employed as the Vice President -- Specialty
Items of New Futech. Mr. Burnham will also be a director of New Futech and will
receive a three year employment agreement providing for a base salary of
$100,000 per year and stock options for a total of 20,000 shares of New Futech
stock, vesting in equal, annual installments and with an exercise price of $7.50
per share. His employment contract includes a one-time signing bonus of $10,000.


     See "New Futech's Management" for a description of the employment
agreements of New Futech's other executive officers.



OTHER ASPECTS OF THE MERGER AGREEMENT; COVENANTS OF THE MERGING COMPANIES



     Each merging company has agreed that, during the period prior to the
effective time, except as expressly permitted by the Merger Agreement, it:



     - will use its best efforts to preserve its present relationships with
       employees, customers and others with which it has business relationships;



     - will not take actions other than in the ordinary course of business which
       would or might have a material adverse effect upon its financial
       condition; and



     - will not pay or incur benefits to stockholders, officers or directors
       other than those consistent with past activities and practices.



     In addition, each merging company has agreed that, during the period prior
to the effective time, it will not, except as expressly permitted by all of the
merging companies in writing:



     - change its articles or certificate of incorporation or bylaws;



     - change the number of shares of stock issued and outstanding, other than
       to cause its equity securities, including options and equity
       participation interests, to conform to the capitalization described in
       Section 3.02 of the merging company's disclosure schedule;


     - merge or consolidate with or into any other corporation or other entity;

     - declare or pay any dividend or repurchase or otherwise acquire any shares
       of stock; or

                                       20
<PAGE>   26

     - increase the compensation payable to or to become payable to any
       shareholder, director, officer, employee or agent, or to pay any bonus,
       severance payment or other compensation to any shareholder, director,
       officer, employee or agent, or enter into any agreement of any type which
       is not terminable by the merging company on no more than 30 days notice.


     DaMert will issue 42.10 shares of its common stock in exchange for
outstanding stock appreciation rights equal to 4% of the aggregate consideration
to be received by the DaMert stockholders in the mergers. This exchange was
taken into account and is reflected in the exchange ratios described above.



     In the merger agreement, New Futech promises to obtain releases of
affiliates of the merging companies from certain personal guarantees of
business-related loans, as described in the following table. New Futech may be
required to refinance the related loans in order to obtain the required
releases.



<TABLE>
<CAPTION>
                                                                                     APPROXIMATE
                                                                                    LOAN BALANCE
                                                                                        AS OF
GUARANTOR                           LENDER                 LOAN DESCRIPTION        AUGUST 31, 1999
---------                           ------                 ----------------        ---------------
<S>                         <C>                       <C>                          <C>
Fred DaMert & Gail Patton   Amresco Financial LLP     Revolving Line of credit       $2,499,736
DaMert                                                Short term Loan                   300,000
                                                      Term Loan                          11,805
Carl E. Voigt IV & Carl E.  Norwest Business Credit   Revolving Credit Facility       1,996,544
Voigt III, and spouses
Carl E. Voigt IV & Carl E.  Liberty Bidco             Term Loan                       1,000,000
Voigt III, and spouses      Investment Corporation
Les Friedland, Dan Lesnick  Commerce Bank             Line of Credit Facility           256,943
& Howard Moore
William W. Burnham, Alice   Wilmington Trust Co.      Demand Note                       638,483
B. Burnham, and Peter B.
Burnham
</TABLE>



     New Futech has also agreed, as part of the merger agreement, to assume
certain debts owed by Trudy to William W. Burnham and two of his family members
in the aggregate amount, including accrued interest through January 31, 1999, of
$810,032. Of this amount, $287,422 of principal and accrued interest
attributable to Mr. Burnham has not accrued interest since March 31, 1998, but
interest at the rate of 10% per annum continues to accrue on the portion of the
debt owing to the two family members, $832,352 as of August 31, 1999. Beginning
on the closing date of the mergers, interest will accrue on the outstanding
balance at the rate of 4% per annum. At the closing, New Futech will repay 25%
of the outstanding balance, and thereafter will repay three equal amounts of
principal plus all accrued interest at six month intervals.



     On September 29, 1999, Trudy signed a promissory note with a maximum
availability of $674,031. The note bears interest at prime plus 1% and is due on
demand. The proceeds of this note were used to repay Trudy's loans from First
Union Bank in full. As of September 30, 1999 there was $638,483 outstanding on
this loan. The note is personally guaranteed by William Burnham, Alice Burnham
and Peter Burnham.



     Within thirty days after the effective date of the mergers, New Futech will
obtain releases of William W. Burnham, Alice Burnham and Peter Burnham of their
personal


                                       21
<PAGE>   27


guaranty of Trudy debts with Wilmington Trust. New Futech may be required to
refinance these loans to obtain the releases.



     New Futech has also agreed, as a part of the merger agreement, to repay
certain promissory notes owing by Futech to certain former stockholders of
Janex. The promissory notes, which were issued on September 30, 1998, in
connection with Futech's purchase of certain Janex securities, have an aggregate
outstanding principal amount of $750,000.


     New Futech has also agreed to assume repayment of loans owing by DaMert to
Fred DaMert in the aggregate principal amount of $128,849.


     The merger agreement also contains numerous representations and warranties
on the part of each merging company and its controlling shareholders that are
customary in merger transactions.



     The representations and warranties relate to:



     - the organization, existence, and corporate power and authority of each of
       the merging companies, and similar corporate matters;



     - the capitalization of each of the merging companies;



     - the absence of subsidiaries and other equity ownership interests by each
       of the merging companies;



     - financial statements and other books and records of each merging company;



     - the filing of tax returns, payment of taxes and other tax matters with
       respect to each merging company;



     - the absence of material adverse events or business other than in the
       ordinary course with respect to each merging company;



     - title to the assets reflected in the financial statements of each merging
       company;



     - the absence of pending litigation, investigations or other proceedings
       against any merging company or relating to its assets or the conduct of
       its business;



     - past and present compliance with applicable environmental, employment and
       other laws and regulations with respect to each merging company and its
       products and assets;



     - the insurance coverage and bank accounts of each merging company;



     - material licenses and permits of each merging company;



     - the absence of dealing with hazardous or toxic material or waste, and the
       compliance with environmental laws and regulations, by any merging
       company;



     - the absence of judgments or governmental investigations against any
       merging company;



     - the completeness, good working order and condition, and sufficiency of
       the material tangible assets of each merging company, reasonable wear and
       tear excepted;



     - the patents, trademarks and other intellectual property of each merging
       company;



     - the largest customers and suppliers of each merging company in terms of
       dollar volume;



     - the completeness and accuracy of the disclosure materials provided by
       each of the merging companies;



     - identification of the material contracts and the absence of defaults
       under the material contracts of each of the merging companies;



     - the absence of undisclosed liabilities of any of the merging companies;


                                       22
<PAGE>   28


     - the quality of the inventory and accounts receivable of each of the
       merging companies;



     - disclosures regarding employees, employee benefits, employment or
       consulting agreements and related matters;



     - the absence of conflicts between the merger agreement on the one hand and
       any law, license, material contract, charter document or similar
       governing instrument or authority on the other hand, with respect to each
       merging company;



     - the absence of stockholder agreements or other contracts regarding the
       capital stock of any merging company; and



     - the absence of influence payments to obtain business or other concessions
       by any merging company.


INDEMNIFICATION BY NEW FUTECH AND BY CERTAIN STOCKHOLDERS


     The merger agreement provides that New Futech will indemnify each merging
company and its officers, directors and employees against liabilities and
expenses reasonably incurred by them in connection with claims by their
stockholders with respect to the mergers or related matters.



     In addition, each merging company and the stockholders identified below
have agreed, jointly and severally, to indemnify New Futech and its officers,
directors and controlling persons against liabilities or expenses they incur in
connection with a material breach of the representations, warranties and
covenants of that merging company in the merger agreement. After the mergers
occur the indemnity will be available only from the identified stockholders.
This indemnity will expire 18 months after the closing. It applies only if the
amounts involved exceed $100,000 and it is limited to the maximum amount of
$2,000,000 with respect to matters that the merging company and its stockholders
are not aware of at the time of closing.



<TABLE>
<CAPTION>
COMPANY        STOCKHOLDERS
-------        ------------
<S>      <C>
Futech   Vincent W. Goett
Janex    None
Trudy    William W. Burnham
Fundex   Carl E. "Chip" Voigt IV
         Carl E. "Pete" Voigt III
DaMert   Fred DaMert
         Gail Patton DaMert
</TABLE>


REGULATORY MATTERS

     The mergers are not subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act, or any other regulatory approvals.

CONDITIONS TO CLOSING


     The obligation of each of the merging companies to complete the mergers is
subject to the satisfaction of specified conditions, which the other parties may
waive in whole or in part. The material conditions include:



     - The merger agreement must have been approved by the stockholders of each
       merging company, but the approval is assured because holders of a
       majority of the


                                       23
<PAGE>   29


       outstanding voting stock of each company have indicated that they will
       vote in favor of the mergers.


     - No court or governmental authority can have done anything that restricts
       or prohibits the mergers and related transactions.


     - No court or administrative action or investigation can be pending
       challenging or seeking material damages in connection with the mergers or
       related transactions, or seeking to limit New Futech's full rights of
       ownership or operation which is reasonably likely to have a material
       adverse effect on any party to the merger agreement.



     - The representations and warranties of each merging company and its
       signing shareholders in the merger agreement must be true in all material
       respects as of the effective time of the mergers with the same force and
       effect as though made on and as of the effective time of the mergers, and
       the merging company and its signing stockholders must have complied in
       all material respects with their agreements and covenants under the
       merger agreement.



     - Any material consents and assignments, and all filings required to be
       made by any merging company in connection with the merger agreement, must
       have been obtained and made.



     - There must have been no material adverse change in the operations, assets
       and financial condition of any merging company, its assets must have been
       maintained, and it must have conducted its business diligently and
       substantially in the same manner, with no material contracts or
       commitments outside the ordinary course of business, since the date of
       the merger agreement.



     - New Futech must have entered into, executed and delivered to the other
       parties employment agreements as described under "Description of Mergers
       and Merger Agreement -- Employment Agreements with Affiliates," above.



     - Specified opinions of counsel of each merging company must have been
       delivered.


DISSENTERS' RIGHTS


     Stockholders who do not vote in favor of the mergers and who comply with
the requirements of the state laws applicable to the company in which they own
stock will be able to exercise dissenters' rights and, if the mergers occur,
will receive the fair value of their shares in cash rather than the merger
consideration described in the merger agreement. The requirements that apply to
the stockholders of each merging company are set forth in the prospectus/proxy
statement supplement for that merging company.


TERMINATION OF THE MERGER AGREEMENT


     The merger agreement may be terminated by mutual consent of each merging
company and its signing shareholders. In addition, the merger agreement may be
terminated by Futech's board of directors, if dissenters' rights are exercised
by stockholders who would otherwise be entitled to receive 5% or more of the
total merger consideration to be received by stockholders in all of the merging
companies combined.


                                       24
<PAGE>   30

                       UNAUDITED PRO FORMA FINANCIAL DATA


     The following unaudited pro forma financial data of New Futech and New Sub
presents the unaudited pro forma consolidated statements of operations for the
year ended December 31, 1998, and for the six months ended June 30, 1999, and
the unaudited pro forma consolidated balance sheet as of June 30, 1999.


     The unaudited pro forma combined consolidated statement of operations for
the year ended December 31, 1998, has been adjusted to give effect to the
following transactions as if such transactions had occurred January 1, 1998:


     - Futech's acquisition of substantially all of the assets of Gick
       Publishing, Inc., completed on March 31, 1998;



     - Futech's acquisition of substantially all of the assets of XYZ Group,
       Inc., completed April 29, 1998;



     - Futech's acquisition of 79% of the outstanding stock and certain
       shareholder loans of Janex, completed December 11, 1998;



     - the mergers described in this prospectus/proxy statement and related
       supplements.



     In addition, the unaudited, pro forma, as adjusted, consolidated statement
of operations for the year ended December 31, 1998, gives effect to the
conversion of certain acquired shareholder notes of Janex into common and
preferred stock of Janex as if such conversion had occurred on January 1, 1998.



     The unaudited pro forma combined consolidated statements of operations for
the six months ended June 30, 1999 has been adjusted to give effect to the
pending mergers as if the mergers had occurred January 1, 1999.



     The unaudited pro forma combined consolidated balance sheet at June 30,
1999 gives effect to the pending mergers as if they had occurred on June 30,
1999.



     The pro forma adjustments represent, in the opinion of management, all
adjustments required by the Securities and Exchange Commission for pro forma
presentation and are based upon available information and assumptions considered
reasonable under the circumstances. The ultimate amounts recorded upon
completion of the mergers could differ. However, management does not believe
that any material adjustments will be required in recording the final amounts
for the mergers. The unaudited pro forma consolidated financial data does not
purport to:



     - present what New Futech's and New Sub's financial position or results of
       operations would actually have been if the events leading to the pro
       forma adjustments in fact occurred on the date or at the beginning of the
       periods indicated; or



     - project New Futech's and New Sub's financial position or results of
       operations for any future date or period.



     The unaudited pro forma consolidated financial data should be read in
conjunction with the consolidated financial statements of each of the companies
involved in the mergers and management's discussions of those financial
statements later in this prospectus/proxy statement.


                                       25
<PAGE>   31

  UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED
                               DECEMBER 31, 1998

<TABLE>
<CAPTION>
                                                       IN THOUSANDS (EXCEPT PER SHARE DATA)
                                   HISTORICAL    JANEX       XYZ          GICK        FUNDEX    TRUDY     DAMERT
                                    COMPANY     INT'L(8)   GROUP(8)   PUBLISHING(8)   GAMES    CORP.(9)   CORP.
                                   ----------   --------   --------   -------------   ------   --------   ------
<S>                                <C>          <C>        <C>        <C>             <C>      <C>        <C>
Net sales........................   $ 6,033      $3,056    $ 4,812       $1,016       $8,577    $3,617    $6,837
Cost of goods sold...............     4,296       1,957      5,378          825       5,694      2,108    4,292
                                    -------      ------    -------       ------       ------    ------    ------
  Gross profit...................     1,737       1,099       (566)         191       2,883      1,509    2,545
Selling, general &
  administrative.................     5,869       1,258      1,091          307       2,465      2,012    2,482
Research and development.........       230           0          0            0           0         86      547
Technology licensing fee
  (credit).......................    (2,000)          0          0            0           0          0        0
Depreciation and amortization....     1,343         314         61           27         231         63      182
                                    -------      ------    -------       ------       ------    ------    ------
  Operating income (loss)........    (3,705)       (473)    (1,718)        (143)        187       (652)    (666)
Interest expense.................    (1,945)       (210)      (217)         (28)       (246)      (125)    (212)
Other, net.......................      (144)          4          0            0          56         17       (1)
                                    -------      ------    -------       ------       ------    ------    ------
Net loss before taxes............   $(5,794)     $ (679)   $(1,935)      $ (171)      $  (3)    $ (760)   $(879)
                                    =======      ======    =======       ======       ======    ======    ======
Weighted average common shares
  outstanding....................    80,277
Janex acquisition shares
  issued.........................
XYZ acquisition shares issued....
Gick acquisition shares issued...
Fundex acquisition shares
  issued.........................
Trudy acquisition shares
  issued.........................
DaMert acquisition shares
  issued.........................
Loss per share(6)................   $ (0.07)

<CAPTION>
                                      IN THOUSANDS (EXCEPT PER SHARE DATA)
                                              PRO FORMA               TOTAL
                                   COMBINED     ADJ.                PRO FORMA
                                   --------   ---------             ---------
<S>                                <C>        <C>         <C>       <C>
Net sales........................  $33,948                          $ 33,948
Cost of goods sold...............   24,550                            24,550
                                   --------                         --------
  Gross profit...................    9,398                             9,398
Selling, general &
  administrative.................   15,484                            15,484
Research and development.........      863                               863
Technology licensing fee
  (credit).......................   (2,000)                           (2,000)
Depreciation and amortization....    2,221    $  1,925        (1)      4,146
                                   --------                         --------
  Operating income (loss)........   (7,170)                           (9,095)
Interest expense.................   (2,983)     (1,469)   (2),(3)     (4,452)
Other, net.......................      (68)                              (68)
                                   --------                         --------
Net loss before taxes............  $(10,221)                        $(13,615)
                                   ========                         ========
Weighted average common shares
  outstanding....................              (76,993)       (4)      3,284
Janex acquisition shares
  issued.........................                  287    (4),(7)        287
XYZ acquisition shares issued....                             (4)          0
Gick acquisition shares issued...                             (4)          0
Fundex acquisition shares
  issued.........................                  512    (4),(5)        512
Trudy acquisition shares
  issued.........................                  400        (4)        400
DaMert acquisition shares
  issued.........................                  692        (4)        692
                                                                    --------
                                                                       5,175
                                                                    ========
Loss per share(6)................                                   $  (2.63)
                                                                    ========
</TABLE>


     See accompanying Notes to Unaudited Pro Forma Consolidated Statement of
Operations.

                                       26
<PAGE>   32

       NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 1998


(1) Represents our estimate of amortization of goodwill and other acquired
intangibles to record amortization of intangibles as if the acquisitions had
taken place as of 1/1/98:



<TABLE>
<CAPTION>
                                                     PRO FORMA      HISTORICAL    PRO FORMA
                                   AMOUNT    LIFE   AMORTIZATION   AMORTIZATION   ADJUSTMENT
                                   -------   ----   ------------   ------------   ----------
<S>                                <C>       <C>    <C>            <C>            <C>
ACQUISITIONS CLOSED AT 12/31/98
XYZ:
  Goodwill.......................  $ 6,603   180       $  440          $293         $  147
  Trademarks.....................    3,900   180          260           173             87
  Assembled workforce............      290    12          290           193             97
Gick:
  Patent.........................    2,071   180          138           104             34
  Loan fees......................       20    12           20            15              5
Janex:
  Goodwill.......................    3,329   180          222            42            180
                                   -------             ------          ----         ------
Total closed acquisitions........   16,213              1,370           820            550
PENDING & PROBABLE ACQUISITIONS
  AT 12/31/98
Janex Minority Interest:
  Goodwill.......................    1,217   180           81             0             81
Fundex:
  Goodwill.......................    8,203   180          547            77            470
Trudy Corp.:
  Goodwill.......................    3,853   180          257             0            257
DaMert Corp.:
  Goodwill.......................    8,511   180          567             0            567
                                   -------             ------          ----         ------
Total pending/probable...........   21,784              1,452            77          1,375
                                   -------             ------          ----         ------
Total............................  $37,997             $2,822          $897         $1,925
                                   =======             ======          ====         ======
</TABLE>


                                       27
<PAGE>   33

       NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS


              FOR THE YEAR ENDED DECEMBER 31, 1998 -- (CONTINUED)



(2) Represents the additional interest expense on the additional borrowings
incurred by the Company to consummate these transactions to reflect interest of
acquisition borrowings as if it had been outstanding since 1/1/98:



<TABLE>
<CAPTION>
                               ACQUISITION   INTEREST     MONTHS      PRO FORMA    ACTUAL
                                  DEBT         RATE     OUTSTANDING   INTEREST    INTEREST   ADJUSTMENT
                               -----------   --------   -----------   ---------   --------   ----------
<S>                            <C>           <C>        <C>           <C>         <C>        <C>
XYZ
  Billings Note..............    $ 4,000      10.00%        12         $  400       $  0       $  400
  Billings Note..............      2,867      10.00%        12            287          0          287
  Intercompany advance.......      1,000       8.25%        12             82         55           27
Gick
  Republic Line..............      1,795      10.25%        12            184        138           46
  Cash paid..................        225       8.25%        12             19         14            5
Janex
  Friedland..................        248       8.25%        12             20          2           18
  Lesnick....................        149       8.25%        12             12          1           11
  Moore......................        353       8.25%        12             29          2           27
Fundex
  Note portion...............      4,500      10.00%        12            450          0          450
Trudy
  Cash portion...............        500       8.25%        12             41          0           41
DaMert
  Note and Cash portion......      3,112       8.25%        12            257          0          257
                                 -------                               ------       ----       ------
Total........................    $18,749                               $1,781       $212        1,569
                                 =======                               ======       ====       ------
Less: Interest on Janex
  shareholder debt converted
  to equity..................                                                                    (100)
                                                                                               ------
                                                                                               $1,469
                                                                                               ======
</TABLE>



Note that in the absence of a stated rate on loans, the interest rate on
Futech's borrowings from its principal shareholder was used, as that is expected
to be the likely source of the cash used to settle the notes. This rate was also
applied to any cash payments due, as Futech will borrow funds to pay such cash.



A portion of Futech's acquisition borrowings have a variable rate of interest. A
change in our borrowing rate of  1/4% would not change pro forma interest
expense materially, as the majority of acquisition debt bears interest at a
fixed rate.



(3) Represents the elimination of interest expense on loans to Janex by its
former stockholders which were acquired by Futech and converted to equity.


(4) The number of shares outstanding and to be issued have been adjusted to
reflect the applicable exchange ratio in the mergers, including shares to be
issued to brokers.


(5) Calculation assumes that all selling shareholders with an option to receive
cash or stock elect to receive cash, and further assumes that such cash will be
made available through additional debt incurred. The effect of alternative
assumptions is not material to pro forma interest expense, net loss, or per
share amounts.


                                       28
<PAGE>   34

       NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS


              FOR THE YEAR ENDED DECEMBER 31, 1998 -- (CONTINUED)


(6) Loss per share has been determined in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." Common share equivalents
have been excluded from the calculation of loss per share for all columns
presented, as their effect is anti-dilutive.

(7) Reflects the conversion of 3,750,000 shares of Futech preferred stock issued
as part of the Janex acquisition into 125,000 shares of New Futech common stock.

(8) Represents historical results of the company prior to its acquisition by
Futech during 1998.


Gick Publishing was acquired on March 31, 1998. XYZ Group was acquired on April
29, 1998. Futech acquired 79% of the common stock and certain shareholder loans
of Janex International on December 11, 1998.



(9) Trudy Corp.'s financial statements have been presented to conform with
Futech's calendar year end. Trudy Corp. historically has used a March 31 year
end. Trudy Corp.'s net loss for the year ended March 31, 1999 was $(1,611,233).


                                       29
<PAGE>   35

            UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

                     FOR THE SIX MONTHS ENDED JUNE 30, 1999

                      IN THOUSANDS (EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                           PRO FORMA         TOTAL
                                     HISTORICAL   FUNDEX   TRUDY(8)   DAMERT   COMBINED   ADJUSTMENTS      PRO FORMA
                                     ----------   ------   --------   ------   --------   -----------      ---------
<S>                                  <C>          <C>      <C>        <C>      <C>        <C>              <C>
Net sales..........................   $ 5,292     $1,680   $   808    $2,574   $ 10,354    $   (757)(7)    $  9,597
Cost of goods sold.................     4,351      1,199     1,028    1,530       8,108        (757)(7)       7,351
                                      -------     ------   -------    ------   --------                    --------
  Gross profit.....................       941        481      (220)   1,044       2,246                       2,246
SG&A...............................     5,048        761       888    1,177       7,874                       7,874
Research and development...........         0          0        29      261         290                         290
Depreciation and amortization......     1,076        157       (24)      75       1,284         707(1)        1,991
                                      -------     ------   -------    ------   --------                    --------
  Operating loss...................    (5,183)      (437)   (1,113)    (469)     (7,202)                     (7,909)
Interest expense...................    (2,066)      (160)      (54)     (92)     (2,372)       (758)(2)      (3,130)
Other income (expense) net.........      (903)        15        95        0        (793)                       (793)
                                      -------     ------   -------    ------   --------                    --------
  Net loss.........................   $(8,152)    $ (582)  $(1,072)   $(561)   $(10,367)                   $(11,832)
                                      =======     ======   =======    ======   ========                    ========
Weighted average shares
  outstanding......................    85,602                                               (82,141)(3)       3,461
Janex acquisitions -- shares
  issued...........................                                                             287(3),(5)      287
XYZ acquisition -- shares issued...                                                               0(3)            0
Gick acquisition -- shares
  issued...........................                                                               0               0
Fundex acquisition -- shares
  issued...........................                                                             512(3),(4)      512
Trudy acquisition -- shares
  issued...........................                                                             400(3)          400
DaMert acquisition -- shares
  issued...........................                                                             692(3)          692
                                                                                                           --------
                                                                                                              5,352
                                                                                                           ========
Loss per share(6)..................   $ (0.09)                                                             $  (2.21)
                                      =======                                                              ========
</TABLE>


See accompanying Notes to Unaudited Pro Forma Consolidated Statement of
Operations.

                                       30
<PAGE>   36


       NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS


                     FOR THE SIX MONTHS ENDED JUNE 30, 1999



(1) Represents the Company's preliminary estimate of amortization of goodwill
and other acquired intangibles which is calculated as follows:



TO RECORD AMORTIZATION OF INTANGIBLES AS IF THE ACQUISITIONS HAD TAKE PLACE AS
OF 1/1/99:



<TABLE>
<CAPTION>
                                            PRO FORMA       HISTORICAL     PRO FORMA
                        AMOUNT     LIFE    AMORTIZATION    AMORTIZATION    ADJUSTMENT
                        -------    ----    ------------    ------------    ----------
<S>                     <C>        <C>     <C>             <C>             <C>
PENDING & PROBABLE
  ACQUISITIONS AT
  6/30/99
Janex: Minority
  Interest:
  Goodwill............  $ 1,217     180        $ 41            $ 0            $ 41
Fundex:
  Goodwill............    8,203     180         273             19             254
Trudy:
  Goodwill............    3,853     180         128              0             128
DaMert:
  Goodwill............    8,511     180         284              0             284
                        -------                ----            ---            ----
Total
  pending/probable....  $21,784                $726            $19            $707
                        =======                ====            ===            ====
</TABLE>


(2) Represents the additional interest expense on the additional borrowings
incurred by the Company to consummate these transactions.


TO REFLECT INTEREST OF ACQUISITION BORROWINGS AS IF IT HAD BEEN OUTSTANDING
SINCE 1/1/99:



<TABLE>
<CAPTION>
                          ACQUISITION    INTEREST    PRO FORMA     ACTUAL     PRO FORMA
                             DEBT          RATE      INTEREST     INTEREST    ADJUSTMENT
                          -----------    --------    ---------    --------    ----------
<S>                       <C>            <C>         <C>          <C>         <C>
XYZ
  Billings notes........    $ 6,867       10.00%       $343          $0          $343
  Intercompany
     advance............      1,000        8.25%         41           0            41
Fundex
  Note portion..........      4,500       10.00%        225           0           225
Trudy
  Cash portion..........        500        8.25%         21           0            21
Damert
  Note and cash
     portion............      3,112        8.25%        128           0           128
                            -------                    ----          --          ----
Total...................    $15,979                    $758          $0          $758
                            =======                    ====          ==          ====
</TABLE>



Note that in the absence of a stated rate on certain loans, the interest rate on
the Company's borrowings from its principal shareholder was used, as that is
expected to be the source of the cash used to settle the notes. This rate was
also applied to any cash payments due, as Futech will borrow funds to pay such
cash.


                                       31
<PAGE>   37

       NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS


             FOR THE SIX MONTHS ENDED JUNE 30, 1999 -- (CONTINUED)



A portion of Futech's acquisition borrowings have a variable rate of interest. A
change in the borrowing rate of  1/4% on such loans would not change pro forma
interest expense materially, as the majority of acquisition debt bears interest
at a fixed rate.


(3) The number of shares outstanding and to be issued have been adjusted to
reflect the applicable exchange ratio in the mergers, including shares to be
issued to brokers.


(4) Calculation assumes that all selling shareholders with an option to receive
cash or stock elect to receive cash, and further assumes that such cash will be
made available through additional debt incurred. The effect of alternative
assumptions is not material to pro forma interest expense, net loss, or per
share amounts.



(5) Reflects the conversion of 3,750,000 shares of Futech preferred stock issued
as part of the Janex acquisition into 125,000 shares of New Futech common stock.


(6) Loss per share has been determined in accordance with statement of financial
Accounting Standards No. 128, "Earnings Per Share." Common share equivalents
have been excluded from the calculation of loss per share for all columns
presented, as their effect is anti-dilutive.


(7) Represents elimination of sales from Trudy to Futech.



(8) Cost of goods sold includes a charge for aged and obsolete inventory of
$376,000 on March 31, 1999.


                                       32
<PAGE>   38

                 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

                                 JUNE 30, 1999

                      IN THOUSANDS (EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                PRO FORMA           TOTAL PRO
                          HISTORICAL   FUNDEX     TRUDY    DAMERT   COMBINED   ADJUSTMENTS            FORMA
                          ----------   -------   -------   ------   --------   -----------          ---------
<S>                       <C>          <C>       <C>       <C>      <C>        <C>                  <C>
Cash....................   $     32    $    --   $    50   $ 184    $   266                         $    266
Accounts receivable.....      2,299        689       170     951      4,109                            4,109
Inventory...............      6,392      2,113     1,470   1,236     11,211                           11,211
Prepaid and other.......      1,080        335       152     198      1,765                            1,765
                           --------    -------   -------   ------   --------                        --------
Total current assets....      9,803      3,137     1,842   2,569     17,351                           17,351
Property and
  equipment.............      1,265        295       108     471      2,139                            2,139
Intangible assets.......     15,671        551       235      --     16,457      $21,784(1)           38,241
Due from company CEO....      1,819         --        --      --      1,819                            1,819
Other assets............         55        570        --      22        647                              647
                           --------    -------   -------   ------   --------                        --------
Total assets............   $ 28,613    $ 4,553   $ 2,185   $3,062   $38,413                         $ 60,197
                           ========    =======   =======   ======   ========                        ========
Accounts payable........   $  7,670    $   723   $   311   $ 194    $ 8,898                         $  8,898
Accrued expenses........      2,539        378       394     126      3,437                            3,437
Notes
  payable -- current....     30,546        478     1,659   2,818     35,501                           35,501
                           --------    -------   -------   ------   --------                        --------
Total current
  liabilities...........     40,755      1,579     2,364   3,138     47,836                           47,836
Long-term debt..........      7,000      2,324       174     129      9,627        8,555(2),(4)       18,182
Redeemable stock........         --         --        --      --         --        6,818(2),(3)        6,818
Preferred stock.........        750         --        --      --        750                              750
Common stock............     22,877      2,021     4,089      10     28,941        6,411(3)           35,352
Unearned compensation...       (735)        --        --      --       (735)                            (735)
Accumulated deficit.....    (42,034)    (1,371)   (4,442)   (215)   (48,006)                         (48,006)
                           --------    -------   -------   ------   --------                        --------
Total stockholders'
  equity (deficit)......    (19,142)       650      (353)   (205)   (19,050)                         (12,639)
                           --------    -------   -------   ------   --------                        --------
Total liabilities and
  stockholder's equity
  (deficit).............   $ 28,613    $ 4,553   $ 2,185   $3,062   $38,413                         $ 60,197
                           ========    =======   =======   ======   ========                        ========
</TABLE>


See accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet.

                                       33
<PAGE>   39

            NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

                              AS OF JUNE 30, 1999



(1) Represents New Futech's preliminary estimates of the adjustment needed to
record the tangible and intangible assets acquired or to be acquired in the
mergers at fair value.



                                                                  (in thousands)



     A summary of the application of the purchase price of each acquisition is
as follows:



<TABLE>
<CAPTION>
                                 JANEX
                                MINORITY
                                INTEREST    FUNDEX    TRUDY     DAMERT     TOTAL
                                --------    ------    ------    ------    -------
<S>                             <C>         <C>       <C>       <C>       <C>
Net tangible assets
  (liabilities)...............   $   --     $ (115)   $(353)    $(205)    $  (673)
Goodwill......................    1,217      8,203     3,853    8,511      21,784
                                 ------     ------    ------    ------    -------
Total.........................   $1,217     $8,088    $3,500    $8,306    $21,111
                                 ======     ======    ======    ======    =======
</TABLE>



     All intangibles are being amortized on a straight line basis. Goodwill is
being amortized over a 15 year period.



(2) Represents the additional borrowings incurred and issuance of redeemable
stock by New Futech to consummate these acquisitions. Additional borrowings also
include borrowings to satisfy the cash payments required to shareholders of
Trudy and DaMert, and the cash option of Fundex, assuming all selling
shareholders with an option to receive cash or stock elect to receive cash.



(3) Represents the issuance of New Futech's common stock to consummate these
acquisitions.



                                                                  (in thousands)



     A summary of stock to be issued is as follows:



<TABLE>
<CAPTION>
                                                   # OF     REDEEMABLE    COMMON
                                                  SHARES      STOCK        STOCK
                                                  ------    ----------    -------
<S>                                               <C>       <C>           <C>
Janex Minority Interest.........................    162       $   --      $ 1,216
Fundex..........................................    512        3,818           --
Trudy...........................................    400        3,000           --
DaMert..........................................    692           --        5,195
                                                  -----       ------      -------
                                                  1,766       $6,818      $ 6,411
                                                  =====       ======      =======
</TABLE>



     Calculation assumes all stockholders with an option to receive cash or
stock elect to receive cash. The impact on total debt and total stockholders'
equity (deficit) should such stockholders elect to receive stock is not
material.



(4) In September 1999, Futech entered into a settlement agreement with Mr.
Billings for full payment of the purchase of XYZ assets. This transaction is not
reflected in the pro forma financial statements because (1) Billings is not a
party to the merger agreement and (2) the settlement agreement is signed after
June 30, the date of these pro forma statements. The agreement requires a
payment of $2,250,001 by December 7, 1999 in full satisfaction of the $8,576,923
of debt and accrued interest due to Mr. Billings as of June 30, 1999. The
reduction will be recorded as a decrease to goodwill upon payment of the
settlement amount.


                                       34
<PAGE>   40

                             NEW FUTECH'S BUSINESS


GENERAL DEVELOPMENT OF BUSINESS



Futech



     Futech Interactive Products, Inc., formerly known as Futech Educational
Products, Inc., was incorporated in Arizona in 1990. Futech was founded in 1988
by Stephen McTaggart and develops electronic "talking" books that utilize
specialized conductive ink on printed pages to convey sounds, voices, and music.
In late November 1992, Futech opened a manufacturing facility and began
manufacturing its own published books under the "TOUCH ME SOUND PAGES" name.
Futech closed this facility in 1996 and currently subcontracts with third
parties to manufacture its products.



     Futech co-publishes and distributes traditional paperback books under a co-
publishing/distribution agreement with Magi Publications. Futech licenses
various book clubs, including Scholastic and Troll, to distribute some of these
paperback books. Futech distributes both Magi books and its own electronic books
on an exclusive basis. On a non-exclusive basis, Futech also distributes
paperback books published and manufactured by various third parties.



     In 1998, Futech entered into agreements to purchase the following three
companies or their assets to broaden product mix and improve distribution: Gick
Publishing, Inc., XYZ Group, Inc., and Janex International, Inc. Gick, a
California corporation, manufactures and distributes foam-based post cards, gift
tags, picture frames, specialty crafts and hobby items. XYZ, a Wisconsin
corporation, distributes children's books, general interest paperback books,
audio books, activity games and related educational products. Janex, a Colorado
corporation, designs, develops, and manufactures functional toy products for
children, including toothbrushes, coin banks, and Wet Pets. Futech acquired the
XYZ distribution facility in Wisconsin along with Gick's distribution center on
the West Coast. Futech closed the West Coast distribution facility and
consolidated the shipping, receiving and billing of Gick's foam-based products
into its Wisconsin distribution facility. Futech currently operates three
facilities: corporate offices in Phoenix, Arizona; a sales office in Chicago,
Illinois; and general sales, distribution and operations facilities in Waukesha,
Wisconsin (near Milwaukee).



Janex



     Janex International, Inc., formerly known as With Design in Mind
International, Inc., was incorporated in Colorado in 1986. Its direct or
indirect wholly-owned subsidiaries include: With Design in Mind, a California
corporation; Janex Corporation, a New Jersey corporation; Malibu Fun Stuffed,
Inc., a California corporation; Pro Gains Company Limited, a Hong Kong
corporation; and Malibu Fun Stuffed International Limited, a Hong Kong
corporation.



     Janex currently develops manufactures and markets a combination of
functional children's products, toys and novelty gift items. The Company sells
its products nationwide to retailers primarily through sales representative
firms.



     On December 11, 1998, Futech purchased 5,219,046 outstanding shares of
Janex common stock and $1,480,783 of stockholder loans, including interest of
$250,784, of Janex from some of Janex's majority stockholders. Subsequently, the
shareholder loans were converted into 8,011,645 shares of common stock and
5,000,000 shares of preferred stock. After this conversion, Futech owned 73.5%
of Janex's outstanding common stock,


                                       35
<PAGE>   41


and it has since purchased additional Janex stock in market transactions,
bringing Futech's total ownership of Janex's outstanding capital stock to 79.2%.
Futech owns 100% of Janex's outstanding preferred stock. At that time Janex
moved its headquarters to Phoenix, Arizona, and is presently operating in the
offices of Futech, its parent corporation.



Trudy



     Trudy was initially organized as a Connecticut corporation under the name
Norwest Manufacturing Corporation on September 14, 1979. It changed its name to
Trudy Toys Company, Inc. on December 5, 1979, and again changed its name to
Trudy Corporation on March 27, 1984, and was re-incorporated as a Delaware
corporation on February 25, 1987. Trudy's principal place of business is 353
Main Avenue, Norwalk, Connecticut 06851.



     Trudy, which does business under the name Soundprints, publishes juvenile
storybooks and audiocassettes, which are sold in conjunction with
contract-manufactured educational toys to the retail, education and mail order
markets. Soundprints' products are sold to book, toy and specialty store
retailers; warehouse clubs; and book, gift and educational distributors by an
in-house sales staff and independent commissioned sale representatives.



Fundex



     Fundex was originally incorporated in the State of Indiana in 1991 as Third
Quarter, Inc. In August 1996, Fundex was reincorporated in the State of Nevada
by establishing a new Nevada corporation and merging the Indiana corporation
into the Nevada corporation. Fundex's principal place of business is located at
2237 Directors Row, Indianapolis, IN 46241.



     Fundex develops, markets, and distributes a variety of games and toys for
both children and adults. The Company's principal products include: (1) card
games, puzzles, and board games; (2) skill and action games for children; (3)
games, puzzles, and toys featuring highly-recognized entertainment characters
licensed by Fundex from third parties; and (4) spring and summer toys for
children. Fundex sells its products nationwide to retailers, primarily through
sales representative firms.



DaMert



     Fred DaMert founded DaMert on February 5, 1973 in San Rafael, California.
It was incorporated in the State of California on January 1, 1979, and elected
subchapter-S status on January 1, 1989. Until its acquisition by New Futech,
DaMert has been self capitalized and wholly owned by Fred DaMert and his wife
Gail Patton DaMert. DaMert's principal place of business is located at 1609
Fourth Street, Berkeley, California 94710.



     DaMert creates and produces affordable, high quality gifts and toys that
entertain, educate and endure, incorporating themes that capture the magic of
imagination, the wonders of nature and science, the beauties of art and the
mysteries of space. Approximately 200 products are marketed to a nationwide
customer base of 8,000 accounts and internationally distributed to over 48
countries.


COMPANY OVERVIEW


     Following the mergers New Futech will be a diversified children's products
company that designs, develops and distributes primarily proprietary children's
products such as books, games, toys and stationery. New Futech expects to
incorporate Futech's patented


                                       36
<PAGE>   42


Talking Pages technology and other interactive technologies into strategically
selected products in each product line, providing significant competitive
advantages through its unique interactive features. We also intend to apply our
technology to strategically create interactive advertising, specialty and
promotional materials.


     Subsequent to the integration of the companies included in the mergers, New
Futech expects to operate using an entrepreneurial style with five separate
business operating units:

     - publishing;

     - toys and games;


     - oKID.com;


     - stationery and novelties; and

     - specialty and educational products.

     Through these operating units, New Futech expects to, among other things:


     - develop and distribute interactive products with patented technology to
       be strategically included in each of its product lines, such as
       publishing, toys, games, stationery and entertainment;



     - develop, publish and distribute children's books, such as story books,
       nature books and self-help/child development books;



     - develop and distribute toys and games, such as board games, family games,
       card games and science games;



     - develop and distribute patented, mailable foam-core post cards and other
       foam-core hobby and craft items, such as foam-core picture frames and
       specialty products;



     - develop new generations of interactive products including books and games
       to be played with family and friends through the internet;



     - continue to develop oKID.com, an interactive web site which, among other
       things, sells products directly to consumers using state of the art
       electronic commerce technology and provides purchasing capability and
       information about products to retail customers;


     - act as a distributor for approximately 65 major publishing companies; and

     - license its patented interactive technology to book and toy manufacturers
       on a non-exclusive basis.


     New Futech expects to distribute to over 26,000 retail stores including
major retailers such as Wal-Mart, K-Mart, Toys 'R' Us, and Target. New Futech
will be integrated via electronic data interchange with major accounts, allowing
New Futech to receive purchase orders from its major customers electronically.
This will enable New Futech to respond to orders within 48 hours of the
placement of orders. Each of the major distribution centers may be expanded to
accommodate new distribution opportunities as they are presented in the future.


                                       37
<PAGE>   43


BENEFITS RESULTING FROM THE MERGERS



     New Futech believes the mergers will provide benefits by:



     - applying its patented interactive technology to products, with
       well-established, well-recognized brand names such as Talking Pages,
       Soundprints, Little Tiger Press, Joy Berry, Fundex and DaMert;



     - enhancing our research and development capabilities;



     - increasing bargaining power with major retailers resulting from combining
       the five companies and their extensive combined list of proprietary
       products;



     - improving price competitiveness and reducing production costs through
       shifting manufacturing to overseas and also by taking advantage of the
       greater economies of scale created through merging the manufacturing of
       the products of five separate companies; and



     - increasing revenue through the distribution of each operating unit's
       products into the sales and distribution venues of the other merging
       companies.


BUSINESS STRATEGY


     Subsequent to the mergers, we expect to operate five separate business
operating units:



     - publishing;



     - toys and games;



     - oKID.com;



     - stationery and novelties; and



     - specialty and educational products.



     Each business operating unit will have a New Futech vice president
responsible for the budget, performance and day-to-day operations of the
business unit. Each operating unit will be responsible for product development
for the unit and will maintain separate sales forces and sales representative
groups to sell its products. However, coordinated sales efforts between
operating units are expected to occur for certain major retail customers. Sales
people from each operating unit will be encouraged to cross-sell products from
other operating units into their customers' stores.



     Our corporate management and staff will be responsible for support and
coordination of the five operating units. Corporate support functions will
include:



     - accounting and finance -- including raising of necessary capital;



     - business analysis;



     - coordination of contract manufacturing;



     - product research and development -- overall direction, new technology,
       overall image and coordination and final approvals;



     - marketing -- including corporate advertising, graphics support, image and
       research;



     - human resources;



     - information services; and


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<PAGE>   44


     - general management direction and coordination.



     Subsequent to the mergers, Futech Interactive Products, Inc. will be New
Futech's name. The established goodwill of the names of the other merging
companies will be retained through the use of product brand names as follows:



     - The Soundprints, Little Tiger Press and Gold Star Publishing names will
       continue to be used as publishing imprints, but each will be designated
       as A Futech Interactive Company to create an umbrella corporate image.
       Talking Pages will continue to be used for the interactive publishing
       products with the same designation.



     - The Fundex name will be used as the brand name for mass market toys and
       games. DaMert will be used as the brand name associated with specialty
       and science related toys and games. In the same way as the publishing
       imprints, they will also each be designated in the branding as A Futech
       Interactive Company.



     - The Gick name has not been used by Futech since 1998.  This line of
       products was changed to Brite Ideas, and will continue to be Brite Ideas,
       a Futech Interactive Company.



     - The Janex name is expected to be phased out during 1999. The product line
       name Malibu Fun Stuff will be used for its swimming, bath and beach
       products, including the Wet Pets line of products. A new name is
       currently being developed for the product line which includes electric
       toothbrushes, clocks and flashlights. Both lines will carry the A Futech
       Interactive Company descriptor.



SALES STRATEGY



     New Futech will consist of five business operating units plus corporate
offices. As in the managing of the business units, the overall corporate sales
strategy is to manage the sales of each business unit through the business unit
itself and to coordinate company-wide sales opportunities at the corporate
level. Each business unit will operate in separate industry environments and
will require different types and mixes of employees and sales representative
groups to be successful. The sales groups for the respective business units will
be as follows:



     - Publishing:  Ten employees and 42 sales representative groups
       representing 168 individual commissioned representatives.



     - Toys and Games:  Six employees and 26 sales representative groups
       representing approximately 150 individual commissioned representatives.



     - oKID.com:  No sales group is expected to be required for this business
       unit.



     - Stationery & Novelties:  Two employees and 20 sales representative groups
       representing 115 individual commissioned representatives.



     - Specialty and Educational Products:  Two employees, with a sales
       representative group base and telemarketing staff which is currently
       under development.


MARKETING STRATEGY


     We intend to implement a major advertising and marketing initiative to
promote greater market recognition of our technology, trade names and products.
For the balance of 1999 and 2000, we expect to spend approximately $1,400,000 in
promotion and advertising


                                       39
<PAGE>   45

to achieve our short and long-term advertising and marketing objectives. We plan
to achieve our promotion and advertising goals by:

     - increasing product brand awareness through product reviews, articles and
       media coverage;


     - purchasing shelf space with major retailers to increase the exposure of
       our products in the mass market;


     - creating and strategically placing trade advertisements in industry trade
       magazines to promote our products to a broad base of retailers including
       mass market and specialty retailers;

     - mailing our interactive corporate brochures to major Fortune 500
       companies, leading media products companies and advertising agencies; and

     - attending a variety of trade shows to promote our image and product brand
       awareness.

PUBLIC RELATIONS STRATEGY


     Futech has hired Phase Two Strategies, a major national public relations
firm, to plan and implement our comprehensive public relations strategy. Phase
Two is initially focusing its efforts on introducing New Futech and its products
to the media through press releases, media pitches, direct mailings and
follow-up phone calls in a concerted effort to garner editorials and other
positive attention from the media. Phase Two is planning an author tour for Joy
Berry during the summer and fall of 1999 in an effort to garner attention for
New Futech through the established connections, recognizable name, and the
press' interest in her child development books and videos.


GROWTH STRATEGY

     Our objective is to become a significant designer, developer and
distributor of affordable proprietary children's products such as books, games,
toys and stationery. We also intend to apply our technology to strategically
create unique, interactive advertising specialty and promotional materials. We
plan to achieve this strategy through the following initiatives:


     - Expand Proprietary Product Lines.  We plan to expand our product lines,
       increase our licensed products and seek new applications for our
       technology. During 1999, we expect to introduce more than 200 new books,
       games, toys and stationery products (see "New Futech's
       Business -- Proprietary Product Lines") utilizing newly acquired licenses
       and additional products are already in initial development. We expect
       these products to be launched in late 1999 and early 2000.



     - Enhance Brand Awareness.  We expect to spend approximately $1,400,000
       during 1999 and 2000 to enhance brand awareness (see "New Futech's
       Business -- Marketing Strategy"). In addition, we will plan and implement
       a comprehensive public relations strategy (see "New Futech's
       Business -- Public Relations Strategy"). These strategies should allow us
       to differentiate our products and technology from the competition,
       attract new customers and strategic partners, generate increased consumer
       sales and position New Futech as the industry innovator and category
       leader.



     - Enhance Operational Efficiencies.  We intend to enhance the operating
       efficiencies of the merged businesses by eliminating duplication of
       efforts and non-essential


                                       40
<PAGE>   46


       personnel, improving manufacturing productivity, increasing distribution,
       and enhancing customer service. More specifically, we intend to:


        - consolidate many of the financial and administrative functions of the
          merged businesses in Phoenix, Arizona;


        - utilize the East and West coast distribution facilities to save
          shipping time and money in fulfilling large mass market orders;



        - attempt to increase the average order size to our customers by
          offering a broader selection of product lines, allowing us to apply
          fixed transaction and processing costs to a larger order;



        - utilize our conductive ink/printed circuitry technology to reduce
          costs and increase margins on some existing product lines which
          currently use less desirable or more expensive technologies; and



        - relocate some domestic production capabilities to overseas facilities
          to reduce manufacturing costs.



     - Expand Distribution.  We plan to increase revenue by expanding the
       distribution of the merged companies' products. Strategies to achieve
       these goals include:


        - marketing our new line of electronic books to mass market retailers
          and national book chains;

        - expanding the distribution of our post card and electronic post card
          line to mass market retailers, national drug chains and supermarkets;

        - increasing the distribution and licensing of our trade publishing
          titles from Soundprints, Little Tiger Press and Gold Star Publishing
          into the mass market, mass market books, supplementary education and
          mail order channels of distribution; and

        - increasing the product categories and title selections purchased from
          publishers and distributed to the warehouse club market and increasing
          this distribution to additional classes of trade.


     - Strengthen and Accelerate Research and Development.  We intend to
       continue developing Futech's technology in electronic audio/visual
       response interaction through the application of special printed circuitry
       and electronic components. Futech has patented new innovations and
       applications, thereby increasing its ability to create a broader scope of
       products. We intend to conduct substantially all of our research and
       development efforts at a research and development facility in Berkeley,
       California. Our research and development initiatives are to:



        - continue to refine and enhance our patented technology;


        - accelerate the research and development of related applications of the
          current technology;


        - acquire other intellectual properties that will help us to expand our
          product lines so we can deliver our products directly to consumers'
          homes via the internet; and



        - develop new products for use on the internet.



     - Penetrate International Markets.  We intend to expand the distribution of
       our products in international markets. We will have exclusive
       distribution of certain


                                       41
<PAGE>   47


       product lines in Canada through a publisher's representative. We will
       also utilize a United Kingdom-based publishing company under an agreement
       to distribute New Futech titles in the European market. We intend to
       concentrate initially on expansion into English speaking countries such
       as Canada and the United Kingdom while pursuing the translations of our
       printed publishing products in the future. Through the mergers with Trudy
       and DaMert, with their international publishing and toy distribution
       experience, we hope to take advantage of potential international
       publishing and distribution opportunities. DaMert already distributes its
       products in 48 countries.



       Futech recently signed a European distribution agreement for its Brite
       Ideas product line with H&H HandelsGesmbH, an Austrian distributor of
       stationery products. This distribution agreement provides the opportunity
       to expand the Brite Ideas product line to approximately 60 new European
       and Asian countries.



       Additionally, Futech is in discussions for distribution or licensing
       agreements with several foreign game and toy manufacturing and
       distribution companies. These companies range from major international
       toys and games manufacturing companies to foreign publishing companies.
       Some discussions are based on potential technology licensing agreements
       to allow for the production of new toys and games products
       internationally. Others are conducted along the lines of potential
       distribution of foreign translations of existing publishing products.



     - Raise Additional Capital.  To expand our business, we must raise
       additional capital in the public or private debt or equity markets as
       soon as practicable after the mergers. On May 24, 1999, Futech retained
       Schroder & Co., Inc. to act as its exclusive financial advisor to perform
       general investment banking services. Vincent W. Goett, our CEO, is
       currently talking to additional potential investors to raise additional
       capital. So far, no reasonably likely sources of additional capital have
       been identified.



     - Capitalize on Proprietary Brand Names and Pursue Additional "Big Name"
       Licenses.  We will be focused on establishing and supporting brand names
       and product formats that can be leveraged across multiple distribution
       channels. We believe many of the merging companies' existing brands are
       well recognized, including Talking Pages, Talking Pages Plus, Talking
       Pages Deluxe, Kinda Like a Card, Better Than a Letter, Little Tiger
       Press, Soundprints, Gold Star Publishing, Phase 10, Fundex Games, DaMert
       Company, Brite Ideas, Malibu Fun Stuff, Wet Pets, Musical Mail, and Look,
       Listen & Learn. We also intend to continue to pursue additional big name
       licenses to further improve consumer purchases (see "New Futech's
       Business -- Strategy for Licensing Characters").



     - Enhance Gross Profit Margin.  Proprietary products will provide us with
       much higher margins than third party distribution products. As we sell
       more proprietary products as a percentage of overall sales, we expect to
       further improve the gross profit margin. Therefore, we intend to increase
       the number of proprietary products we market.



     - Enter Supplementary Education Channels of Distribution.  With the
       combination of Soundprints and Gold Star Publishing book titles and
       DaMert science and nature products and games, we hope to be able to enter
       the supplementary education channels of distribution. Products sold in
       these channels of distribution are generally


                                       42
<PAGE>   48


       sold at higher gross profit margins and with less seasonal volume
       fluctuations than products sold in the general retail market.



     - Take Advantage of Public Relations Opportunities.  We expect to create
       exciting public relations events to enhance company, product and brand
       awareness. To assist in these efforts, we will plan and implement a
       comprehensive public relations strategy (see "New Futech's
       Business -- Public Relations Strategy"). Among the public relations
       opportunities we expect to create are:



        - introduction of our first interactive board game, in conjunction with
          NASCAR and five of its best drivers;


        - announcements of additional licensing agreements for interactive
          publishing and interactive games;

        - publicity resulting from Joy Berry's author tour and potential
          television deal;


        - introduction of oKID.com; and



        - the announcement of the merger agreements.



DESCRIPTION OF OPERATING UNITS AND THEIR INDUSTRIES


PUBLISHING


     The main office, sales, operations and distribution for the publishing
business operating unit will be located in Waukesha, Wisconsin. Additional
distribution to the mass market will be for the East, through the Norwalk,
Connecticut facility, and for the West, through the Berkeley, California
facility. Our officer responsible for this business unit will be William E.
Hermes, Vice President Publishing. Within publishing, New Futech will focus on
interactive publishing, children's trade publishing and book distribution for
third party publishers.



Interactive Publishing.


     Interactive publishing consists of books and games containing sound,
promotional publishing and specialty products. Interactive sound technology did
not appear until the early 1980's. Early stage products used electronics more
suited for motion than interactivity. Books containing sound first appeared on
the market in the early 1980's in the form of a piano keyboard attached to a
hard cover book featuring easy-to-play, familiar children's songs. These books
were generally low-tech products featuring a single-sound computer chip and a
low-quality speaker. With the introduction of low cost microchips and
microprocessors, the cost for incorporating speech technology, sound effects and
music into products dropped dramatically in the mid-1980's. Improved technology
allowed story books to be enhanced by an electronic sound pad.


     New Futech expects to publish interactive electronic books and a series of
electronic fold out play boards that incorporate patented conductive ink
technology. These products contain up to 42 touch points or switches that are
embedded in the surface of the play boards, covers and pages of the books. When
a touch point is pushed, it triggers a switch, and a microchip delivers an
audible message. Depending on the format, the audible message consists of
speech, music and/or sound effects. The ability to embed sound within a book
significantly enhances the story line, facilitates the educational process,
draws the reader into the pages and enriches the reading experience. These
products are being tested and prototypes are being developed in the fourth
quarter 1999.


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<PAGE>   49


     We expect to publish four formats of electronic books under the brand names
of Look, Listen & Learn, Talking Pages and Talking Pages Plus. These product
lines are presently being sold through normal distribution channels at Futech.
Talking Pages Deluxe is a fourth format of electronic book which has been
designed and is ready for production. It will not be produced until New Futech
can negotiate production costs at a profitable level. Futech has also created an
interactive electronic book called Track Sounds, which is based on a racing
theme utilizing the NASCAR name. This title is currently being produced and sold
by Futech. New Futech will also be selling WCW Talking Pages, published under
license by World Championship Wrestling, and six additional non-licensed Talking
Pages titles, which are expected to be available for sale in the first quarter
2000. These two categories have been designed, story lines have been created and
edited, and prototypes have been shown to several customers. Production is
expected to begin in the fourth quarter 1999. These formats feature, or will
feature, entertainment, educational and religious titles and will retail for $5
to $15. We believe this price range compares favorably with similar electronic
publishing products which typically retail between $10 and $20. Depending on the
format, the books contain anywhere from 10 to 250 musical sounds, voices or
sound effects, as well as various interactive play options. We intend to sell
these books to major mass market retailers, national book chains and independent
retailers in the United States and internationally.



     In 1999, Futech brought its own interactive publishing products to market
for the first time. The first interactive publishing products were placed in
retail stores during the second quarter and met with favorable consumer
response. Initial shipments have sold well, with a one-third sell-through of the
products placed in retail stores during the first week. An additional one-third
of the products sold during the second week. These preliminary results have
exceeded expectations. In addition to the excellent consumer response, initial
retailer response has also been encouraging. The majority of Futech's 1999
interactive publishing product introductions arrived in retail stores in July
and August in preparation for the 1999 holiday selling season. Orders have
already been received on these products from several major mass retailers,
including Target, Kmart, Sam's Clubs, Costco and Meijer Stores.



Children's Trade Publishing.



     The trade publishing industry is diverse. Thousands of publishers release a
wide variety of consumer books into the market, including hard cover best
sellers, paperback best sellers, trade paperbacks, audio books, children's
books, computer books, religious books, gardening books, travel books, gift
books, novelty books, electronic books and others. The dominant players, with
which we distribute books, in the area of consumer books are:



     - Simon & Schuster, Inc.,



     - McGraw-Hill Companies, Inc.,



     - Harcourt Brace,



     - Golden Books Family Entertainment,



     - Random House, Inc.,



     - Penguin Putnam, Inc.,



     - Scholastic, Inc.,



     - Andrews & McMeel Publishing,


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<PAGE>   50


     - HarperCollins,



     - Avon Books, Inc., and



     - Houghton Mifflin Company.



     Futech has a publishing agreement with Magi Publications, a United Kingdom
publisher. The agreement allows Futech to publish and distribute several
children's picture book formats in the United States under the brand name Little
Tiger Press, which is an established brand name that has been marketed in the
United States since 1996. Magi has been operating since 1988 producing an
extensive list of new titles each year and has an excellent catalog of back list
titles. New Futech will continue to publish and import titles from Magi's United
Kingdom-based authors and illustrators. In addition, New Futech will work with
Magi to publish and distribute additional titles from the European and
Australian markets and to develop new formats of Magi books. Futech has licensed
certain of Little Tiger Press' United States paperback rights through various
book clubs such as Scholastic, Inc., Troll Communications, LLC and
Book-of-the-Month Club for United States specialty distribution.



     Futech has also entered a joint venture, Gold Star Publishing, LLC, with
children's author Joy Berry to develop, produce and distribute children's
self-improvement books. During 1999, Gold Star is publishing 80 new books, kits
and videos which are expected to be available during the fourth quarter of 1999
and first quarter of 2000. Previously, Joy Berry has sold more than 80 million
books through various direct mail and book club catalogs. Through the joint
venture, Futech has exclusive distribution rights to all new Gold Star products
plus approximately 250 of Joy Berry's 280 previously published titles.



Book Distribution for Third Party Publishers.



     Futech currently acts as a non-exclusive distributor for approximately 65
major publishing houses such as Random House, Inc., Simon & Schuster, Inc.,
Scholastic Inc., Bantam Doubleday Dell, Penguin Putnam, Avon Books,
HarperCollins Publishers and others through its distribution facility in
Waukesha, Wisconsin. The largest demand for distribution services originates
from the warehouse club segment of the retail market such as Sam's Clubs, Costco
and BJ's. These customers require various customized services such as collating
and shrink wrapping custom packages along with direct shipments to each
individual store. During 1999, Futech has been named the exclusive book
distributor for two major retail store chains, Imaginarium and Kohl's Department
Stores.



     We plan to dramatically increase our book distribution business. Advanced
Marketing Services is the current overall market leader for book distribution to
warehouse clubs, with more than $400 million of annual sales to warehouse clubs.
Futech has previously focused on children's books, but has begun diversifying
into other book segments such as audio books. We plan to continue this
diversification into paperbacks, computer books, cook books, gardening books,
self-help books, and religious books.



     We also plan to take advantage of the warehouse clubs' desire to diversify
their supplier base to a second supplier. In order to grow this business, we
intend to improve our service through lower prices, offering more extensive
programs, improving our inventory management systems, improving our retail
customer reporting systems, offering volume discounts on our proprietary lines
tied to increased volume from book distribution, and concentrating on services
and products not currently addressed by Advanced Marketing Services.


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<PAGE>   51

TOYS AND GAMES


     The main office for our toys and games business operating unit along with
sales, operations and distribution for the mass market will be located in
Indianapolis, Indiana. Sales, operations and distribution for the specialty
market will be located in Berkeley, California. Additional distribution to the
mass market will be for the East, through the Norwalk, Connecticut facility, and
for the West, through the Berkeley, California facility. The New Futech officer
responsible for this business unit will be Carl E. "Chip" Voigt, IV, Vice
President -- Toys and Games. We expect to utilize the Fundex brand name for mass
market toys and games, the DaMert brand name for specialty toys and games, and
the Malibu Fun Stuff brand name for swimming pool, bath and bathroom toys and
games. The Janex line of products will continue to use the Janex brand name for
the short-term, but is expected to be changed to a new brand name by the end of
1999.


     Toys, games and interactive games encompass many product categories
including: conventional board games, electronic board games and book and toy
packages. The market for interactive toys and games has grown in recent years
due to parents' interest in combining entertainment with educating their
children. We expect to establish a competitive advantage by designing products
which provide high quality play processes, interactive capabilities, educational
experiences and superior value to the consumer at competitive prices. The
interactive board game products are expected to be sold at retail for $15 to
$30. We believe this price point compares favorably with similar electronic game
and toy products which typically retail between $30 and $100.

     Examples of interactive games that Futech is developing are three NASCAR
board games called Racing Legends NASCAR Real Life Racing, which feature board
games with sounds. These products include collectible diecast race cars of
drivers Dale Earnhardt, Jeff Gordon, Rusty Wallace, Dale Jarrett, or Dale
Earnhardt, Jr. As the child plays along by pressing a dice icon on the board
game's surface they move the race cars around the track. The track is divided
into spaces which feature sound effects and play options that determine the
outcome of the game. Sound effects include straight away and curve racing
sounds, screeching tires, crashes, and even pit stop sounds with wrenches and
air guns. The first racer to circle the track the pre-determined number of laps
and cross the finish line wins.


OKID.COM





     The main office for the oKID.com business operating unit will be located in
Phoenix, Arizona. Distribution for oKID.com will be located in Waukesha,
Wisconsin. The officer responsible for this business unit is Vincent W. Goett,
Chief Executive Officer.



     We intend to focus on and make substantial investments into e-commerce
capability and continue Futech's web site development activities. Futech
launched its interactive internet web site, www.futechinteractive.com, in March,
1999. Consumer visitors to the web site can now order from a selection of
hundreds of products, order replacement batteries, play interactive online games
and learn general information about New Futech. The web site will also provide
e-mail links to key personnel, current press releases, a map of New Futech
locations, catalog order forms, and listings of current New Futech job
opportunities, in a general interactive environment that makes visiting the site
fun. Previous online customers can conveniently return and track their orders
directly from the web site. Customer contact forms will be available to provide
easy communication with New Futech representatives.


                                       46
<PAGE>   52


     An Arizona based e-commerce solution company provides the purchasing
capabilities including online credit card processing, shipping options and order
tracking. A web site marketing company is diligently working to improve Futech's
listing on web based search engines such as Yahoo. We anticipate a gradually
increasing number of web site hits and orders as a result of this marketing
effort. Custom music has also been written to add to the unique experience of
visiting the New Futech web site.



     The creation of the Futech web site has required the use of high quality
graphic design software and programming. Web site tracking capabilities allow us
to know how many people visit the site, which web browser they use, and what
time they visited.



     On September 1, 1999, Futech launched a change to its e-commerce store
name. oKID.com, formerly futechinteractive.com, The Online Kid Site includes
many new features. A virtual town, the oKID Town, allows web site visitors to
explore the web site in a unique, yet familiar fashion. Each section of the site
is created utilizing information from our products. Most sections promote sales
of our products and provide interactive learning experiences for kids. A major
location in the oKID town is the Town Mall. At the mall, virtual stores are
expected to be created for each type of New Futech product. We expect to sell
store front space to other vendors of children's related products. The oKID Town
includes an on-line arcade, a space station, a religious center, a zoo, a kids'
club, a race track, a harbor, a school house, a construction site, and a post
office. Free e-mail is available for teachers. Chat rooms will allow visitors to
discuss a number of educational subjects. Children are also able to find e-mail
pen pals. Integrated search engines enable visitors to quickly find any product
or page in the site. The site has search capabilities for a visitor to find
product recommendations by age, gender, product type, or combinations of any of
these. Additionally, the web site recognizes previous customers and their
orders, thus allowing it to recommend additional products. Gift wrapping is
expected to be an option for store customers as well as the ability to send
friends personalized messages on Brite Ideas foam cards.



     oKID.com will be hosted at our Phoenix corporate office on two
SunMicrosystems servers connected to the internet backbone by multiple T-1
lines. These servers and lines are expected to deliver extremely fast
connections and download times as well as facilitate our increased web site
customization. One of the servers is installed and functional. The second server
is expected to be functional by November 1, 1999.



     A significant portion of our future game development is expected to include
internet game play.


STATIONERY AND NOVELTIES


     The main office, sales, operations and distribution for the stationery and
novelties business operating unit will be located in Waukesha, Wisconsin.
Additional distribution to the mass market will be for the East, through the
Norwalk, Connecticut facility, and for the West, through the Berkeley,
California facility. The officer responsible for this business unit will be R.
Bradford Turner, Vice President Stationery and Novelties. One of our short-term
strategic acquisition goals is to acquire a company or companies that will
provide us with additional brands and lines of products, operations management
depth, a separate distribution facility and extensive distribution channels for
the Stationery and Novelties business operating unit.


     Among the stationery products, we expect to distribute over 150 foam-based
post cards to approximately 3,900 stores, including 2,500 independent, specialty
retailers and to

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<PAGE>   53


chains such as Michael's Stores, Inc., FabriCenter of America and Linens' N
Things. The post cards are currently being test marketed at Eckerd Drugs and an
expanded test is expected soon. The post cards are marketed under the Better
Than A Letter and Kinda Like A Card brand names. We have added our sound
technology to this product and market a complete line of interactive post cards
called Musical Mail.



     Another soon to be released line, which will utilize Futech's innovative
sound technology, is Fan Mail. Fan Mail is a line of electronic post cards
featuring such drivers as Jeff Gordon, Dale Earnhardt, Rusty Wallace, Dale
Jarrett and Dale Earnhardt, Jr. Each card features a variety of photos of
driver's race cars, and such captured moments as winning big races. Race fans
can purchase a card specific to a particular racer that is authentically
autographed. These cards contain actual commentary with driver and race
statistics. This product line will be sold at racing events. This line also
could potentially feature a collection of famous movie stars all printed in
black and white. After pressing the printed icon on the card's surface, the
recipient will hear a famous quote or song by the featured star.


SPECIALTY AND EDUCATIONAL PRODUCTS


     The main offices, sales, operations and distribution facility for the
specialty and educational products business operating unit will be located in
Norwalk, Connecticut. The officer responsible for this business unit is William
W. Burnham, Vice President -- -- Specialty and Educational Products.



     The specialty and educational products operating unit will include direct
mail distribution, educational channels of distribution, specialty advertising
and other premium incentive channels of distribution of products from all other
operating business units. It also is expected to include the production of
variations of New Futech products from other operating units to meet the needs
of the described channels of distribution. One example of such a product
variation is the Aditude corporate advertising version of the Brite Ideas
mailable foam-core post cards.



     We expect to utilize our conductive ink and sound technology to produce
interactive brochures, interactive mailable foam core advertisements and other
interactive promotional materials using the brand name: "Aditude. Advertising
for the next generation". These innovative products will offer a company a
unique way to promote its advertising message by stimulating three of the five
human senses: sight, sound and touch. We expect to market these new products to
Fortune 500 companies and advertising agencies nationwide. They can be custom
designed with full-color art, music, speech and sound effects of the client's
choice and can be custom cut in about any shape and size. They are U. S. Post
Office approved for direct mailing or can be handed out at events and expos. The
recipient simply presses a printed icon on the card's surface to activate up to
one minute of promotional messages. The disposable unit is expected to include
enough battery power for up to 45 minutes of continuous play.


LICENSING TECHNOLOGY AND OTHER RIGHTS TO OTHER COMPANIES


     We expect to license certain applications of our patented technology to
other companies while reserving all applications for our own products and
formats. On August 14, 1996, Futech entered into a joint venture with Golden
Books Family Entertainment, Inc., the world's largest publisher of children's
books. In January, 1998, Futech transformed its agreement with Golden into a
five-year, non-exclusive licensing agreement and received a $2 million up-front,
non-refundable guarantee for the non-


                                       48
<PAGE>   54

exclusive use of the technology. Golden Books recently filed for bankruptcy
protection for reorganizational purposes.


     We also expect to license certain United States paperback publishing rights
of our books to various book clubs, such as Scholastic, Inc., Troll
Communications, LLC and Book-of-the-Month Club, for specialty distribution. When
these companies license the paperback rights, we will provide them with films
which will allow them to produce their own low cost paperback editions. A
substantial royalty guarantee to New Futech will be included in the contract,
and an advance on the guarantee will be paid by these companies to New Futech
for the rights to produce the books. These companies distribute these special
editions to students and schools throughout the United States. They distribute
flyers/order blanks directly to children so the product can be ordered via mail
order. They also participate in school book fairs at which they set up book
displays at schools for a one week period and sell directly to students and
teachers. Sales of these editions often average 100,000 copies or more.



     We also expect to license certain foreign publishing rights of our books to
various foreign publishers. Procedures similar to those discussed above for book
clubs are involved with this type of licensing. Trudy brings to New Futech
extensive experience in foreign publishing licenses through its licensing of
Soundprints products abroad.



RECENT ACQUISITIONS BY FUTECH



     In addition to the merger agreement, Futech has completed several
additional acquisition and joint venture agreements during 1998 and 1999:



     - On March 31, 1998, Futech purchased the net assets of Gick, a distributor
       of foam-based post cards, stationery, specialty crafts and hobby items,
       based in Irvine, California, for an asset purchase price of $2.2 million
       plus assuming $1.0 million in liabilities.



     - On May 1, 1998, Futech purchased the net assets of XYZ Group, Inc., a
       Midwest distributor of children's books, general paperback and hardcover
       books, audio books, activity games and related educational products, for
       an asset purchase price of $7.9 million plus assuming $10.4 million in
       liabilities. This agreement has been the focal point of litigation, but
       has been settled and re-negotiated. See "Certain Relationships and
       Related Transactions."



     - Futech has agreed in principle to significantly expand the
       co-publishing/distribution agreement with Magi Publications, an agreement
       originally reached between XYZ and Magi. The terms of the new agreement
       are in negotiation. However, we expect that the agreement will grant New
       Futech exclusive North American publishing rights for all Little Tiger
       Press titles, substantially increased gross profit margins on Little
       Tiger Press titles, and shared future increased market value of the
       Little Tiger logo. We also expect New Futech to maintain a right of first
       refusal in the case of sale of the Little Tiger Press logo.


REASONS FOR MERGERS


     Most of the industries represented in the mergers, publishing, toys and
games, and stationery and novelties, have experienced tremendous consolidation.
Smaller companies find it very difficult to compete with the larger
conglomerates, especially for product placement in the mass retail market.
Simply stated, the reason for the mergers is to provide the merging companies
the opportunity to better compete in their industries.


                                       49
<PAGE>   55


     Through the mergers, New Futech expects to provide several advantages to
the merging companies that they would otherwise not enjoy on their own, such as:


     - necessary financial resources through the ability to raise public
       capital;

     - mass and diverse product presentation to allow the opportunity to sell to
       the mass retail market;

     - current New Futech patented technology to be incorporated into existing
       and future product lines;

     - new technology provided through ongoing research and development not
       available to small, individual companies;

     - access to popular key licenses to be incorporated into existing and
       future product lines;

     - access to more experienced and deeper management; and


     - broader company strength, through a broader product base and expected
       improved financial strength, to withstand potential aggression from large
       competitors designed to eliminate smaller competition.


SPECIFIC REASONS FOR PREVIOUS ACQUISITIONS AND PROPOSED MERGERS


UNIVERSAL OPPORTUNITIES IN ALL PREVIOUS ACQUISITIONS AND MERGERS:


     - expand product lines;

     - integrate Futech technology into existing proprietary products;

     - improve profitability through reduced costs and enhanced operational
       efficiencies; and

     - expand domestic and international distribution coverage in the
       publishing, toys, games, and stationery and industries.

SPECIFIC TO XYZ:

     - long-standing exclusive distribution arrangement with New Futech;

     - excellent facilities for centralized distribution of books from the
       Midwest;

     - experienced management within the publishing distribution industry;

     - experience with book production in the Orient;


     - complete sales management and sales representative groups within retail
       book industry; and


     - experience with New Futech technology in the publishing industry.

SPECIFIC TO GICK:

     - experience within the gift and novelty industries;

     - sales and representative groups in specialty retail industry; and

     - exclusive patents on mailable foam core products.

                                       50
<PAGE>   56

SPECIFIC TO FUNDEX:

     - facility for centralized distribution of toys and games from the Midwest;

     - experienced management within the toys and games industry;

     - successful designer of award-winning games;

     - experience with toys and games production in Asia;

     - complete sales management and representative network within the retail
       toys and games industry; and


     - with the country's second-highest selling card game, Phase 10, enabling
       nationwide toys and games distribution.


SPECIFIC TO JANEX:

     - good relationship with Toys 'R' Us;

     - extensive experience, success and name recognition with licensed products
       and within the licensing industry; and

     - experience in Letter of Credit/FOB Hong Kong business.

SPECIFIC TO TRUDY:

     - experienced management within the publishing industry;

     - strong publishing back-list including twelve Parents' Choice award
       winning titles;

     - East coast distribution facility;

     - East coast fulfillment center for mail order and commerce;

     - experience in licensing of educational opportunities such as Smithsonian
       and The Nature Conservancy; and

     - experience in premium, supplemental education and other specialty
       industries.

SPECIFIC TO DAMERT:

     - West coast distribution facility;

     - West coast fulfillment center for mail order and commerce;

     - experienced management within the specialty toy retail industry; and

     - product development team and facility to consolidate with existing New
       Futech's research and development equipment for future New Futech
       technological advances.

INTEGRATION OF MERGING COMPANIES' FACILITIES


     Subsequent to the mergers, we initially intend to be divided into five
business operating units utilizing six facilities:



     - the corporate offices will be located in the current Futech facility in
       Phoenix, Arizona and will include the internet services business
       operating unit;


                                       51
<PAGE>   57


     - the publishing operating unit and stationery and novelties operating unit
       and major distribution facility for both units, as well as internet
       sales' distribution, will be located in the current Futech facility in
       Waukesha, Wisconsin;



     - the sales office will be located in Chicago, Illinois;



     - the toys and games operating unit and major distribution warehouse for
       mass market toys and games will be located in the current Fundex facility
       in Indianapolis, Indiana;



     - direct mail catalog distribution, East coast mass retail distribution for
       publishing, toys and games and stationery and novelties, the specialty
       and educational products operating unit, along with New Futech's
       publisher and related editorial and graphics staff will be located in the
       current Trudy facility in Norwalk, Connecticut; and



     - the major distribution warehouse for the specialty channel of
       distribution for toys and games and the West coast mass retail
       distribution for publishing, toys and games and stationery and novelties
       will be located in the current DaMert facility in Berkeley, California,
       along with all research and development equipment and personnel.


INTEGRATION OF MANAGEMENT OF MERGING COMPANIES

     Integration of the management from each of the companies involved in the
mergers are as follows:


     - Futech management will become officers of New Futech and will continue
       intact with the exception of William Hermes, currently Futech's Vice
       President of Sales and R. Bradford Turner, currently Futech's Vice
       President of Marketing. Mr. Hermes will become Vice President of
       Publishing and will be responsible for the publishing operating unit. Mr.
       Turner will become Vice President of Stationery and Novelties and will be
       responsible for the stationery and novelties operating unit.



     - Fundex President, Carl E. "Chip" Voigt, IV, will become Vice President of
       Toys and Games and will be responsible for the toys and games operating
       unit. The remainder of Fundex management will become responsible for the
       mass market portion of the toys and games division, including the
       products previously in the Janex product line.



     - DaMert Chairman, Frederick A. DaMert, will become the Vice President of
       Research and Development and will be responsible for the development of
       New Futech technologies. DaMert CEO, Gail Patton DaMert, will become Vice
       President of Business Integration and Analysis and will be responsible
       for the operations of the Berkeley, California facility, the specialty
       stores channel of distribution of the toys and games division and will
       add responsibilities related to business analysis and integration of
       acquisitions.



     - Trudy President, William W. Burnham, will become Vice President of
       Specialty and Educational Products and will be responsible for the
       specialty and educational products operating unit, the operations of the
       Connecticut facility, and assist with New Futech business strategy and
       acquisitions. Former Trudy Vice President, Elisabeth Prial, will become
       New Futech's Publisher and will be responsible for the development and
       marketing of all New Futech publishing products.


     - Janex Vice President and Chief Operating Officer, Daniel Lesnick, will
       devote his time to developing licensing opportunities for all the New
       Futech operating units

                                       52
<PAGE>   58

       and assist as needed in the future development of the Janex product line
       and in the contracting of overseas manufacturing.

STRATEGY FOR FUTURE ACQUISITIONS


     New Futech will continue to evaluate acquisition prospects subsequent to
the mergers. With the advent of the mergers, the anticipated breadth of New
Futech's product line will have been clearly defined (see "New Futech's
Business -- Business Strategy"). The strategy for future acquisitions is to
provide additional:



     - depth to the five previously defined operating units such as additional
       brands and lines of products within the toys and games unit;



     - imprints within the publishing unit;



     - educational products within both the toys and games and/or publishing
       unit;



     - stationery brands and lines of products within the stationery and
       novelties unit;



     - operations management depth; and



     - distribution facilities and distribution channels in the stationery and
       novelties unit.


PRODUCT DESIGN


     We expect to conduct our own engineering, research and development for new
products, while continually refining and enhancing existing technology. We will
have the combined talents of the merging companies, which will provide product
development expertise in proprietary publishing, toys and games, and stationery
and novelty items. We expect to employ a team of approximately 15 product
designers. This design team will take products from inception to manufacturing,
including prototyping, coordinating the required production materials,
illustrating, scripting, editing, mold design and technology development for the
products. The design team also will act as a support service to manufacturers of
our products. Combined with a team of outside creative partners of artists,
editors, inventors, and excellent resources and talents available through
licensing partners, we expect to demonstrate our commitment to new products
through our product development and proprietary technology.



     Some of the product lines in the New Futech family of products will be
based on licensing agreements allowing for the use of popular characters, such
as Disney or other popular sports and pop culture figures such as NASCAR Racing
drivers and WCW professional wrestlers. Within these product lines, we will
continually look for new characters to license. A popular culture character can
be used to extend the life of an existing product or create a new book, product
or game. When new licenses are acquired, the licensors specify exactly which
products into which the licensed characters can be incorporated and the
territory in which the products can be sold. We believe our proprietary
technology and diverse product lines should give us an additional advantage when
negotiating new licensing agreements.



     New products will be initially selected based on what we believe will be
successful. However, in order to avoid the expense of producing product that may
not sell, we will utilize varying forms of market research and consumer testing.
We will also utilize feedback from this testing in developing packaging and
retail pricing strategies.



     Although we will have a product design staff, we also expect to work in
conjunction with outside inventors and product designers throughout the United
States. Generally, we


                                       53
<PAGE>   59


will review outside concepts for new toys and games and we will then decide
whether to accept and develop the new game, toy or educational product. If the
new idea is accepted, a royalty will be paid to the inventor ranging from 1% to
10% of net sales and a commitment to sell a minimum number of items is usually
set.


     We plan to broaden the application of Futech's patented interactive
conductive ink technology to new types of interactive books, interactive board
games and interactive puzzles. New product designs will focus initially on newly
available licenses plus integrating existing proprietary books, toys and games
from the merging companies with Futech's proprietary technology to create a
broad and deep range of interactive books, toys, games and educational products.

PROPRIETY PRODUCT LINES


     We expect to benefit from an extensive consolidated list of new products,
many already existing, with more expected to be developed quickly. We anticipate
that our product lines will bring increased clout with the major mass-market
retailers who generally prefer working with larger vendors that offer extensive
lists of proprietary products. We expect to be able to offer large retailers
such as Wal-Mart, K-Mart and Costco a product line that includes books, toys and
games, stationery and crafts, along with new and exciting interactive products.
Below is a summary of our anticipated 1999 product lines. Many of these products
were released in the second and third quarters to coincide with the holiday
selling season.


PUBLISHING

Interactive publishing for kids


     The following books are currently being produced and sold by Futech:



     - Talking Pages Picture Books, four-color, twelve page interactive story
       books with illustrations, published in four titles.



     - Talking Pages Plus Books, four-color, twelve page learning books with
       multi-game playing capabilities, published in two titles.


     - Look, Listen and Learn, gate-fold style interactive educational play
       boards, published in four titles.


     - NASCAR Stats and Standings, four-color, 24 page book and a collectible
       diecast race car featuring popular NASCAR drivers such as Jeff Gordon,
       Dale Earnhardt, Rusty Wallace and Dale Jarrett.


     - NASCAR Track Sounds, electronic books featuring full-color photography,
       speech and sound effects of current season racing moments from a variety
       of racing legends with the same drivers as above plus Dale Earnhardt, Jr.


     The following books are being developed by Futech:



     - Talking Pages Deluxe Books, four-color, twelve page non-fiction
       interactive learning books, published in two titles. Production of this
       book has been halted until lower manufacturing costs can be negotiated.


     - Talking Pages Plus Bible Stories, similar to the Talking Pages Prayer
       book line, but featuring eight different religious stories (i.e. Creation
       Story, Easter Story, Christmas Story, Moses, Gideon, Jonah and the Whale,
       Noah's Ark, David and

                                       54
<PAGE>   60


       Goliath). Pre-production for these books has been delayed. The concept
       and content are being discussed by Futech's editing and publishing staff.



     - Additional licensed books are expected to be available in the first
       quarter of 2000. These books are in development and editing, but will be
       based on the significant newly acquired licenses.



     - Utilizing existing publishing products from New Futech's proprietary
       imprints, additional interactive products are expected to be added in
       early 2000.



     - Talking Pages Prayer Books, four-color, twelve page interactive prayer
       books with illustrations, published in two titles. Production of this
       book has been halted until lower manufacturing costs can be negotiated.



Little Tiger Press Picture Books for Kids



     The following books are currently being purchased and resold by Futech:



     - Nine new hardcover picture books: Another Fine Mess, How to Be a Happy
       Hippo, Little Bunny Bopkin, Little Tiger's Big Surprise, Love is a
       Handful of Honey, Nine Naughty Kittys, One, Two, Three, Oops!, Selfish
       Crocodile, and Smudge.



     - Four new anthologies: Bible Stories for the Young, Counting Leopard's
       Spots, Not-So-Grizzly Bear Stories, and The Fox and the Rooster.



     - Over 50 backlist titles.



     The following books are being created by Futech's editorial staff and will
be presented to Magi for approval in the fourth quarter of 1999:



     - Two new cloth books: Bedtime Little Tiger and Where's Smudge's Ball.



     - Four new seasonal titles: Hurry Santa!, Laura's Christmas Star, Little
       Bear's Christmas, and Shhh!.



     - Three new board and flap books: Little Tiger Goes to School, I Don't Want
       to Take a Bath, and I Don't Want to Go to Bed.



     - Three new paperback books: I Don't Want to Take a Bath, I Don't Want to
       Go to Bed, and Dora's Eggs.



Gold Star Publishing (Joy Berry's) Books for Kids



     All of Gold Star's following books are being created and will likely be
presented to Futech's editorial and sales staff for approval in the fourth
quarter of 1999:



     - Six new board books in the Teach Me About series for kids under four
       years old: Potty Training, Bathtime, Bedtime, Mealtime, Crying, and
       Separation.



     - Six new kits in the Teach Me About series including board books, activity
       charts and diplomas.



     - Six new paperback books in the A Fun and Easy Way series for kids six to
       twelve: Clean Your Room, Be a Good Pet Owner, Earn Your Allowance, Be
       Good, Do Homework and Schoolwork, and Get Good Grades.



     - Six new paperback books in the Good Manners series for kids six to
       twelve: When Eating, When in Public, When Talking, When Telephoning, When
       Entertaining, and When Visiting.


                                       55
<PAGE>   61


     - Ten new paperback books in the Good Answers to Tough Questions series for
       parents and children of all ages: About Dependence and Separation, About
       Change and Moving, About Divorce, About Stepfamilies, About Weight
       Problems, About Substance Abuse, About Physical Disabilities, About
       Traumatic Experiences, About Disasters, and About Death.



     - Three new paperback books in the Bee Safe series for children of all
       ages: Bee Careful, Bee Prepared, and Bee a Lifesaver.



     - Six new paperback books in the Six Simplified Steps series for parents
       and children of all ages: Successful Parent, Relationships, Discipline,
       Self-Esteem, Good Kids, and Happy Kids.



     - Three new paperback books in the Sensational Seasons and Holidays series
       for all children: Experiencing October, Experiencing November and
       Experiencing December.



     - Six new paperback books in the Get Over It series for adolescents:
       Criticism and Rejection, Fear, Bad Habits, Rude People, Stress, and Tough
       Situations.



     - Six new paperback books in the Go For It series for adolescents: Be a
       Winner, Be Liked, Be a Star, Great Future, Be Happy, and Be Beautiful.



     - Six new paperback books in the Work It series for adolescents: Goals,
       Creativity, Intelligence, Control, Organization, and Assertiveness.



     - Four new paperback books in the Let's Talk About series for kids six to
       twelve: Feeling Disappointed, Feeling Frustrated, Feeling Jealous, and
       Being Good.


Soundprints


     All of the following Soundprints titles are presently produced and sold by
Trudy and Futech:



     - Smithsonian Institution Series via an exclusive license from the
       Smithsonian Institution. These products include realistic wildlife plush
       toys, storybooks and audio cassettes, and are also available in
       educational kits:



        - Four new board book titles: New Baby Giraffe, Panda's Busy Day, Orang
          Utan's Playtime, and Rhinoceros's Bathtime.



        - One new title in the Backyard series: Coyote at Pinon Place.



        - One new title in the Oceanic series: Survival in the Sea.



        - One new title in the Odyssey series: Run With Me, Nike!.



        - 60 title backlist in four different series: Oceanic, Backyard,
          Odyssey, and Wild Heritage.



     - The Nature Conservancy Series via an exclusive license from The Nature
       Conservancy. The first four titles in the habitat series were introduced
       in the spring of 1997. These products also include realistic wildlife
       plush toys, storybooks and audio cassettes, and are also available in
       educational kits:



        - Two new titles: Along the Luangwa and Mountain Mists;



        - 10 title backlist;


                                       56
<PAGE>   62


        - Make Friends Around the World Series, a picture book and doll series
          about children from foreign lands;



        - The Legend of the Kite for China;



        - Eva's Summer Vacation for the Czech Republic; and


        - Two previously published titles.

TOYS AND GAMES


For the Mass Market Utilizing the Fundex Brand



     - NASCAR interactive board games. Three NASCAR board games called Racing
       Legends NASCAR Real Life Racing feature board games with sounds. These
       products include collectible diecast race cars of drivers Dale Earnhardt,
       Jeff Gordon, Rusty Wallace, Dale Jarrett, or Dale Earnhardt, Jr. As the
       child plays along by pressing a dice icon on the board game's surface
       they move the race cars around the track. The track is divided into
       spaces which feature sound effects and play options that determine the
       outcome of the game. Sound effects include straight away and curve racing
       sounds, screeching tires, crashes, and even pit stop sounds with wrenches
       and air guns. The first racer to circle the track the pre-determined
       number of laps and cross the finish line wins. These products have been
       designed and prototypes have been finished. Production has begun with the
       first batch expected to be sold in November 1999.



     The following products are presently being produced and sold by Fundex:



     - Phase 10. A card game for ages eight to adult. Phase 10 is currently the
       second best-selling, branded card game in the United States, with over 6
       million units sold. Sister products are Phase 10 Dice, Phase 10 UPSETS
       and Take Five.


     - Wooden Games. These include competitively priced and quality made wood
       versions of several classic games such as labyrinths, chess, checkers,
       Chinese checkers and mancala.


     - Basic Board and Mini Games. A comprehensive line of traditional board
       games such as chess and checkers that retail in the $2.99 to $9.99 price
       range.



For the Mass Market Utilizing the Malibu Fun Stuff Brand



     - A line of swimming, bath and beach toys that include Wee Wet Pets, Wet
       Pet Babies, and Water Wings, which are currently being sold by Janex and
       Fundex. New Futech management is discussing revitalizing this line and
       may reintroduce a new line of Wet Pets in 2000.



For the Mass Market Utilizing the Janex Brand



     - Most of the Janex products incorporate licensed fantasy characters. The
       product line currently includes the following: battery operated Power
       Toothbrush and Stand, battery operated Power Flashlight, Action/Talking
       Alarm Clock, and Role Play Gear.


                                       57
<PAGE>   63


For the Mass Market, Book Trade Market or Specialty Toy Market: Books Plus Audio
and Plush Toys



     - Soundprints titles. For detailed information about Soundprints titles,
       see the publishing products section.



For the Specialty Toy Market



     All products in this category are presently manufactured and sold by
DaMert.


     - Puzzles/Brainteasers. This product line includes the cardboard Triazzle
       Puzzle Collection and the plastic 3D Slide Puzzle Collection. Triazzle
       Puzzles are manufactured under a long-term exclusive agreement with the
       inventor.

     - Glow-in-the-Dark. A line of items using "Glow-in-the-Dark" plastics and
       inks including stickers, balls and mobiles.

     - Great Gizmos and Rainbows. A line of science related toys that are
       educational and fun.

     - Activity Kits. A series of "All about . . ." activity planners that
       teaches children about topics from Animation to Rainbows to Planets and
       Stars.

     - Discovery Kits. A series of compact kits to teach kids more about the
       world around them. Topics include Constellations, Bird Watching and
       Geology.

     - Out-of-this-World Games. A line of family games incorporating lights and
       sound, including Alien Autopsy and Impact Zone, winner of the 1998 T.O.Y.
       award (toy of the year award).


STATIONERY AND NOVELTIES (UTILIZING THE BRITE IDEAS BRAND)



     All products in this category are currently manufactured and sold by
Futech.


     - Patented mailable foam-core post cards:


        - 12 products in the Musical Mail line;


        - 36 products in the Better Than a Letter line; and

        - 55 products in the Kinda Like a Card line.

     - Crafts and novelties:

        - 48 products in the Little Bits line;

        - 12 products in the Bigger Bits line;

        - 6 products in the Banners line;

        - 6 products in the Little Bits Frame Kits line;

        - 4 products in the Little Bits of Cheer line;

        - 12 products in the Make a Memory do-it-yourself frame line.

STRATEGY FOR LICENSING CHARACTERS


     One of our long-term strategies in product development will be to create a
balance between licensed and non-licensed products. Through the acquisition of a
controlling interest of Janex, Futech gained a new level of experience and
access into the licensing


                                       58
<PAGE>   64


industry. Janex's long-standing relationships with most key domestic licensors
will provide New Futech the opportunity to better fulfill this strategy quickly.



     Our strategy will involve four levels to the licensing balance:



     - The first level includes licenses familiar to most consumers. Futech
       currently has a license and distribution agreement with Action
       Performance (expires December 31, 2000) and sub-licenses through Action
       Performance with NASCAR, Jeff Gordon, Dale Earnhardt, Rusty Wallace, Dale
       Jarrett and Dale Earnhardt, Jr. to produce interactive books, interactive
       games, Fan Mail, book and car packages, and various other toy products
       such as toothbrushes and clocks. Futech is also negotiating additional
       licenses and distribution agreements with other licensors for additional
       interactive books and post cards. In addition, Futech and its majority
       owned subsidiary, Janex, currently have licensing and distribution
       agreements for various toy products with:



        - Warner Brothers Corporation for Looney Tunes, expires December 31,
          1999,



        - Children's Television Workshop for Sesame Street, expires December 31,
          1999,



        - Leisure Concepts for World Championship Wrestling, Inc. for WCW
          characters, expires December 31, 2000,



        - The Lyons Group for Barney, expires December 31, 2000,



        - Saban Merchandising, Inc. for Power Rangers in Space, expires December
          31, 2000,



        - Lionel LLC for Lionel Trains, expires December 31, 1999,



        - New Line Cinema Productions, Inc. for Lost in Space, expires October
          31, 1999, and



        - JG Motorsports for Jeff Gordon, expires December 31, 2000.



      Trudy also has licensing and distribution agreements for Soundprints
      books, audio cassettes and plush toys with:



        - the Smithsonian Institution, expires September 30, 2002, and



        - The Nature Conservancy, expires January 1, 2000. We intend to continue
          to pursue additional licensing and strategic agreements for
          publishing, toys, games, stationery and its electronic products.



     - The second level includes potential license agreements with other
       publishers and manufacturers to develop joint venture products. Futech is
       currently working with a major game manufacturer and a major publisher to
       determine how its interactive book technology can be successfully applied
       through joint venture products to some of their most successful licenses.
       Futech has also initiated discussions with a religious publisher to
       develop religious books exclusively for the religious markets.


     - The third level includes our exclusive imprints and licenses. Futech has
       a long-term agreement with Magi Publishers of London, England to
       exclusively publish and distribute products using the Little Tigers Press
       imprint and license.


     - The fourth level includes our non-licensed, New Futech branded
       proprietary products using branding such as Soundprints, Talking Pages,
       Wet Pets, Gold Star Publishing and Brite Ideas. By maintaining
       proprietary products not tied to third


                                       59
<PAGE>   65

       party licenses, we expect to be able to balance against the risks of
       being dependent on other companies.

PROPRIETARY TECHNOLOGY AND PATENTED TECHNOLOGY


     Our proprietary technology will relate primarily to printed audible
signals, visual circuitry and associated electrical components such as switches,
batteries, speakers and liquid crystal displays. This technology will be applied
to produce books and play boards that emit speech, music and sound effects or
other visual signals activated by pressing switches embedded in the surface of
the product. Upon pressing a designated point on the page or surface of the
product a microchip is activated and a speech, music, or sound effect response
is emitted. In certain products light emitting diodes or liquid crystal diodes
provide visual enhancement.



     Futech holds ten United States patents and three foreign patents. The
patents relate to technology applicable to a variety of products and industries
including electronic publishing, promotional publishing, interactive
advertising, electronic greeting cards and other sound-based consumer products.
In addition, Futech has four United States and 13 foreign patent applications
pending. A summary of the registered patents are as follows:



                            REGISTERED U.S. PATENTS



<TABLE>
<CAPTION>
                 TITLE/(SHORT TITLE)                   PATENT NO.  EXPIRATION DATE
                 -------------------                   ----------  ---------------
<S>                                                    <C>         <C>
Electronic Book                                         5,417,575         05/23/12
Apparatus for Combining Audio and Visual Indicia
  (Electronic Book)                                     5,484,292         01/16/13
Electronic Book                                         5,167,508         12/01/09
Method of Combining Audio and Visual Indicia
  (Electronic Book)                                     5,609,488         03/11/14
Game Board Incorporating Apparatus for Selectively      5,772,208         11/07/15
Model Motor Vehicle Track System                        5,782,186         01/03/17
Decorative Novelty Articles (Non-musical postcard)      5,735,453         11/14/15
Squeeze Flashlight                                      5,434,761         05/23/12
Activated Work and Method of Forming Same (Sigalos &
  Levine Electronic Book)                               4,656,469         04/07/04
Visual and Audible Activated Work and Method of
  Forming Same (Sigalos & Levine Electronic Book with
  Sound)                                                4,703,573         02/04/05
</TABLE>



                           REGISTERED FOREIGN PATENTS



<TABLE>
<CAPTION>
  COUNTRY          TITLE/(SHORT TITLE)        PATENT NO.  EXPIRATION DATE
-----------        -------------------        ----------  ---------------
<C>          <S>                              <C>         <C>
New Zealand  Apparatus for Combining             314,675         11/04/09
             Audio and Visual Indicia
New Zealand  Electronic Book                     258,342         11/04/09
  Australia  Electronic Book                     664,701         11/14/12
</TABLE>


MANUFACTURING


     Futech subcontracts with third parties to manufacture its electronic books,
including Talking Pages and Talking Pages Plus, in conjunction with one of the
largest commercial


                                       60
<PAGE>   66

printers in China. Trudy's and Futech's trade books are manufactured by a
variety of printers located in Belgium, Italy, Singapore and China. Futech has a
variety of electronic products and learning games that are manufactured by
companies throughout Asia. Our specialty products, including promotions and
specialty post cards, will be manufactured domestically. The sound module for
Futech's electronic greeting cards are manufactured in China. Plush toys are
manufactured in China, Bangladesh, and Sri Lanka.

CUSTOMER BASE


     We expect to have a diversified base of well established retail customers.
The merged companies have distributed a wide variety of products to the mass
market to over 26,000 retail locations and list most of the country's largest
retailers as their customers. Current customers include some of the most
recognized names in retailing such as:



     - Toys 'R' Us,



     - Walmart,



     - Kmart,



     - Target,



     - Baby Superstores, Inc.,



     - Kohl's Department Store,



     - Sam's Club,



     - Costco Wholesale Corporation,



     - BJ's Wholesale Corporation,



     - Walden,



     - Barnes & Noble,



     - B. Daltons,



     - Borders Group, Inc.,



     - Waldenbooks,



     - Michael's,



     - TJ Max,



     - QVC, Inc.,



     - Nordstroms, Inc.,



     - Safeway Inc.,



     - Eckerd Corporation,



     - Rite-Aid Corporation,



     - Scholastic,



     - The Nature Company,



     - Galyans, and



     - The Museum Company.



     We believe these long-standing relationships will allow New Futech to
significantly expand the distribution of its proprietary products.


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<PAGE>   67

MARKETS


     Given the numerous applications of our interactive, patented technology, we
believe we will be well positioned to sell in a variety of markets. These
markets include:



     - interactive games,



     - interactive publishing,



     - trade publishing,



     - promotional publishing,



     - book distribution,



     - games,



     - toys,



     - stationery,



     - novelties,



     - mail order,



     - Internet, and



     - advertising and promotion and supplementary education to libraries and
       classrooms.



     Specifically, there has been an explosion of super bookstore construction
led by Borders and Barnes and Noble. This has led to increased book sales
category growth. In addition, on line ordering of books through e-commerce sites
such as barnesandnoble.com and amazon.com is growing rapidly such that this
distribution channel now represents a 7% share of all book sales. We believe
that our interactive web site will offer consumers and retail customers an
attractive alternative for purchasing direct along with new technology games to
play on the internet.



     With the federal initiative to reduce classroom sizes through an
augmentation of certified teaching professionals, significant increases in
government and state funds are being allocated to local school boards. According
to statistics published on the internet in 1999, and other written comments
made, by the Association of American Publishers, the purchasing decisions for
library and classroom teaching materials are being made at the teacher level as
opposed to the state level. The AAP indicates this has stimulated double digit
increases in supplementary instructional material spending over the past three
years.


COMPETITION

     We expect to operate in highly competitive markets. Some of our competitors
are significantly larger than us and have substantially greater resources
available for developing and marketing their products.


     In interactive publishing, one major publisher, Publications International,
Inc., currently has a much larger share of the market than we expect to
initially have, partly because we have just begun to deliver these products to
the market. We believe that we will be able to gain significant market share
over the next few years. One of the areas where we believe we have a competitive
advantage is in our interactive books' superior sound technology. We believe the
sound produced from our products is clearer and crisper than that of our
competitors' interactive products. In addition to this, our technology allows us
to make products with in-the-page touch points. We believe this is a benefit to
the user of our product because it makes the reading experience easier and more
fun. We believe these unique points will help us improve our market share of
interactive books.


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<PAGE>   68


     In trade publishing, our competition consists of thousands of publishers,
including:



     - Simon & Schuster, Inc.,



     - McGraw-Hill Companies, Inc.,



     - Harcourt Brace,



     - Golden Books Family Entertainment,



     - Random House, Inc.,



     - Penguin Putnam, Inc.,



     - Scholastic, Inc.,



     - Andrews & McMeel Publishing,



     - HarperCollins,



     - Avon Books, Inc., and



     - Houghton Mifflin.



     Subsequent to the mergers, New Futech will attempt to gain additional
market share through its three trade publishing imprints: Little Tiger,
Soundprints, Gold Star Publishing. We are not aware of any significant direct
competitors with our licensed, plush toys packaged with an educational book and
audio cassette or our kids self-help products. Because we own (or own rights to)
the three trade publishing imprints, we can offer unique products at an
attractive price to our customers. We are able to do this because we are a
smaller company with lower overhead costs compared to our large competitors, and
because we own exclusive rights to the imprints.



     The book distribution market to warehouse clubs is currently controlled by
one distributor, Advanced Marketing Services, which has over 95% of total sales.
In 1990, there were ten warehouse club chains in the country and eight book
distributors servicing those chains. Due to consolidations and acquisitions,
there are only three major chains remaining: Costco, Sam's Club and B.J.'s. As a
result of the mergers, we will be able to broaden the scope of our distributed
books and will have additional distribution facilities to improve our customer
service. We also hope to benefit from the warehouse clubs' desire to maintain an
alternative supplier to Advanced Marketing Services.



     We are currently being considered by all three of the major warehouse clubs
as an alternative for a source for books. One of the primary reasons we are
competitive with AMS is our flexibility. Typically, a large company such as AMS
sells books in master cartons. For instance, they might sell a master carton of
one book title and the quantity in this carton is 24. This would be considered a
minimum order quantity for one product. Futech, on the other hand, offers to
sell several products in one master carton. For example, we might sell 4 pieces
of 6 different book titles in one master carton. This allows our customer to buy
lower quantities of a single title, and at the same time, purchase a wider
selection of products to place on the retail shelf.



     We also work with the warehouse clubs in negotiating better pricing. In the
example in the previous paragraph, we might arrange with Costco for all of the
varied books in the master carton of 24 to have one average price per book. The
clubs like this idea because it gives them flexibility in purchasing goods and
it allows them to handle their purchasing costs with greater ease.



     Another example of our flexibility is our negotiated packaging. Sometimes
our customers want a series of similar products to be packaged together and the
publishers and AMS will not do this. We will provide this type of service, for
instance, if a customer


                                       63
<PAGE>   69


wants to retail a set of 4 similar books that the publisher or AMS will not
package together, we will negotiate with the customer to give them the product
they want. In this case, we would buy the various books from the various
publishers and repackage them in the manner the customer requests. These are
just a few examples of the flexibility we offer to our customers that we believe
gives us an advantage over our larger competitors.



     The toys and games market is highly competitive and includes numerous small
manufacturers, but is dominated by two industry giants controlling approximately
50% of the market: Hasbro, Inc. and Mattel, Inc. The industry is sensitive to
changing consumer preferences and demands. Competition is based primarily on
price, quality and play value. In recent years, the industry has experienced
rapid consolidation, driven by the desire of industry leaders to offer a range
of products across a broader variety of categories.


     The key competitors in specialty toys can be identified for each product
category as follows:


     - Puzzles/brainteasers: Binary Arts, Bedazzled


     - Glow-in-the-Dark: Great Explorations, Illuminations

     - Activity Kits: Creativity for Kids, Curiosity Kits

     - Science Toys: Wild Planet

     - Rainbows: White Eagle, Lightrix

     - Games: University Games, Briarpatch.

All of these competitors are small in size, relative to the toy manufacturers in
other segments of the business.


     There are no major competitors in the Brite Ideas (foam-core post cards)
line of products. However, Hallmark Cards and Gibson Greetings are fiercely
competitive in the stationery line as a whole, and may decide to enter the
foam-core post cards market at any given time. The size of these companies,
relative to the size of New Futech, may cause us to lose market share if they
decide to market foam based cards. If this were to occur, we would seek a court
order for these competitors to cease using our patented technology.


RESEARCH AND DEVELOPMENT


     Futech is in the process of consolidating its research and development
resources into its facility in Berkeley, California. In addition, Futech
maintains relationships with individual inventors and companies involved in the
development of related technologies that are used to enhance and expand Futech's
products. New Futech will take over the management of Futech's research and
development resources after the merger.


DISTRIBUTION AND LOGISTICS


     We expect to operate distribution facilities in the East, Midwest and West,
which are currently operated by Trudy, Futech and DaMert, respectively. We will
be electronic data interface integrated to receive orders and invoice our major
customers. This means we can receive customer orders electronically, and after
shipping orders, invoice the customers electronically. This allows us to
generate and ship sales orders at a very low operating cost. In addition, we
will have a custom bar-code-based inventory management system and computerized
shipping system in our warehouses. High speed packing machines, labeling
machines and conveyors will allow for quick processing of customers' orders,
allowing us to respond to orders within forty-eight hours of the placement of
orders. A computerized rate


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<PAGE>   70


shopper allows us to determine the most economical and fastest way to ship
products to our customers, thereby controlling our overall freight expenses and
providing exceptional service. All of our major distribution centers can easily
be expanded within 30 to 60 days to accommodate major new distribution
opportunities as they are presented in the future. With the addition of the West
and East coast distribution facilities, we will be able to service our East and
West coast customers in the mass retail market in two days instead of the
previous five days.



YEAR 2000



     The Year 2000 presents special concerns for business and consumer
computing. The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the year. Computer programs that
have date-sensitive functions may recognize a date using "00" as the year 1900
rather than the year 2000. This issue has grown in importance as the use of
computers has become more pervasive and the dependence on computers has
increased. Futech could be materially and adversely affected by the Year 2000
issue, either directly or indirectly. This could occur as a result of a system
failure of miscalculation causing disruption to operations, including a
temporary inability to process transactions, send invoices, ship goods, or
engage in similar, normal business activities.



     Failure of New Futech to complete testing and renovation of its critical
systems on a timely basis could have a material adverse effect on our financial
condition and operating results, as could Year 2000 compliance problems
experienced by other companies with whom we do business. Because of the broad
range of possible issues and the large number of variables involved, it is
impossible to quantify the potential cost of problems should New Futech's
remediation efforts, or the efforts of those companies with which Futech does
business, not be successful.



     Futech's internal information systems, both in Phoenix and in Wisconsin,
are client/ server environments. The system in Phoenix has been tested by a
third party computer consulting firm and we believe this system is Year 2000
compliant. We hired another third party computer consultant to test the system
in Wisconsin. This work was begun in June 1999 and is expected to be completed
before October 15, 1999. We have replaced several pieces of hardware and we have
upgraded all of our operating and administration software. We believe this
system will be Year 2000 compliant on or before October 15. In addition to the
computer systems, we have done testing of, and have subsequently upgraded our
telephone systems and voice mail systems at both the Phoenix and Wisconsin
locations. We have also installed new hardware and software for internal (e-
mail) communications. All of the vendors for these upgrades have represented to
us that the systems are now (or will be by October 15) Year 2000 compliant. Our
total cost of all these upgrades and testing was approximately $60,000.



     Futech has not begun formal communications with suppliers or customers to
determine the extent to which their failure to remedy their own Year 2000
compliance problems would materially affect Futech. At this time we do not know
whether the suppliers will be able to deliver goods or services, or whether
customers will be able to place orders, beyond December 31, 1999. If our
suppliers are not able to provide necessary products or services to Futech as a
result of Year 2000 compliance problems, we may be forced to seek other
suppliers, or cease doing business with such vendors. Additionally, if our major
customers are not able to function as a result of Year 2000 compliance


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<PAGE>   71


problems, we may be forced to substantially reduce operations, or worst case,
discontinue operations until such problems are resolved.



     At this time we cannot guarantee that there would not be a system failure.
Our contingency plan, is to use all of our employees to manually perform the
duties that would normally be performed electronically in order to meet the
demands of our customers. We believe that our company is trading partners with
vendors and customers who are much larger than us. We believe because of their
size, they will have instituted Year 2000 compliance programs to a much larger
degree than Futech. If these companies do not establish adequate Year 2000
resolutions, we may be, worst case, forced to substantially reduce or
discontinue operations.



     Any failure to address any unforeseen Year 2000 issue could adversely
affect our business, financial condition, and results of operations.


EMPLOYEES


     No employee of the merging companies is a member of a union. The merging
companies consider their respective relations with their employees to be good.
Initially, we expect to employ approximately the following number of full-time
employees in our locations:



     - corporate office and futechinteractive.com operating unit, Phoenix, AZ 45
       employees;



     - publishing, stationery and novelties operating units and distribution
       centers, Waukesha, WI 42 employees;



     - toys and games operating unit, mass market sales and distribution center,
       Indianapolis, IN 21 employees;



     - specialty toys and games distribution, West coast distribution center,
       and research and development facility, Berkeley, CA 25 employees;



     - specialty and educational products operating unit, East coast, direct
       mail and e-commerce distribution center, Norwalk, CT 18 employees; and



     - sales office, Highland Park, IL 1 employee.



     The merging companies employed a total of approximately 152 employees as of
August 31, 1999.


PROPERTIES


     Our facilities will be comprised of the properties listed below. We believe
that these facilities are adequate for our current requirements and that
suitable additional space is readily available if needed.



     - Corporate office and oKID.com operating unit: 9,628 sq. ft. at 2999 North
       44th Street, Suite 225, Phoenix, AZ. Lease expires on February 1, 2003.



     - Publishing and stationary operating units and distribution centers:
       58,000 sq. ft. of warehouse and office space at N16 W23390 Stoneridge
       Drive, Waukesha, WI. The lease expires June 30, 2002.



     - Toys and games operating unit, mass market sales and distribution center:
       32,000 sq. ft. at 2237 Directors Row, Indianapolis, IN. The lease expires
       in five years with a renewal option for three additional years.


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<PAGE>   72


     - Specialty toys and games distribution, West coast distribution center,
       and research and development facility: 32,000 sq. ft. of office and
       warehouse space at 1609 Fourth Street, Berkeley, CA. It is divided into
       24,000 sq. ft. of warehouse and 8,000 sq. ft. of office space. The lease
       expires December 1, 2001 and provides for one six-year extension option
       at a fair market rental rate for a similar industrial gross lease.



     - Specialty and educational products operating unit, East coast, direct
       mail and e-commerce distribution center: 27,000 sq. ft. of office and
       warehouse space at 353 Main Avenue, Norwalk, CT. The lease expires
       December 31, 2004.



     - Sales office: 650 sq. ft. of office space at 580 Roger Williams Avenue,
       Suite 21, Highland Park, IL. The lease expires June 30, 2002.



     - Toys and games showroom and office space: 1,000 sq. ft. at Toy Center
       South, 200 Fifth Avenue, Room 516, New York, NY. The showroom is used to
       exhibit products for the International Toy Fair in February each year and
       is used as an office for the balance of the year. A larger space will be
       needed as the number of products and product lines continue to grow. The
       lease expires April 30, 2006.



     - Previous office space: 4,643 sq. ft. in Laguna Hills, CA is currently
       sub-leased. The lease expires June 30, 2000.



     - Previous office space: 4,662 sq. ft. at 21700 Oxnard Street, Woodland
       Hills, CA is currently sub-leased to a third party for the balance of the
       lease. The lease expires December 31, 2000.


GOVERNMENT REGULATIONS


     We will endeavor to comply with all applicable regulations through a
program of quality inspections and product testing. We expect to maintain
product liability insurance in the amount of $2,000,000.


LEGAL PROCEEDINGS


     Futech was involved in one material legal proceeding as a defendant in Gary
Roy, a/k/a Joe Billings v. Futech Interactive Products, Inc. This action was
initiated on November 20, 1998 in Waukesha County Circuit Court of Wisconsin.
Mr. Billings, a Director of Futech, alleges Futech wrongfully terminated his
employment and failed to perform according to the terms of the Agreement for
Purchase and Sale of Assets of XYZ. Mr. Billings claims damages resulting from
the wrongful termination equal approximately $1,150,000 plus costs and
attorneys' fees. This suit was dismissed pending arbitration. Futech admits it
owes Mr. Billings amounts in connection with the acquisition of XYZ and has
accrued such amounts in Futech's financial statements.



     On September 16, 1999, after mediation, Futech and Billings signed
settlement agreements under which this lawsuit was resolved and Futech agreed to
pay to Billings $2,250,001 on or before December 7, 1999 in full settlement of
all amounts owed under the XYZ purchase agreement and the Billings employment
agreement. At the time of the settlement, Futech had debt obligations in its
financial statements of $8,576,923 with respect to the XYZ purchase agreement.
Upon payment of the new settlement agreement, Futech will record a reduction to
the XYZ debt and intangible assets. As part of these agreements, Mr. Billings
has resigned from the Futech board of directors, however this resignation can be
revoked if payments under the agreement are not paid timely. See "Certain
Relationships And Related Transactions."


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<PAGE>   73

                            NEW FUTECH'S MANAGEMENT

     The following table sets forth information regarding the executive officers
and directors of New Futech following the completion of the mergers:

DIRECTORS AND EXECUTIVE OFFICERS

     The following table describes the person who will initially be directors
and executive officers of New Futech following the mergers:


<TABLE>
<CAPTION>
NAME                                   AGE                      TITLE
----                                   ---                      -----
<S>                                    <C>    <C>
Vincent W. Goett.....................  35     Chairman of the Board, Chief Executive
                                              Officer and Director
Paul C. Oursler......................  42     President
Joseph K. Petter.....................  56     Chief Operating Officer
Frederick B. Gretsch, Sr.............  53     Chief Financial Officer, Treasurer and
                                              Secretary
Carl E. "Chip" Voigt, IV.............  38     Vice President, Games/Toys and Director
William W. Burnham...................  56     Vice President, Specialty and Educational
                                              Products and Director
Roderick L. Turner...................  66     Director
Gary A. Oman.........................  50     Director
Robert J. Rosepink...................  48     Director
F. Keith Withycombe..................  54     Director
</TABLE>



     VINCENT W. GOETT. Mr. Goett has served as Chairman and Chief Executive
Officer and Director of Futech since March 1995 and as President from September
1998 through August 1999. Mr. Goett has served as Chairman of the Board, Chief
Executive Officer, President and Director of Janex since December 11, 1998. Mr.
Goett joined Futech as its Chief Operating Officer on January 5, 1995. From
August 1991 to January 1995, Mr. Goett owned and operated Paradise
International, an investment business engaged in acquisition and joint venture
activities. From September 1985 to August 1991, Mr. Goett was President of
Westplex, Inc. which effected major investments in commercial real estate. Mr.
Goett attended Arizona State University. Mr. Goett is the son-in-law of Roderick
L. Turner, a director of Futech, and brother-in-law of R. Bradford Turner, who
is Vice President, Stationery/Novelties of Futech.



     PAUL C. OURSLER. Mr. Oursler was hired as president of Futech on September
1, 1999. Prior to joining Futech, from September 1997 to September 1999, Mr.
Oursler was Director of Fan Fueler, a retail merchandising division of publicly
traded Action Performance Co., Inc., a leader in motorsports merchandising. From
August 1992 to September 1997, he served as CEO of Music Concepts, Inc. a
company he founded in 1992, that licensed and marketed products as well as
developed sponsorships and endorsement opportunities with properties within the
country music and NASCAR industries. From July 1985 thru August 1992, Mr.
Oursler served as President of Corporate Image, Inc., a company he founded and
that licensed and marketed merchandise and corporate sponsorships within the
NASCAR industry. From August 1980 to July 1985, Mr. Oursler served as
Vice-President of Sales for Concessions Management, Inc., a distributor of
printed sportswear and novelties to theme parks, corporations, and the country
music industry. Mr. Oursler attended Volunteer State Community College.


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<PAGE>   74

     JOSEPH K. PETTER. Mr. Petter has served as Chief Operating Officer of
Futech since February 1997. Mr. Petter has served as Chief Operating Officer of
Janex since December 11, 1998. Mr. Petter joined Futech as Vice President of
Operations in March 1996. Prior to joining Futech, from July 1989 to December
1995, Mr. Petter was a Division Vice President of ADVO, Inc., a direct mail
marketing company. From 1970 to 1989, Mr. Petter was a Group or Senior Manager
with several different operating companies of the Dun & Bradstreet Corporation.
Mr. Petter completed the Executive Management Program from the University of
Chicago and received his B.S. in Industrial Engineering from the Illinois
Institute of Technology.


     FREDERICK B. GRETSCH, SR. Mr. Gretsch has served as Chief Financial
Officer, Secretary and Treasurer of Futech since September 1997. Mr. Gretsch has
been Chief Financial Officer, Treasurer, Secretary and Director of Janex since
December 11, 1998. He has served in various financial and marketing positions
throughout his career. Prior to joining Futech, from May 1996 to December 1996,
Mr. Gretsch was Treasurer of Vail Resorts, Inc., a ski resort company and from
November 1995 to May 1996, he was Treasurer of Cable Systems International, a
copper wire and cable manufacturing company. From February 1992 to February
1995, Mr. Gretsch was Director of Treasury Operations at General Dynamics
Corporation, a defense contractor. From June 1975 to December 1991, he was Vice
President at Citicorp/Citibank, a major bank holding company. From October 1968
to June 1975, Mr. Gretsch was manager of Sales Accounting and Administrator of
Finance at RCA, a diversified corporation. Mr. Gretsch received his MBA from
Columbia University and his B.A. in Economics from Georgetown University.



     CARL E. "CHIP" VOIGT, IV. Mr. Voigt is the President and Chief Executive
Officer of Fundex Games, Ltd., and he has held those positions since he
co-founded Fundex in 1991. Mr. Voigt has been engaged in the toy and game
industry for over 15 years. Prior to his activities on behalf of Fundex, Mr.
Voigt spent four years as a manufacture's representative in the toy and game
industry. Mr. Voigt received a B.S. degree in Industrial Management from Purdue
University.


     WILLIAM W. BURNHAM. Mr. Burnham has been President of Trudy Corporation
since 1979, prior to which he served in marketing and sales positions for
Pepsico and Vlasic Foods. Mr. Burnham received a B.S. from Trinity College and
an M.B.A. from Columbia University.

     RODERICK L. TURNER. Mr. Turner has served as Director of Futech since July
1995. Mr. Turner retired as Senior Executive Vice President of Colgate
Palmolive, Inc. in 1992 with 30 years of service in various executive management
positions within Colgate. Since 1992, Mr. Turner has been engaged in
entrepreneurial interests along with the management of his personal investments.
Mr. Turner is the father-in-law-of Vincent Goett, an officer and director of
Futech, and father of R. Bradford Turner, an officer of Futech. Mr. Turner
received his BA in Business from Cornell University.

     GARY A. OMAN. Mr. Oman has served as a Director of Futech since January
1996. Mr. Oman has been a Vice President of Coldwell Banker Success Realty since
1991. From 1973 to 1991, Mr. Oman was a real estate investment consultant and
entrepreneur. Prior to his business interests in real estate investments, Mr.
Oman was in the education profession. Mr. Oman attended Mankato State College
where he studied Educational Administration.

     ROBERT J. ROSEPINK. Mr. Rosepink has served as a Director of Futech since
January 1998. Mr. Rosepink has been a partner of Rosepink & Estes, a law firm
specializing in estate planning, probate and trust law since 1988. Mr. Rosepink
was a

                                       69
<PAGE>   75

partner at the law firm of Snell & Wilmer in Phoenix, Arizona from 1985 to 1988
and an associate and shareholder at the law firm of Fennemore, Craig, von Ammon,
Udall & Powers in Phoenix, Arizona from 1975 to 1985. Mr. Rosepink received his
J.D. degree, with honors, from George Washington University.

     F.  KEITH WITHYCOMBE. Mr. Withycombe has served as a Director of Futech
since November, 1998. Mr. Withycombe was President and Chief Operating Officer
of Evans Withycombe Residential, Inc. from 1994 to 1996, and President of Evans
Withycombe Inc. from 1981 to 1994. Mr. Withycombe received a B.S. in Engineering
from the United States Air Force Academy and a M.S. in Engineering from Arizona
State University.


     Board Compensation Committee Report on Executive Compensation.  In the
absence of a separate compensation committee, the Futech board of directors
reviewed the compensation payable to the persons mentioned below. The board
believed that the salary payable and stock options awarded to the President and
Chief Executive Officer reflected his contributions to us, demonstrated by his
vision and leadership with respect to our financing and acquisition strategies.
The board felt that the salary payable and stock options awarded to the Chief
Operating Officer appropriately compensated him for overseeing all of our
manufacturing operations, both domestic and international. The board determined
that the salary payable and stock options awarded to the Chief Financial
Officer, Treasurer, and Secretary reflected his contributions to our progress in
improving our financial position and instituting more extensive financial
controls consistent with the company's growth.


MANAGEMENT TEAM


     - WILLIAM E. HERMES, VICE PRESIDENT -- PUBLISHING.  Mr. Hermes joined
       Futech in October, 1998. Prior to joining Futech, Mr. Hermes was Vice
       President of Sales with Kidsbooks, Inc. in Chicago. Mr. Hermes was Vice
       President of Sales and part owner of XYZ Distributors, and prior to that
       was Manager of National Accounts with Sight & Sound, Inc. Mr. Hermes
       worked as Military Sales Manager with Western Publishing and also worked
       in packaged good sales with Kraft Foods. Mr. Hermes graduated in 1982
       from the University of Wisconsin.



     - R. BRADFORD TURNER, VICE PRESIDENT -- STATIONERY AND NOVELTIES.  Mr.
       Turner joined Futech in October, 1998. Prior to joining Futech, Mr.
       Turner served as Group Marketing Manager for the Kellogg's Company,
       responsible for regional promotions, media and advertising for their
       Latin American operations. Previously, Mr. Turner served as Regional
       Account Director for the Leo Burnett Advertising Agency, and in various
       account management positions in Young & Rubicam and Foote, Cone and
       Belding. Mr. Turner has a B.A. from Tulane University.



     - ELISABETH T. PRIAL, VICE PRESIDENT -- PUBLISHER.  Mrs. Prial joined Trudy
       in 1991 and was appointed Vice President of Sales for Trudy Corporation
       in 1994. In 1996, Mrs. Prial became Publisher of Trudy. Prior to joining
       Trudy, she worked in juvenile publishing with Warner Books, Putnam
       Publishing, Bantam Books, and others. Mrs. Prial attended the Fashion
       Institute of Technology in New York.



     - FREDERICK A. DAMERT, VICE PRESIDENT -- RESEARCH AND DEVELOPMENT.  Mr.
       DaMert was the founder and Chairman of the Board of DaMert Company since
       February 1973. He owned and operated DaMert for 26 years, and is
       responsible for creating and sourcing toy and gift products. Mr. DaMert
       attended San Francisco State University.


                                       70
<PAGE>   76


     - GAIL PATTON DAMERT, PH. D. VICE PRESIDENT -- BUSINESS INTEGRATION AND
       ANALYSIS. Dr. DaMert became a member of the DaMert Board of Directors in
       1983. In December 1989, she joined DaMert as the Director of Finance. In
       January 1994, she became DaMert's Chief Executive Officer. Prior to 1989,
       Mrs. DaMert was a systems engineering manager at Lockheed Missiles and
       Space Company. She holds a BA Degree in Mathematics and Astronomy from
       Smith College, and a PhD in Astronomy from State University of New York
       at Stony Brook.



     - STEPHEN S. STUHMER, PRESIDENT -- E-COMMERCE.  Mr. Stuhmer joined Futech
       in July, 1999. From November 1994 through December 1998, Mr. Stuhmer
       founded and served as Chairman, President and CEO for Webshare Inc., a
       100% Internet based e-commerce travel and lead-generation company. In
       August 1997, Mr. Stuhmer founded Coldwell Banker Success In Time, the
       first Coldwell Banker Real Estate franchise operating exclusively as an
       Internet based, e-commerce online real estate company, which he continues
       to operate.


EMPLOYMENT AGREEMENTS

     During 1997, in return for services rendered, Futech granted Vincent W.
Goett 333,333 options to purchase common stock at an exercise price of $1.50 per
share, expiring in 2009.

     VINCENT W. GOETT, the Chairman of the Board, President and Chief Executive
Officer of Futech, entered into an employment agreement with Futech dated
December 31, 1997. Under the agreement, Mr. Goett is entitled to an annual base
salary of not less than $200,000 in the first year of the agreement and $350,000
in the second year of the agreement, plus a bonus at Futech's discretion. In
addition, Futech agreed to grant Mr. Goett options to purchase a total of
233,333 shares of Futech's common stock at an exercise price of $3.00 per share,
exercisable as follows: 66,667 on December 31, 1998; 66,667 on December 31,
1999; 33,333 on December 31, 2000; 33,333 on December 31, 2001; and the
remaining 33,333 on December 31, 2002. The agreement terminates on December 31,
2002, unless earlier terminated, and is renewable for additional one year
periods. His agreement will remain in full force and will be assumed by New
Futech in the mergers.

     JOSEPH K. PETTER, Chief Operating Officer of Futech, entered into an
employment agreement with Futech dated February 1, 1997. Under the agreement,
Mr. Petter is entitled to $125,000 per year for the first year and $175,000 for
the second through fifth years of employment. The agreement terminates January,
2002. Mr. Petter also entered into a confidentiality agreement with Futech dated
March 4, 1996. His agreement will remain in full force and will be assumed by
New Futech in the mergers.

     FREDERICK B. GRETSCH, SR., Chief Financial Officer, Secretary and Treasurer
of Futech, entered into an employment agreement with Futech dated September 2,
1997. Under the agreement, Mr. Gretsch is entitled to an annual base salary of
not less than $125,000. The agreement terminates on December 31, 2000. Mr.
Gretsch also entered into a confidentiality agreement with Futech in connection
with his employment. His agreement will remain in full force and will be assumed
by New Futech in the mergers.


     WILLIAM E. HERMES, Executive Vice President -- Sales, entered into an
employment agreement with Futech dated April 1, 1999. Under the agreement, Mr.
Hermes is entitled to an annual salary of not less than $125,000. Additionally,
he received 83,333.33 immediately exercisable options to purchase Futech's
preferred stock at $1.50 per share


                                       71
<PAGE>   77


until March 1, 2009. Mr. Hermes also received options to purchase 66,666.63
shares of Futech common stock at $7.50 per share. One third of these options may
be exercised on March 1 of each year from 2000 to 2002. The agreement terminates
on April 1, 2002. Mr. Hermes also entered into a confidentiality agreement with
Futech in connection with his employment. His agreement will remain in full
force and will be assumed by New Futech in the mergers.



     CARL E. "CHIP" VOIGT, IV AND CARL E. VOIGT, III, The Merger Agreement
provides that Carl E. Voigt, IV, who is currently the CEO of Fundex, will be a
director and vice president of the toys/games division of New Futech as well as
a director and president of New Sub. His father, Carl E. Voigt, III will be the
vice president of New Sub. In connection with these positions each of them will
receive three year employment contracts providing for a base salary of $150,000
per year and options for 33,333 shares of New Futech stock, vesting in three
annual installments with an exercise price of $4.50 per share.



     FRED DAMERT AND GAIL PATTON DAMERT, who are currently the owners and
principal executives of DaMert, will be employed as Vice President -- Research
and Development and Vice President -- Business Integration and Analysis,
respectively, of New Futech after the mergers. They each will receive a three
year employment agreement providing for a base salary of $120,000 per year,
without stock options.



     WILLIAM W. BURNHAM, who is presently one of the principal stockholders and
executive officers of Trudy, will be employed as the Vice President -- Specialty
and Educational Products of New Futech. Mr. Burnham will also be a director of
New Futech. Mr. Burnham will receive a three year employment agreement providing
for a base salary of $100,000 per year and stock options for a total of 20,000
shares of New Futech stock, vesting in equal, annual installments and with an
exercise price of $7.50 per share.



     PAUL C. OURSLER, President of Futech, entered into an employment agreement
with Futech on September 1, 1999. Under the agreement, Mr. Oursler is entitled
to a base annual salary of $150,000 in the first year and $200,000 in each of
the 2(nd) and 3(rd) years. The agreement calls for a semi-annual bonus to be
paid in the amount of 1% of gross revenues if Futech is profitable, and if
Futech's revenue exceeds $12,500,000 for the semi-annual period. The agreement
grants immediately vested stock options which allow Mr. Oursler to purchase up
to 100,000 shares of New Futech common stock at $1.50 per share from the date
the agreement is signed until September 1, 2009. The agreement also allows Mr.
Oursler to purchase additional shares of New Futech at $3.75 per share according
to the following schedule:



     35,000 shares from 9-1-2000 until 9-1-2010


     30,000 shares from 9-1-2001 until 9-1-2011


     30,000 shares from 9-1-2002 until 9-1-2012



The employment agreement expires 9-1-2002



     STEPHEN S. STUHMER, President -- E-Commerce, entered into an employment
agreement with Futech on July 15, 1999. Under the agreement, Mr. Stuhmer is
entitled to a base annual salary of $125,000. The agreement grants immediately
vested stock options which allow Mr. Stuhmer to purchase up to 83,333.33 shares
of New Futech common stock at $1.50 per share from the date the agreement is
signed until July 15, 2009. The


                                       72
<PAGE>   78


agreement also allows Mr. Stuhmer to purchase additional shares of New Futech at
$7.50 per share according to the following schedule:



     22,222.20 shares from 7-15-2000 until 7-15-2010


     22,222.23 shares from 7-15-2001 until 7-15-2011


     22,222.23 shares from 7-15-2002 until 7-15-2012



The employment agreement expires 7-15-2002


EXECUTIVE COMPENSATION


     The following tables set forth for the year ended December 31, 1998, the
compensation awarded to, earned by, or paid to Futech's Chief Executive Officer
and the other Futech executive officers who were serving as executive officers
as of December 31, 1998, and whose aggregate compensation exceeded $100,000.
These tables do not include information about 1998 compensation of executive
officers of the other merging companies. New Futech's employment agreements with
its executive officers, including those with executive officers of the other
merging companies, are described under the heading "Employment Agreements"
above. The stock option awards shown in the tables below have been adjusted for
the conversion ratio into New Futech stock options resulting from the mergers.


                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                           LONG-TERM
                                                      COMPENSATION AWARDS
                              ANNUAL COMPENSATION    ---------------------
                             ---------------------   SECURITIES UNDERLYING     ALL OTHER
NAME AND PRINCIPAL POSITION  SALARY($)    BONUS($)    OPTIONS/SARS(#)(1)      COMPENSATION
---------------------------  ---------    --------   ---------------------    ------------
<S>                          <C>          <C>        <C>                      <C>
Vincent W. Goett...........  $200,000       --             1,398,333(2)               --
  Chief Executive Officer
Joseph K. Petter...........  $176,042       --                83,333                  --
  Chief Operating Officer
Frederick B. Gretsch,
  Sr.......................  $129,594       --               116,667                  --
  Chief Financial Officer,
  Secretary and Treasurer
</TABLE>

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

(1) Consists entirely of stock options. The amounts shown have been adjusted for
    the exchange ratio in the mergers.


(2) Of the amount shown, 331,667 are owned by Mr. Goett and his spouse and the
    remainder are owed by Palmilla Management Trust, which they control.

                                       73
<PAGE>   79

                     OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                       INDIVIDUAL GRANTS
                           -----------------------------------------
                              NUMBER
                                OF         PERCENT OF
                            SECURITIES       TOTAL
                            UNDERLYING    OPTIONS/SARS
                           OPTIONS/SARS    GRANTED TO    EXERCISE OF
                             GRANTED      EMPLOYEES IN   BASE PRICE    EXPIRATION      GRANT DATE
          NAME                 (#)        FISCAL YEAR      ($/SH)         DATE      PRESENT VALUE(2)
          ----             ------------   ------------   -----------   ----------   ----------------
<S>                        <C>            <C>            <C>           <C>          <C>
Vincent W. Goett.........     41,667          2.43%         1.50          1/3/04         12,500
                             240,000         14.01%         1.50         3/31/04         72,000
                              50,000          2.92%         1.50          5/5/04         15,000
                              33,333          1.95%         1.50         6/24/04         10,000
                             200,000         11.67%         1.50         8/10/04         60,000
                             700,000         40.86%         1.50         12/3/08        210,000
                             133,333          7.78%         1.50        12/15/04         40,000
Frederick B. Gretsch,
  Sr. ...................     83,333          4.86%         4.50         1/29/08         25,000
                              33,333          1.95%         4.50         6/29/08         10,000
Joseph K. Petter.........     83,333          4.86%         4.50         1/29/08         25,000
</TABLE>

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

(1) The number of options and the exercise price have been adjusted to reflect
    the exchange ratio in the mergers.


(2) The fair value for these options/warrants was estimated at the date of grant
    using the minimum value pricing model assuming a risk-free interest rate of
    5.38%; dividend yield of 0%; and a weighted average expected life of five
    years.

  AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTIONS/SAR
                                     VALUES

<TABLE>
<CAPTION>
                                                               NUMBER OF
                                                              SECURITIES            VALUE OF
                                                              UNDERLYING          UNEXERCISED
                                                              UNEXERCISED         IN-THE-MONEY
                                                            OPTIONS/SARS AT     OPTIONS/SARS AT
                                                            FISCAL YEAR-END     FISCAL YEAR-END
                                     SHARES       VALUE           (#)                 ($)
                                   ACQUIRED ON   REALIZED    EXERCISABLE/         EXERCISABLE/
              NAME                 EXERCISE(#)     ($)       UNEXERCISABLE    UNEXERCISABLE(1),(2)
              ----                 -----------   --------   ---------------   --------------------
<S>                                <C>           <C>        <C>               <C>
Vincent W. Goett.................   none          n/a          1,341,667               $0
                                                               1,189,999               $0
Frederick B. Gretsch, Sr.........   none          n/a             83,333               $0
                                                                 108,333               $0
Joseph K. Petter.................   none          n/a             83,333               $0
                                                                  91,667               $0
</TABLE>

-------------------------
(1) There were no in-the-money options or warrants as of the last fiscal year
    end. The company has no SARs.


(2) Fair market value for options and warrants was based upon management's
    estimate of the fair value of the Company's common stock of $1.50 and using
    the minimum value option valuation method. The number of options and the
    exercise price have been adjusted to reflect the exchange ratio in the
    mergers.


                                       74
<PAGE>   80

COMPENSATION OF DIRECTORS

STANDARD ARRANGEMENTS

     As compensation for their services, non-employee directors are granted
options each year to purchase 833.33 shares of common stock of New Futech at a
price of $1.50 per share. Additionally, directors are reimbursed for
out-of-pocket expenses that are incurred in connection with their duties
associated with our business.

OTHER ARRANGEMENTS


     In December 1998, as consideration for a personal guarantee of a line of
credit with a bank, the following directors received warrants to purchase common
stock of New Futech.


     F. Keith Withycombe received warrants to purchase the equivalent of 700,000
shares of New Futech at an exercise price of $1.50 per share. These warrants are
exercisable starting in December 1998 and expire in December 2008. The fair
value of the warrants at the time of issuance was $420,000.

     Robert J. Rosepink received warrants to purchase the equivalent of 133,333
          shares of New Futech at an exercise price of $1.50 per share. These
warrants are exercisable starting in December 1998 and expire in December 2008.
The fair value of the warrants at the time of issuance was $80,000.


     Vincent W. Goett received warrants to purchase the equivalent of 700,000
shares of New Futech at an exercise price of $1.50 per share. These warrants are
exercisable starting in December, 1998 and expire in December 2008. The fair
value of the warrants at the time of issuance was $420,000.


1999 STOCK OPTION PLAN


     The 1999 Stock Option Plan (the "1999 Plan") will be submitted for approval
by New Futech's board of directors and stockholders. A total of 1,000,000 shares
of New Futech common stock will be reserved for issuance under the 1999 Plan.
The 1999 Plan will survive the merger.



     Purposes.  The purpose of the 1999 Plan will be to attract and retain the
best available directors and employees of New Futech and New Sub, as well as
appropriate third parties who can provide valuable services to New Futech, to
provide additional incentive to such persons and to promote the success of the
business of New Futech.



     Administration.  The 1999 Plan will be administered by the board of
directors or a committee of the board of directors constituted so as to permit
the 1999 Plan to comply with Rule 16b-3. The committee will determine the
persons to whom stock options will be granted, the terms of such grants and the
number of shares subject to options. The 1999 Plan provides for the grant of
options which qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code and "non-statutory stock options" which do not
specifically qualify for favorable income tax treatment under the Internal
Revenue Code.



     Eligibility and Participation.  Any employee of New Futech or any of its
subsidiaries will be eligible to receive options under the 1999 Plan.
Non-employee directors are eligible to receive only non-statutory stock options
under the 1999 Plan, while employee directors are eligible for both incentive
stock options and non-statutory stock options. In addition, any other individual
whose participation the committee determines is in the best interests of New
Futech is eligible to receive only non-statutory stock options under the 1999
Plan. The committee will have complete discretion to determine which eligible
individuals are to


                                       75
<PAGE>   81


receive option grants. In general, the only consideration received by New Futech
for the grant of an award will be past services or the expectation of future
services, or both. The 1999 Plan does not confer on any participant in the 1999
Plan any right with respect to continued employment or other services to New
Futech and will not interfere in any manner with the right of New Futech to
terminate a 1999 Plan participant's employment or other services.



     Stock Subject to the 1999 Plan.  The aggregate number of shares which may
be issued pursuant to the exercise of options granted under the 1999 Plan is
1,000,000 shares of New Futech's common stock, subject to adjustments in
circumstances such as reorganizations, recapitalizations, stock splits, reverse
stock splits, stock dividends and the like. If any outstanding option grant
under the 1999 Plan for any reason expires or is terminated, the shares of
common stock allocated to the unexercised portion of the option grant will again
be available for options under the 1999 Plan as if no options had been granted
with respect to those shares.



     Limitations on Awards.  No grants are required to be made during any
calendar year. No incentive stock options may be exercised:



     - more than ten years from the date of grant -- -- five years in the case
       of a 1999 Plan participant owning more than 10% or more of the total
       combined voting power of all classes of stock of New Futech or any
       incentive stock option group member;



     - immediately after the date the 1999 Plan participant ceases to perform
       services for New Futech or any incentive stock option group member, for
       reasons other than death or disability);



     - one year after the date the 1999 Plan participant ceases to perform
       services for New Futech or any incentive stock option group member if due
       to death or disability; or



     - the date the 1999 Plan participant ceases to perform services for New
       Futech or any incentive stock option group member if cessation is for
       cause.



     No non-statutory stock option may be exercised more than:



     - ten years from the date of grant;



     - one year after the date the participant ceases to perform services for
       New Futech or its affiliates -- for reasons other than death, disability,
       retirement or cause;



     - two years after the date the participant cease to perform services for
       New Futech or its affiliates, if cessation is due to death, disability or
       retirement; or



     - the date the participant ceases to perform services for New Futech or its
       affiliates, if cessation is for cause.



     Pricing and Payment of Options.  The per share exercise price of each stock
option granted under the 1999 Plan will be established by the committee at the
time of grant. Subject to the provisions of the Internal Revenue Code, grants to
Participants may be either incentive stock options or non-statutory stock
options. In the case of an incentive stock option, the per share exercise price
may be no less than 100% of the fair market value of a share of common stock on
the date of grant -- 110% in the case of a participant who owns, directly or
indirectly, 10% or more of the outstanding voting power of all classes of stock
of New Futech. The per share exercise price of a non-statutory stock option may
be any amount determined in good faith by the committee. With respect to
incentive stock options, the aggregate fair market value of the common stock for
which one or more


                                       76
<PAGE>   82


options granted to a participant may become exercisable during any one calendar
year may not exceed $1,000,000. The fair market value of the common stock will
be the closing price on the date in question on the principal exchange or other
market on which the stock is then traded.


     Under the 1999 Plan, the purchase price of an option is payable upon
exercise:


     - in cash;



     - by check;



     - to the extent permitted by the particular option grant, by transferring
       to New Futech shares of common stock at their fair market value as of the
       option exercise date -- provided that the participant held the shares of
       stock for at least six months; or



     - through a sale and remittance procedure by which a participant delivers
       concurrent written instructions to a New Futech-designated brokerage firm
       to sell immediately the purchased common stock and remit to New Futech
       sufficient funds to pay for the options exercised and by which the
       certificates for the purchased common stock are delivered directly to the
       brokerage firm.



     New Futech may also extend and maintain, or arrange for the extension and
maintenance of, credit to a participant to finance the purchase of shares
pursuant to the exercise of options, on such terms as may be approved by the
board of directors or its committee, subject to applicable regulations of the
Federal Reserve Board and any other applicable laws or regulations in effect at
the time such credit is extended.



     The committee may require, as a condition to exercise an option, that the
participant pay to New Futech, in cash or in shares of the common stock, the
entire amount of taxes which New Futech is required to withhold by reason of
such exercise, in such amount as the committee or the board of directors may
determine. Alternatively, the participant may elect, subject to rules adopted by
the committee or the board of directors, or New Futech may require, that New
Futech withhold from the shares to be issued that number of shares having a fair
market value equal to the amount which New Futech is required to withhold.



     Exercise.  As described above, the committee has the authority to determine
the vesting and exercise provisions of all grants under the 1999 Plan. In
general, under the 1999 Plan, no option will be exercisable during the lifetime
of a participant by any person other than the participant, his or her guardian
or legal representative.



     Accelerating Events.  The options granted under the 1999 Plan become fully
exercisable if New Futech is dissolved or liquidated, is acquired or subject to
a hostile takeover attempt, undergoes a change in control or if there is an
announcement or proxy solicitation relating to such events.



     Termination or Amendment of the 1999 Plan.  The Board of Directors may
amend or modify the 1999 Plan at any time; provided, that stockholders' approval
must be obtained for any action for which stockholders' approval is required in
order to comply with Rule 16b-3, the Internal Revenue Code, or other applicable
laws or regulatory requirements. The 1999 Plan will terminate on January 29,
2008, unless sooner terminated by the board of directors.


     Option Grants.  No options have been granted under the 1999 Plan.

                                       77
<PAGE>   83

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


     On October 17, 1997, Futech entered into an agreement for purchase and sale
of assets with XYZ Group, Inc., pursuant to which Futech purchased substantially
all of the assets of XYZ on May 1, 1998. Mr. Billings, a former director of
Futech, was the sole shareholder of XYZ. The agreement requires Futech to pay
the following consideration:



     - $1 million in cash;



     - $4 million in a 12-month, no interest note;



     - $2,867,334 in cash or in shares of common stock at $.20 a share -- $6.00
       for New Futech shares; and



     - an additional $1,000,000 to be added to the total amount, if the
       $4,000,000 is not paid by April 30, 1999. This additional $1,000,000 is
       now due and both the $4,000,000 and the additional $1,000,000 bear
       interest at 10%. Futech has previously paid $1 million in cash. As the
       sole shareholder of XYZ, a subchapter S corporation, Mr. Billings
       received the cash and shares of common stock constituting the purchase
       price for XYZ.



     On September 16, 1999, Futech and Billings signed settlement and mutual
release agreements, in which Futech agrees to pay to Billings $2,250,001 by
December 7, 1999 in full payment of the original purchase of XYZ and Billings'
employment agreement with Futech.



     Pursuant to the agreement for purchase and sale of assets with XYZ, Futech
assumed a $7 million line of credit from Republic Acceptance Corporation made by
XYZ. The line of credit generally bears interest at prime plus 2.5%. Mr.
Billings personally guaranteed the loan. Additionally, the loan is secured with
the inventory and accounts receivable of XYZ.



     On January 1, 1997, Futech entered into an agreement which allows Vincent
W. Goett, its chief executive officer, to borrow funds from Futech from time to
time. The outstanding balance bears interest at prime plus 1% on the amounts
outstanding and is due on December 31, 2001. There is an option to renew the
agreement for an additional three years. As of December 31, 1998, the balance
due to Futech was $1,440,270. As of August 31, 1999, the balance was $1,856,378.



     In April 1997, Roderick L. Turner, a director and stockholder of Futech,
loaned Futech $350,000, with interest at 10%, due July 2, 1999. This loan was
subsequently amended to be due on demand. In lieu of payment, Mr. Turner could
receive 840,000 common shares at $0.50 per share, which is the equivalent of
28,000 shares at $15.00 of New Futech common stock. On March 1, 1999, Mr. Turner
and Futech agreed to amend the loan agreement, converting the loan balance plus
interest, $417,083.33, to 2,780,555.533 shares of Futech common stock at $0.15
per share, which is the equivalent of 92,685 shares, or $4.50 per share, of New
Futech common stock. In connection with the original loan, Futech paid Mr. Goett
$35,000 and issued 1,000,000 shares of common stock, which is the equivalent of
33,333 shares of New Futech common stock, as a loan origination fee.



     On October 29, 1997, Roderick L. Turner and Vincent W. Goett loaned Futech
$245,000, with interest at 10%, due December 31, 1997. This loan was
subsequently amended to be due on demand. Futech repaid this loan on January 14,
1998. In connection with this loan, Futech issued to Mr. Goett 500,000 shares of
common stock,


                                       78
<PAGE>   84


which is the equivalent of 16,667 shares of New Futech common stock, as a loan
origination fee.



     At various times in 1997, Mr. Turner and Mr. Goett loaned Futech an
aggregate of $3,000,000, with interest at 10%, due in 1998 and 1999. This loan
was subsequently amended to be due on demand. In connection with the loans,
Futech paid Mr. Goett $300,000 and issued 7,000,000 shares of common stock,
which is the equivalent of 233,333 shares of New Futech common stock, as a loan
origination fee.



     On January 2, 1998, Mr. Turner and Mr. Goett loaned Futech $2,500,000, with
interest at 10%, due April 30, 1998. In connection with this loan, Futech paid
Mr. Goett $250,000 and issued 2,500,000 shares of common stock, which is the
equivalent of 83,333 shares of New Futech common stock, as a loan origination
fee. Later in the year the loan fee and stock were re-characterized as a loan
and stock options.



     On March 31, 1998, Mr. Goett personally guaranteed $3.6 million of a $4
million line of credit newly established by Futech with Republic Bank. In
connection with this guarantee, Futech paid Mr. Goett $360,000 and issued
7,200,000 shares of common stock, which is the equivalent of 240,000 shares of
New Futech common stock, as a loan origination fee. Later in the year, the loan
fee and stock were re-characterized as a loan and stock options.



     On May 5, 1998, Mr. Turner and Mr. Goett loaned Futech $1,500,000, with
interest at 10%, due May 5, 2000. At the same time, Mr. Turner and Mr. Goett
signed a subordination agreement with Republic Bank to subordinate all of their
debt to Republic. In connection with the loan and the subordination fee, Futech
paid Mr. Goett $500,000 and issued 3,000,000 shares of common stock, which is
the equivalent of 100,000 shares of New Futech common stock, as a loan
origination fee. Later in the year, the loan fee and stock were re-characterized
as a loan and stock options.



     On June 1, 1998, Futech entered a patent licensing and purchase agreement
with Grand Slam Investments, L.L.C., which is controlled by Mr. Goett. Under the
agreement, Grand Slam granted Futech exclusive, world-wide rights to use two
patents owned by Grand Slam in exchange for 12 monthly royalty payments of
$10,000 beginning June 1, 1998. On June 30, 1999, Futech would purchase the
patents for $1,500,000. Alternatively, Futech had the right to purchase the
patents at the earlier date of December 30, 1998 for a reduced cost of
$1,000,000. This agreement was amended on December 9, 1998, and Futech agreed to
pay $650,000 on December 9, 1998 and $850,000 on or before June 1, 1999.
Additionally the monthly royalty payments of $10,000 were suspended as of
December 31, 1998. Futech has not yet paid $831,385 of the payment that was due
to Mr. Goett on June 30, 1999. The cost of these patents to Grand Slam was
approximately $550,000. The selling price was determined by Mr. Goett based on
his belief of future, potential sales of products using the technology in the
patents.



     On June 24, 1998, Mr. Turner and Mr. Goett loaned Futech $1,000,000, with
interest at 10%, due December 24, 1998. In connection with the loan, Futech paid
Mr. Goett $100,000 and issued 2,000,000 shares of common stock, which is the
equivalent of 66,667 shares of New Futech common stock, as a loan origination
fee. Later in the year, the loan fee and stock were re-characterized as a loan
and stock options.



     On August 3, 1998, Mr. Turner loaned Futech $300,000, with no interest, due
upon repayment of the $2,000,000 loan by Mr. and Mrs. Goett described below. No
repayment was made and on March 1, 1999, Mr. Turner and Futech agreed to amend
the loan


                                       79
<PAGE>   85


agreement so that interest was added to the loan at 10% per annum. Additionally,
on March 1, 1999, the loan plus interest, $314,601, was converted to
2,097,342.47 shares of Futech common stock, which is the equivalent of 69,911
shares of New Futech common stock.



     On August 10, 1998, Mr. Goett and his wife, Melissa, loaned Futech
$2,000,000, with interest at 10%, due on September 1, 1999. In connection with
the loan, Futech paid Mr. and Mrs. Goett $200,000 and issued 8,000,000 shares of
Futech common stock, which is the equivalent of 266,667 shares of New Futech
common stock, as a loan origination fee. Later in the year, the loan fee and
stock were re-characterized as a loan and stock options.



     On December 3, 1998, F. Keith Withycombe, a director, and Mr. Goett
personally guaranteed Futech's $7 million line of credit newly established with
Bank of America. In return for their personal guarantees, Mr. Withycombe and Mr.
Goett each received warrants for 21,000,000 common stock shares which is the
equivalent of 700,000 shares of New Futech common stock, exercisable at $0.05
per share - - $1.50 per share of New Futech common stock. In connection with
this transaction, Robert J. Rosepink, a director of Futech, received warrants to
purchase 4,000,000 shares of common stock, which is the equivalent of 133,333
shares of New Futech common stock, exercisable at $0.05 per share - - $1.50 per
share of New Futech common stock. Additionally, as part of this agreement, Mr.
Goett may take a loan advance of $300,000 from Futech.



     On December 15, 1998, Mr. Turner and Mr. Goett agreed to extend the due
date of their combined $8,000,000 in loans, and Mr. and Mrs. Goett agreed to
extend the due date of the August 3, 1998 $2,000,000 loan to December 15, 1999.
In connection with this extension, Mr. Turner and the Goetts received options
for a combined 8,000,000 shares of Futech common stock, which is the equivalent
of 266,667 shares of New Futech common stock, exercisable at $0.05 per share -
- $1.50 per share of New Futech common stock.



     On May 21, 1999, F. Keith Withycombe, a director of Futech, agreed to
provide a secured $2,000,000 line of credit to Futech. The line of credit is due
on December 1, 1999 and interest accrues at prime plus 1% per annum. Mr.
Withycombe agreed to subordinate this secured loan to the $7,000,000 line of
credit to Futech from Bank of America. As consideration for this loan Futech
agreed to issue to Mr. Withycombe warrants for 9,000,000 shares of Futech common
stock, which is the equivalent of 300,000 shares of New Futech common stock,
exercisable at $0.05 per share - - $1.50 per share of New Futech common stock.
As consideration for facilitating this loan, Futech agreed to issue Robert J.
Rosepink, a director, warrants for 2,000,000 shares of Futech common stock,
which is the equivalent of 66,667 shares of New Futech common stock, exercisable
at $0.05 per share - - $1.50 per share of New Futech common stock. Additionally,
Mr. Goett received warrants for 5,000,000 shares of Futech common stock, which
is the equivalent of 166,667 shares of New Futech common stock exercisable at
$0.05 per share - - $1.50 per share of New Futech common stock.



     On May 31, 1999 Futech and Newtech Consulting, Inc., a 3% owner of New
Futech, agreed to convert outstanding debt including interest, totaling
$1,158,630, into $50,000 cash, a $200,000 note bearing interest at 8% due by
June 30, 1999, and 3,634,520 shares of Futech common stock. Futech paid to
Newtech $50,000 on May 31 and $100,000 during August 1999. No other payments
have been made under this agreement.



     Futech had an agreement with Newtech, an entity owned by Goett and the
former owner of Futech, whereby monthly payments were made to fund research and
development


                                       80
<PAGE>   86


efforts. Under the terms of the arrangement, Futech paid $25,000 per month
through December 2000 for the first right to purchase intellectual property
rights to the technologies developed by Newtech. Such payments were charged to
research and development expense as incurred. Total payments to Newtech were
$300,000 and $150,000 in the years ended December 31, 1997 and 1998 and $25,000
and $75,000 in the six-month periods ending June 30, 1998 and 1999,
respectively. This agreement was cancelled in October 1998.



     In October 1997, Futech acquired intellectual property assets from Newtech
for consideration of a $2,000,000 note payable and 3,000,000 shares of common
stock, which is the equivalent of 100,000 shares of New Futech common stock,
valued at $750,000. The fair value of the consideration given, $2,750,000, was
charged to research and development expense, as the underlying technologies have
not been commercialized, and the recoverability of the amount paid is uncertain.
The note bears interest at 10% and was due on April 30, 1998. The balance of
this past due loan is $1,000,000 as of December 31, 1998.



     In December 1997, Goett sold his 50 percent interest back to Newtech. As
partial consideration for his ownership interest, Newtech gave Goett 50% of the
Futech note receivable. Goett redeemed this note back to Futech to offset prior
borrowings. As a result, only $1,000,000 of the original Newtech note is
outstanding as of December 31, 1997 and 1998.



     In December 1997, Futech entered into an agreement to purchase equipment
owned by Newtech. As consideration for the assets acquired, Futech issued a note
payable of $300,000 and 6,000,000 shares of common stock, which is the
equivalent of 200,000 shares of New Futech, valued at $1,500,000. The note was
paid in February 1998.



     Futech signed an agreement on March 3, 1999 with Trudy that, in the event
the merger did not occur by June 1, 1999, Futech will assist in providing the
working capital needs of Trudy, if needed, to maintain sales momentum until the
closing. Its agreement also stated that Futech will assure that Trudy is not in
default under any of the loan agreements, including its borrowings from First
Union. Through August 31, 1999, Futech has paid $346,730 under this agreement.



     On June 7, 1999, Fundex and Futech entered into a loan and licensing
agreement under which (a) Futech agreed to loan Fundex $250,000 upon signing the
merger Agreement, $500,000 prior to the closing of the merger, and an additional
$750,000 loan or other financial assistance as required pending the mergers, and
(b) a nonexclusive license to use Futech's game board technology pending the
mergers in exchange for a royalty equal to 50% of net operating profits from the
associated products. The debt must be repaid with interest at the rate of 10%
per annum two years after the date of this agreement. If New Futech defaults on
the promissory notes issued to the Fundex stockholders under the merger
agreement, and as a result they foreclose on the stock of New Sub, $750,000 of
the balance due under these loans will be forfeited by New Futech as a penalty.
As of August 31, Futech has loaned to Fundex $231,829 under this agreement.



     On August 4, 1999, John W. Dawson agreed to loan Futech a total of
$5,000,000 for working capital needs. The loan bears interest at the prime rate
plus 1% due monthly, and the loan principal is due December 1, 1999. In
connection with the loan, Futech issued warrants for 20,000,000 shares of Futech
common stock exercisable at $0.05 per share. As


                                       81
<PAGE>   87


a fee for facilitating this loan, Robert J. Rosepink, a director, received
warrants to purchase 2,000,000 shares of Futech common stock, exercisable at
$0.05 per share. As of October 1, 1999, a total of $4,350,000 has been borrowed
on this loan.



     The transactions discussed in this section were not evaluated by a third
party to determine the fair value of such transactions. We do not know whether
these transactions have terms equivalent to those that would be in transactions
effected with unrelated third parties under similar circumstances.


                                       82
<PAGE>   88

                            NEW FUTECH STOCKHOLDERS

PRO FORMA SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


     Information regarding the stock ownership as of a recent date for each of
the merging companies is included in the prospectus/proxy statement supplement
for the particular merging company. The following table sets forth pro forma
information with respect to the beneficial ownership of New Futech's common
stock by:


- each of New Futech's directors;


- executive officers named in the summary Compensation Table;


- the executive officers and directors of New Futech as a group; and


- by each person known to New Futech who will be the beneficial owner of more
  than five percent of the outstanding common stock upon completion of the
  mergers, based on their stock ownership in the respective merging companies as
  of October 1, 1999.



     The percentages assume that none of the eligible Fundex stockholders elects
the All Cash Alternative and that no additional shares are issued to the Trudy
stockholders as described above in "Description of the Mergers and the Merger
Agreement -- Basic Terms of the Merger Agreement."



<TABLE>
<CAPTION>
                                                              SHARES BENEFICIALLY
                                                                OWNED PRIOR TO
                                                                 MERGER(1)(2)
                                                              -------------------
IDENTITY OF STOCKHOLDER(18) OR GROUP                           NUMBER     PERCENT
------------------------------------                          ---------   -------
<S>                                                           <C>         <C>
Vincent W. and Melissa Turner Goett(3)......................  3,132,567    39.4
Debra McTaggart(4)..........................................    650,882    11.6
Roderick L. Turner(5).......................................    766,899    13.2
Gary A. Oman(6).............................................     95,248     1.7
Robert J. Rosepink(7).......................................    286,685     4.9
Joseph K. Petter(8).........................................     47,796     0.8
Frederick B. Gretsch, Sr.(9)................................     38,889     0.7
F. Keith Withycombe(10).....................................  1,000,000    15.1
DaMert Trust UDT 9/28/98(11)................................    613,070    10.9
Carl E. Voigt IV(12)........................................    231,264     4.1
William W. Burnham(13)......................................    133,157     2.4
John W. Dawson(14)..........................................    666,667    10.6
Paul C. Oursler(15).........................................    100,000     1.7
Stephen S. Stuhmer(16)......................................     83,333     1.5
William E. Hermes(17).......................................     83,333     1.5
All Directors and Executive Officers as a Group (12
  persons)..................................................  5,999,171    61.4
</TABLE>


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


 (1) Beneficial ownership is determined in accordance with the rules of the SEC
     and generally includes voting or investment power with respect to
     securities. In accordance with SEC rules, shares which may be acquired upon
     exercise of stock options which are currently exercisable or which become
     exercisable within 60 days of the date of the table are deemed beneficially
     owned by the optionee. Except as indicated by footnote, and subject to
     community property laws where applicable, the persons or entities named in
     the table above have sole voting and investment power with respect to all
     shares of common stock shown as beneficially owned by them.


                                       83
<PAGE>   89


 (2) Includes shares issuable upon the exercise of warrants or options which are
     currently exercisable or become exercisable within 60 days of October 1,
     1999, as applicable for each of the following individuals: Vincent W. and
     Melissa Turner Goett, Roderick L. Turner, Robert J. Rosepink, Joseph K.
     Petter, Frederick B. Gretsch, Sr., F. Keith Withycombe, and Patricia A.
     Withycombe, Paul C. Oursler, Stephen S. Stuhmer, William E. Hermes and John
     W. Dawson.



 (3) 903,333 share options are currently exercisable by Vincent W. Goett,
     331,666 options are currently exercisable jointly by Vincent and Melissa
     Goett, and 233,333 warrants as well as 866,667 warrants are currently
     exercisable by Palmilla Management Trust, which is controlled by the
     Goetts. 71,600 shares are owned of record by Vincent Goett; 61,667 shares
     are owned of record by Melissa Goett; 520,475 shares are owned of record
     jointly by Vincent and Melissa Goett; and 10,000 are owned of record by
     three minor children of the Goetts. 333 shares are owned by purchase of
     Janex stock from broker.



 (4) 133,333 shares are owned of record by Newtech Consulting, Inc. and 121,151
     shares are owned of record by Newtech Consulting, Inc./Kingdom Funding,
     which are controlled by Stephen McTaggart; 183,412 shares are owned of
     record by Mr. McTaggart's spouse, Debra McTaggart; 100,000 shares owned of
     record by Pacific Ranch, LP, which is controlled by Debra McTaggart; and
     4,000 shares are owned of record by the six minor children of the
     McTaggarts.



 (5) Roderick L. Turner is the father-in-law of Vincent W. Goett. 30,000 are in
     a family trust controlled by Mr. Turner. 240,857 shares are owned
     individually, 45,459 shares are owned by Terry C. Turner, Mr. Turner's
     spouse. 191,667 options are currently exercisable by Mr. Turner. Mr. Turner
     has also converted two separate loans with Futech to shares yet-to-be
     received for a total of 162,597 additional shares.



 (6) Indicated shares are owned of record by The Oman Family Trust, of which
     Gary Oman and his spouse, Sherri Oman, are trustees.



 (7) 16,667 shares are owned of record by Robert J. Rosepink. Mr. Rosepink
     currently has 266,667 warrants that are exercisable.



 (8) 10,000 shares are held in Joseph K. Petter's Individual Retirement Account,
     and 6,667 shares are held by Mr. Petter individually. Mr. Petter currently
     has 27,778 options that are exercisable.



 (9) Mr. Frederick B. Gretsch, Sr. currently has 38,889 options that are
     exercisable.



(10) Mr. F. Keith Withycombe and Patricia A. Withycombe currently have an
     aggregate of warrants that are exercisable to purchase 1,000,000 shares of
     New Futech common stock.



(11) Indicated shares are owned of record by the DaMert Trust UDT September 28,
     1998, of which Frederick A. DaMert and his spouse, Gail Patton DaMert, are
     trustees.



(12) 212,331 shares are owned of record by Carl E. Voigt, IV and 18,933 options
     that are exercisable.



(13) Indicated shares are owned of record by William W. Burnham.



(14) John W. Dawson currently has 666,667 warrants that are exercisable.


                                       84
<PAGE>   90


(15) Paul C. Oursler currently has 100,000 options that are exercisable.



(16) Stephen S. Stuhmer currently has 83,333 options that are exercisable.



(17) William E. Hermes currently has 83,333 options that are exercisable.



(18) Name and address for each beneficial owner of greater than 5 percent of the
     stock:



     Vincent W. & Melissa Turner Goett


     6400 North 48th Street


     Paradise Valley, AZ 85253



     Debra McTaggart


     76955 Indian Valley Road


     San Miguel, CA 93451



     Roderick L. Turner


     36 Cornwell Beach Road


     Sands Point, NY 11050



     F. Keith Withycombe


     6237 North 59th Place


     Paradise Valley, AZ 85253



     DaMert Trust UDT 9/28/98


     1609 Fourth Street


     Berkeley, CA 94710



     John W. Dawson


     7400 E. McCormack Parkway, Suite B-200


     Scottsdale, AZ 85258


                                       85
<PAGE>   91

                    DESCRIPTION OF NEW FUTECH CAPITAL STOCK


     The following description of New Futech's capital stock is a summary only
and is subject to, and qualified in its entirety by, reference to New Futech's
certificate of incorporation and bylaws, copies of which are included as
exhibits to this prospectus/proxy statement, and by reference to Delaware law
under which New Futech is incorporated.


COMMON STOCK


     The current authorized capital of New Futech consists of 45,000,000 shares
of common stock, par value $.0001 per share. As of October 5, 1999, there was
one share of common stock issued and outstanding, which is held by Futech. In
connection with the mergers, New Futech is obligated to issue a minimum
aggregate of 5,510,550 and a maximum aggregate of 5,598,219 shares of New Futech
common stock to Trudy, Janex, Fundex, DaMert and Futech stockholders. There are
also 1,000,000 shares of New Futech common stock reserved for issuance pursuant
to New Futech's 1999 stock option plan, under which no shares have been granted.



     Each share of New Futech's common stock is entitled to one vote. The
directors of New Futech are elected to serve a three-year term on a staggard
board. Pursuant to its certificate of incorporation, New Futech's board of
directors may amend the bylaws. New Futech's bylaws provide for removal of a
director, with cause, by the affirmative vote of a majority of all shares
entitled to vote at an election of directors.



     Holders of New Futech capital stock do not have preemptive or other
subscription rights to purchase or subscribe for unissued stock or other
securities of New Futech.



     Holders of New Futech capital stock do not have special liquidation or
dividend rights.


PREFERRED STOCK


     The current authorized capital of New Futech consists of 5,000,000 shares
of preferred stock, having a par value of $.001 per share, none of which is
currently outstanding. New Futech expects to issue 2,222,222 shares of preferred
stock in exchange for $10,000,000 of the principal amount of its outstanding
debt. Each share of New Futech preferred stock is entitled to one vote.



     Holders of New Futech preferred stock do not currently have liquidation or
dividend rights, but the New Futech board does have the right to fix and
determine special dividend and liquidation rights of the preferred stock.



PROMISSORY NOTES



     The Fundex shareholders who do not elect to receive only cash for their
Fundex shares will receive one-year promissory notes from New Sub that are fully
and unconditionally guaranteed by New Futech and secured by a subordinated
pledge of New Sub's assets and a pledge of all the issued and outstanding stock
of New Sub. If New Futech defaults on the notes, then New Futech will forfeit up
to $750,000 of funds Fundex is entitled to borrow from New Futech pursuant to a
loan and licensing agreement between New Futech and Fundex.


                                       86
<PAGE>   92

                                    EXPERTS


     Ernst & Young LLP, independent auditors, have audited the following
financial statements of certain companies that are included in this registration
statement filed on Form S-4, Registration No. 333-80131, as set forth in their
reports, which each contain an explanatory paragraph describing conditions that
raise substantial doubt about each company's ability to continue as a going
concern as described in Note 1 to each financial statement. The following
financial statements are included in reliance on Ernst & Young LLP's reports,
given on their authority as experts in accounting and auditing:


     - Futech Interactive Products, Inc. as of December 31, 1997 and 1998 and
       for each of the two years in the period ended December 31, 1998.

     - Janex International Corporation as of December 31, 1998 and for year then
       ended.

     - Trudy Corporation d/b/a Soundprints as of March 31, 1999 and for year
       then ended.


     The financial statements of Fundex Games, Ltd. as of December 31, 1998 and
1997 and for the years then ended and Janex International, Inc. as of December
31, 1997 and for the year then ended, included in the prospectus/proxy statement
have been audited by BDO Seidman, LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon authority of said firm as experts in accounting and auditing.



     The annual financial statements of DaMert Company included in this
prospectus/proxy statement as of and for the fiscal years ended December 31,
1998 and 1997, have been audited by Armanino McKenna LLP, independent public
accountants, as set forth elsewhere in the prospectus/proxy, given on their
authority as experts in accounting and auditing.



     The annual financial statements of XYZ Group, Inc. as of December 31, 1997,
and for the year then ended and the financial statements of XYZ Group, Inc. as
of April 30, 1998, and for the four-month period then ended have been audited by
Virchow, Krause & Company, LLP, as set forth elsewhere in this prospectus/proxy
statement, given on their authority as experts in accounting and auditing.



     The financial statements of Gick Publishing, Inc. as of September 30, 1997,
and for the eleven months then ended have been audited by Sparks, Nelson &
Jacobson CPAs, independent public accountants, as set forth elsewhere in the
prospectus/proxy statement, given on their authority as experts in accounting
and auditing.


     The financial statements of Trudy Corporation as of March 31, 1998, and for
the year then ended, have been audited by Abrams and Company, P.C., independent
public accountants, as set forth in their report elsewhere in this
prospectus/proxy statement, given on their authority as experts in accounting
and auditing.


     Janex has agreed to indemnify and hold harmless BDO Seidman, LLP for any
and all liabilities, costs or expenses of any nature whatsoever, including legal
fees incurred by BDO Seidman, LLP in defending itself in a lawsuit brought
because of the re-issuance of BDO Seidman, LLP's report on its audit of Janex's
1997 financial statements. In accordance with the agreement, the indemnification
will be void and any advanced funds will be returned to Janex if a court, after
adjudication, finds BDO Seidman, LLP to be


                                       87
<PAGE>   93


liable for malpractice or BDO Seidman, LLP otherwise paid settlement or judgment
costs. A copy of the indemnification agreement is attached as Exhibit 10.25J.


                                 LEGAL MATTERS

     The validity of the shares of common stock offered hereby will be passed
upon for New Futech by Quarles & Brady LLP, Phoenix, Arizona. Certain legal
matters in connection with the mergers will be passed upon for Futech by Quarles
& Brady LLP, Phoenix, Arizona.

                      WHERE YOU CAN FIND MORE INFORMATION

     New Futech has filed Registration Statements on Form S-4 and Form 8-A with
the SEC. These registration statements contain some information that is not
included in this prospectus/proxy statement or in any prospectus/proxy statement
supplements provided to the stockholders of each of the merging companies. New
Futech will also file annual, quarterly and special reports, proxy statements
and other information with the SEC. Similarly, Janex and Trudy each file annual,
quarterly and special reports, proxy statements and other information with the
SEC. These SEC filings are available to the public over the Internet at the
SEC's web site at http.//www.sec.gov. You may also read and copy any document
filed by New Futech or any of the merging companies at the SEC's public
reference rooms in Washington, D.C., New York, and Chicago. You can call the SEC
at 1-800-732-0330 for further information about the public reference rooms.

     The SEC allows New Futech and the merging companies to "incorporate by
reference" some of the information we file with them, which means we are assumed
to have disclosed important information to you when we refer you to documents
that are on file with the SEC. The information we have incorporated by reference
is an important part of this prospectus/proxy statement and the related
prospectus/proxy statement supplement, and information that we file later with
the SEC will automatically update and supersede this information. We incorporate
by reference the documents listed below and any future documents we file with
the SEC under Sections 13(a), 13(c), l4 or 15(d) of the Securities Exchange Act
of 1934 until the mergers occur.

     - Annual Reports on Form 10-KSB of Janex for the fiscal year ended December
       31, 1998, and of Trudy for the fiscal year ended March 31, 1999.


     - Quarterly Reports on Form 10-QSB of Janex for the quarters ended March
       31, 1999 and June 30, 1999 and of Trudy for the quarter ended June 30,
       1999.



     - Current Reports on Form 8-K of Janex dated February 25, 1999 and of Trudy
       dated April 12, 1999.


     You may request a copy of these documents at no cost by writing to us at
the following address:

          Futech Interactive Products, Inc.
          2999 North 44th Street, Suite 225
          Phoenix, Arizona 85018-7247
          Attn: Frederick B. Gretsch, Sr.
          Telephone: 602-808-8765

                                       88
<PAGE>   94

     Although we are already sending to you the prospectus/proxy statement
supplement that relates specifically to your company, we will also send you the
prospectus/proxy statement supplement for any or all of the other merging
companies, without charge, upon request to us at the address stated above.


     You should rely only on the information provided, or incorporated by
reference, in this prospectus/proxy statement or any prospectus/proxy statement
supplement. Neither New Futech nor any of the merging companies has authorized
anyone else to provide you with additional or different information. New Futech
and New Sub are not making an offer of any securities in any state where the
offer is not permitted. You should not assume that the information in this
prospectus/proxy statement or any prospectus/proxy statement supplement is
accurate as of any date other than the date on the front of these documents or
an earlier date as indicated in this prospectus/proxy statement.


                                       89
<PAGE>   95

                         INDEX TO FINANCIAL STATEMENTS


<TABLE>
<S>                                                           <C>
Futech Interactive Products, Inc. and Subsidiary
  Consolidated Financial Statements
  Report of Ernst & Young LLP, Independent Auditors.........    F-4
  Consolidated Balance Sheets as of December 31, 1997 and
     1998 and June 30, 1999 (unaudited).....................    F-5
  Consolidated Statements of Operations for the years ended
     December 31, 1997 and 1998 and the six months ended
     June 30, 1998 (unaudited) and June 30, 1999
     (unaudited)............................................    F-6
  Consolidated Statements of Shareholders' Deficit for the
     years ended December 31, 1997 and 1998 and the six
     months ended June 30, 1999 (unaudited).................    F-7
  Consolidated Statements of Cash Flows for the years ended
     December 31, 1997 and 1998, and the six months ended
     June 30, 1998 (unaudited) and June 30, 1999
     (unaudited)............................................    F-8
  Notes to Consolidated Financial Statements................   F-10
Janex International, Inc. and Subsidiaries
  Consolidated Financial Statements
  Report of Ernst & Young LLP, Independent Auditors.........   F-29
  Report of BDO Seidman, LLP, Independent Certified Public
     Accountants............................................   F-30
  Consolidated Balance Sheets as of December 31, 1997 and
     1998 and June 30, 1999 (unaudited).....................   F-31
  Consolidated Statements of Operations for the years ended
     December 31, 1997 and 1998 and the six months ended
     June 30, 1998 (unaudited) and June 30, 1999
     (unaudited)............................................   F-32
  Consolidated Statements of Shareholders' Equity (Deficit)
     for the years ended December 31, 1997 and 1998 and the
     six months ended June 30, 1999 (unaudited).............   F-33
  Consolidated Statements of Cash Flows for the years ended
     December 31, 1997 and 1998, and the six months ended
     June 30, 1998 (unaudited) and June 30, 1999
     (unaudited)............................................   F-34
  Notes to Consolidated Financial Statements................   F-35
Trudy Corporation
  Financial Statements
  Report of Ernst & Young LLP, Independent Auditors.........   F-49
  Report of Abrams and Company, P.C., Independent
     Auditors...............................................   F-50
  Balance Sheets as of March 31, 1998 and March 31, 1999 and
     June 30, 1999 (unaudited)..............................   F-51
  Statements of Operations for the years ended March 31,
     1998 and 1999 and the three months ended June 30, 1998
     (unaudited) and June 30, 1999 (unaudited)..............   F-53
  Statements of Shareholders' Equity (Deficit) for the years
     ended March 31, 1998 and 1999 and the three months
     ended June 30, 1999 (unaudited)........................   F-54
</TABLE>


                                       F-1
<PAGE>   96

<TABLE>
<S>                                                           <C>
  Statements of Cash Flows for the years ended March 31,
     1998 and March 31, 1999, and the three months ended
     June 30, 1998 (unaudited) and June 30, 1999
     (unaudited)............................................   F-55
  Notes to the Financial Statements.........................   F-57
Fundex Games, Ltd.
  Financial Statements
  Report of BDO Seidman, LLP, Independent Certified Public
     Accountants............................................   F-69
  Balance Sheets as of December 31, 1997 and 1998 and June
     30, 1999 (unaudited)...................................   F-70
  Statements of Operations for the years ended December 31,
     1997 and 1998 and the six months ended June 30, 1998
     (unaudited) and June 30, 1999 (unaudited)..............   F-71
  Statements of Stockholders' Equity for the years ended
     December 31, 1997 and 1998 and the six months ended
     June 30, 1999 (unaudited)..............................   F-72
  Statements of Cash Flows for the years ended December 31,
     1997 and 1998, and the six months ended June 30, 1998
     (unaudited) and June 30, 1999 (unaudited)..............   F-73
  Notes to the Financial Statements.........................   F-74
DaMert Company
  Financial Statements
  Report of Armanino McKenna LLP, Independent Auditors......   F-82
  Balance Sheets as of December 31, 1997 and 1998 and June
     30, 1999 (unaudited)...................................   F-83
  Statements of Operations for the years ended December 31,
     1997 and 1998 and the six months ended June 30, 1998
     (unaudited) and June 30, 1999 (unaudited)..............   F-85
  Statements of Shareholders' Equity for the years ended
     December 31, 1997 and 1998 and the six months ended
     June 30, 1999 (unaudited)..............................   F-86
  Statements of Cash Flows for the years ended December 31,
     1997 and 1998, and the six months ended June 30, 1998
     (unaudited) and June 30, 1999 (unaudited)..............   F-87
  Notes to the Financial Statements.........................   F-88
XYZ Group, Inc
  Financial Statements
  Report of Virchow, Krause & Company, LLP, Independent
     Auditors...............................................   F-93
  Balance Sheet as of December 31, 1997.....................   F-94
  Statement of Operations and Retained Deficit for the year
     ended December 31, 1997................................   F-95
  Statement of Cash Flows for the year ended December 31,
     1997...................................................   F-96
  Notes to the Financial Statements.........................   F-97
  Report of Virchow, Krause & Company, LLP, Independent
     Auditors...............................................  F-102
  Balance Sheet as of April 30, 1998........................  F-103
  Statement of Operations and Retained Deficit for the four
     months ended April 30, 1998............................  F-104
</TABLE>


                                       F-2
<PAGE>   97

<TABLE>
<S>                                                           <C>
  Statement of Cash Flows for the four months ended April
     30, 1998...............................................  F-105
  Notes to the Financial Statements.........................  F-106
Gick Publishing, Inc.
  Financial Statements
  Report of Sparks, Nelson & Jacobson CPA's, Independent
     Auditors...............................................  F-110
  Balance Sheet as of September 30, 1997....................  F-111
  Statement of Operations for the eleven months ended
     September 30, 1997.....................................  F-112
  Statement of Stockholders' Equity for the eleven months
     ended September 30, 1997...............................  F-113
  Statement of Cash Flows for the eleven months ended
     September 30, 1997.....................................  F-114
  Notes to the Financial Statements.........................  F-116
</TABLE>


                                       F-3
<PAGE>   98

                       FUTECH INTERACTIVE PRODUCTS, INC.

                              FINANCIAL STATEMENTS
<PAGE>   99

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Futech Interactive Products, Inc.

     We have audited the accompanying consolidated balance sheets of Futech
Interactive Products, Inc. and subsidiary as of December 31, 1997 and 1998, and
the related consolidated statements of operations, shareholders' deficit, and
cash flows for each of the two years in the period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Futech Interactive Products, Inc. and subsidiary at December 31, 1997 and 1998,
and the consolidated results of its operations and its cash flows for the each
of the two years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.

     As discussed in Note 1 to the consolidated financial statements, the
Company's recurring losses and net capital deficiency raise substantial doubt
about its ability to continue as a going concern. Additionally, the majority of
the Company's debt is due within one year. Management's plans as to those
matters are also described in Note 1. The 1998 consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

                                              /s/ Ernst & Young LLP

Phoenix, Arizona
March 5, 1999, except for
  Note 17 as to which the date

  is October 4, 1999


                                       F-4
<PAGE>   100

                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                            ---------------------------     JUNE 30,
                                                                1997           1998           1999
                                                            ------------   ------------   ------------
                                                                                          (UNAUDITED)
<S>                                                         <C>            <C>            <C>
                          ASSETS
Current assets:
  Cash and cash equivalents...............................  $      5,701   $    186,743   $     31,964
  Accounts receivable, less allowance for doubtful
     accounts of $0, $768,470, and $770,173 at December
     31, 1997, 1998, and June 30, 1999, respectively......            --      2,315,960      2,299,089
  Inventory, less allowance of $0, $196,270, $226,270 at
     December 31, 1997, 1998, and June 30, 1999,
     respectively.........................................            --      4,118,483      6,391,812
  Prepaid expenses and other..............................        46,178        438,268      1,079,881
                                                            ------------   ------------   ------------
Total current assets......................................        51,879      7,059,454      9,802,746
Property and equipment, net...............................       241,334      1,075,189      1,265,330
Intangible assets, net....................................            --     16,598,320     15,671,379
Due from Company chief executive officer..................            --      1,440,270      1,819,430
Advances for acquisitions.................................       225,000             --             --
Other assets..............................................            --         41,598         54,620
                                                            ------------   ------------   ------------
          Total assets....................................  $    518,213   $ 26,214,831   $ 28,613,505
                                                            ============   ============   ============
          LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
  Accounts payable........................................  $    495,171   $  6,117,307   $  7,670,756
  Accrued expenses........................................       552,924      2,281,160      2,539,284
  Due to Company's chief executive officer................       204,717             --
  Notes payable
     Related party........................................     5,627,000     12,500,000     10,831,385
     Other................................................        24,668     16,806,520     19,714,596
                                                            ------------   ------------   ------------
Total current liabilities.................................     6,904,480     37,704,987     40,756,021
Notes payable
  Related party...........................................       913,000             --             --
  Other...................................................     1,332,571      2,450,000      7,000,000
Advance from Joint Venture................................     2,000,000             --             --
Shareholders' deficit:
  Preferred stock, no par value:
     Authorized shares -- 100,000,000
     Issued and outstanding shares -- 0, 3,750,000, and
       3,750,000 at December 31, 1997, 1998, and June 30,
       1999, respectively.................................            --        750,000      1,250,000
  Common stock, no par value:
     Authorized shares -- 235,000,000
     Issued and outstanding shares -- 80,242,457,
       80,278,457 and 90,973,598 at December 31, 1997,
       1998, and June 30, 1999, respectively..............    19,736,236     20,909,236     23,706,960
  Unearned compensation...................................    (1,550,000)      (987,059)    (1,335,000)
  Accumulated deficit.....................................   (28,818,074)   (34,612,333)   (42,764,476)
                                                            ------------   ------------   ------------
          Total shareholders' deficit.....................   (10,631,838)   (13,940,156)   (19,142,516)
                                                            ------------   ------------   ------------
          Total liabilities and shareholders' deficit.....  $    518,213   $ 26,214,831   $ 28,613,505
                                                            ============   ============   ============
</TABLE>


See accompanying notes.

                                       F-5
<PAGE>   101

                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                 SIX MONTHS ENDED
                                 YEAR ENDED DECEMBER 31,             JUNE 30,
                                --------------------------   -------------------------
                                    1997          1998          1998          1999
                                ------------   -----------   -----------   -----------
                                                             (UNAUDITED)   (UNAUDITED)
<S>                             <C>            <C>           <C>           <C>
Net product sales.............  $         --   $ 6,032,910   $ 1,084,424   $ 5,291,517
Cost of sales.................            --     4,295,578       823,070     4,350,955
                                ------------   -----------   -----------   -----------
Gross profit..................            --     1,737,332       261,354       940,562
Operating expenses:
  Selling, general and
     administrative...........     3,563,905     5,869,146     2,296,658     5,047,824
  Research and development....     6,732,875       229,480       150,000            --
  Depreciation and
     amortization of
     intangibles..............        55,491     1,343,197       430,996     1,075,576
  (Income) loss on Joint
     Venture..................     1,393,778    (2,000,000)   (2,000,000)           --
                                ------------   -----------   -----------   -----------
Loss from operations..........   (11,746,049)   (3,704,491)     (616,300)   (5,182,838)
Other expense:
  Loan origination fees and
     related amortization.....     2,460,000       241,250         5,000       314,099
  Interest....................       221,134     1,704,444       568,377     1,751,724
  Other, net..................            --       144,074       (53,860)      903,482
                                ------------   -----------   -----------   -----------
                                   2,681,134     2,089,768       519,517     2,969,305
                                ------------   -----------   -----------   -----------
Net loss......................  $(14,427,183)  $(5,794,259)  $(1,135,817)  $(8,152,143)
                                ============   ===========   ===========   ===========
Net loss per common share,
  basic and diluted...........  $      (0.23)  $     (0.07)  $     (0.01)  $     (0.10)
                                ============   ===========   ===========   ===========
Weighted average number of
  shares outstanding
  Basic and diluted...........    63,824,659    80,277,175    80,275,672    85,602,051
                                ============   ===========   ===========   ===========
</TABLE>


See accompanying notes.

                                       F-6
<PAGE>   102

                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT


<TABLE>
<CAPTION>
                                        COMMON STOCK            PREFERRED STOCK                                         TOTAL
                                  ------------------------   ----------------------     UNEARNED     ACCUMULATED    SHAREHOLDERS'
                                    SHARES       AMOUNT       SHARES       AMOUNT     COMPENSATION     DEFICIT         DEFICIT
                                  ----------   -----------   ---------   ----------   ------------   ------------   -------------
<S>                               <C>          <C>           <C>         <C>          <C>            <C>            <C>
Balance at December 31, 1996....  59,154,257   $11,385,802          --           --            --    $(14,390,891)  $ (3,005,089)
  Conversion of notes payable to
    common stock................     500,000       153,384          --           --            --              --        153,384
  Sales of common stock.........     863,200       215,800          --           --            --              --        215,800
  Compensatory stock options....          --     3,050,000          --           --   $(1,050,000)             --      2,000,000
  Common stock issued for
    services....................     225,000        56,250          --           --            --              --         56,250
  Common stock issued in
    connection with
    acquisitions................   9,000,000     2,250,000          --           --            --              --      2,250,000
  Common stock issued for loan
    fees........................   8,500,000     2,125,000          --           --            --              --      2,125,000
  Common stock issued for loan
    guarantee...................   2,000,000       500,000          --           --      (500,000)             --             --
  Net loss......................          --            --          --           --            --     (14,427,183)   (14,427,183)
                                  ----------   -----------   ---------   ----------   -----------    ------------   ------------
Balance at December 31, 1997....  80,242,457    19,736,236          --           --    (1,550,000)    (28,818,074)   (10,631,838)
Conversion of notes payable to
  common stock..................      36,000        18,000          --           --            --              --         18,000
Preferred stock issued in
  connection with acquisition...          --            --   3,750,000   $  750,000            --              --        750,000
Compensatory stock
  options/warrants..............          --     1,155,000          --           --            --              --      1,155,000
Amortization of unearned
  compensation..................          --            --          --           --       562,941              --        562,941
  Net loss......................          --            --          --           --            --      (5,794,259)    (5,794,259)
                                  ----------   -----------   ---------   ----------   -----------    ------------   ------------
Balance at December 31, 1998....  80,278,457    20,909,236   3,750,000      750,000      (987,059)    (34,612,333)   (13,940,156)
Conversion of notes payable to
  common stock (unaudited)......  10,695,141     1,967,724          --           --            --              --      1,967,724
Compensatory stock options and
  repricing (unaudited).........          --       830,000          --      500,000      (600,000)             --        730,000
Amortization of unearned
  compensation (unaudited)......          --            --          --           --       252,059              --        252,059
Net loss (unaudited)............          --            --          --           --            --      (8,152,143)    (8,152,143)
                                  ----------   -----------   ---------   ----------   -----------    ------------   ------------
Balance at June 30, 1999
  (unaudited)...................  90,973,598   $23,706,960   3,750,000   $1,250,000   $(1,335,000)   $(42,764,476)  $(19,142,516)
                                  ==========   ===========   =========   ==========   ===========    ============   ============
</TABLE>


See accompanying notes.

                                       F-7
<PAGE>   103

                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                       DECEMBER 31,                  JUNE 30,
                                --------------------------   -------------------------
                                    1997          1998          1998          1999
                                ------------   -----------   -----------   -----------
                                                             (UNAUDITED)   (UNAUDITED)
<S>                             <C>            <C>           <C>           <C>
OPERATING ACTIVITIES
Net income (loss).............  $(14,427,183)  $(5,794,259)   (1,135,817)   (8,152,143)
Adjustments to reconcile net
  income (loss) to net cash
  provided by (used in)
  operating activities:
  Depreciation................        55,491       227,459        51,903       248,547
  Amortization................     2,460,000     1,356,988       379,093     1,141,128
  Recognition of deferred
     revenue..................            --    (2,000,000)   (2,000,000)           --
  Loss on Joint Venture.......     1,393,778            --            --            --
  Additional loan fees on XYZ
     acquisition debt.........            --            --            --     1,000,000
  Equity-based expenses.......     3,971,250       210,000       105,000       835,000
  Litigation settlement.......     1,620,000            --            --            --
  Provision for uncollectible
     accounts.................            --       343,145            --         1,704
  Write-off of advance on
     discontinued
     acquisition..............            --       200,000            --            --
Changes in operating assets
  and liabilities, net of
  effects of businesses
  acquired:
     Accounts receivable......            --       951,675     1,705,786        15,167
     Inventories..............            --       198,370       114,483    (2,273,329)
     Prepaid expenses and
       other..................       (46,178)     (162,038)     (246,751)     (654,636)
     Accounts payable.........       (69,147)      124,812       617,330     1,553,449
     Accrued expenses and
       other..................       369,307      (141,030)     (186,738)      258,124
                                ------------   -----------   -----------   -----------
Net cash used in operating
  activities..................    (4,672,682)   (4,484,878)     (595,711)   (6,026,989)
</TABLE>


                                       F-8
<PAGE>   104


<TABLE>
<CAPTION>
                                       DECEMBER 31,                  JUNE 30,
                                --------------------------   -------------------------
                                    1997          1998          1998          1999
                                ------------   -----------   -----------   -----------
                                                             (UNAUDITED)   (UNAUDITED)
<S>                             <C>            <C>           <C>           <C>
INVESTING ACTIVITIES
Purchases of property and
  equipment, net..............      (152,921)      (38,499)            0      (462,423)
Sale of property and
  equipment, net..............            --            --       158,175            --
Purchases of businesses.......            --    (2,939,195)   (2,994,028)           --
Advances for acquisitions.....      (225,000)     (100,000)     (100,000)           --
Product development costs.....            --            --            --       (30,615)
Investment in Joint Venture...            --            --            --             0
                                ------------   -----------   -----------   -----------
Net cash used in investing
  activities..................      (377,921)   (3,077,694)   (2,935,853)     (493,038)
                                ------------   -----------   -----------   -----------
FINANCING ACTIVITIES
Net proceeds on notes
  payable.....................     5,826,502     9,388,601     4,742,264     6,744,408
Net change in borrowings from
  Company chief executive
  officer.....................    (1,056,590)   (1,644,987)   (1,007,000)     (379,160)
Proceeds from stock sales.....       215,800            --            --            --
                                ------------   -----------   -----------   -----------
Net cash provided by financing
  activities..................     4,985,712     7,743,614     3,735,264     6,365,248
                                ------------   -----------   -----------   -----------
Net increase (decrease) in
  cash and cash equivalents...       (64,891)      181,042       203,700      (154,779)
Cash and cash equivalents at
  beginning of period.........        70,592         5,701         5,701       186,743
                                ------------   -----------   -----------   -----------
Cash and cash equivalents at
  end of period...............  $      5,701   $   186,743   $   209,401   $    31,964
                                ============   ===========   ===========   ===========
</TABLE>


See accompanying notes.

                                       F-9
<PAGE>   105

                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE
                        30, 1998 AND 1999 IS UNAUDITED)


1.  DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

     Futech Interactive Products, Inc. and subsidiary ("Futech" or "the
Company") own proprietary technology which the Company believes will enable cost
effective production of printed materials containing printed circuitry. The
Company also develops, manufacturers (through subcontractors), markets and sells
toys and functional children's products and also distributes books to large
retailers and wholesale clubs. The Company previously operated under the name of
Futech Educational Products, Inc. and on January 29, 1998, changed its name.

     The consolidated financial statements include the accounts of the Company
and its subsidiary. All intercompany accounts and transactions have been
eliminated in consolidation.

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

     Certain reclassifications have been made to the 1997 consolidated financial
statements to conform to the December 31, 1998 presentation.

     The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has incurred
operating losses to date and has negative net worth and negative working capital
at December 31, 1998. To date, the Company has been funded through debt and
equity infusions from certain principal shareholders. The inability of the
Company to attract additional capital and ultimately, to achieve profitability,
could result in discontinuation of the Company's business.

     The Company's ultimate ability to continue as a going concern depends on
the market acceptance of products including those utilizing its proprietary
technology, and the achievement of operating profits and positive cash flow.
Management believes that the completed and pending acquisitions and the planned
proceeds from supplemental shareholder loans and advances, as needed, will be
sufficient to allow the Company to continue in operation. Management also has
commitments in place to convert substantially all of its non-bank debt into
shares of preferred stock during 1999.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INTERIM FINANCIAL STATEMENTS


     The accompanying consolidated balance sheet at June 30, 1999 and the
consolidated statements of operations, stockholders' equity and cash flows for
the six-month periods ended June 30, 1998 and 1999 are unaudited and have been
prepared on the same basis as the audited consolidated financial statements
included herein. In the opinion of management, such unaudited consolidated
financial statements include all adjustments necessary to present fairly the
information set forth herein, which consist solely of normal


                                      F-10
<PAGE>   106
                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


recurring adjustments. The results of operations for such interim periods are
not necessarily indicative of results for the full year.

CASH EQUIVALENTS

     The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.

CONCENTRATION OF CREDIT RISK

     The Company performs ongoing credit evaluations of its customers' financial
condition and requires no collateral from its customers. Receivables from two
customers at December 31, 1998 comprise the majority of the Company's net
accounts receivable, as follows:


<TABLE>
<S>                                                   <C>           <C>
Sam's Club..........................................  $  744,518    32.1%
Costco Wholesale....................................     447,315    19.3
                                                      ----------    ----
                                                      $1,191,833    51.4%
                                                      ==========    ====
</TABLE>


     For the year ended December 31, 1998, Costco Wholesale represented 29
percent of net sales. No other customer represented greater than 10 percent of
net product sales.

INVENTORIES

     Inventories are valued at the lower of cost or market. Cost is determined
on various methods which approximate the first-in, first-out method. Inventories
consist of the following:


<TABLE>
<CAPTION>
                                          DECEMBER 31, 1998    JUNE 30, 1999
                                          -----------------    -------------
<S>                                       <C>                  <C>
Finished goods..........................     $3,122,439         $4,871,962
Work-in-process.........................        996,044          1,519,850
                                             ----------         ----------
                                             $4,118,483         $6,391,812
                                             ==========         ==========
</TABLE>


     The Company has entered into an exclusive distributorship agreement with
Magi Publications to distribute books in the United States. The books are
initially received on a consignment basis. Upon receipt, a deposit of $1.00 per
book is paid to the manufacturer. These deposits total $295,498 as of December
31, 1998 and are included as inventory in the accompanying consolidated balance
sheets.

PROPERTY AND EQUIPMENT

     Property and equipment is stated at cost. Depreciation is computed
principally by the straight-line method over the estimated useful lives of the
assets which range from three to seven years.

                                      F-11
<PAGE>   107
                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


FAIR VALUE OF FINANCIAL INSTRUMENTS

     At December 31, 1998, the Company has the following financial instruments:
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses, and long-term debt. The carrying value of cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses approximates their
fair value based on the liquidity of these financial instruments or based on
their short-term nature. The carrying value of long-term debt approximates fair
market value based on the market interest rates available to the Company for
debt of similar risk and maturities.

INTANGIBLE ASSETS

     Intangible assets resulting from business acquisitions, consist of cost in
excess of net assets of subsidiaries acquired (goodwill), trademarks, patents,
assembled workforce costs, loan fees and product development costs. All
intangibles are being amortized on a straight-line basis. Goodwill, trademarks
and patents are being amortized over a 15 year period. Assembled workforce costs
are being amortized over twelve months. Loan fees are amortized over the life of
the related loan, from one to two years. Product development costs are being
amortized over the life of the related product, from two to five years.

ADVERTISING


     The Company expenses advertising as incurred. Advertising expense for the
years ended December 31, 1997 and 1998 and the three months ended June 30, 1998
and 1999 was not material.


REVENUE RECOGNITION

     Revenue is recognized upon shipment of the product, with appropriate
allowances made for estimated returns and uncollectible accounts.

INCOME TAXES

     Income taxes have been accounted for under the asset and liability method
in accordance with SFAS No. 109, "Accounting for Income Taxes" (Statement 109).
Under the asset and liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in operations in the period
that includes the enactment date.

                                      F-12
<PAGE>   108
                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


STOCK-BASED COMPENSATION

     The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options. Under APB 25, to
the extent that the exercise price of the Company's employee stock options
equals management's estimate of the fair value of the underlying stock on the
date of grant, no compensation expense is recognized.

     Deferred expense on stock and compensatory stock options issued to officers
and directors for services or other consideration to be received in the future
are offset against equity and are amortized to expense over the period of
benefit.

COMPREHENSIVE LOSS

     As of January 1, 1998, the Company adopted FASB's SFAS No. 130, "Reporting
Comprehensive Income" (Statement 130). Statement 130 establishes new rules for
the reporting and display of comprehensive loss and its components, and
accordingly, the adoption of this statement had no impact on the Company's net
loss or shareholders' equity. Comprehensive loss is the same as net loss as
there are no necessary adjustments reported in shareholders' deficit.

LOSS PER SHARE COMPUTATION


     The Company determines loss per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," (Statement
128). Under Statement 128, the Company presents basic and diluted earnings per
share. Basic earnings per share is computed using the weighted average number of
common shares. Diluted earnings per share is computed using the weighted average
number of dilutive common share equivalents during the period. Potential
dilutive common share equivalents include employee stock options using the
treasury stock method, preferred stock, and dilutive convertible securities
using the if-converted method. Common share equivalents have been excluded from
the calculation of loss per share for the years ended December 31, 1997 and 1998
and for the three months ended June 30, 1999 and 1998, as their effect is either
not dilutive or is anti-dilutive.


SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

     Effective January 1, 1998, the Company adopted the SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (Statement
131). Statement 131 established standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas
and major customers (see Note 14).

                                      F-13
<PAGE>   109
                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


3.  ACQUISITIONS

     On March 31, 1998, the Company acquired substantially all of the assets of
Gick Publishing, Inc. ("Gick"), for cash consideration of $2,020,000 plus the
assumption of certain liabilities totaling $940,452. Gick manufactures and sells
foam-based greeting cards and products.

     The Gick acquisition was funded, in part, through a bank loan of $4,000,000
obtained on March 31, 1998. The loan bears interest at prime plus 2.5 percent
and is due on demand. The Company's chief executive officer ("Goett") has
guaranteed the loan personally up to $3,600,000.


     On April 29, 1998, the Company acquired substantially all of the assets of
XYZ Group Inc. ("XYZ"), a wholesaler and distributor of books and various book
products including children's electronic toys and book and toy combination
products. The agreement requires Futech to pay consideration of $1,000,000 in
cash, $4,000,000 in a 12-month, noninterest bearing note, $2,867,334 in cash or
in shares of common stock, and an additional $1,000,000, if the $4,000,000 is
not paid by April 30, 1999. As the note was not repaid by April 30, 1999, the
additional $1,000,000 and $400,000 in back interest became due during the
six-month period ending June 30, 1998. Both the $4,000,000 and the additional
$1,000,000 bear interest at 10 percent. The additional charges have been
recorded as other expense.


     As part of the agreement with XYZ, Futech assumed a $7 million line of
credit which bears interest at prime plus 2.5 percent and is personally
guaranteed by the former owner of XYZ. Additionally, the loan is collateralized
with the inventory and accounts receivable of XYZ.

     On December 11, 1998, the Company acquired approximately 73 percent of the
outstanding common stock and 100 percent of the outstanding preferred stock of
Janex International, Inc., ("Janex") a developer, marketer and seller of toys
and children's products, for consideration of $1,500,000, consisting of a
$750,000 note payable and $750,000 payable with 3,750,000 shares of the
Company's preferred stock. The note payable bears interest at 10 percent and is
payable 30 days after the merger of Futech into Janex. Janex is a publicly
traded New Jersey based Nasdaq "pink sheet" company which trades under the
symbol "JANX."

     The Company's Series A preferred stock is convertible into common stock on
a one-for-one basis, has voting rights, and has no par value. The preferred
stock is senior to the Company's common stock and the holder of the shares is
entitled to one vote per share.

     All of these transactions were accounted for using the purchase method of
accounting. For all acquisitions, the acquired tangible and identifiable
intangible assets and liabilities have been recorded at their estimated fair
values at the dates of acquisition with any excess purchase price reflected as
goodwill, which is being amortized over the life of the underlying assets.
Purchase accounting values for all acquisitions are assigned on a preliminary
basis and are subject to adjustment when final information as to the fair values

                                      F-14
<PAGE>   110
                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


of the net assets acquired is available. The operations of the acquired
businesses are included in the statements of operations from the date of
acquisition.

     The Company is currently awaiting final purchase price allocation data from
its independent valuation advisors. The final purchase price allocation is not
expected to change materially.

     A summary of the purchase price allocations for these acquisitions is as
follows:

<TABLE>
<CAPTION>
                                   GICK           XYZ            JANEX
                                ----------    ------------    -----------
<S>                             <C>           <C>             <C>
Tangible assets acquired......  $  869,254    $  7,381,257    $   908,559
Goodwill......................          --       6,741,699      3,160,315
Trademarks....................          --       3,900,000             --
Patents.......................   2,128,108              --             --
Other intangibles.............          --         290,000        179,774
Less: preferred stock
  issued......................          --              --       (750,000)
Less: notes issued............          --      (6,867,334)      (750,000)
Less: liabilities assumed.....    (940,452)    (10,403,504)    (2,666,735)
                                ----------    ------------    -----------
Cash purchase price...........  $2,056,910    $  1,042,118    $    81,193
                                ==========    ============    ===========
</TABLE>

     The following table sets forth the unaudited pro forma results of
operations for each year in which acquisitions occurred and for the immediately
preceding year as if the acquisitions were consummated at the beginning of the
immediately preceding year:

<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31
                                             ---------------------------
                                                 1997           1998
                                             ------------    -----------
                                                     (Unaudited)
<S>                                          <C>             <C>
Total revenues.............................  $ 29,027,979    $15,885,780
Net loss...................................   (20,599,550)    (9,288,731)
Net loss per common share, basic and
  diluted..................................  $      (0.32)   $     (0.12)
</TABLE>

                                      F-15
<PAGE>   111
                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


4.  PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:


<TABLE>
<CAPTION>
                                          DECEMBER 31,
                                     ----------------------     JUNE 30,
                                       1997         1998          1999
                                     --------    ----------    ----------
<S>                                  <C>         <C>           <C>
Molds..............................  $     --    $1,837,826    $1,841,964
Machinery and equipment............    46,955       242,793       414,632
Office furniture and equipment.....   311,268       762,667     1,165,330
Vehicles...........................    30,000        49,575        49,575
Leasehold improvements.............    20,369        55,962        74,447
                                     --------    ----------    ----------
                                      408,592     2,948,823     3,545,948
Accumulated depreciation and
  amortization.....................   167,258     1,873,634     2,280,618
                                     --------    ----------    ----------
                                     $241,334    $1,075,189    $1,265,330
                                     ========    ==========    ==========
</TABLE>


5.  INTANGIBLE ASSETS

     Intangible assets consist of the following:


<TABLE>
<CAPTION>
                                          DECEMBER 31,
                                       -------------------     JUNE 30,
                                       1997       1998           1999
                                       ----    -----------    -----------
<S>                                    <C>     <C>            <C>
Goodwill.............................   $--    $10,042,758    $10,042,758
Trademarks...........................   --       3,900,000      3,900,000
Patents..............................   --       2,128,108      2,128,108
Loan fees............................   --       1,245,000      1,298,199
Product development costs............   --         130,402        105,163
Assembled workforce..................   --         290,000        290,000
                                        --     -----------    -----------
                                        --      17,736,268     17,764,228
Less amortization....................   --       1,137,948      2,092,849
                                        --     -----------    -----------
                                        $--    $16,598,320    $15,671,379
                                        ==     ===========    ===========
</TABLE>


                                      F-16
<PAGE>   112
                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


6.  ACCRUED EXPENSES

     Accrued expenses consist of the following:


<TABLE>
<CAPTION>
                                              DECEMBER 31,
                                         ----------------------     JUNE 30,
                                           1997         1998          1999
                                         --------    ----------    ----------
<S>                                      <C>         <C>           <C>
Accrued interest.......................  $ 89,595    $  577,417    $1,331,169
Accrued salaries and benefits..........   346,991       431,207       440,098
Accrued royalties......................        --       175,773        45,292
Accrued commissions....................        --       154,063        58,989
Accrued returns and allowances.........        --       483,122       334,763
Other..................................   116,338       459,578       328,973
                                         --------    ----------    ----------
                                         $552,924    $2,281,160    $2,539,284
                                         ========    ==========    ==========
</TABLE>


7.  NOTES PAYABLE

     Notes payable consist of the following:


<TABLE>
<CAPTION>
                                             DECEMBER 31,
                                       ------------------------    JUNE 30,
                                          1997         1998          1999
                                       ----------   -----------   -----------
<S>                                    <C>          <C>           <C>
Notes payable to shareholders, all
  due during 1999, interest at prime
  + 0.5 percent (8.25 percent at June
  30, 1999) to 10 percent payable at
  maturity...........................  $3,350,000   $10,650,000   $ 8,000,000
$4.0 million line of credit with a
  bank due December 31, 1999,
  interest at prime rate + 2.5
  percent (10.25 percent at June 30,
  1999) due monthly. $3.6 million is
  personally guaranteed by the
  Company's CEO......................          --     4,000,000     4,000,000
$7.0 million line of credit with a
  bank due December 31, 1999,
  interest at prime + 2.5 percent
  (10.25 percent at June 30, 1999)
  due monthly, secured by inventory
  and accounts receivable of XYZ, and
  guaranteed by the former owner of
  XYZ................................          --     3,456,446     3,579,777
Notes payable to shareholders, due
  May 30, 2000, interest at prime +
  0.5 percent (8.25 percent at June
  30, 1999)..........................          --            --     2,000,000
</TABLE>


                                      F-17
<PAGE>   113
                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)



<TABLE>
<CAPTION>
                                             DECEMBER 31,
                                       ------------------------    JUNE 30,
                                          1997         1998          1999
                                       ----------   -----------   -----------
<S>                                    <C>          <C>           <C>
$7.0 million line of credit with a
  bank, due December 1, 2000,
  interest at prime + 1.0 percent
  (8.75 percent at June 30, 1999) due
  monthly, personally guaranteed by
  the Company's CEO and a
  director/warrant holder............  $       --   $ 2,450,000   $ 7,000,000
Note payable to Newtech, past due
  (See Note 10)......................   1,300,000     1,000,000       200,000
Note payable to Golden Books, due
  June 1, 1999, interest at prime
  plus 1 percent (8.75 percent at
  June 30, 1999) payable at
  maturity...........................   1,000,000     1,000,000     1,000,000
Note payable for purchase of patent
  due June 1, 1999 (See Note 13).....   1,620,000       850,000       831,385
Note payable to former owner of XYZ,
  payable in cash (up to $2,867,334
  may be paid in common stock) (See
  Note 3)............................          --     6,867,334     7,867,334
Notes payable, due April 1999 to June
  1999, interest at 10 percent,
  payable at maturity convertible
  into common stock at $0.50 per
  share..............................     332,571       363,148        41,855
Note payable to shareholders, repaid
  in 1998............................     270,000            --            --
Notes payable to shareholders in
  connection with the acquisition of
  Janex (See Note 3).................          --       750,000       750,000
Note payable to shareholder, due
  December 1, 1999, interest at prime
  + 1.0 percent (8.75 percent at June
  30, 1999) due monthly..............          --            --     2,000,000
</TABLE>


                                      F-18
<PAGE>   114
                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)



<TABLE>
<CAPTION>
                                             DECEMBER 31,
                                       ------------------------    JUNE 30,
                                          1997         1998          1999
                                       ----------   -----------   -----------
<S>                                    <C>          <C>           <C>
$400,000 line of credit with a bank,
  due December 31, 1999, interest at
  prime rate plus .25 percent (8.00
  percent at June 30, 1999) payable
  monthly, collateralized by all
  assets of Janex and personally
  guaranteed by two shareholders.....  $       --   $   257,000   $   257,000
Other................................      24,668       112,592        18,630
                                       ----------   -----------   -----------
                                        7,897,239    31,756,520    37,545,981
Less current portion.................   5,651,668    29,306,520    30,545,981
                                       ----------   -----------   -----------
Notes payable, noncurrent............  $2,245,571   $ 2,450,000   $ 7,000,000
                                       ==========   ===========   ===========
</TABLE>



     Future maturities of notes payable are as follows at June 30, 1999:



<TABLE>
<S>                                                     <C>
1999..................................................  $28,545,981
2000..................................................    9,000,000
                                                        -----------
                                                        $37,545,981
                                                        ===========
</TABLE>


     Certain of the Company's borrowing arrangements contain covenants including
restrictions on levels of indebtedness and the restriction of dividend payments.


     Of the $10 million of notes payable to shareholders, $7 million of such
notes contain features which permit the note holder to convert such amounts into
shares of common stock at $0.05 per share.



     On March 1, 1999, the conversion price on Futech's convertible debt was
reduced from $0.50 per share to $0.15 per share, and holders of debt totaling
$327,409 converted their debt into 2,182,723 shares of common stock. Additional
loans totaling $731,685 were converted into 4,877,898 shares of common stock at
a conversion rate of $0.15 per share.



     Cash paid for interest for the years ended December 31, 1997, 1998 and the
six-month periods ended June 30, 1998 and 1999 was approximately $188,000,
$837,000, $252,837, and $997,972, respectively.


8.  RELATED PARTY TRANSACTIONS


     In April 1997, Roderick L. Turner ("Turner"), a director and stockholder
loaned Futech $350,000, with interest at 10 percent, due July 2, 1999. This loan
was subsequently amended to be due on demand. In lieu of payment, on March 1,
1999, Turner agreed to convert the loan plus interest (totaling $417,083) into
shares of common stock which are included in the debt conversions described in
Note 7. In connection with the original loan,


                                      F-19
<PAGE>   115
                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


Futech paid Goett $35,000 and issued 1,000,000 shares of common stock as a loan
origination fee.

     On October 29, 1997, Turner and Goett loaned Futech $245,000, with interest
at 10 percent, due December 31, 1997. This loan was subsequently amended to be
due on demand. This loan was repaid January 15, 1998. In connection with this
loan, Futech issued Goett 500,000 shares of common stock as a loan origination
fee.

     At various times in 1997, Turner and Goett loaned Futech $3,000,000, with
interest at 10 percent, due in 1998 and 1999. These loans were subsequently
amended to be due on demand. In connection with the loans, Futech paid Goett
$300,000 and issued 7,000,000 shares of common stock as a loan origination fee.

     The 8,500,000 shares of common stock issued to Goett as loan fees in 1997,
along with $335,000 in loan fees paid in cash, were charged to expense in 1997,
as the related loans were due on demand. The 8,500,000 shares received by Goett
were valued at $2,125,000 ($.25 per share) based on contemporaneous third party
transactions.

     On January 2, 1998, Turner and Goett loaned Futech $2,500,000 with interest
at 10 percent due April 30, 1998. In connection with this loan, Futech issued
options to purchase 2,500,000 shares of common stock at $0.05 per share as a
loan origination fee and gave Goett the right to borrow $250,000 from the
Company.

     On March 31, 1998, Goett personally guaranteed $3.6 million of a $4 million
line of credit newly established with a bank. In connection with this guarantee,
Futech issued options to purchase 7,200,000 shares of common stock at $0.05 per
share as a loan origination fee and gave Goett the right to borrow $360,000 from
the Company.

     On May 5, 1998, Turner and Goett loaned Futech $1,500,000 with interest at
10 percent due May 5, 2000. At the same time, Turner and Goett signed an
agreement to subordinate all of their debt to a bank. In connection with the
loan and the subordination, Futech issued options to purchase 3,000,000 shares
of common stock at $0.05 per share as a loan origination fee and gave Goett the
right to borrow $500,000 from the Company.

     On June 24, 1998, Mr. Turner and Mr. Goett loaned Futech $1,000,000, with
interest at 10 percent, due December 24, 1998. In connection with the loan,
Futech issued options to purchase 2,000,000 shares of common stock at $0.05 per
share as a loan origination fee and gave Goett the right to borrow $100,000 from
the Company.

     On August 3, 1998, Turner loaned Futech $300,000, with no interest, due
upon receipt of the $2,000,000 listed below. No repayment was made and on March
1, 1999, and the loan agreement was amended to add interest at 10 percent per
annum since inception. On March 1, 1999, the loan plus interest (totaling
$314,604) was converted to 2,097,342 shares of common stock.

     On August 10, 1998, Goett and his wife loaned Futech $2,000,000, with
interest at 10 percent, due on September 1, 1999. In connection with the loan,
Futech issued options

                                      F-20
<PAGE>   116
                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


to purchase 8,000,000 shares of common stock at $0.05 per share as a loan
origination fee and gave Goett the right to borrow $200,000 from the Company.

     On December 3, 1998, Goett and a director of the Company personally
guaranteed a $7 million line of credit newly established with a bank. In return
for their personal guarantees, Goett and the director each received warrants to
purchase 21,000,000 common stock shares exercisable at $0.05 per share. In
connection with this transaction, another director received warrants to purchase
4,000,000 shares of common stock exercisable at $0.05 per share as the
facilitator of this transaction. Additionally, as part of this agreement, Goett
may borrow $300,000 from the Company.

     On December 15, 1998, Turner and Goett agreed to extend the due date of
their combined $8,000,000 loans, and Goett and his wife agreed to extend the due
date of the $2,000,000 loan to December 15, 1999. In connection with this
extension, Turner and the Goetts received options for a combined 8,000,000
shares of common stock exercisable at $0.05 per share.


     The value of the 76,700,000 options granted to Goett, his wife, Turner, and
two directors has been capitalized and amortized over the term of the related
loans. In accordance with SFAS No. 123, fair value was determined using the
minimum value method and a fair value of $0.05 per share. The fair value of
Futech's common stock was estimated by management, in the absence of any recent
third party stock sales. The total calculated fair value of the options granted
for loan fees in 1998 is $1,155,000. Of this amount, $155,000 was amortized to
expense is 1998 and $1,000,000 remains capitalized at year-end.


     Goett periodically may provide working capital advances to the Company
which are generally collateralized by a second lien on the Company's assets.
These advances are net of periodic draws taken by Goett. These advances do not
bear interest. At December 31, 1997 the net amount due to Goett was $204,717 and
is reflected as due to Company's chief executive officer in the balance sheet.
There was no such amount outstanding at December 31, 1998.


     In 1997, the Company entered an agreement which allows the chief executive
officer to borrow funds from time to time based on the amount of financing he
raises on behalf of the Company. The outstanding balance bears interest at prime
plus 1 percent (8.75 percent at December 31, 1998) and is due on December 31,
2001. As of December 31, 1998 and March 31, 1999, the balance due to the Company
was $1,440,270 and $1,819,430, respectively.



     On May 21, 1999, F. Keith Withycombe, a director, agreed to provide a
secured $2,000,000 line of credit to Futech. The line of credit is due on
December 1, 1999 and interest accrues at prime plus 1% per annum. Mr. Withycombe
agreed to subordinate this secured loan to the $7,000,000 loan to Futech from
Bank of America National Trust and Savings Association. As consideration for
this loan Futech agreed to issue warrants for 9,000,000 shares of Futech common
stock (300,000 in New Futech shares) exercisable at


                                      F-21
<PAGE>   117
                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)



$0.05 per share ($1.50 per share in New Futech shares). As consideration for
facilitating this loan Futech agreed to issue Robert J. Rosepink, a director,
warrants for 2,000,000 shares of Futech common stock (66,667 shares of New
Futech common stock) exercisable at $0.05 per share ($1.50 per share in New
Futech Shares). Additionally, Vincent W. Goett received warrants for 5,000,000
shares of Futech common stock (166,667 shares of New Futech common stock)
exercisable at $0.05 per share ($1.50 per share in New Futech shares).



     On May 31, 1999 Futech Interactive Products and Newtech Consulting, a 3%
owner of New Futech, agreed to convert outstanding debt, including interest,
totaling $1,158,630 into $50,000 cash, a $200,000 note bearing interest at 8%
due by June 30, 1999, and 3,634,520 shares of Futech common stock. Futech paid
$50,000 on May 31, 1999. No other payments have been made under this agreement.


9.  LEASE COMMITMENTS


     The Company leases operating facilities and certain equipment under
noncancelable operating leases. Rent expense was $117,354, $512,918, $75,064,
and $333,374 during the years ended December 31, 1997, and 1998, and the three
month periods ended June 30, 1998 and 1999, respectively. Future minimum
payments under noncancelable operating leases with initial terms of one year or
more consisted of the following at December 31, 1998:


<TABLE>
<S>                                                      <C>
1999.................................................    $  612,078
2000.................................................       485,106
2001.................................................       247,418
2002.................................................       126,431
                                                         ----------
Total minimum lease payments.........................    $1,471,033
                                                         ==========
</TABLE>

10.  NEWTECH CONSULTING


     The Company had an agreement with Newtech Consulting, Inc. ("Newtech"), an
entity owned by Goett and the former owner of the Company, whereby monthly
payments were made to fund research and development efforts. Under the terms of
the arrangement, the Company paid $25,000 per month through December 2000 for
the first right to purchase intellectual property rights to the technologies
developed by Newtech. Such payments were charged to research and development
expense as incurred. Total payments to Newtech were $300,000 and $150,000 in the
years ended December 31, 1997 and 1998 and $25,000 and $75,000 in the six-month
periods ending June 30, 1998 and 1999, respectively. This agreement was verbally
cancelled in October 1998. Payments after this date were payments of past-due
amounts accrued prior to October 1998.


     In October 1997, the Company acquired certain intellectual property from
Newtech for consideration of a $2,000,000 note payable and 3,000,000 shares of
common stock

                                      F-22
<PAGE>   118
                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


valued at $750,000. The fair value of the consideration given, $2,750,000, was
charged to research and development expense, as the underlying technologies have
not been commercialized, and the recoverability of the amount paid is uncertain.
The note bears interest at 10 percent and was due on April 30, 1998. The balance
of this past due loan is $1,000,000 at December 31, 1998.

     In December 1997, Goett sold his 50 percent interest back to Newtech. As
partial consideration for his ownership interest, Newtech gave Goett 50 percent
of the Futech note receivable. Goett redeemed this note back to the Company to
offset prior borrowings. As a result, only $1,000,000 of the original Newtech
note is outstanding as of December 31, 1997 and 1998.


     In December 1997, the Company entered into an agreement to purchase
equipment from Newtech. As consideration for these assets acquired, Futech
issued a note payable of $300,000 and 6,000,000 shares of common stock valued at
$1,500,000. The note was paid in February 1998.


11.  STOCK-BASED COMPENSATION

     On September 26, 1997, Goett received an option to purchase 10,000,000
shares of common stock at $0.05 per share as compensation for services rendered
to the Company. The options were fully vested upon issuance. The Company
recognized a charge of $2,000,000 in 1997 for the difference between the
exercise price of the shares under option and the fair value of the Company's
stock, as determined based on contemporaneous third-party transactions.

     As part of his employment agreement dated December 31, 1997, Goett received
options to purchase 7,000,000 shares at $0.10 per share. The options vest 29
percent in years one and two, and 14 percent in years three, four and five. The
difference between the option price and management's estimated fair value of the
Company's common stock on the date of grant has been recorded as $1,050,000 of
unearned compensation and will be amortized to expense over the vesting period.

     On January 29, 1998, the Board of Directors approved the 1998 Stock Option
Plan (Plan) under which 7,200,000 shares of the Company's common stock have been
reserved. As of December 31, 1998, the Plan had not been implemented; however,
the Company expects full implementation by 2000.

                                      F-23
<PAGE>   119
                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


     The Company has issued nonqualified options and warrants outside of the
Plan. A summary of the Company's stock option and warrant activity, and related
information for the years ended December 31, 1997 and 1998 and the three-month
period ended March 31, 1999 follows:


<TABLE>
<CAPTION>
                                            OPTIONS/      WEIGHTED-AVERAGE
                                            WARRANTS       EXERCISE PRICE
                                           -----------    ----------------
<S>                                        <C>            <C>
Outstanding, at December 31, 1996........           --          $ --
Granted..................................   17,750,000           .08
Exercised................................           --            --
Forfeited................................           --            --
                                           -----------          ----
Outstanding, at December 31, 1997........   17,750,000           .08
Granted..................................   86,150,000           .07
Exercised................................           --            --
Forfeited................................           --            --
                                           -----------          ----
Outstanding, at December 31, 1998........  103,900,000           .07
                                           ===========          ====
Exercisable at December 31, 1998.........   58,700,000
                                           ===========
Weighted-average fair value of options/
  warrants granted during 1998...........                       $.01
                                                                ====
</TABLE>


     Exercise prices for options/warrants outstanding as of December 31, 1998
ranged from $.05 to $.25. The weighted-average remaining contractual life of
those options is 8.98 years.

     Pro forma information regarding net loss is required by SFAS No. 123, and
has been determined as if the Company had accounted for its employee stock
options and warrants under the fair value method of that Statement. The fair
value for these options/warrants was estimated at the date of grant using the
minimum value pricing model assuming a risk-free interest rate of 5.38 percent;
dividend yield of 0 percent; and a weighted-average expected life of five years
for the years ended December 31, 1997 and 1998.

     Option/warrant valuation models require the input of highly subjective
assumptions. Because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.

     No options were issued prior to January 1, 1997. All option grants are
nonqualified. For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the applicable vesting period. The
Company's pro forma information follows:

<TABLE>
<CAPTION>
                                                      DECEMBER 31
                                               --------------------------
                                                   1997          1998
                                               ------------   -----------
<S>                                            <C>            <C>
Net loss.....................................  $(14,427,183)  $(5,794,259)
Pro forma expense for stock options under
  SFAS No. 123...............................    (2,102,500)           --
Actual expense for stock options under APB
  No. 25.....................................     2,000,000            --
                                               ------------   -----------
Pro forma net loss...........................  $(14,529,683)  $(5,794,259)
                                               ============   ===========
</TABLE>

                                      F-24
<PAGE>   120
                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


     The fair value of all employee stock options issued in 1998 and accounted
for using APB 25 was $0.


     On May 27, 1999, the Company's Board of Directors reduced the exercise
price on options to purchase 10,800,000 shares of common stock. The exercise
price prior to this action varied from $0.20 to $0.25. The new exercise price is
$0.15. As a result of the repricing, expense of $230,000 was recorded for
options that had already vested, and unearned compensation of $600,000 was
recorded given the new price was less than fair value. Unearned compensation
will be amortized to expense over the remaining vesting period of the options.
In the respect to future periods these options will be accounted for as
variable.



     On April 1, 1999 the Company hired an executive and issued immediately
vested options to purchase 2,500,000 shares of preferred stock at $0.05 per
share. The grant resulted in a charge to expense of $500,000 during 1999.


12.  INVESTMENT IN JOINT VENTURE

     During 1997, the Company terminated a joint venture with Golden Books (the
"Joint Venture"). Pursuant to the termination agreement, the Company is
obligated to pay a one-time termination fee of $1,000,000 (including repayment
of $250,000 previously advanced). The termination fee was charged to expense in
1997, and the related note payable was guaranteed by Goett. In exchange for this
guarantee, Goett received 2,000,000 shares of common stock which had a fair
value of $500,000 on the date of issuance. The value of such shares will be
amortized to expense over the note term. The Company also agreed to assume the
cost of certain patent infringement litigation brought by the Joint Venture
against a competitor.

     Effective January 1, 1998, the Company entered into a technology and
licensing agreement with Golden Books whereby the remaining $2,000,000 advance
from the Joint Venture was converted into a nonrefundable technology payment
from Golden. This $2,000,000 advance was recognized as revenue in 1998.

13.  COMMITMENTS AND CONTINGENCIES

     Futech is a defendant in an action entitled Gary Roy, a/k/a Joe, Billings
v. Futech Interactive Products, Inc. This action was initiated on November 20,
1998 in Waukesha County Circuit Court of Wisconsin. Mr. Billings, a Director of
Futech, alleges Futech wrongfully terminated his employment and failed to
perform according to the terms of the Agreement for Purchase and Sale of Assets
of XYZ. Mr. Billings claims damages resulting from the wrongful termination
equal approximately $1,150,000 plus costs and attorneys' fees. This suit was
dismissed pending arbitration. Although the outcome of the arbitration cannot be
determined at this time, management does not believe it will be material to the
operations, financial position, or cash flows of the Company.

                                      F-25
<PAGE>   121
                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


     On December 22, 1998, Premier Publishing, Inc. filed a complaint in
Wisconsin against the Company alleging, among other things, conversion and
breach of contract related to the termination of a proposed deal for Futech to
acquire Premier. Discovery is currently ongoing. The outcome of this matter
cannot be determined at this time.


     In addition to these matters, the Company is a party to other litigation in
the ordinary course of business. Management, after taking into account the
opinion of counsel, believes the ultimate outcome of such matters will not have
a material adverse effect on the Company's financial position, results of
operations, or cash flows.



     During 1997, Grand Slam Investments, L.L.C., ("Grand Slam") which is
controlled by Goett, settled a lawsuit, brought by a third party against Futech
and certain of its shareholders regarding patent rights. Under the settlement,
Grand Slam acquired certain patent rights which the plaintiffs allege that
Futech had licensed but not paid for. The cost of this settlement, $1,620,000,
was charged to expense in 1997, as this transaction was entered into on behalf
of Futech by Grand Slam, and Futech had no use for the patent rights acquired by
Grand Slam.


     On July 1, 1998, Futech entered a patent licensing and purchase agreement
to formalize its repayment arrangement with Grand Slam. Under the agreement,
Grand Slam grants Futech exclusive, world-wide rights to use patent rights
acquired by Grand Slam. Under this agreement, Futech made monthly royalty
payments of $10,000 through December 31, 1998. This agreement was amended on
December 9, 1998 whereby Futech agreed to pay $650,000 on December 9, 1998 and
$850,000 on or before June 1, 1999 and the monthly payments of $10,000 were
suspended. The balance due under this agreement at December 31, 1998 is
$850,000.


     On June 7, 1999, Fundex and Futech entered into a loan and licensing
agreement pursuant to which Futech agreed to loan Fundex $250,000 upon signing a
merger agreement with Futech, an additional $500,000 prior to the closing of the
merger, and an additional $750,000 loan or other financial assistance as
required pending the mergers, and a nonexclusive license to use Futech's game
board technology pending the mergers in exchange for a royalty equal to 50
percent of net operating profits on the associated products. The debt must be
repaid with interest at the rate of 10 percent per annum two years after the
date of the agreement. If Futech defaults on certain promissory notes issued to
the Fundex stockholders as part of the merger, Futech will forfeit $750,000 of
the balance due under these loans as a penalty.



     Futech signed an agreement on March 3, 1999 with Trudy that, in the event
the merger did not occur by June 1, 1999, Futech would assist in providing the
working capital needs of Trudy, if needed, to maintain sales momentum until the
closing. The agreement also states that Futech will assure that Trudy is not in
default under any of the loan agreements, including its borrowings from First
Union.


                                      F-26
<PAGE>   122
                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


14.  SEGMENT INFORMATION

     Prior to its acquisition of Janex in December 1998, the Company had no
reportable segments. Subsequent to the Janex acquisition, the Company began
monitoring operating results for two segments. The distribution segment operates
in the United States and includes the former businesses of Gick and XYZ. The
Janex segment operates primarily in Hong Kong and includes the former Janex
business.


     The operating results of the Janex segment and the long-lived assets held
overseas are not material as of or for the year ended December 31, 1998, and for
the six month period ended June 30, 1999.


15.  INCOME TAXES

     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income taxes are as follows:

<TABLE>
<CAPTION>
                                                      DECEMBER 31
                                               -------------------------
                                                  1997          1998
                                               ----------    -----------
<S>                                            <C>           <C>
Deferred tax assets:
  Net operating loss carryforwards...........  $4,000,000    $ 7,000,000
  Other......................................   4,000,000      4,000,000
                                               ----------    -----------
                                                8,000,000     11,000,000
  Less valuation reserve.....................   8,000,000     11,000,000
                                               ----------    -----------
Net deferred tax assets......................  $       --    $        --
                                               ==========    ===========
</TABLE>

     Gross deferred taxes and the related valuation allowance increased by
$3,000,000 at December 31, 1998 due to the losses incurred. The Company has
fully reserved for its deferred tax assets due to the uncertainty of recovery
from future operations. The Company has no income tax expense or benefit and
therefore tax expense differs from the federal statutory rate by the amount of
such rate. The reason for such difference is an increase in valuation reserves
provided for deferred tax assets.

     At December 31, 1998 the Company has net operating loss carryforwards for
federal income tax purposes of $18,000,000 which begin to expire in 2015, to the
extent not previously utilized. These losses are limited for tax purposes under
both the separate return limitation year rules and Internal Revenue Code section
382 which limit the annual utilization of net operating losses.

                                      F-27
<PAGE>   123
                FUTECH INTERACTIVE PRODUCTS, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


16.  PENDING TRANSACTIONS

     On March 4, 1999, the Company signed a letter of intent to acquire all the
outstanding stock of Fundex Games, Ltd. ("Fundex"), for consideration of
$9,000,000, of which $4,500,000 is payable in 18,000,000 shares of the Company's
common stock. The acquisition will be accounted for as a purchase. Fundex
develops, markets, and sells games and toys nationwide. Closing of the
transaction is contingent upon a number of conditions. Fundex is a privately
held Indianapolis, Indiana based company.

     On February 26, 1999, the Company entered into a definitive agreement to
acquire all the outstanding stock of Trudy Corporation d/b/a Soundprints
("Soundprints") for consideration of $3,500,000, of which $3,000,000 is payable
in 12,000,000 shares of the Company's common stock, plus the guarantee of
certain debt to existing Soundprints shareholders. The acquisition will be
accounted for as a purchase. Soundprints designs, manufacturers, and markets
plush stuffed animals and publishes children's books and audio cassettes. Trudy
Corporation is a publicly traded Norwalk, Connecticut based, Nasdaq "pink
sheeted" company which trades under the symbol "TRDY."

     On March 24, 1999, the Company signed a letter of intent to acquire all the
outstanding shares of DaMert Company for consideration of approximately
$8,300,000, of which approximately $5,200,000 is payable in 20,774,400 shares of
the Company's common stock. The acquisition will be accounted for as a purchase.
DaMert produces, distributes, and sells products to toy gift stores and catalog
retailers. DaMert is a privately held, Berkley, California based company.

17.  SUBSEQUENT EVENTS


     Subsequent to June 30, 1999 the Company hired two executives and entered
into employment agreements. The Company also granted these executives
immediately vested options to purchase 5,500,000 shares of common stock at $0.05
per share. At the time of the grant the fair value of common stock was $0.25.
Accordingly the Company will record a charge of $1,100,000 in the period of
grant. The Company also granted options to purchase 2,850,000 shares of common
stock at $0.125 per share vesting over three years, and 2,500,000 shares at
$0.25 also vesting over three years. The Company will record unearned
compensation of $356,250 with respect to the $0.125 options.



     On August 4, 1999 Futech entered into a line-of-credit arrangement with an
individual whereby it could borrow up to $5.0 million. The credit facility is
due December 1, 1999. In connection with the credit facility warrants to
purchase 20,000,000 shares of common stock were issued to the lender, and
2,000,000 warrants to purchase common stock were issued to a third party
facilitator for the transaction. Each of the 22,000,000 warrants have an
exercise price of $0.05 per share and expire in ten years.


                                      F-28
<PAGE>   124

                           JANEX INTERNATIONAL, INC.

                              FINANCIAL STATEMENTS
<PAGE>   125

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Janex International, Inc.

     We have audited the accompanying consolidated balance sheet of Janex
International, Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, shareholders' equity (deficit), and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Janex International, Inc. at December 31, 1998 and the consolidated results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.

     As discussed in Note 1 to the consolidated financial statements, the
Company's recurring losses and net capital deficiency raise substantial doubt
about its ability to continue as a going concern. Management's plans as to those
matters are also described in Note 1. The 1998 consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

                                          /s/  ERNST & YOUNG LLP

Phoenix, Arizona
April 7, 1999

                                      F-29
<PAGE>   126

                          REPORT OF BDO SEIDMAN, LLP,
                    INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
Janex International, Inc.
Eatontown, New Jersey

     We have audited the accompanying consolidated balance sheet of Janex
International, Inc. as of December 31, 1997, and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Janex
International, Inc. as of December 31, 1997, and the consolidated results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
losses from operations, including a net loss of $3,174,851 for the year ended
December 31, 1997, and has negative working capital of $1,782,770 and a net
stockholders' deficit of $2,049,126 at December 31, 1997. The Company has also
been slow and delinquent in paying its accounts payables and other obligations.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. There is no assurance that the Company will be able to realize
its recorded assets and liquidate its liabilities in the normal course of
business. Management's plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

                                                 /s/ BDO SEIDMAN, LLP
                                          --------------------------------------
                                                      Woodbridge, NJ
                                                      March 30, 1998

                                      F-30
<PAGE>   127

                   JANEX INTERNATIONAL, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                                  ---------------------------     JUNE 30,
                                                      1997           1998           1999
                                                  ------------   ------------   ------------
                                                                                (UNAUDITED)
<S>                                               <C>            <C>            <C>
                     ASSETS
Current assets:
  Cash and cash equivalents.....................  $    164,672   $     62,412   $     14,902
  Certificate of deposit........................       100,000             --
  Accounts receivable, less allowance for
     doubtful accounts of $10,439, $26,000 and
     $25,973 at December 31, 1997, 1998, and
     June 30, 1999 respectively.................       225,826        162,710        211,793
  Inventories...................................       173,107        131,098         35,018
  Prepaid royalties.............................        61,626         59,934        124,434
  Other current assets..........................        19,925         25,257         27,534
                                                  ------------   ------------   ------------
Total current assets............................       745,156        441,411        413,681
Property and equipment, net.....................       395,165        258,103        174,383
Intangible assets, net..........................       448,815        405,625        362,011
Other assets....................................       119,664             --         13,022
                                                  ============   ============   ============
          Total assets..........................  $  1,708,800   $  1,105,139   $    963,097
                                                  ============   ============   ============
     LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
  Advance from parent...........................  $         --   $    621,080   $  1,571,249
  Accounts payable..............................       685,725        602,715        356,343
  Accrued expenses..............................     1,373,899      1,203,277        842,364
  Notes payable -- other........................       468,302        257,000        257,000
                                                  ------------   ------------   ------------
          Total current liabilities.............     2,527,926      2,684,072      3,026,956
Notes payable to related parties................     1,230,000             --             --
Shareholders' deficit:
  Class A convertible preferred stock, no par
     value:
     Authorized shares -- 5,000,000 Issued and
       outstanding shares -- none and 5,000,000
       and 5,000,000 at December 31, 1997, 1998,
       and June 30, 1999 respectively...........            --        569,022        569,022
  Common stock, no par value:
  Authorized shares -- 20,000,000 Issued and
     outstanding shares -- 7,989,028, 18,098,750
     and 18,098,750 at December 31, 1997, 1998,
     June 30, 1999 respectively.................    11,618,816     12,803,327     12,803,327
  Additional paid-in capital....................       554,517        554,517        554,517
  Accumulated deficit...........................   (14,222,459)   (15,505,799)   (15,990,725)
                                                  ------------   ------------   ------------
          Total shareholders' deficit...........    (2,049,126)    (1,578,933)    (2,063,859)
                                                  ------------   ------------   ------------
          Total liabilities and shareholders'
             deficit............................  $  1,708,800   $  1,105,139   $    963,097
                                                  ============   ============   ============
</TABLE>


See accompanying notes.

                                      F-31
<PAGE>   128

                   JANEX INTERNATIONAL, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                SIX MONTHS ENDED
                                 YEAR ENDED DECEMBER 31,            JUNE 30,
                                -------------------------   -------------------------
                                   1997          1998          1998          1999
                                -----------   -----------   -----------   -----------
                                                            (UNAUDITED)   (UNAUDITED)
<S>                             <C>           <C>           <C>           <C>
Net sales.....................  $ 5,596,979   $ 3,117,599   $2,200,625    $   244,935
Cost of sales.................    3,354,114     1,633,627    1,124,523        201,909
Royalty expense...............      651,422       380,969      221,925          6,152
                                -----------   -----------   ----------    -----------
Gross profit..................    1,591,443     1,103,003      854,177         36,874
Operating expenses:
  Selling, general and
     administrative...........    2,208,106     1,755,882      762,900        354,108
  Depreciation and
     amortization.............      551,951       376,283      162,263        148,956
  Write-off of goodwill and
     intangible assets........    1,643,386            --           --             --
                                -----------   -----------   ----------    -----------
Income/(loss) from
  operations..................   (2,812,000)   (1,029,162)     (70,986)      (466,190)
Other income (expense):
  Interest income.............       21,461         8,833        4,160             --
  Interest expense............     (389,401)     (260,533)    (113,771)       (12,360)
  Other income (expense)......        8,637         3,268        1,840         (1,651)
                                -----------   -----------   ----------    -----------
Net loss before income
  taxes.......................   (3,171,303)   (1,277,594)    (178,757)      (480,201)
Provision for income taxes....       (3,548)       (5,746)      (5,900)        (4,725)
                                -----------   -----------   ----------    -----------
Net loss......................  $(3,174,851)  $(1,283,340)  $ (184,657)   $  (484,926)
                                ===========   ===========   ==========    ===========
Basic and diluted net loss per
  common share................  $     (0.55)  $     (0.13)  $    (0.02)   $     (0.03)
                                ===========   ===========   ==========    ===========
Weighted average number of
  shares outstanding..........    5,745,439    10,261,070    9,962,105     18,098,750
                                ===========   ===========   ==========    ===========
</TABLE>


See accompanying notes.
                                      F-32
<PAGE>   129

                   JANEX INTERNATIONAL, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)


<TABLE>
<CAPTION>
                                                                 CLASS A CONVERTIBLE                                    TOTAL
                                            COMMON STOCK           PREFERRED STOCK      ADDITIONAL                  SHAREHOLDERS'
                                      ------------------------   --------------------    PAID-IN     ACCUMULATED       EQUITY
                                        SHARES       AMOUNT       SHARES      AMOUNT     CAPITAL       DEFICIT        (DEFICIT)
                                      ----------   -----------   ---------   --------   ----------   ------------   -------------
<S>                                   <C>          <C>           <C>         <C>        <C>          <C>            <C>
Balance at December 31, 1996........   5,296,721    11,268,816          --         --     554,517     (11,047,608)       775,725
  Issuance of common stock..........   2,692,307       350,000          --         --          --              --        350,000
  Net loss..........................          --            --          --         --          --      (3,174,851)    (3,174,851)
                                      ----------   -----------   ---------   --------    --------    ------------    -----------
Balance at December 31, 1997........   7,989,028    11,618,816          --         --     554,517     (14,222,459)    (2,049,126)
  Sale of common stock..............   1,923,077       250,000          --         --          --              --        250,000
  Common stock issued for
     services.......................     175,000        22,750          --         --          --              --         22,750
  Stock issued upon conversion of
     notes payable..................   8,011,645       911,761   5,000,000    569,022          --              --      1,480,783
  Net loss..........................          --            --          --         --          --      (1,283,340)    (1,283,340)
                                      ----------   -----------   ---------   --------    --------    ------------    -----------
Balance at December 31, 1998........  18,098,750   $12,803,327   5,000,000   $569,022    $554,517    $(15,505,799)   $(1,578,933)
  Net loss (unaudited)..............          --            --          --         --          --        (484,926)      (484,926)
                                      ----------   -----------   ---------   --------    --------    ------------    -----------
Balance at June 30, 1999
  (unaudited).......................  18,098,750   $12,803,327   5,000,000   $569,022    $554,517    $(15,990,725)   $(2,063,859)
                                      ==========   ===========   =========   ========    ========    ============    ===========
</TABLE>


See accompanying notes.

                                      F-33
<PAGE>   130

                   JANEX INTERNATIONAL, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                     DECEMBER 31,                  JUNE 30,
                                               -------------------------   -------------------------
                                                  1997          1998          1998          1999
                                               -----------   -----------   -----------   -----------
                                                                           (UNAUDITED)   (UNAUDITED)
<S>                                            <C>           <C>           <C>           <C>
OPERATING ACTIVITIES
Net income (loss)............................  $(3,174,851)  $(1,283,340)   $(184,657)    $(484,926)
Adjustments to reconcile net income (loss) to
  net cash provided by (used in) operating
  activities:
  Depreciation...............................      272,088       218,659       90,722        90,118
  Amortization of intangible assets..........    1,921,291       157,624       71,541        58,838
  Amortization of loan fees..................      214,292       116,863       40,546            --
  Provision (credit) for doubtful accounts...     (192,195)       22,561      (10,439)           --
  Write-off of inventory.....................           --       299,000           --            --
  Unrealized foreign exchange losses.........           --         3,268           --            --
  Issuance of common stock for services......           --        22,750           --            --
  Changes in operating assets and
    liabilities:
    Accounts receivable......................      196,848        40,555      (98,942)      (49,083)
    Inventories..............................      396,530      (256,991)    (150,447)       96,080
    Prepaid expenses and other...............      289,160        (4,107)      (7,426)      (70,776)
    Accounts payable.........................     (123,583)      (83,010)     249,299      (246,368)
    Accrued expenses and other...............      523,600        80,161      (70,182)     (360,946)
                                               -----------   -----------    ---------     ---------
Net cash provided by (used in) operating
  activities.................................      323,180      (666,007)     (69,985)     (967,064)
INVESTING ACTIVITIES
Purchases of property and equipment..........     (190,898)      (81,567)     (54,702)           --
Product development costs....................     (106,084)     (114,464)     (80,042)      (30,615)
Decrease in certificate of deposit...........      400,000       100,000           --            --
                                               -----------   -----------    ---------     ---------
Net cash provided by (used in) investing
  activities.................................      103,018       (96,031)    (134,744)      (30,615)
FINANCING ACTIVITIES
Advances from parent.........................           --       621,080           --       950,169
Proceeds from line of credit.................           --       257,000           --            --
Net payments on notes payable................     (712,167)     (219,189)    (115,743)           --
Proceeds (payments) from loans
  payable -- agent...........................     (200,975)     (249,113)     (56,364)           --
Issuance of stockholder notes payable........      115,000            --           --            --
Proceeds from issuance of common stock.......      350,000       250,000      250,000            --
                                               -----------   -----------    ---------     ---------
Net cash provided by (used in) financing
  Activities.................................     (448,142)      659,778       77,893       950,169
                                               -----------   -----------    ---------     ---------
Net increase (decrease) in cash and cash
  equivalents................................      (21,944)     (102,260)    (126,836)      (47,510)
Cash and cash equivalents at beginning of
  period.....................................      186,616       164,672      164,672        62,412
                                               -----------   -----------    ---------     ---------
Cash and cash equivalents at end of period...  $   164,672   $    62,412    $  37,836     $  14,902
                                               ===========   ===========    =========     =========
</TABLE>


See accompanying notes.

                                      F-34
<PAGE>   131

                   JANEX INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30,
                          1998 AND 1999 IS UNAUDITED)


1.  DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

     Janex International, Inc. and subsidiaries (the Company) are in the
business of developing, marketing and selling toys and functional children's
products which are manufactured by subcontractors. The Company sells its
products primarily to U.S.-based retailers and their Hong Kong subsidiaries.

     On December 11, 1998, approximately 79 percent of the Company's outstanding
stock was acquired by Futech Interactive Products, Inc. ("Futech"). See Note 7.
Because the minority interest exceeds 20 percent, the Company did not establish
a new basis of accounting upon the acquisition.


     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All inter-company accounts and transactions
have been eliminated in consolidation. All balance sheet accounts of the
Company's foreign subsidiaries are translated at the current exchange rate at
balance sheet date, while income statement items are translated at the average
currency exchange rates for each period presented. The resulting translation
adjustments, if significant (for the years ended December 31, 1997 and 1998, and
the six-month period ended June 30, 1999, the adjustment was not significant),
are recorded as comprehensive income.


     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

     Certain reclassifications have been made to 1997 consolidated financial
statements to conform to the 1998 presentation.

     The financial statements have been prepared assuming the Company will
continue as a going concern. The Company has incurred significant operating
losses in the past three years and has negative net worth and negative working
capital at December 31, 1998. These factors raise significant doubt as to the
Company's ability to continue as a going concern.

     The Company's ultimate ability to continue as a going concern depends on
the market acceptance of products, and the achievement of operating profits and
positive cash flow. The Company will also require additional financial resources
from its new parent or other sources to provide near term operating cash to
enable the Company to execute its plans to move toward profitability. Management
believes that the financial resources of its new parent company, in addition to
sales to be generated from new product lines that are being developed, will be
sufficient to allow the Company to continue in operation.

                                      F-35
<PAGE>   132
                   JANEX INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30,
                   1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INTERIM FINANCIAL STATEMENTS


     The accompanying consolidated balance sheet at June 30, 1999 and the
consolidated statements of operations, stockholders' equity and cash flows for
the six-month periods ended June 30, 1998 and 1999 are unaudited and have been
prepared on the same basis as the audited consolidated financial statements
included herein. In the opinion of management, such unaudited consolidated
financial statements include all adjustments necessary to present fairly the
information set forth herein, which consist solely of normal recurring
adjustments. The results of operations for such interim periods are not
necessarily indicative of results for the full year.


CASH EQUIVALENTS

     The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.

INVENTORIES

     Inventories are stated at the lower of cost or market. Cost is determined
on various methods which approximate the first-in, first-out method.

PROPERTY AND EQUIPMENT

     Property and equipment is stated at cost. Depreciation is computed
principally by the straight-line method over the estimated useful lives of the
assets which range from two to five years for molds, machinery and equipment,
and furniture and fixtures. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the lease term.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     At December 31, 1998, the Company has the following financial instruments:
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and long-term debt. The carrying value of cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses approximates their
fair value based on the liquidity of these financial instruments or based on
their short-term nature. The carrying value of long-term debt approximates fair
market value based on the market interest rates available to the Company for
debt of similar risk and maturities.

INTANGIBLE ASSETS

     Intangible assets consist of goodwill and product development costs.

     Costs of business acquisitions in excess of net asset of subsidiaries
acquired (goodwill) are amortized on a straight-line basis over a ten year
period. The Company records impairment losses on long-lived assets used in
operations when events and

                                      F-36
<PAGE>   133
                   JANEX INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30,
                   1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


circumstances indicate that the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less then the carrying
amounts of those assets. This methodology includes intangible assets acquired.
Goodwill relating to specific intangible assets is included in the related
impairment measurements to the extent it is identified with such assets.

     Product development costs consist of product design and development
(through subcontractors) for the various toys and children's products the
Company sells. The designs are stated at the lower of cost or net realizable
value and amortized on a straight-line basis over a one to five year period.

     Management reviews goodwill and other intangible assets periodically for
possible impairment. This policy includes recognizing write-downs if it is
probable that measurable undiscounted future cash flows and/or the aggregate net
cash flows of an asset, as measured by current revenues and costs (exclusive of
depreciation) over the asset's remaining depreciable life, are not sufficient to
recover the net book value of an asset. During 1997, the Company wrote off
goodwill, licensing relationships and trademarks from certain previous
acquisitions totaling $1,643,386, because they were considered to have no future
value.

CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

     The Company transacts business on a credit basis with its customers. The
Company routinely assesses the financial strength of its customers and, as a
consequence, believes that its trade accounts receivable credit risk exposure is
limited. The Company does not require collateral to support customer
receivables. However, foreign receivable are generally secured by a letter of
credit. The Company maintains allowance for potential credit losses and such
losses have been within management's expectations.

     The Company's two largest customers totaled approximately 53 percent and 52
percent of net sales in 1997 and 1998 (see Note 13). The loss of any of these
major customers could have a material adverse effect on the results of the
Company's operations.

REVENUE RECOGNITION

     The Company recognizes revenue upon shipment of the product to the
customer, with appropriate allowances made for estimated returns and
uncollectible accounts.

INCOME TAXES

     Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) 109 "Accounting for Income Taxes." The statement
employs an asset and liability approach for financial accounting and reporting
of deferred income taxes. Generally, SFAS 109 allows for recognition of deferred
tax assets in the current period for the future benefit of net operating loss
carry forward and items for which expenses have been recognized for financial
statement purposes but will be deductible in future periods. A

                                      F-37
<PAGE>   134
                   JANEX INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30,
                   1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


valuation allowance is recognized, if the weight of available evidence is more
likely than not that some portion or all of the deferred tax assets will not be
realized.

STOCK-BASED COMPENSATION

     As permitted by SFAS 123, "Accounting for Stock-Based Compensation," the
Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options. Under APB 25, to the extent that
the exercise price of the Company's employee stock options equals management's
estimate of the fair value of the underlying stock on the date of grant, no
compensation expense is recognized.

     Deferred expense on stock and options issued to officers and directors for
services or other consideration to be received in the future are offset against
equity and are amortized to expense over the period of benefit.

     The pro-forma effects of SFAS 123 are not presented in these financial
statements because they do not have a material effect on earnings per share
calculations.

LOSS PER SHARE

     Loss per share is calculated in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share," (Statement 128).
Basic earnings per share is computed using the weighted average number of common
shares. Diluted earnings per share is computed using the weighted average number
of common share equivalents during the period. Common share equivalents include
employee stock options using the treasury method and dilutive convertible
securities using the if-converted method. Common share equivalents have been
excluded from the calculation of loss per share for all periods presented, as
their effect is anti-dilutive.

COMPREHENSIVE LOSS

     As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" (Statement 130). Statement 130 establishes new rules for
the reporting and display of comprehensive loss and its components.
Comprehensive loss for the Company is the same as net loss for all periods
presented.

SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

     Effective January 1, 1998, the Company adopted the SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information" (Statement
131). Statement 131 established standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas
and major customers (see Note 13).

                                      F-38
<PAGE>   135
                   JANEX INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30,
                   1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


3.  INVENTORIES

     Inventories consist of the following:


<TABLE>
<CAPTION>
                                             DECEMBER 31,
                                         --------------------    JUNE 30,
                                           1997        1998        1999
                                         --------    --------    --------
<S>                                      <C>         <C>         <C>
Work in progress.......................  $135,364    $     --         --
Finished goods.........................    37,743     131,098     35,018
                                         --------    --------     ------
                                         $173,107    $131,098     35,018
                                         ========    ========     ======
</TABLE>


4.  PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:


<TABLE>
<CAPTION>
                                          DECEMBER 31,
                                    ------------------------    JUNE 30,
                                       1997          1998         1999
                                    ----------    ----------    ---------
<S>                                 <C>           <C>           <C>
Molds.............................  $1,756,229     1,837,826    1,841,964
Machinery and equipment...........     146,593       146,593      146,589
Leasehold improvements............       3,866         3,866        3,866
                                    ----------    ----------    ---------
                                    $1,906,688    $1,988,285    1,992,419
Less accumulated depreciation and
  amortization....................   1,511,523     1,730,182    1,818,036
                                    ----------    ----------    ---------
                                    $  395,165    $  258,103      174,383
                                    ==========    ==========    =========
</TABLE>


5.  INTANGIBLE ASSETS

     Intangible assets consist of the following:


<TABLE>
<CAPTION>
                                         DECEMBER 31,
                                   ------------------------     JUNE 30,
                                      1997          1998          1999
                                   ----------    ----------    ----------
<S>                                <C>           <C>           <C>
Goodwill.........................  $  422,220    $  422,220    $  422,220
Product development costs........   1,009,165     1,047,290     1,071,459
                                   ----------    ----------    ----------
                                    1,431,385     1,469,510     1,493,679
Less amortization................     982,570     1,063,885     1,131,668
                                   ----------    ----------    ----------
                                   $  448,815    $  405,625    $  362,011
                                   ==========    ==========    ==========
</TABLE>


                                      F-39
<PAGE>   136
                   JANEX INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30,
                   1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


6.  ACCRUED EXPENSES

     Accrued expenses consist of the following:


<TABLE>
<CAPTION>
                                           DECEMBER 31,
                                     ------------------------    JUNE 30,
                                        1997          1998         1999
                                     ----------    ----------    --------
<S>                                  <C>           <C>           <C>
Allowance for returns and
  allowances.......................  $  334,763    $  334,763    $332,964
Accrued royalties..................     588,608       182,628      98,148
Accrued commissions................      80,721       154,063      55,484
Accrued interest...................     137,341         1,770      (1,770)
Other accrued expenses.............     232,466       530,053     357,538
                                     ----------    ----------    --------
                                     $1,373,899     1,203,277    $842,364
                                     ==========    ==========    ========
</TABLE>


7.  NOTES PAYABLE TO RELATED PARTIES

     Notes payable to related parties consist of the following:


<TABLE>
<CAPTION>
                                         DECEMBER 31,
                                   ------------------------     JUNE 30,
                                      1997          1998          1999
                                   ----------    ----------    ----------
<S>                                <C>           <C>           <C>
Revolving Credit Agreement,
  converted to equity in 1998....  $  615,000    $       --    $       --
Promissory notes to two
  shareholders, converted to
  equity in 1998.................     500,000            --            --
Commission loan to shareholder,
  converted to equity in 1998....     115,000            --            --
                                   ----------    ----------    ----------
                                   $1,230,000    $       --    $       --
                                   ==========    ==========    ==========
</TABLE>


     On December 11, 1998, Futech purchased 5,219,046 shares of common stock and
shareholder loans (including interest of $250,784) of $1,480,783 from certain of
the Company's majority stockholders. Subsequently, the shareholder loans were
converted into 8,011,645 shares of common stock and 5,000,000 shares of
preferred stock. After such conversion, Futech owns approximately 79 percent of
the Company's outstanding stock.

     Until December 1998, the Company had the ability to borrow up to $900,000
under a Revolving Credit Agreement (the "Agreement") with a significant
shareholder of the Company that expires on October 19, 1999. The Agreement bore
interest at 9.5 percent payable quarterly. The Agreement was secured by all of
the assets of Janex Corporation, and the guarantee of the Company. As additional
consideration, on April 19, 1996, the Company granted the Lender warrants to
purchase up to 900,000 shares of the Company's common stock, exercisable at a
price of $1.45 per share through April 19, 2000. The warrants were immediately
exercisable. The Company has used $150,000 under the

                                      F-40
<PAGE>   137
                   JANEX INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30,
                   1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


Agreement as security to issue a stand-by letter of credit in connection with
the loan payable to the Company's Hong Kong agent. This agreement ended and all
warrants were canceled on December 11, 1998.

     In connection with the acquisition of Janex Corporation in 1993, the
Company issued promissory notes to two stockholders totaling $1,000,000, payable
in semi-annual installments over a three-year period. On June 28, 1996, the note
holders agreed to extend the payment date for all remaining payments to February
1, 1998, subject to payment of interest at the rate of 9.5 percent per annum,
retroactive to January 1, 1996. On August 4, 1997, the note holders agreed to
further extend the payment date to February 1, 1999. Quarterly interest payments
commenced on September 1, 1996. In connection with the extension of the notes,
the Company entered into a warrant agreement with each of the note holders,
providing for the issuance of up to 282,994 warrants to one of them and up to
167,994 warrants to the other, to acquire a total of 450,988 shares of the
Company's common stock, exercisable at a price of $1.45 per share through June
28, 2000. The warrants vested in six-month increments over the term of the loan,
and if the loan was paid off early, certain of the warrants would be voided. The
agreement ended and all warrants were canceled on December 11, 1998.

     The Company charged to operations $214,292 and $116,863 of imputed interest
expense from the issuance of stock purchase warrants noted above for the years
ended December 31, 1997 and 1998, respectively.

8. NOTES PAYABLE -- OTHER


     The Company may borrow up to $400,000 under a line of credit agreement with
a bank. Borrowings under the line bear interest at the bank's prime rate plus
0.25 percent (8.0 percent at June 30, 1999). The line is secured by all of the
Company's assets and is personally guaranteed by two shareholders. Borrowings
under the line are due September 1, 1999. Borrowing capacity of $143,000 is
available at December 31, 1998.


     Through 1998, the Company had the ability to borrow up to $450,000 from its
Hong Kong agent for the payment of product development and tooling costs. Any
loans are to be repaid from collections of certain customer invoices at the rate
of 5 percent of the invoice amount, with interest at two percent above the Hong
Kong prime rate. All borrowings under this arrangement were repaid in 1998. Any
borrowings are secured by certain tooling, as well as an irrevocable stand-by
letter of credit for $150,000.

     Pursuant to a supplementary agency agreement, the Company had the ability
to borrow an additional $200,000 from its Agent provided that the Company issues
to the Agent an irrevocable stand-by letter of credit for $100,000. Any advance
under this facility is to be repaid within 60 days from the date of advance with
interest at 2 percent above the Hong Kong prime rate. As of December 31, 1997
and 1998, the Company had no borrowing under this credit facility.

                                      F-41
<PAGE>   138
                   JANEX INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30,
                   1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


     The Company had borrowed $340,000 under a private unsecured loan. At
December 31, 1997, the balance outstanding against this facility was $219,189,
which bore interest at prime plus 2 percent. This loan was repaid in 1998.

9.  INCOME TAXES

     The income tax provision, all of which is current, consists of the
following:

<TABLE>
<CAPTION>
                                                         YEARS ENDED
                                                        DECEMBER 31,
                                                      -----------------
                                                       1997       1998
                                                      -------    ------
<S>                                                   <C>        <C>
Current:
  Federal...........................................  $    --    $   --
  State.............................................    3,548     5,746
  Foreign...........................................       --        --
                                                      -------    ------
                                                      $ 3,548    $5,746
                                                      =======    ======
</TABLE>

     The Company's net deferred tax asset and deferred tax asset valuation
allowance are comprised of the following temporary differences and carry
forwards:

<TABLE>
<CAPTION>
                                                      DECEMBER 31,
                                                ------------------------
                                                   1997          1998
                                                ----------    ----------
<S>                                             <C>           <C>
Net operating loss carry-forward..............  $3,405,971    $3,600,000
Other, net....................................    (218,384)           --
                                                ----------    ----------
Net deferred tax assets.......................   3,187,587     3,600,000
Less: Valuation allowance.....................  (3,187,587)   (3,600,000)
                                                ----------    ----------
                                                $       --    $       --
                                                ==========    ==========
</TABLE>

     Because of the Company's recurring losses, the net deferred tax assets have
a 100 percent valuation allowance at December 31, 1997 and 1998.

     The income tax provision differs from the amount computed by applying the
U.S. Federal income tax rate (34 percent) because of the effect of foreign
losses not deductible in the U.S. return and the tax effect of unrecognized net
operating loss deductions.

     At December 31, 1997 and 1998, the Company had federal net operating loss
(NOL) carryforwards of approximately $9,273,000 and $10,000,000, respectively.
The Company also had state net operating loss (NOL) carryforwards. NOL
carryforwards may be available to offset future taxable income. If not used, the
federal and state NOL carryforwards will expire through 2018 and 2003,
respectively. Federal tax rules impose limitations on the use of NOL
carryforwards from a change in ownership. The losses

                                      F-42
<PAGE>   139
                   JANEX INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30,
                   1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


before taxes related to the foreign subsidiaries for the years ended December
31, 1997 and 1998 were $883,494 and $839,248, respectively.

10.  COMMITMENTS AND CONTINGENCIES

     The Company maintains a noncancelable operating lease on its former
facility. Effective April 1, 1997, the Company entered into an agreement to
sublease a portion of the former facility to a third party for the balance of
the lease. Effective May 1, 1998, the entire facility was subleased to a
different third party. The Company also leased other facilities under a
noncancelable operating lease, which expired on March 31, 1998. The monthly
rental income derived from the sublease was slightly less than rent expense. The
difference was not material.

     Future minimum payments under these noncancelable operating leases with
initial terms of one year or more consisted of the following at December 31,
1998:

<TABLE>
<S>                                                    <C>
1999...............................................    $102,000
2000...............................................     102,000
                                                       --------
Total minimum lease payments.......................    $204,000
                                                       ========
</TABLE>

     Net rental expense was approximately $68,000 and $37,000, $13,200 and
$5,100 for the years ended December 31, 1997 and 1998, and the three-month
periods ended March 31, 1998 and 1999, respectively.

     At December 31, 1998, the Company has commitments for minimum guaranteed
royalties under licensing agreements as follows:

<TABLE>
<S>                                                    <C>
1999...............................................    $268,959
2000...............................................      35,000
                                                       --------
Total minimum royalty payments.....................    $303,959
                                                       ========
</TABLE>


     Total royalty expense was approximately $651,000, $381,000 and $6,152 for
the years ended December 31, 1997 and 1998, and for the six months ending June
30, 1999, respectively.


     During the year ended December 31, 1996, holders of certain warrants
threatened to sue the Company, claiming that the Company was obligated to
register the stock underlying the warrants and to use its best efforts to
maintain the registration statement effective during the period the warrants are
exercisable, and that the Company had failed to meet these obligations. On March
26, 1996, the Company entered into a Settlement Agreement and Specific Release
with the warrant holder under which the Company issued additional warrants to
purchase 100,000 shares of the Company's common stock, at a price of $.64 per
share, in exchange for a release from any and all prior claims relating to
violations of the warrant agreement and failure to update the registration
statement. These warrants expire on March 26, 2001.

                                      F-43
<PAGE>   140
                   JANEX INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30,
                   1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


11.  STOCK-BASED COMPENSATION

     A summary of the Company's stock option activity and related information is
as follows:

<TABLE>
<CAPTION>
                                                          WEIGHTED-AVERAGE
                                             OPTIONS       EXERCISE PRICE
                                            ----------    ----------------
<S>                                         <C>           <C>
Outstanding, December 31, 1997............   1,846,236          (1.45)
  Granted.................................          --             --
  Exercised...............................          --             --
  Forfeited...............................  (1,801,236)         (1.45)
                                            ----------         ------
Outstanding, December 31, 1998............      45,000         $ 1.67
                                            ==========         ======
Exercisable at December 31, 1998..........      45,000
                                            ==========
</TABLE>

     Exercise prices for options outstanding as of December 31, 1998 range from
$1.25 to $2.13 per share. The weighted-average remaining contractual life of
those options is 1.9 years.

     The fair value of options and warrants is estimated on the date of grants
utilizing the Black-Scholes option pricing model with the following weighted
average assumptions for years ended 1997, and 1998: expected life of 4.4 years,
expected volatility of 22.5 percent, risk-free interest rate of 6 percent and a
0 percent dividend yield.

     Option valuation models require the input of highly subjective assumptions.
Because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.

     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the applicable vesting period. The pro
forma effect of SFAS No. 123 was not material for any year presented.

12.  COMMON STOCK

     The Company has the following shares reserved for future issuance at
December 31, 1998:

<TABLE>
<S>                                                           <C>
Warrants at $7.50 per share, expiring May 9, 1999.........    1,725,000
Warrants at $0.64 per share, expiring March 26, 2001......      100,000
Stock Options.............................................       45,000
                                                              ---------
                                                              1,870,000
                                                              =========
</TABLE>

     All warrants outstanding are fully exercisable.

                                      F-44
<PAGE>   141
                   JANEX INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30,
                   1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


     In October 1996, the Company issued 150,000 shares of common stock to the
former owners of an acquired company in exchange for cancellation of certain
earn-out provisions. The common stock was valued at $1.00 per share, which was
management's estimate of the fair value at the time. Accordingly, $150,000 was
recorded as compensation expense.

     The Company currently has 1,725,000 Public Warrants issued and outstanding,
which were issued in connection with the 1991 Public Offering. Each such warrant
entitles the holder to acquire one share of Common Stock at a price of $7.50 per
share. The expiration date of the Public Warrants was extended from May 9, 1996
to May 9, 1999.

     On August 27, 1997, the Company issued 2,307,692 shares of common stock at
fair market value for a total purchase price of $300,000 in a private placement
with two shareholders of the Company.

     On October 4, 1997, the Company issued 384,615 shares of common stock at
fair market value for a total purchase price of $50,000 in a private placement.

     On January 14, 1998, the Company issued 1,346,153 shares of common stock at
fair market value for a total purchase price of $175,000 in a private placement
with two shareholders of the Company.

13.  SEGMENT INFORMATION

     The Company operates exclusively in the children's products industry. For
geographical reporting, revenues are attributed to the geographic location from
which goods are shipped. Intercompany sales are recorded at cost.

     In 1997, customer A and customer B represented 39 percent and 14 percent of
the Company's net sales, respectively. In 1998, customer A and customer B
represented 47 percent and 5 percent of the Company's net sales, respectively.
Sales to these customers were made by the Hong Kong segment.

                                      F-45
<PAGE>   142
                   JANEX INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30,
                   1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


     A summary of the Company's operations by geographical area for the years
ended December 31, 1997 and 1998 were as follows:

<TABLE>
<CAPTION>
                                                  ADJUSTMENTS
                         UNITED         HONG          AND
                         STATES         KONG      ELIMINATIONS   CONSOLIDATED
                       -----------   ----------   ------------   ------------
<S>                    <C>           <C>          <C>            <C>
YEAR ENDED DECEMBER
  31, 1997
Net sales:
  Customers..........  $   856,975   $4,740,004   $        --    $ 5,596,979
  Intercompany.......    1,844,086       22,621    (1,866,707)            --
                       -----------   ----------   -----------    -----------
Total revenue........    2,701,061    4,762,625    (1,866,707)     5,596,979
Operating income
  (loss).............   (3,767,147)     955,147            --     (2,812,000)
Interest expense.....     (350,405)     (38,996)           --       (389,401)
Depreciation and
  amortization.......     (214,368)    (337,583)           --       (551,951)
Total assets.........    7,848,088      676,523    (6,815,811)   $ 1,708,800
YEAR ENDED DECEMBER
  31, 1998
Net sales:
  Customers..........  $    65,683   $3,051,916   $        --    $ 3,117,599
  Intercompany.......    1,222,267        6,685    (1,228,952)            --
                       -----------   ----------   -----------    -----------
Total revenue........    1,287,950    3,058,601    (1,228,952)     3,117,599
Operating loss.......      (82,950)    (946,212)           --     (1,029,162)
Interest expense.....     (234,976)     (25,557)           --       (260,533)
Depreciation and
  amortization.......     (123,702)    (252,581)           --       (376,283)
Total assets.........    3,055,804      801,894    (2,752,559)   $ 1,105,139
</TABLE>

                                      F-46
<PAGE>   143
                   JANEX INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30,
                   1998 AND 1999 IS UNAUDITED) -- (CONTINUED)



     A summary of the Company's operations by geographical area for the six
months ended June 30, 1998, and 1999 were as follows:



<TABLE>
<CAPTION>
                                                  ADJUSTMENTS
                        UNITED         HONG           AND
                        STATES         KONG       ELIMINATIONS    CONSOLIDATED
                       ---------    ----------    ------------    ------------
<S>                    <C>          <C>           <C>             <C>
SIX MONTH PERIOD
  ENDED JUNE 30, 1998
Net sales:
Customers............  $  28,388    $2,172,237            --       $2,200,625
Intercompany.........         --         1,952        (1,952)              --
                       ---------    ----------      --------       ----------
Total revenue........     28,388     2,174,189        (1,952)       2,200,625
Operating income
  (loss).............   (754,601)      683,615            --          (70,986)
Interest expense.....    (98,581)      (15,190)           --         (113,771)
Depreciation and
  amortization.......    (57,187)     (105,076)           --         (162,263)
SIX MONTH PERIOD
  ENDED JUNE 30, 1999
Net sales:
Customers............  $ 119,354    $  125,581      $     --       $  244,935
Intercompany.........         --            --            --               --
                       ---------    ----------      --------       ----------
Total revenue........    119,354       125,581            --          244,935
Operating loss.......   (352,966)     (113,224)           --         (466,190)
Interest expense.....    (12,422)           62            --          (12,360)
Depreciation and
  Amortization.......    (51,225)      (97,731)           --         (148,956)
</TABLE>


14.  RELATED PARTY TRANSACTIONS

     The Company pays sales commissions at the rate of 4 percent of net sales to
a company owned by a former stockholder and current director, relating to
customers located in New York, New Jersey, Connecticut and Pennsylvania.
Commissions on such sales of approximately $2,450,000 and $1,625,000 amounted to
$98,166 and $65,154 for the years ended December 31, 1997 and 1998,
respectively, which are included in selling, general and administrative
expenses. Accrued commissions included in accrued expenses and accounts payable,
on such sales amounted to $68,262 and $134,754 as of December 31, 1997 and 1998,
respectively. The Company also rented showroom space from this major

                                      F-47
<PAGE>   144
                   JANEX INTERNATIONAL, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


 (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH PERIODS ENDED JUNE 30,
                   1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


stockholder for which the Company paid $26,000 during 1997. No such expense was
incurred in 1998. In addition, the Company utilized the services of a public
warehouse facility in Baltimore, Maryland that is owned by the father of a
former stockholder for a fee based on the amount of goods received and shipped.
Fees amounted to $20,911 for the year ended December 31, 1997. No such fees were
incurred in 1998 or 1999.

                                      F-48
<PAGE>   145

                               TRUDY CORPORATION

                              FINANCIAL STATEMENTS
<PAGE>   146

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Trudy Corporation

     We have audited the accompanying balance sheet of Trudy Corporation as of
March 31, 1999, and the related statements of operations, shareholders' equity
(deficit), and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Trudy Corporation at March
31, 1999, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.

     As discussed in Note 1 to the financial statements, the Company's operating
loss, deficiency in net assets, and default under its borrowing agreement raise
substantial doubt about its ability to continue as a going concern. Management's
plans as to those matters are also described in Note 1. The March 31, 1999
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

                                          /S/ ERNST & YOUNG LLP

Phoenix, Arizona
June 11, 1999

                                      F-49
<PAGE>   147

            REPORT OF ABRAMS AND COMPANY, P.C., INDEPENDENT AUDITORS

To The Stockholders
Trudy Corporation
Norwalk, Connecticut

     We have audited the accompanying balance sheet of Trudy Corporation as of
March 31, 1998, and the related statements of operations, shareholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Trudy Corporation as of
March 31, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.


     As disclosed in Note 9, the previously issued financial statements were
restated to reflect the change in reporting interest forgiveness from an
extraordinary item and inclusion in net income to additional paid-in capital.


/s/ ABRAMS AND COMPANY, P.C.
---------------------------------------------

Melville, NY
June 26, 1998, except as to

Note 9, the


date of which is


September 15, 1999


                                      F-50
<PAGE>   148

                               TRUDY CORPORATION

                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                    MARCH 31
                                            -------------------------    JUNE 30,
                                               1998          1999          1999
                                            -----------   -----------   -----------
                                                                        (UNAUDITED)
<S>                                         <C>           <C>           <C>
                                      ASSETS
Current assets:
  Cash and cash equivalents...............  $        --   $       624   $    49,605
  Accounts receivable, net of allowance
     for doubtful accounts of $31,361,
     $50,044 and $53,794 at March 31, 1998
     and 1999, and June 30, 1999
     respectively.........................      321,898       246,049       169,556
  Inventories, net........................    1,574,901     1,501,204     1,469,838
  Prepaid expenses and other current
     assets...............................      105,730        50,842       153,357
  Deferred income taxes...................       59,000            --            --
                                            -----------   -----------   -----------
          Total current assets............    2,061,529     1,798,719     1,842,356
Property and equipment, net...............      129,769       114,185       107,937
Pre-publication costs and royalty
  advances................................      379,546       205,212       234,722
Deferred income taxes.....................      319,000            --            --
                                            -----------   -----------   -----------
          Total assets....................  $ 2,889,844   $ 2,118,116   $ 2,185,015
                                            ===========   ===========   ===========
                  LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Checks drawn in excess of cash
     balances.............................  $    23,517   $        --   $        --
  Accounts payable and accrued expenses...      295,176       477,696       704,006
  Due to Futech...........................           --            --        10,000
  Line of credit in default...............           --       770,000       697,234
  Long-term debt in default...............       49,350       200,349       186,099
  Current portion of notes
     payable -- related parties...........      287,612       626,322       766,322
                                            -----------   -----------   -----------
          Total current liabilities.......      655,655     2,074,367     2,363,661
Bank note payable.........................      388,688            --            --
Long-term debt............................      200,651            --            --
Notes payable to related parties..........      161,276       171,408       173,941
Shareholders' equity (deficit):
  Common stock: $.0001 par value:
     Authorized shares -- 850,000,000
     Issued and outstanding shares --
       331,222,249 at March 31, 1998 and
       1999 and June 30, 1999.............       33,123        33,123        33,123
</TABLE>


                                      F-51
<PAGE>   149


<TABLE>
<CAPTION>
                                                    MARCH 31
                                            -------------------------    JUNE 30,
                                               1998          1999          1999
                                            -----------   -----------   -----------
                                                                        (UNAUDITED)
<S>                                         <C>           <C>           <C>
  Additional paid-in capital..............    4,056,636     4,056,636     4,056,636
  Accumulated deficit.....................   (2,606,185)   (4,217,418)   (4,442,346)
                                            -----------   -----------   -----------
          Total shareholders' equity
             (deficit)....................    1,483,574      (127,659)     (352,587)
                                            -----------   -----------   -----------
          Total liabilities and
             shareholders' equity
             (deficit)....................  $ 2,889,844   $ 2,118,116   $ 2,185,015
                                            ===========   ===========   ===========
</TABLE>


See accompanying notes.

                                      F-52
<PAGE>   150

                               TRUDY CORPORATION

                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                YEAR ENDED MARCH 31       THREE MONTHS ENDED JUNE 30,
                            ---------------------------   ---------------------------
                                1998           1999           1998           1999
                            ------------   ------------   ------------   ------------
                                                          (UNAUDITED)    (UNAUDITED)
<S>                         <C>            <C>            <C>            <C>
Net sales.................  $  4,977,599   $  3,390,884   $    710,733   $    422,292
Cost of sales.............     2,730,401      2,168,685        454,640        295,984
                            ------------   ------------   ------------   ------------
Gross profit..............     2,247,198      1,222,199        256,093        126,308
Operating expenses:
  Selling, general and
     administrative.......     2,168,322      2,355,787        357,876        372,172
  Depreciation and
     amortization.........        17,449         22,175          9,000          8,019
                            ------------   ------------   ------------   ------------
Income (loss) from
  operations..............        61,427     (1,155,763)      (110,783)      (253,883)
Other income (expense):
  Interest expense........      (102,099)      (111,604)       (15,243)       (29,413)
  Other income............        35,904         34,134          4,203         58,368
                            ------------   ------------   ------------   ------------
Net loss before income
  taxes...................        (4,768)    (1,233,233)      (121,823)      (224,928)
Income tax benefit
  (provision).............       152,000       (378,000)            --             --
                            ------------   ------------   ------------   ------------
Net income (loss).........  $    147,232   $ (1,611,233)  $   (121,823)  $   (224,928)
                            ============   ============   ============   ============
Net income (loss) per
  share:
  Basic and diluted.......  $       0.00   $       0.00   $       0.00   $       0.00
                            ============   ============   ============   ============
Weighted average shares
  used in computation:
  Basic and diluted.......   324,598,187    331,222,249    331,222,249    331,222,249
                            ============   ============   ============   ============
</TABLE>


See accompanying notes.

                                      F-53
<PAGE>   151

                               TRUDY CORPORATION

                  STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)


<TABLE>
<CAPTION>
                           COMMON STOCK        ADDITIONAL                      TOTAL
                       ---------------------    PAID-IN     ACCUMULATED    SHAREHOLDERS'
                         SHARES      AMOUNT     CAPITAL       DEFICIT     EQUITY (DEFICIT)
                       -----------   -------   ----------   -----------   ----------------
<S>                    <C>           <C>       <C>          <C>           <C>
Balance at April 1,
  1997...............  324,457,249   $32,446   $3,993,698   $(2,753,417)    $ 1,272,727
  Issuance of common
     stock...........    6,765,000       677        6,618            --           7,295
  Forgiveness of
     interest........           --        --       56,320            --          56,320
  Net income.........           --        --           --       147,232         147,232
                       -----------   -------   ----------   -----------     -----------
Balance at March 31,
  1998...............  331,222,249    33,123    4,056,636    (2,606,185)      1,483,574
  Net loss...........           --        --           --    (1,611,233)     (1,611,233)
                       -----------   -------   ----------   -----------     -----------
Balance at March 31,
  1999...............  331,222,249    33,123    4,056,636    (4,217,418)       (127,659)
Net loss
  (unaudited)........           --        --           --      (224,928)       (224,928)
                       -----------   -------   ----------   -----------     -----------
Balance at June 30,
  1999 (unaudited)...  331,222,249   $33,123   $4,056,636   $(4,442,346)    $  (352,587)
                       ===========   =======   ==========   ===========     ===========
</TABLE>


See accompanying notes.

                                      F-54
<PAGE>   152

                               TRUDY CORPORATION

                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                   THREE MONTHS
                                     YEAR ENDED MARCH 31           ENDED JUNE 30
                                   -----------------------   -------------------------
                                     1998         1999          1998          1999
                                   ---------   -----------   -----------   -----------
                                                             (UNAUDITED)   (UNAUDITED)
<S>                                <C>         <C>           <C>           <C>
OPERATING ACTIVITIES
Net income (loss)................  $ 147,232   $(1,611,233)    (121,823)     (224,928)
Adjustments to reconcile net
  income (loss) to net cash used
  in operating activities:
  Depreciation...................     17,449        22,175        9,000         8,019
  Amortization of pre-publication
     costs.......................    107,137       140,121       36,000        32,700
  (Gain)/loss on disposal of
     property and equipment......       (300)       53,080           --            --
  Loss on write down of pre-
     publication costs and
     royalty advances............         --       199,901           --            --
  Provision for losses on
     accounts receivable.........     45,157        33,596        7,500         3,500
  Provision for slow moving
     inventory...................     50,000       205,000           --            --
  Deferred income taxes..........   (162,000)      378,000           --            --
  Changes in operating assets and
     liabilities:
     Accounts receivable.........   (193,358)       42,253     (222,235)       72,993
     Inventories.................   (220,311)     (131,303)    (185,451)       31,366
     Prepaid expenses and other
       current assets............    (16,116)       54,888       (1,616)     (102,516)
     Prepaid income taxes........    (20,124)           --           --            --
     Accounts payable and accrued
       expenses..................    (50,532)      182,520       18,471       226,309
                                   ---------   -----------    ---------     ---------
Net cash used in/(provided by)
  operating activities...........   (295,766)     (431,002)    (460,154)       47,443
                                   ---------   -----------    ---------     ---------
INVESTING ACTIVITIES
Purchases of property and
  equipment......................    (81,679)      (59,671)     (14,056)       (1,770)
Pre-publication and royalty
  advances, net..................   (135,500)     (165,688)      16,398       (62,211)
Proceeds from sale of
  equipment......................        300            --           --            --
                                   ---------   -----------    ---------     ---------
Net cash used in investing
  activities.....................   (216,879)     (225,359)       2,348       (63,981)
                                   ---------   -----------    ---------     ---------
FINANCING ACTIVITIES
Net proceeds on short-term
  borrowings.....................   (105,598)      706,637       (2,375)      140,000
Proceeds from issuance of
  loans -- long-term.............    648,822            --      470,000            --
</TABLE>


                                      F-55
<PAGE>   153


<TABLE>
<CAPTION>
                                                                   THREE MONTHS
                                     YEAR ENDED MARCH 31           ENDED JUNE 30
                                   -----------------------   -------------------------
                                     1998         1999          1998          1999
                                   ---------   -----------   -----------   -----------
                                                             (UNAUDITED)   (UNAUDITED)
<S>                                <C>         <C>           <C>           <C>
Repayment of
  loans -- long-term.............    (40,813)      (49,652)      (6,086)      (84,481)
Proceeds from exercise of common
  stock options..................      7,295            --           --            --
                                   ---------   -----------    ---------     ---------
Advance from Futech Interactive
  Products, Inc..................         --            --           --        10,000
Net cash provided by financing
  activities.....................    509,706       656,985      461,539        65,519
                                   ---------   -----------    ---------     ---------
Net increase (decrease) in cash
  and cash equivalents...........     (2,939)          624        3,727        48,981
Cash and cash equivalents at
  beginning of year..............      2,939            --           --           624
                                   ---------   -----------    ---------     ---------
Cash and cash equivalents at end
  of period......................  $      --   $       624        3,727        49,605
                                   =========   ===========    =========     =========
Cash paid for interest...........  $  85,003   $    78,027       15,348        17,926
Cash paid for income taxes.......     35,957            --           --            --
Non cash investing activity-
  Forgiveness of interest net of
     related income taxes........     56,230            --           --            --
</TABLE>


See accompanying notes.

                                      F-56
<PAGE>   154

                               TRUDY CORPORATION

                         NOTES TO FINANCIAL STATEMENTS

                   MARCH 31, 1998 AND 1999 AND JUNE 30, 1999


(THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE THREE-MONTH PERIODS ENDED JUNE
                        30, 1998 AND 1999 IS UNAUDITED)


1.  ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

     Trudy Corporation (Company) designs, manufactures and markets plush stuffed
animals and publishes children's books and audiocassettes for sale to both
retail and wholesale customers, both domestically and internationally. All
Company product is sold under the trade name of Soundprints.

BASIS OF PRESENTATION

     The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred operating
losses, negative working capital and has failed to meet certain provisions of
its credit agreement at March 31, 1999. The Company has been funded through
loans from certain principal shareholders. The inability of the Company to
attract additional capital and ultimately, to achieve profitability, could
result in discontinuation of the Company's business.

     The Company's ultimate ability to continue as a going concern depends on
the market acceptance of products utilizing its proprietary agreements with
certain licensees, and the achievement of operating profits and positive cash
flow.

     The Company is party to a merger agreement dated June 4, 1999 with Futech
Interactive Products, Inc. ("Futech") and certain other companies and
shareholders thereof. Under the terms of the merger, Futech will acquire all of
the Company's outstanding stock for $456,330 in cash (net of broker's fee of
$43,670) and 400,000 shares of Futech stock. Futech has also agreed to provide
working capital advances to the Company and to assure that the Company is not in
default under any of its credit agreements. Futech has also agreed to repay
approximately $800,000 of loans and interest payable to the Company's president
and his family. However, management has no assurances that Futech currently has
the financial resources to honor these commitments. The merger is subject to
closing conditions, including shareholder approval. The Company is depending
upon additional financial resources that it expects to receive from Futech.
Should the merger with Futech not occur, management plans to obtain additional
financial resourcing from yet to be identified third parties and/or seek
potential acquirers who would provide additional resources.

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

     Certain amounts shown in the prior year financial statements have been
reclassified to conform with the current year financial statement presentation.

                                      F-57
<PAGE>   155
                               TRUDY CORPORATION

                         NOTES TO FINANCIAL STATEMENTS

                   MARCH 31, 1998 AND 1999 AND JUNE 30, 1999


(THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE THREE-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


CASH EQUIVALENTS

     The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.

ACCOUNTS RECEIVABLE


     Accounts receivable consist of amounts due from customers and also include
$25,761 and $35,761 at March 31, 1999 and June 30, 1999, respectively of
expenses related to the merger with Futech which will be reimbursed by Futech.


     The Company transacts business on a credit basis with its customers. The
Company routinely assesses the financial strength of its customers and, as a
consequence, believes that its trade accounts receivable credit risk exposure is
limited. The Company does not require collateral or other security to support
credit sales, but provides an allowance for bad debts based on historical
experience and specifically identified risks.

     The Company's largest customer, Advanced Marketing Services, Inc., totaled
approximately 35.2 percent and 28.8 percent of net sales in 1998 and 1999.

INVENTORIES

     Inventories, which consist principally of finished goods, are stated at the
lower of cost or market. Cost is determined by various methods which approximate
the first-in, first-out method.

PROPERTY AND EQUIPMENT

     Property and equipment is stated at cost. Depreciation is computed
principally by the straight-line method over the estimated useful lives of the
assets which range from five to seven years for machinery and equipment, and
furniture and fixtures. Leasehold improvements are amortized over the shorter of
their estimated useful lives or the lease term.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     At March 31, 1999, the Company has the following financial instruments:
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and long-term debt. The carrying value of cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses approximates their
fair value based on the liquidity of these financial instruments or based on
their short-term nature. The carrying value of long-term debt approximates fair
market value based on the market interest rates available to the Company for
debt of similar risk and maturities.

                                      F-58
<PAGE>   156
                               TRUDY CORPORATION

                         NOTES TO FINANCIAL STATEMENTS

                   MARCH 31, 1998 AND 1999 AND JUNE 30, 1999


(THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE THREE-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


REVENUE

     The Company recognizes revenue upon shipment of the product to the
customer, with appropriate allowances made for estimated returns and
uncollectible accounts.


     The Company sells certain goods under a license from the Smithsonian
Institution ("Smithsonian"). Sales with the Smithsonian name approximated 90
percent and 80 percent of net sales in the years ended March 31, 1998 and 1999,
respectively.


INCOME TAXES


     Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." The
statement employs an asset and liability approach for financial accounting and
reporting of deferred income taxes. Generally, SFAS 109 allows for recognition
of deferred tax assets in the current period for the future benefit of net
operating loss carryforwards and items for which expenses have been recognized
for financial statement purposes but will be deductible in future periods. A
valuation allowance is recognized, if on the weight of the available evidence it
is more likely than not that some portion or all of the deferred tax assets will
not be realized.


STOCK-BASED COMPENSATION

     The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options. Under APB 25, to
the extent that the exercise price of the Company's employee stock options
equals management's estimate of the fair value of the underlying stock on the
date of grant, no compensation expense is recognized.

     Deferred expense on stock and options issued to officers and directors for
services or other consideration to be received in the future are offset against
equity and are amortized to expense over the period of benefit.

     The Company periodically issues shares of its common stock to employees and
vendors for services provided to the Company. Shares issued for services are
valued at the Company's estimate of fair value of the common stock at the date
of issuance.

LOSS PER SHARE COMPUTATION

     Loss per share is computed in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share," (Statement 128).
Basic earnings per share is computed using the weighted average number of common
shares. Diluted earnings per share is computed using the weighted average number
of common shares and common share equivalents during the period. Dilutive common
share equivalents consist of

                                      F-59
<PAGE>   157
                               TRUDY CORPORATION

                         NOTES TO FINANCIAL STATEMENTS

                   MARCH 31, 1998 AND 1999 AND JUNE 30, 1999


(THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE THREE-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


employee stock options using the treasury method and dilutive convertible
securities using the if-converted method.

COMPREHENSIVE LOSS

     As of April 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" (Statement 130). Statement 130 establishes new rules for
the reporting and display of comprehensive income and its components.
Comprehensive loss for the Company is the same as net loss for all periods
presented.

SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

     Effective April 1, 1998, the Company adopted the FASB's SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (Statement
131). Statement 131 established standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The Company has determined it has no reportable segments
under Statement 131.

ADVERTISING


     Advertising costs are expensed as incurred, except for catalogs and
brochures which are all amortized over the period benefited not to exceed the
publication date of the new brochure or twelve months, whichever is less.
Included in prepaid expenses and other current assets are prepaid catalogs and
brochures of approximately $53,000 and $2,000 $22,000 and $2,000 at March 31,
1998 and March 31, 1999 and for the three months ended June 30, 1999,
respectively.



     Advertising expense was approximately $76,000, $58,000, $1,500 and $11,150
respectively, for the years ended March 31, 1998 and 1999 and for the three
months ended June 30, 1998 and 1999.


                                      F-60
<PAGE>   158
                               TRUDY CORPORATION

                         NOTES TO FINANCIAL STATEMENTS

                   MARCH 31, 1998 AND 1999 AND JUNE 30, 1999


(THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE THREE-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


2.  INVENTORIES

     Inventories consist of the following:


<TABLE>
<CAPTION>
                                           MARCH 31
                                   ------------------------     JUNE 30
                                      1998          1999          1999
                                   ----------    ----------    ----------
<S>                                <C>           <C>           <C>
Raw materials....................  $   50,880    $   58,439    $   58,723
Finished goods...................   1,574,021     1,697,765     1,666,115
                                   ----------    ----------    ----------
                                    1,624,901     1,756,204     1,724,838
Reserve for slow-moving
  inventory......................      50,000       255,000       255,000
                                   ----------    ----------    ----------
                                   $1,574,901    $1,501,204    $1,469,838
                                   ==========    ==========    ==========
</TABLE>


3.  PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:


<TABLE>
<CAPTION>
                                              MARCH 31
                                        --------------------    JUNE 30
                                          1998        1999        1999
                                        --------    --------    --------
<S>                                     <C>         <C>         <C>
Machinery and equipment...............  $343,806    $311,987    $313,758
Furniture and fixtures................    34,630      47,909      47,909
                                        --------    --------    --------
                                         378,436     359,896     361,667
Accumulated depreciation..............   248,667     245,711     253,730
                                        --------    --------    --------
                                        $129,769    $114,185    $107,937
                                        ========    ========    ========
</TABLE>


                                      F-61
<PAGE>   159
                               TRUDY CORPORATION

                         NOTES TO FINANCIAL STATEMENTS

                   MARCH 31, 1998 AND 1999 AND JUNE 30, 1999


(THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE THREE-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


4.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

     Accounts payable and accrued expenses consist of the following:


<TABLE>
<CAPTION>
                                              MARCH 31
                                        --------------------    JUNE 30
                                          1998        1999        1999
                                        --------    --------    --------
<S>                                     <C>         <C>         <C>
Accounts payable......................  $206,234    $225,359    $310,210
Accrued royalties.....................    22,385     156,037     125,686
Accrued payroll.......................    34,271      29,164      31,670
Accrued interest......................     2,758      18,261      26,444
Commissions payable...................    12,777      13,685      11,575
Other.................................    16,751      35,190     198,421
                                        --------    --------    --------
                                        $295,176    $477,696    $704,006
                                        ========    ========    ========
</TABLE>


5.  COMMITMENTS

LINE OF CREDIT IN DEFAULT


     The Company had a loan agreement with a bank which provided up to $1.2
million of available funds at an interest rate of the bank's prime rate plus
0.25 percent (8.0 percent at June 30, 1999). The loan agreement expired on June
15, 1999. The line is collateralized by eligible accounts receivable and
inventory as well as personal guarantees of certain shareholders.


LONG-TERM DEBT IN DEFAULT

     Long-term debt consists of a promissory note collateralized by the assets
of the Company. The terms of the note are for monthly installments of $6,207
including interest at 8.75 percent, until April 30, 2002 when all remaining
principal and interest is due.

COMPLIANCE WITH FINANCIAL COVENANTS


     Certain financial covenants are required to be met in connection with the
long-term debt and line of credit agreement including tangible net worth and
indebtedness. At June 30, 1999, the Company has failed to meet these
requirements. As a result of this noncompliance, there are various options
available to the lending institution including the immediate repayment of
outstanding balances of both loans. The bank many also increase the interest
rate of the loans to a default rate, which is 300 basis points higher than the
stated rate.


     In accordance with SFAS No. 78, "Classification of Obligations That Are
Callable by the Creditor," the Company has classified the balance of the term
loan and line of credit

                                      F-62
<PAGE>   160
                               TRUDY CORPORATION

                         NOTES TO FINANCIAL STATEMENTS

                   MARCH 31, 1998 AND 1999 AND JUNE 30, 1999


(THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE THREE-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


borrowings as a current liability. Management of the Company has met with the
lenders in an attempt to restructure the credit facility, or otherwise
satisfactorily resolve the defaults. It is not possible, however, to predict at
this time the success of management's efforts. No assurance can be given that
the outcome of the Company's negotiating efforts with the lenders will not
adversely affect the Company's business, financial condition, results of
operations and cash flows.

NOTES PAYABLE TO RELATED PARTIES

     Notes payable to related parties consist of the following:


<TABLE>
<CAPTION>
                                              MARCH 31
                                        --------------------    JUNE 30
                                          1998        1999        1999
                                        --------    --------    --------
<S>                                     <C>         <C>         <C>
$365,387 in aggregated promissory
  notes to the president of the
  Company at interest rates varying
  between 8 to 12 percent. Note terms
  have passed and payments are made as
  cash flows permit. Notes are
  collateralized by cash, accounts
  receivable, inventory, and furniture
  and fixtures........................  $287,612    $287,422    $287,422
$28,900 promissory note to the
  president, collateralized by cash,
  accounts receivable, inventory, and
  furniture and fixtures, payable in
  total including 8 percent interest
  on July 10, 1999....................        --      28,900      28,900
$310,000 promissory note to the
  president, collateralized by cash,
  accounts receivable, inventory and
  furniture and fixtures, payable in
  total including 8 percent interest
  on October 5, 1998..................        --     310,000     310,000
$140,000 promissory note the wife of
  the company's president,
  collateralized by cash, accounts
  receivable, inventory and furniture
  and fixtures, payable in total
  including 8 percent interest on July
  2, 1999.............................        --          --     140,000
</TABLE>


                                      F-63
<PAGE>   161
                               TRUDY CORPORATION

                         NOTES TO FINANCIAL STATEMENTS

                   MARCH 31, 1998 AND 1999 AND JUNE 30, 1999


(THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE THREE-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)



<TABLE>
<CAPTION>
                                              MARCH 31
                                        --------------------    JUNE 30
                                          1998        1999        1999
                                        --------    --------    --------
<S>                                     <C>         <C>         <C>
$101,326 family loan at 10 percent
  interest, noncompounding. There are
  no established repayment terms......   161,276     171,408     173,941
                                        --------    --------    --------
                                         448,888     797,730     940,263
Less current portion..................   287,612     626,322     766,322
                                        --------    --------    --------
                                        $161,276    $171,408    $173,941
                                        ========    ========    ========
</TABLE>



     As of March 31, 1998, the president agreed to forgive the approximately
$96,000 of interest in addition to amending the Company's borrowing terms to
omit any future interest on his loan. This amount is reflected as additional
paid-in capital.


LEASE COMMITMENTS

     The Company leases its building from a related party and miscellaneous
other items under noncancelable operating leases. Rent expense was approximately
$106,000 and $108,000 during the years ended March 31, 1998 and 1999,
respectively. Future minimum payments under noncancelable operating leases with
initial terms of one year or more consisted of the following at March 31, 1999:

<TABLE>
<S>                                                            <C>
2000.......................................................    $111,524
2001.......................................................     111,681
2002.......................................................     111,260
2003.......................................................     110,000
2004.......................................................     110,000
Thereafter.................................................      27,500
                                                               --------
Total minimum lease payments...............................    $581,965
                                                               ========
</TABLE>

OTHER COMMITMENTS


     In June 1999, the Company began selling its products to Futech. Futech has
assumed sales responsibility for the majority of the Company's trade accounts
and will act as a distributor of the Company. Through June, sales have totaled
$75,329. Futech is also funding some of the Company's working capital needs and
through June 30, 1999 has advanced $10,000 to the Company.


     The Smithsonian has granted the Company a nontransferable license to
utilize the names "Smithsonian Institution" and "Smithsonian" for products and
purposes as defined

                                      F-64
<PAGE>   162
                               TRUDY CORPORATION

                         NOTES TO FINANCIAL STATEMENTS

                   MARCH 31, 1998 AND 1999 AND JUNE 30, 1999


(THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE THREE-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


in the license agreement. The agreement expires on September 30, 2002. The
agreement requires the Company to pay royalties of 5 percent on products sold
using the Smithsonian name. The Company has guaranteed the following minimum
royalty amounts:

<TABLE>
<CAPTION>
PERIOD                                                          AMOUNT
------                                                         --------
<S>                                                            <C>
October 1, 1998 -- September 30, 1999......................    $ 95,000
October 1, 1999 -- September 30, 2000......................     100,000
October 1, 2000 -- September 30, 2001......................     105,000
October 1, 2001 -- September 30, 2002......................     110,000
</TABLE>


     The Company is also a guarantor on an installment loan made to Noreast
Management LLC ("Noreast") a limited liability company of which the Company's
president is a member. The Company leases its current facility from Noreast. The
purpose of the loan was to fund improvements to the facility currently occupied
by the Company. The loan is payable in 95 monthly installments of $3,125, plus
interest at 9.5 percent. At March 31, 1999 and June 30, 1999, the balance of the
installment loan was $200,000 and $190,625, respectively.


6.  INCOME TAXES

     The Company's provision (benefit) for income taxes consists of the
following:


<TABLE>
<CAPTION>
                                                        MARCH 31
                                                  ---------------------
                                                    1998         1999
                                                  ---------    --------
<S>                                               <C>          <C>
Current -- State................................  $  10,000    $     --
Deferred -- Federal.............................   (162,000)    378,000
                                                  ---------    --------
                                                  $(152,000)   $378,000
                                                  =========    ========
</TABLE>


                                      F-65
<PAGE>   163
                               TRUDY CORPORATION

                         NOTES TO FINANCIAL STATEMENTS

                   MARCH 31, 1998 AND 1999 AND JUNE 30, 1999


(THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE THREE-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


     The provision (benefit) for income tax differs from the U.S. federal
statutory rate as follows:

<TABLE>
<CAPTION>
                                                       MARCH 31
                                              --------------------------
                                                 1998           1999
                                              -----------    -----------
<S>                                           <C>            <C>
Income tax provision (benefit) at statutory
  rate......................................        (39.0)%        (34.0)%
Net operating loss for which no current
  benefit has been taken....................           --           34.0
Establishment of valuation reserve for
  deferred tax assets.......................           --           30.7
State income tax net of federal benefit.....        138.4             --
Effect of graduated rate on statutory
  rate......................................        (85.6)            --
Utilization of net operating loss...........       (332.6)            --
                                              -----------    -----------
Income tax provision (benefit)..............       (318.8)%        30.7%
                                              ===========    ===========
</TABLE>

     The deferred tax assets consist of the following:


<TABLE>
<CAPTION>
                                                       MARCH 31
                                              --------------------------
                                                 1998           1999
                                              -----------    -----------
<S>                                           <C>            <C>
Reserves and accruals.......................  $    65,000    $   157,000
Net operating loss carryforwards............    1,061,000      1,156,000
                                              -----------    -----------
          Total gross deferred tax assets...    1,126,000      1,313,000
Less valuation allowance....................      748,000     (1,313,000)
                                              -----------    -----------
                                              $   378,000    $        --
                                              ===========    ===========
Current.....................................  $    59,000    $        --
Non-current.................................      319,000             --
                                              -----------    -----------
                                              $   378,000    $        --
                                              ===========    ===========
</TABLE>


     The Company has a net operating loss carryforward of $3,400,000 for Federal
income tax purposes, which begins to expire in 2004, to the extent not
previously utilized.

     The realization of the Company's deferred tax assets is dependent on future
profits, which are not assured, accordingly, a valuation allowance equal to the
net deferred tax assets has been provided at March 31, 1999. The valuation
allowance for deferred tax assets decreased $324,000 during the year ended March
31, 1998 due to the utilization of net operating loss carryforwards and
increased by $565,000 during the year ended

                                      F-66
<PAGE>   164
                               TRUDY CORPORATION

                         NOTES TO FINANCIAL STATEMENTS

                   MARCH 31, 1998 AND 1999 AND JUNE 30, 1999


(THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE THREE-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


March 31, 1999 due to the establishment of valuation reserves against all net
deferred tax assets.

7.  STOCK-BASED COMPENSATION

     The Company has stock options outstanding under its 1987 Stock Option Plan
("the Plan"). No further options may be granted under the Plan. Existing options
expire upon the earlier of employee termination or ten years from the date of
grant. Options outstanding have exercise prices from $0.001 to $0.002 and have a
weighted average remaining life of 65 months.

     A summary of the Company's stock option activity, and related information
is as follows:


<TABLE>
<CAPTION>
                                                              WEIGHTED-
                                                               AVERAGE
                                                              EXERCISE
                                                 OPTIONS        PRICE
                                                ----------    ---------
<S>                                             <C>           <C>
Outstanding at April 1, 1997..................  21,603,500     $0.001
Granted.......................................          --         --
Exercised.....................................  (6,765,000)     0.001
Forfeited/canceled............................    (158,500)     0.011
                                                ----------     ------
Outstanding at March 31, 1998.................  14,680,000      0.001
Granted.......................................          --         --
Exercised.....................................          --         --
Forfeited.....................................          --         --
                                                ----------     ------
Outstanding at March 31, 1999.................  14,680,000     $0.001
Granted.......................................          --
Exercised.....................................          --
Forfeited.....................................          --
                                                ----------
Outstanding at June 30, 1999..................  14,680,000     $0.001
                                                ==========     ======
Exercisable at end of year....................  14,680,000
                                                ==========
</TABLE>


     Pro forma information regarding net loss is required by SFAS No. 123, and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using the minimum value option
pricing model assuming a risk-free interest rate of 5 percent; dividend yield of
0 percent; and a weighted-average expected life of the

                                      F-67
<PAGE>   165
                               TRUDY CORPORATION

                         NOTES TO FINANCIAL STATEMENTS

                   MARCH 31, 1998 AND 1999 AND JUNE 30, 1999


(THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE THREE-MONTH PERIODS ENDED JUNE
                 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


option of 5 years for the year ended March 31, 1999. Pro forma expense under
SFAS No. 123 was not material in the years ended March 31, 1998 and 1999.

     Option valuation models require the input of highly subjective assumptions.
Because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.

8.  BENEFIT PLAN

     Effective January 1, 1999, the Company adopted a 401(k) Retirement Plan,
which covers substantially all employees of the Company that have completed one
year of service. The plan permits participants to contribute to the plan,
subject to Internal Revenue Code restrictions, and the plan directs the Company
to make matching contributions of 50 percent on the first 3 percent of employee
contributions. During the year ended March 31, 1999, the Company made $2,260 in
matching contributions to the Plan and paid $830 in administrative expenses.


9.  RESTATEMENT



     The financial statements for the year ended March 31, 1998 were restated to
reflect the change in reporting interest forgiveness (net of related taxes)
related to the company's indebtedness to the president from an extraordinary
item and inclusion in net income to additional paid-in capital. The components
of the restatement are as follows:



<TABLE>
<CAPTION>
                                   PREVIOUSLY
                                    REPORTED      ADJUSTMENT     RESTATED
                                   -----------    ----------    -----------
<S>                                <C>            <C>           <C>
Net income.......................  $   203,552     $56,320      $   147,232
Accumulated deficit..............   (2,549,865)     56,320       (2,606,185)
Additional paid-in capital.......    4,000,316      56,320        4,056,636
</TABLE>


                                      F-68
<PAGE>   166

                               FUNDEX GAMES, LTD.

                              FINANCIAL STATEMENTS
<PAGE>   167

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Fundex Games, Ltd.

     We have audited the accompanying balance sheets of Fundex Games, Ltd. as of
December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fundex Games, Ltd. at
December 31, 1998 and 1997, and the results of its operations and cash flows for
the years then ended, in conformity with generally accepted accounting
principles.

                                              /S/ BDO SEIDMAN, LLP

Chicago, Illinois
March 17, 1999

                                      F-69
<PAGE>   168

                               FUNDEX GAMES LTD.

                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                       -------------------------    JUNE 30,
                                                          1997          1998          1999
                                                       -----------   -----------   -----------
                                                                                   (UNAUDITED)
<S>                                                    <C>           <C>           <C>
                       ASSETS
Current Assets
  Cash...............................................  $  130,348    $   41,214    $         0
  Accounts receivable -- trade, less allowance for
    doubtful accounts of $70,000, $138,000 and 53,000
    for December 31, 1997, 1998 and June 30, 1999....   1,313,920     1,690,571        688,816
  Income tax receivable (Note 5).....................      20,000            --             --
  Inventories (Note 2)...............................   2,447,204     1,907,939      2,112,629
  Prepaid expenses (Notes 3 and 4)...................     254,021       212,111        335,579
                                                       ----------    ----------    -----------
         Total Current Assets........................   4,165,493     3,851,835      3,137,024
                                                       ----------    ----------    -----------
Property and Equipment
  Machinery, equipment and tooling...................     445,743       540,628        596,103
  Furniture and fixtures.............................      31,261        45,046         48,912
  Leasehold improvements.............................      47,746        47,746         47,746
                                                       ----------    ----------    -----------
                                                          524,750       633,420        692,761
  Less accumulated depreciation and amortization.....     177,608       316,466        397,759
                                                       ----------    ----------    -----------
Net Property and Equipment...........................     347,142       316,954        295,002
                                                       ----------    ----------    -----------
Other Assets
  Loan costs (Note 1)................................          --       334,846        370,348
  Patent/Trademarks Costs............................          --            --         14,701
  Intangible game rights (Note 9)....................     280,706       204,146        165,866
  Prepaid trade credits (Note 1).....................          --       571,591        570,195
                                                       ----------    ----------    -----------
         Total Other Assets..........................     280,706     1,110,583      1,121,110
                                                       ----------    ----------    -----------
         Total Assets................................  $4,793,341    $5,279,372    $ 4,553,136
                                                       ==========    ==========    ===========
        LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
  Accounts payable...................................  $1,226,744    $  538,180    $   723,266
  Current maturities of long-term debt (Note 8)......          --        49,717        478,105
  Distribution payable to stockholders...............       9,008         9,008          9,008
  Accrued liabilities
    Commissions......................................     156,010        65,581         46,101
    Royalties and licenses (Notes 3 and 4)...........      75,791       104,981         67,402
    Pension (Note 10)................................     173,472       247,759         50,227
    Other............................................     293,531       300,579        204,908
                                                       ----------    ----------    -----------
         Total Current Liabilities...................   1,934,556     1,315,805      1,579,017
Deferred Rent (Note 6)...............................      23,616        29,304         32,148
Long-Term Debt, less current maturities (Note 8).....   1,600,000     2,702,021      2,291,643
                                                       ----------    ----------    -----------
         Total Liabilities...........................   3,558,172     4,047,130      3,902,808
                                                       ----------    ----------    -----------
Commitments (Notes 4, 6, 7 and 10)
Stockholders' Equity
  Preferred stock, $1 par value; 1,000,000 shares
    authorized; none issued or outstanding...........          --            --             --
  Common stock, $.001 par value; 8,000,000 shares
    authorized; 1,624,824 issued and outstanding on
    December 31, 1997, 1998, and June 30, 1999.......       1,625         1,625          1,625
  Paid-in capital....................................   2,019,901     2,019,901      2,019,901
  Accumulated deficit................................    (786,357)     (789,284)    (1,371,198)
                                                       ----------    ----------    -----------
         Total Stockholders' Equity..................   1,235,169     1,232,242        650,328
                                                       ----------    ----------    -----------
         Total Liabilities and Stockholder's
           Equity....................................  $4,793,341    $5,279,372    $ 4,553,136
                                                       ==========    ==========    ===========
</TABLE>


See accompanying notes to financial statements.

                                      F-70
<PAGE>   169

                               FUNDEX GAMES, LTD.

                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                 SIX MONTHS ENDED
                               YEAR ENDED DECEMBER 31,               JUNE 30,
                              --------------------------    --------------------------
                                 1997           1998           1998           1999
                              -----------    -----------    -----------    -----------
                                                            (UNAUDITED)    (UNAUDITED)
<S>                           <C>            <C>            <C>            <C>
Net Sales (Note 12).........  $7,797,681     $8,576,702      2,460,738     $1,679,891
Cost of Sales...............   5,098,750      5,693,644      1,782,659      1,199,062
                              -----------    ----------     ----------     ----------
Gross profit................   2,698,931      2,883,058        678,079        480,829
Selling, General and
  Administrative Expenses
  (Note 3)..................   3,810,056      2,695,853        986,861        918,056
                              -----------    ----------     ----------     ----------
Operating income (loss).....  (1,111,125)       187,205       (308,782)      (437,227)
                              -----------    ----------     ----------     ----------
Other Income (Expense)
  Royalty income............      28,009         51,816         17,666         20,000
  Interest income...........       5,343          3,947          2,968              0
  Interest expense..........     (86,419)      (245,895)       (79,217)      (159,849)
  Other.....................          --             --            489         (4,838)
                              -----------    ----------     ----------     ----------
                                 (53,067)      (190,132)       (58,094)      (144,687)
                              -----------    ----------     ----------     ----------
Net Loss....................  $(1,164,192)   $   (2,927)    $ (366,876)    $ (581,914)
                              ===========    ==========     ==========     ==========
</TABLE>


See accompanying notes to financial statements.

                                      F-71
<PAGE>   170

                               FUNDEX GAMES, LTD.

                       STATEMENTS OF STOCKHOLDERS EQUITY

   YEARS ENDED DECEMBER 31, 1997 AND 1998 AND SIX MONTHS ENDED JUNE 30, 1999
                                  (UNAUDITED)



<TABLE>
<CAPTION>
                               COMMON STOCK      ADDITIONAL    RETAINED
                            ------------------    PAID-IN      EARNINGS
                             SHARES     AMOUNT    CAPITAL      (DEFICIT)       TOTAL
                            ---------   ------   ----------   -----------   -----------
<S>                         <C>         <C>      <C>          <C>           <C>
Balance, January 1,
  1997....................  1,225,000   $1,225   $  454,900   $   377,835   $   833,960
Net loss, for the year
  ended 1997..............         --       --           --    (1,164,192)   (1,164,192)
Conversion of bridge loan
  (Note 11)...............    122,910      123      437,077            --       437,200
Issuance of 207,100 shares
  and 103,550 warrants in
  private placement (Note
  11).....................    207,100      207      767,645            --       767,852
Exercise of 69,814
  warrants (Note 11)......     69,814       70      360,279            --       360,349
                            ---------   ------   ----------   -----------   -----------
Balance, December 31,
  1997....................  1,624,824    1,625    2,019,901      (786,357)    1,235,169
Net loss, for the year
  ended 1998..............         --       --           --        (2,927)       (2,927)
                            ---------   ------   ----------   -----------   -----------
Balance, December 31,
  1998....................  1,624,824    1,625    2,019,901      (789,284)    1,232,242
Net loss, for the six
  months ended June 30,
  1999 (unaudited)........         --       --           --      (581,914)     (581,914)
                            ---------   ------   ----------   -----------   -----------
Balance, June 30, 1999
  (unaudited).............  1,624,824   $1,625   $2,019,901   $(1,371,198)  $   650,328
                            =========   ======   ==========   ===========   ===========
</TABLE>


See accompanying notes to financial statements.

                                      F-72
<PAGE>   171

                               FUNDEX GAMES LTD.

                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                     SIX MONTHS ENDED
                                      YEAR ENDED DECEMBER 31,            JUNE 30,
                                     -------------------------   -------------------------
                                        1997          1998          1998          1999
                                     -----------   -----------   -----------   -----------
                                                                 (UNAUDITED)   (UNAUDITED)
<S>                                  <C>           <C>           <C>           <C>
CASH FLOWS FROM OPERATING
  ACTIVITIES
  Net loss.........................  $(1,164,192)  $    (2,927)   $(366,876)   $  (581,914)
  Adjustments to reconcile net loss
     to net cash used in operating
     activities
     Depreciation and
       amortization................      179,894       230,512       98,359        156,701
     Deferred rent.................        5,688         5,688        2,844          2,844
     Changes in assets and
       liabilities
       (Increase) decrease in
          accounts receivable......     (246,388)     (376,651)     174,323      1,001,755
       Decrease (increase) in
          inventories..............   (1,548,583)      539,265      539,438       (204,691)
       Decrease (increase) in
          prepaid expenses and
          other assets.............     (145,036)       61,910      153,595       (123,468)
       Increase in prepaid trade
          credits..................           --      (571,591)    (546,504)            --
       (Decrease) increase in
          accounts payable.........      214,415      (688,564)     165,171        184,868
       Increase (decrease) in
          accrued liabilities......      267,970        20,096     (235,368)      (347,418)
                                     -----------   -----------    ---------    -----------
Net cash provided by (used in)
  operating activities.............   (2,436,232)     (782,262)     (15,018)        88,677
                                     -----------   -----------    ---------    -----------
CASH FLOWS FROM INVESTING
  ACTIVITIES
  Capital expenditures.............     (201,433)     (108,670)     (64,654)       (97,698)
  Expenditures for patents.........           --            --           --        (14,701)
                                     -----------   -----------    ---------    -----------
Net cash (used in) investing
  activities.......................     (201,433)     (108,670)     (64,654)      (112,399)
CASH FLOWS FROM FINANCING
  ACTIVITIES
  Proceeds from note payable.......           --     1,000,000           --        100,000
  Deferred loan costs..............           --      (349,940)          --        (35,502)
  Repayment of note payable........      (40,000)           --           --             --
  Repayment of line of credit......           --    (1,600,000)          --        (81,990)
  Distribution to stockholders.....      (61,092)           --           --             --
  Net proceeds from line of
     credit........................    1,600,000     1,751,738           --
  Net proceeds from private
     placement.....................      767,852            --           --             --
  Net proceeds from exercise of
     warrants......................      360,349            --           --             --
                                     -----------   -----------    ---------    -----------
Net cash provided by (used in)
  financing activities.............    2,627,109       801,798           --        (17,492)
                                     -----------   -----------    ---------    -----------
Net Increase (Decrease) in cash....      (10,556)      (89,134)     (79,672)       (41,214)
Cash, at beginning of period.......      140,904       130,348      130,348         41,214
                                     -----------   -----------    ---------    -----------
Cash, at end of period.............  $   130,348   $    41,214    $  50,676    $         0
                                     ===========   ===========    =========    ===========
SUPPLEMENTAL DISCLOSURE OF CASH
  FLOW INFORMATION
  Cash paid for interest...........  $   253,251   $    64,229    $  79,217    $   159,849
                                     ===========   ===========    =========    ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
  FINANCING ACTIVITIES
  Conversion of bridge loan to
     equity........................  $   437,200   $        --    $      --    $        --
                                     ===========   ===========    =========    ===========
</TABLE>


See accompanying notes to financial statements.
                                      F-73
<PAGE>   172

                               FUNDEX GAMES, LTD.

                         NOTES TO FINANCIAL STATEMENTS

                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


(INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
                               1999 IS UNAUDITED)


1.  SUMMARY OF ACCOUNTING POLICIES

BUSINESS

     Fundex Games, Ltd. (the "Company") develops, manufactures (through
subcontractors), markets and sells games and toys nationwide through discount
retailers, specialty toy retailers, toy wholesalers, drug and grocery retailers
and certain catalog and specialty accounts from its Indianapolis, Indiana
facility. The Company's principal products include card games, children's board
games, skill and action games, family games, puzzles and spring and summer toys.
The Company's products are manufactured to the Company's specifications by
manufacturers based in the United States, Taiwan, Philippines and China.

INTERIM FINANCIAL STATEMENTS


     The financial statements as of June 30, 1999 and with respect to the six
months ended June 30, 1998 and 1999 are unaudited. In the opinion of management,
the financial statements contain all adjustments, including normal recurring
accruals, necessary for the fair presentation of the results of such periods.
The information is not necessarily indicative of the results of operations to be
expected for the fiscal year.


ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the financial statements. Actual results could differ
from those estimates.

CASH AND CASH EQUIVALENTS

     The Company considers all highly liquid investments with a maturity of
three months or less to be cash equivalents.

CONCENTRATION OF CREDIT RISK

     Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
The Company primarily provides credit, in the normal course of business, to its
customers. The Company performs ongoing credit evaluations of its customers and
maintains allowances for potential credit losses, if necessary.

INVENTORIES

     Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.

                                      F-74
<PAGE>   173
                               FUNDEX GAMES, LTD.


                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


         (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED


                      JUNE 30, 1998 AND 1999 IS UNAUDITED)


PREPAID TRADE CREDITS

     Prepaid trade credits represent the estimated fair value of trade credits
received in exchange for inventory. The trade credits, together with specified
cash payments, can be redeemed for a variety of services. The credits expire on
December 31, 2003.

ADVERTISING


     The Company generally expenses production costs of print and television
advertisements as of the first date the advertisement runs. Advertising expenses
included in selling, general and administrative expenses were $1,672,368,
$269,117, $2,547 and $59,804 for December 31, 1997 and 1998, and for June 30,
1998 and 1999, respectively. Advertising cost included in prepaid expenses were
$41,488 for year ending December 31, 1997 and $0, $0, and $0 for year ending
December 31, 1998, six months ending June 30, 1998, and six months ending June
30, 1999, respectively.


MACHINERY AND EQUIPMENT

     Machinery and equipment are carried at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives:

<TABLE>
<CAPTION>
                                                          YEARS
                                                          -----
<S>                                                       <C>
Furniture and fixtures................................     3-5
Machinery, equipment and tooling......................     3-7
</TABLE>

     Leasehold improvements are amortized over the lesser of the lease term or
the useful life of the property.

INCOME TAXES

     As of January 1, 1997, the Company switched from an S corporation to a C
corporation. The Company recognizes deferred tax assets for the expected future
tax consequences of temporary differences between the tax basis and financial
reporting basis of certain assets based upon currently enacted tax rates
expected to be in effect when such amounts are realized.

DEFERRED LOAN COSTS

     Deferred loan costs represent the costs incurred in obtaining the mezzanine
financing and the credit facility. These costs are being amortized by use of the
interest method over the life of the debt.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This standard
establishes accounting and reporting standards for derivative instruments and
for hedging contracts.

                                      F-75
<PAGE>   174
                               FUNDEX GAMES, LTD.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999
         (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
                      JUNE 30, 1998 AND 1999 IS UNAUDITED)

This standard is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. When the Company adopts this statement, it is not expected
to have a material impact on the Company's financial statements or their
presentation.

2.  INVENTORIES

     Inventories consist of the following:


<TABLE>
<CAPTION>
                                 DECEMBER 31,    DECEMBER 31,     JUNE 30,
                                     1997            1998           1999
                                 ------------    ------------    ----------
<S>                              <C>             <C>             <C>
Raw Materials..................   $1,004,075      $  828,179     $  758,787
Finished goods.................    1,443,129       1,079,760      1,353,842
                                  ----------      ----------     ----------
                                  $2,447,204      $1,907,939     $2,112,629
                                  ==========      ==========     ==========
</TABLE>


3.  ROYALTIES


     The Company's products are generally acquired by the Company from others or
developed for the Company by unaffiliated third parties. If the Company accepts
and develops a third party's concept for a new game, it generally pays a royalty
to the inventor on games sold which were developed from the concept, often with
a commitment to manufacture and sell a minimum number. Royalties paid to the
inventors range from 1% to 6% of the wholesale sales price for each unit sold by
the Company. Royalty expense was $330,678 and $363,778 for the years ended
December 31, 1997, and 1998, and $81,161 and $125,896 for the six months ended
June 30, 1998 and 1999, respectively. The Company may pay advance royalties to
an inventor on products where a significant amount of development has been done
by the inventor. At December 31, 1997 and 1998, and at June 30, 1999,
respectively, advance royalties were $193,434, 177,684 and 179,283,
respectively.


4.  LICENSE AGREEMENTS

     During 1996, the Company entered into an exclusive agreement with Hollywood
Ventures Corporation ("HVC") for certain properties and characters associated
with "The Big Comfy Couch" for use on board games, paperboard puzzles and wooden
puzzles. Shipment of these products began in July 1996. Under the renewal terms
of the license, the Company has the exclusive rights for the above products
through December 31, 1999. The Company has agreed to pay the licensor royalties
in the amount of 8% of the sales of the products and has guaranteed a minimum of
$45,000 in royalties during the license term. The Company has incurred more than
the guaranteed minimum. See Note 3.

     The Company has entered into an additional exclusive agreement with HVC for
the use of "The Big Comfy Couch" name and logo on an inflatable couch to be
functional as furniture for children. Shipments of this product began in the
fourth quarter of 1996. Under the terms of this license the Company had
exclusive rights for such product through

                                      F-76
<PAGE>   175
                               FUNDEX GAMES, LTD.


                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


         (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED


                      JUNE 30, 1998 AND 1999 IS UNAUDITED)


December 31, 1999. The Company has the right to renew the agreement for one
additional year provided the Company generates sales which produce royalties to
HVC of at least $200,000. The Company has agreed to pay HVC royalties in the
amount of 8% of sales and has guaranteed a minimum of $40,000 in royalties. This
license applies to the United States and Canada. The Company has incurred more
than the guaranteed minimum. See Note 3.

5.  TAXES ON INCOME

     As of January 1, 1997, the Company switched from an S corporation to a C
corporation.

     The Company has approximately $1,000,000 of net operating loss
carryforwards (expiring in 2012), which can be utilized to offset future taxable
income. The deferred tax asset of $340,000 has been fully offset by a valuation
allowance because realization is not considered likely at this time.

6.  LEASES


     The Company leases its industrial and office facilities in Indianapolis,
Indiana under an operating lease that expires March 31, 2002. In addition,
beginning January 1, 1996, the Company leased a showroom and office space in New
York, New York under an operating lease that expires April 30, 2006. Rental
payments under this lease did not begin until July 1, 1996. Generally accepted
accounting principles require total minimum rental payments to be recognized as
rent expense on a straight-line basis over the term of the lease. Accordingly,
total rental expense under these leases was $155,718, $192,581, $79,862 and
$84,494 for the years ended December 31, 1997 and 1998, and the six months ended
June 30, 1998 and 1999, respectively. The excess of such charges over amounts
required to be paid under the lease agreement is carried as a noncurrent
liability on the Company's balance sheet.



     The Company leases various equipment under operating leases. The leases
expire through December 2003. Total rental expense under these leases was
$31,447, $42,577, $15,541, and $15,491 for the years ended December 31, 1997 and
1998, and the six months ended June 30, 1998 and 1999, respectively.


                                      F-77
<PAGE>   176
                               FUNDEX GAMES, LTD.


                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


         (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED


                      JUNE 30, 1998 AND 1999 IS UNAUDITED)


     Minimum future rental payments as of December 31, 1998 under all of these
leases are as follows:

<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S>                                                    <C>
1999...............................................    $221,836
2000...............................................     233,156
2001...............................................     214,080
2002...............................................      83,588
2003...............................................      41,362
Thereafter.........................................      83,300
                                                       --------
Total..............................................    $877,322
                                                       ========
</TABLE>

7.  STOCK OPTION PLANS

     The Company's Board of Directors and stockholders adopted the 1996 Employee
Stock Option Plan and the 1996 Stock Plan for Non-Employee Directors (the
"Plans") in September 1996. The Plans permit the granting of awards to
employees, directors and independent contractors in the form of stock options.
Options are designated at the time of grant as Incentive Stock Options intended
to qualify under Section 422 of the Internal Revenue Code or Non-Qualified
Options which do not qualify. A total of 300,000 shares of the Company's common
stock have been reserved pursuant to the Plans.

     The Company granted 53,000 and 76,000 options during 1997 and 1998 under
the Employee Stock Option Plan at an exercise price of $4.00 and $3.00 per
share, respectively. These options vest ratably over five or 10 years and are
exercisable from 2002 through 2008. No compensation cost was recognized as the
exercise price exceeded the fair value at the grant date.

     The Company also granted 6,000 options during 1997 and 1998 under the Stock
Plan for nonemployee directors at an exercise price of $4.00 per share. These
options vest ratably over 10 years and are exercisable through 2007 and 2008,
respectively. No compensation cost was recognized as the exercise price exceeded
the fair value at the grant date.

     The Company accounts for options under APB Opinion No. 25, under which no
compensation cost is recognized when exercise price equals or exceeds the fair
value at the grant date.

     The weighted-average, grant date fair value of stock options granted to
employees during the year and the weighted-average significant assumptions used
to determine those fair values, using a modified Black-Sholes option pricing
model, and the pro forma effect

                                      F-78
<PAGE>   177
                               FUNDEX GAMES, LTD.


                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


         (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED


                      JUNE 30, 1998 AND 1999 IS UNAUDITED)


on earnings of the fair value accounting for stock options under Statement of
Financial Accounting Standards No. 123, are as follows:

<TABLE>
<CAPTION>
                                                    1997          1998
                                                 -----------    --------
<S>                                              <C>            <C>
Weighted average fair value per options
  Granted......................................  $      1.52    $   0.81
Significant assumptions (weighted Average)
  Risk-free interest rate at grant date........         6.03%       4.57%
  Expected stock price volatility..............           --          --
  Expected dividend payout.....................           --          --
  Expected option life (years).................          8.3         7.6
Net loss
  As reported..................................   (1,164,192)     (2,927)
  Pro forma....................................   (1,253,762)    (69,267)
</TABLE>

8.  NOTES PAYABLE

     (a) In July 1996, the Company obtained a credit facility from an outside
group of investors to provide up to $500,000 in bridge financing, at an interest
rate of 10% per annum. As of December 31, 1996, $413,000 of the $500,000 had
been drawn down. These bridge notes were converted into common stock during
1997. See Note 11.

     (b) In January 1997, the Company obtained a commitment for a $2,500,000
credit facility from a bank with interest at LIBOR plus three points. The
facility matured in May 1998. The line was repaid in October 1998 with the new
credit facility discussed in Note 8(d).


     (c) In August 1998, the Company obtained mezzanine financing in the amount
of $1,000,000 due in July 2003 with interest-only payments for 12 months at
prime plus 3 1/2%. Thereafter, interest and principal payments will be made in
equal monthly installments to amortize the principal over the term of the note.
The note includes certain financial covenants and is collateralized by
substantially all the assets of the Company. In conjunction with the note, the
Company signed a revenue participation agreement with the holder of the note
which calls for payment of 1.25% of net sales for the term of the note or until
repaid. During 1998, the Company incurred approximately $53,000 of additional
interest under this participation agreement. Additional interest incurred for
the six months ended June 30, 1999 was approximately $21,000.


     This note is subordinate to the Company's main credit facility.

     (d) In October 1998, the Company replaced and repaid the credit facility
discussed in Note 8(b) with a $2,500,000 revolving credit facility with interest
at prime plus 1%. The facility matures in October 2001, with interest payments
only until maturity. The borrowing availability will be based on 80% of eligible
accounts receivable, 40% of eligible parts inventory and 60% of eligible
finished goods inventory less the reserve for accrued

                                      F-79
<PAGE>   178
                               FUNDEX GAMES, LTD.


                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


         (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED


                      JUNE 30, 1998 AND 1999 IS UNAUDITED)



cooperative advertising. The facility is secured by substantially all the assets
of the Company and personal guarantees of the principal stockholders. The
facility also calls for certain minimum financial statement covenants to be met.
As of December 31, 1998 and June 30, 1999, $1,751,738 and $1,669,748,
respectively, has been drawn down on the line.



     As of December 31, 1998, the aggregate amount of long-term debt maturing in
each of the next five years is as follows: 1999 -- $49,717; 2000 -- $161,596;
2001 -- $1,933,828; 2002 -- $205,184; and 2003 -- $401,413.


9.  INVESTMENT IN JOINT VENTURE

     In December 1995, the Company entered into a joint venture with a
partnership for the development, design and sale of new products. The venture,
which was 50% owned by the Company, did not commence operations until 1996. On
August 28, 1996, the Company purchased the remaining 50% of the joint venture,
which consisted primarily of tooling costs, and the rights to four fully
developed games. The consideration paid was 75,000 shares of the Company's stock
and 75,000 warrants to purchase stock at 120% of the proposed public offering
price. The value assigned to the stock and the warrants was 65% of the proposed
1996 public offering price ($5.20 and $.065, respectively). The proposed
offering was not consummated. The cost in excess of the tangible assets acquired
($382,787) was assigned to intangible game rights and is being amortized over 60
months.

10.  RETIREMENT PLAN

     The Company established a contributory salary reduction simplified pension
plan pursuant to Section 408(k) of the Internal Revenue Code covering all its
employees. Employer contributions to the plan are discretionary. Also, the
Company established a money purchase plan and trust. This plan provides for
contributions by the Company equal to 10% of eligible wages.


     The amounts charged against operations were $91,397, $74,287, $41,800 and
$(197,532) for the years ended December 31, 1997 and 1998, and the six months
ended June 30, 1998 and 1999, respectively.


     Subsequent to year end, the Company terminated both plans and determined
that the final distribution under these plans is approximately $48,000.
Therefore, the Company will recognize approximately $200,000 in income in 1999
as a reversal of the accrued liability recorded at December 31, 1998.

     In April 1999, the Company established a Simple IRA plan pursuant to
Section 408(p) of the Internal Revenue Code covering all full-time employees.
Employer contributions to the plan are set at a matching of employee's
contribution, up to a maximum of 3%.

                                      F-80
<PAGE>   179
                               FUNDEX GAMES, LTD.


                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)


                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


         (INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED


                      JUNE 30, 1998 AND 1999 IS UNAUDITED)


11.  EQUITY TRANSACTIONS

     (a) In April 1997, the Company completed the private placement of 207,100
shares of the Company's $.001 par value common stock at a price of $4.20 per
share. Each share had two detachable warrants to purchase additional shares.
103,550 warrants were exercisable on or before May 15, 1997 at an exercise price
of $5.50. An additional 103,550 warrants were exercisable on or before December
31, 1997 at an exercise price of $6.30, but only if the May 15 warrants were
exercised. Proceeds to the Company, after deducting selling commissions of
$52,200 and offering expenses of $25,000, were $767,851. During 1997, 53,000
warrants were exercised and 50,550 warrants expired.

     (b) In connection with the private placement, the holders of the bridge
loans outstanding (Note 8(a)) converted their loans into common stock. The
conversion price was $3.36 per share. In addition, each bond holder received a
$4.20 warrant, which expires five years from the exchange date. The bond holders
also received two warrants -- 61,455 $5.50 warrants, which expired May 15, 1997,
and 61,455 $6.30 warrants, which expired December 31, 1997 and were only
exercisable if the May 15, 1997 warrants were exercised. During 1997, 16,814
warrants were exercised and 106,096 warrants expired.

12.  CUSTOMER AND PRODUCT CONCENTRATION


     During the year ended December 31, 1998, sales to one customer accounted
for 18% of revenues. During the year ended December 31, 1997, sales to three
customers accounted for 20%, 13% and 13% of revenues, respectively. During the
period ended June 30, 1998 and 1999, sales to one customer accounted for 21% and
31% of revenues, respectively.



     The Company derived approximately 34% and 36% of net sales for the years
ended December 31, 1997 and 1998, respectively, from its "Phase 10" product
line. The Company derived 46% and 67% of net sales for the six month periods
ended June 30, 1998 and 1999, respectively, from its "Phase 10" product line.


                                      F-81
<PAGE>   180

                                 DAMERT COMPANY
                              FINANCIAL STATEMENTS
<PAGE>   181

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors
DaMert Company
Berkeley, California

     We have audited the accompanying balance sheets of DaMert Company as of
December 31, 1998 and 1997, and the related statements of income, stockholder's
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DaMert Company as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.

                                              /s/  ARMANINO MCKENNA LLP


San Leandro, California

February 19, 1999
(except for Note 9, as to which
the date is April 21, 1999)

                                      F-82
<PAGE>   182

                                 DAMERT COMPANY

                            BALANCE SHEETS -- ASSETS


<TABLE>
<CAPTION>
                                                                              UNAUDITED
                                              DECEMBER 31,    DECEMBER 31,     JUNE 30,
                                                  1997            1998           1999
                                              ------------    ------------    ----------
<S>                                           <C>             <C>             <C>
ASSETS
---------
Current assets
Cash........................................   $      350      $   52,334     $  184,410
Accounts receivable (net of allowance for
  doubtful accounts of $22,000, $40,000, and
  $4,756 for December 31, 1998 and 1999, and
  June 30, 1999, respectively...............    1,765,871         952,590        951,418
Inventory, net of reserve...................    1,215,106       1,452,955      1,235,703
Prepaid expenses and other current assets...      168,638         144,901        197,683
                                               ----------      ----------     ----------
Total current assets........................    3,149,965       2,602,780      2,569,214
                                               ----------      ----------     ----------
Property and equipment
Office equipment............................      382,151         341,114        341,856
Vehicles....................................       42,345              --             --
Molds.......................................      553,157         698,785        765,870
Equipment...................................       50,586          56,053         56,053
                                               ----------      ----------     ----------
                                                1,028,239       1,095,952      1,163,779
Less accumulated depreciation...............     (542,840)       (618,257)      (693,257)
                                               ----------      ----------     ----------
                                                  485,399         477,695        470,522
                                               ----------      ----------     ----------
Other assets
Deposits....................................       22,080          22,080         22,080
                                               ----------      ----------     ----------
          Total assets......................   $3,657,444      $3,102,555     $3,061,816
                                               ==========      ==========     ==========
</TABLE>


                                      F-83
<PAGE>   183

                                 DAMERT COMPANY

                    BALANCE SHEETS -- LIABILITIES AND EQUITY


<TABLE>
<CAPTION>
                                                                              UNAUDITED
                                              DECEMBER 31,    DECEMBER 31,     JUNE 30,
                                                  1997            1998           1999
                                              ------------    ------------    ----------
<S>                                           <C>             <C>             <C>
LIABILITIES AND EQUITY
---------------------------------
Current liabilities
Accounts payable............................   $  145,918      $  124,804     $  194,400
Accrued expenses............................      158,488         100,928        109,674
Line of credit..............................    1,908,895       1,863,205      2,499,748
Current portion of notes payable............       20,065         520,065        319,455
Other.......................................        1,271              --         15,000
                                               ----------      ----------     ----------
Total current liabilities...................    2,234,637       2,609,002      3,138,277
                                               ----------      ----------     ----------
Long-term liabilities
Notes payable, net of current portion.......       26,753           9,386             --
Notes payable -- stockholder................      128,849         128,849        128,849
                                               ----------      ----------     ----------
Total long-term liabilities.................      155,602         138,235        128,849
                                               ----------      ----------     ----------
          Total liabilities.................    2,390,239       2,747,237      3,267,126
                                               ----------      ----------     ----------
Stockholders' equity
Common stock (5,000 shares authorized, 1,000
  shares issued and outstanding, no stated
  value)....................................       10,000          10,000         10,000
Retained earnings...........................    1,257,205         345,318       (215,310)
                                               ----------      ----------     ----------
                                                1,267,205         355,318       (205,310)
                                               ----------      ----------     ----------
          Total liabilities and equity......   $3,657,444      $3,102,555     $3,061,816
                                               ==========      ==========     ==========
</TABLE>


                                      F-84
<PAGE>   184

                                 DAMERT COMPANY

                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                               UNAUDITED              UNAUDITED
                             DECEMBER 31, 1997      DECEMBER 31, 1998        JUNE 30, 1998          JUNE 30, 1999
                            --------------------   --------------------   --------------------   --------------------
                              AMOUNT     PERCENT     AMOUNT     PERCENT     AMOUNT     PERCENT     AMOUNT     PERCENT
                            ----------   -------   ----------   -------   ----------   -------   ----------   -------
<S>                         <C>          <C>       <C>          <C>       <C>          <C>       <C>          <C>
Sales.....................  $8,876,462    100.0%   $6,837,280    100.0%   $2,496,862    100.0%   $2,574,001    100.0%
Cost of sales.............   5,328,453     60.0%    4,291,854     62.8%    1,579,488     63.3%    1,530,222     59.4%
                            ----------    -----    ----------    -----    ----------    -----    ----------    -----
Gross profit..............   3,548,009     40.0%    2,545,426     37.2%      917,374     36.7%    1,043,779     40.6%
                            ----------    -----    ----------    -----    ----------    -----    ----------    -----
Operating expenses
Product development.......     488,638      5.5%      546,706      8.0%      325,996     13.1%      260,978     10.1%
Marketing.................   1,320,380     14.9%      998,802     14.6%      499,302     20.0%      450,558     17.5%
General and
  administrative..........   1,647,803     18.6%    1,878,005     27.5%      894,607     35.8%      892,852     34.7%
                            ----------    -----    ----------    -----    ----------    -----    ----------    -----
Total operating
  expenses................   3,456,821     38.9%    3,423,513     50.1%    1,719,905     68.9%    1,604,388     62.3%
                            ----------    -----    ----------    -----    ----------    -----    ----------    -----
Income (loss) before
  taxes...................      91,188      1.0%     (878,087)   (12.8)%    (802,531)   (32.1)%    (560,609)   (21.8)%
Provision for income
  taxes...................       1,431      0.0%          800      0.0%            0      0.0%            0      0.0%
                            ----------    -----    ----------    -----    ----------    -----    ----------    -----
Net income (loss).........  $   89,757      1.0%   $ (878,887)   (12.9)%  $ (802,531)   (32.1)%  $ (560,609)   (21.8)%
                            ==========    =====    ==========    =====    ==========    =====    ==========    =====
</TABLE>


                                      F-85
<PAGE>   185

                                 DAMERT COMPANY

                       STATEMENTS OF SHAREHOLDER'S EQUITY


<TABLE>
<CAPTION>
                                          COMMON STOCK NO PAR VALUE
                                          --------------------------
                                             NUMBER OF
                                           SHARES ISSUED                 RETAINED
                                          AND OUTSTANDING    DOLLARS     EARNINGS
                                          ---------------    -------    ----------
<S>                                       <C>                <C>        <C>
Balance, December 31, 1996..............       1,000         $10,000    $1,352,448
Net income..............................          --              --        89,757
Stockholder distributions...............          --              --      (185,000)
                                               -----         -------    ----------
Balance, December 31, 1997..............       1,000          10,000     1,257,205
Net loss................................          --              --      (878,887)
Stockholder distributions...............          --              --       (33,000)
                                               -----         -------    ----------
Balance, December 31, 1998..............       1,000          10,000       345,318
Unaudited Net loss......................          --              --      (560,609)
                                               -----         -------    ----------
Unaudited Balance, June 30, 1999........       1,000         $10,000    $ (215,310)
                                               =====         =======    ==========
</TABLE>


                                      F-86
<PAGE>   186

                                 DAMERT COMPANY

                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                    UNAUDITED   UNAUDITED
                                      DECEMBER 31,   DECEMBER 31,   JUNE 30,    JUNE 30,
                                          1997           1998         1998        1999
                                      ------------   ------------   ---------   ---------
<S>                                   <C>            <C>            <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................   $   89,757     $(878,887)    $(802,531)  $(560,608)
Adjustments to reconcile net income
  (loss) to net cash used in
  operating activities
Depreciation........................      135,970       182,083        66,000      75,000
Loss on disposal of property and
  equipment.........................           --        16,866            --          --
Deferred taxes......................          831            --            --          --
Changes in assets and liabilities
Accounts receivable.................     (662,842)      813,281       891,390       1,172
Inventory...........................      (24,005)     (237,849)       32,752     217,252
Prepaid expenses and other current
  assets............................      (38,098)       23,737      (131,668)    (52,782)
Accounts payable....................      (23,790)      (21,114)       73,902      69,596
Accrued expenses....................     (140,486)      (57,560)      (10,075)      8,746
Other...............................       (1,667)       (1,271)       (1,348)     14,970
                                       ----------     ---------     ---------   ---------
Net cash used in operating
  activities........................     (664,330)     (160,714)     (118,422)   (226,654)
                                       ----------     ---------     ---------   ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and
  equipment.........................     (189,618)     (191,245)      (91,517)    (67,827)
                                       ----------     ---------     ---------   ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on line of
  credit............................    1,051,402       (45,690)      (12,699)    636,543
Borrowing on term loan..............           --       502,698        18,794          --
Repayment of term loan..............      (20,065)      (20,065)           --    (209,996)
Stockholder distributions...........     (185,000)      (33,000)      (33,000)         --
                                       ----------     ---------     ---------   ---------
Net cash provided by financing
  activities........................      846,337       403,943       (26,905)    426,547
                                       ----------     ---------     ---------   ---------
Increase (decrease) in cash.........       (7,611)       51,984             0     132,066
Cash at beginning of period.........        7,961           350           350      52,334
                                       ----------     ---------     ---------   ---------
Cash at end of period...............   $      350     $  52,334     $     350   $ 184,400
                                       ==========     =========     =========   =========
</TABLE>


                                      F-87
<PAGE>   187


                                 DAMERT COMPANY



                         NOTES TO FINANCIAL STATEMENTS


                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


           (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH


               PERIODS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

OPERATIONS

     DaMert Company (the Company) is engaged in the business of producing,
distributing, and selling products to toy gift stores and catalog retailers
throughout the United States, Canada and Europe.

INVENTORY


     Inventory is valued at the lower of cost or market. Cost is determined by
using the average cost method. Inventory consists primarily of finished goods
for sale. The Company maintains a reserve for future obsolete or excess
inventory. The balance of the reserve was $44,849, $38,453 and $38,684 at
December 31, 1998, 1997 and June 30, 1999, respectively.


DEPRECIATION


     Depreciation is computed on individual assets over their estimated useful
lives by the straight-line method. Lives range from 3 to 7 years for all assets.
Expenditures for major renewals and betterments that extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and repair
are charged to expense as incurred. For the years ended December 31, 1998 and
1997, and for the six month periods ending June 30, 1999 and 1998 depreciation
expense was $182,083, $135,970, $75,000 and $34,500, respectively.


INCOME TAXES

     The Company, with the consent of its shareholders, has elected under the
Internal Revenue Code to be an S corporation. In lieu of corporation income
taxes, the shareholders of an S corporation are taxed on their proportionate
share of the Company's taxable income. Therefore, no provision or liability for
federal income taxes has been included in the financial statements. The Company
is subject to minimum state taxes, which have been provided for.

USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain amounts and disclosures. Actual results could
differ from those estimates.

RECLASSIFICATIONS

     Certain amounts in the 1997 financial statements have been reclassified to
conform to the December 31, 1998 and March 31, 1999 presentations.

                                      F-88
<PAGE>   188

                                 DAMERT COMPANY



                         NOTES TO FINANCIAL STATEMENTS


                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


           (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH


       PERIODS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


YEAR 2000 ISSUE

     Like other organizations and individuals around the world, the Company
could be adversely affected if the computer systems it uses and those used by
significant third parties (e.g., vendors, customers, third party administrators)
do not properly process and calculate date-related information and data. This is
commonly known as the "Year 2000 issue." Management is assessing its computer
systems and business processes and intends to initiate actions to address the
Year 2000 needs identified. Management is also assessing the actions being taken
by significant third parties that interface with the Company. At this time,
management is not able to determine the impact, including the costs of
remediation of the Year 2000 issue on the Company.

2.  PROFIT SHARING PLAN


     The Company has a 401(k) profit sharing plan that was revised as of January
1, 1996. The plan covers all eligible employees. Employees may defer a portion
of their salary under the plan. The Company makes a non-elective matching
contribution of 10% of the employee's salary deferral. Employees are immediately
vested in the balance of their matching account. The employer may also make
discretionary contributions at the discretion of the Board of Directors. There
were no discretionary contributions for the years 1998 and 1997 or for the three
month period ending June 30, 1999.


3.  LINE OF CREDIT


     The Company has a $2,500,000 revolving credit line expiring May 15, 1999,
secured by the Company's accounts receivable and inventory. Interest rates in
1999, 1998, and 1997 were prime plus three-fourths of a percent (8.50% at March
31, 1998). The outstanding balances at December 31, 1997 and 1998 and for the
six month period ending June 30, 1999 were $1,908,895, $1,863,205, and
$2,499,748 respectively. At December 31, 1998, the Company was not in compliance
with certain financial covenants required by the credit agreement (see Note 9).


                                      F-89
<PAGE>   189

                                 DAMERT COMPANY



                         NOTES TO FINANCIAL STATEMENTS


                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


           (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH


       PERIODS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


4.  NOTES PAYABLE

     Notes payable consist of the following:


<TABLE>
<CAPTION>
                                          DECEMBER 31,         JUNE 30,
                                        1997        1998         1999
                                      --------    ---------    ---------
<S>                                   <C>         <C>          <C>
Notes payable to stockholder in
  monthly payments of interest only
  at 9%, unsecured..................  $128,849    $ 128,849    $ 128,849
Note payable to bank at prime plus
  3.75% (11.5% at December 31,
  1998), due December 15, 1998 (past
  due; see Note 9)..................        --      500,000      300,000
Equipment notes payable in monthly
  installments of $1,672, plus
  interest at 9%, secured by
  equipment.........................    46,818       29,451       19,455
                                      --------    ---------    ---------
                                       175,667      658,300      448,304
Less current maturity of long-term
  debt..............................   (20,065)    (520,065)     319,455
                                      --------    ---------    ---------
                                      $155,602    $ 138,235    $ 128,849
                                      ========    =========    =========
</TABLE>



     The anticipated principal payments required on the Company's long-term debt
during the next three fiscal years are: 1999 -- $520,065; 2000 -- $9,386; and
thereafter -- $128,849. Interest expense incurred was $211,746, $180,152,
84,443, and 106,633 for the years ended December 31, 1998 and 1997 and for the
six-month period ended June 30, 1998 and 1999, respectively.


5.  OPERATING LEASES

     The Company leased its facilities beginning December 1, 1995. The lease
term is for six years with one six-year extension option. Base monthly rent for
the initial six-year term was fixed at $23,295. Rent for the option period shall
be set at the then fair market rental rate for a similar industrial gross lease.
In addition to the base rent, the Company is liable for its share of any
increase in operating expenses over the base year operating expenses. During the
years ended December 31, 1998 and 1997, total rent expense was $288,653 and
$283,071, respectively. Future minimum payments on the Company's facilities
lease are $279,540 for 1999, $279,540 for 2000 and $256,245 for 2001.

6.  COMMITMENTS

     The Company has a master licensing agreement with a major designer of one
of the Company's product lines, which expires on December 31, 2001. The Company
also has a separate international licensing agreement with the designer, which
includes a guaranteed royalty of $24,000 annually through 2001.

                                      F-90
<PAGE>   190

                                 DAMERT COMPANY



                         NOTES TO FINANCIAL STATEMENTS


                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


           (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH


       PERIODS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


7.  STOCK COMPENSATION PLANS

     On February 29, 1996, the Company granted an option to one employee to
purchase 52.63 shares of common stock in the Company for $1. The option expires
on March 3, 2024. The option is exercisable only with the consent of the
Company, or upon the sale of at least 50% or a public offering of the Company's
stock. There were no stock options granted, exercised, forfeited or expired in
1998 or 1997.

     The Company has granted stock appreciation rights ("SARs") to certain
employees. The SARs earn a proportionate share of the increase in the value of
the Company, payable in cash upon the sale of at least 50% or a public offering
of the Company's stock, or the termination of employment. Under the agreements,
the value of the Company is defined as the net book value of the Company unless
and until a sale or public offering establishes a different value. The
employees' interests in the SARs vest 20% annually over 5 years. In 1998, the
Company's net losses reduced the net book value of the Company so as to reduce
the liability for the SARs to $0 and resulted in the recognition of a $26,128
offset to compensation expense. The compensation expense recognized for the SARs
was $3,673 in 1997. Because this liability may ultimately be settled based on
the value of the Company in a sale or stock offering rather than book value, the
liability for the SARs and the related compensation expense is an estimate that
is subject to material change in the near term.

8.  YEAR 2000 ISSUE

     Like other organizations and individuals around the world, the Company
could be adversely affected if the computer systems it uses and those used by
significant third parties (e.g., vendors, customers, third party administrators)
do not properly process and calculate date-related information and data. This is
commonly known as the "Year 2000 issue." Management is assessing its computer
systems and business processes and intends to initiate actions to address the
Year 2000 needs identified. Management is also assessing the actions being taken
by significant third parties that interface with the Company. At this time,
management is not able to determine the impact, including the costs of
remediation of the Year 2000 issue on the Company.

9.  SUBSEQUENT EVENT

     In 1998, the Company sustained a substantial net loss. This net loss caused
the Company to be in violation of its credit agreements with its bank, due to
the Company's inability to meet certain financial ratio and net income
covenants. As of December 31, 1998, the Company had made all interest payments
but had not made the $500,000 principal payment that was due December 15, 1998.
Under the provisions of the credit agreements, these covenant violations and
failure to make a principal payment when due give the bank the right to declare
all outstanding balances immediately due and payable. As a result of these
circumstances, on March 24, 1999 the Company agreed in principle to

                                      F-91
<PAGE>   191

                                 DAMERT COMPANY



                         NOTES TO FINANCIAL STATEMENTS


                  DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999


           (THE INFORMATION AS OF JUNE 30, 1999 AND FOR THE SIX-MONTH


       PERIODS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED) -- (CONTINUED)


be acquired by Futech Interactive Products, Inc. and the bank agreed to waive
the enforcement of its default rights until June 30, 1999. This may not be
sufficient extension to allow the merger to close. DaMert will have to
renegotiate the extension and cannot be certain it will be approved.

                                      F-92
<PAGE>   192

                                XYZ GROUP, INC.

                              FINANCIAL STATEMENTS
<PAGE>   193

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors
XYZ Group, Inc.
Waukesha, Wisconsin

     We have audited the accompanying balance sheets of XYZ Group, Inc. (an S
corporation) as of December 31, 1997, and the statements of operations and
retained deficit and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of XYZ Group, Inc. as of
December 31, 1997 and the results of its operations and its cash flows for the
periods then ended in conformity with generally accepted accounting principles.

     The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $1,361,635 for 1997 and has incurred net
losses for each of the past four years. At December 31, 1997, current
liabilities exceed current assets by $2,275,710, and total liabilities exceed
total assets by $1,763,394. The recorded liabilities include $772,637 of notes
to shareholders. These factors, and others discussed in Note 11 raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.

                                            VIRCHOW, KRAUSE & COMPANY, LLP

                                       /s/ VIRCHOW, KRAUSE & COMPANY, LLP
                                       -----------------------------------------

Waukesha, Wisconsin
February 12, 1998

                                      F-93
<PAGE>   194

                                XYZ GROUP, INC.

                                 BALANCE SHEET
                               DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                 1997
                                                              -----------
<S>                                                           <C>
                           ASSETS
Current Assets
  Cash and cash equivalents.................................  $    23,106
  Accounts receivable.......................................    3,465,545
  Inventories...............................................    3,887,990
  Deposit -- Inventory consignment..........................      114,407
  Prepaid expenses..........................................          194
                                                              -----------
          Total Current Assets..............................    7,491,242
                                                              -----------
Property and Equipment
  Vehicles..................................................       47,566
  Machinery.................................................      234,180
  Furniture and fixtures....................................      818,779
  Leasehold improvements....................................       38,985
                                                              -----------
  Less: accumulated depreciation............................     (627,194)
                                                              -----------
     Net Property and Equipment.............................      512,316
                                                              -----------
          Total Assets......................................  $ 8,003,558
                                                              ===========
            LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
  Accounts payable..........................................  $ 4,856,072
  Accrued liabilities.......................................       70,088
     Notes payable -- current portion.......................          -0-
     Notes payable -- financial institutions................    4,068,155
     Notes payable -- shareholder...........................      772,637
          Total Current Liabilities.........................    9,766,952
                                                              -----------
Stockholders' Equity
  Common stock, $1 par, 56,000 shares authorized; 20,632
     shares issued and 19,600 shares outstanding............       20,632
  Treasury stock (1,032 shares at cost).....................       (1,032)
  Additional paid-in capital................................      154,570
  Retained deficit..........................................   (1,937,564)
                                                              -----------
          Total Stockholder's Equity........................   (1,763,394)
                                                              -----------
          Total Liabilities and Stockholder's Equity........  $ 8,003,558
                                                              ===========
</TABLE>

See accompanying notes to financial statements and independent auditors' report.

                                      F-94
<PAGE>   195

                                XYZ GROUP, INC.

                  STATEMENT OF OPERATIONS AND RETAINED DEFICIT
                      FOR THE YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                           PERCENT OF
                                                               1997         REVENUES
                                                            -----------    ----------
<S>                                                         <C>            <C>
NET SALES.................................................  $18,188,674      100.00
COST OF GOODS SOLD........................................   15,406,497       84.70
                                                            -----------      ------
  Gross profit............................................    2,782,177       15.30
                                                            -----------      ------
OPERATING EXPENSES
  Selling.................................................    1,461,816        8.04
  Shipping and receiving..................................    1,201,088        6.60
  General and administrative..............................      845,471        4.65
                                                            -----------      ------
     Total Operating Expenses.............................    3,508,375       19.29
                                                            -----------      ------
       Operating Income (Loss)............................     (726,198)      (3.99)
                                                            -----------      ------
OTHER INCOME (EXPENSE)
  Loss on disposal of assets..............................      (29,826)      (0.16)
  Interest expense........................................     (616,789)      (3.39)
  Miscellaneous income....................................       11,178        0.06
                                                            -----------      ------
     Net Other Income (Expense)...........................     (635,437)      (3.49)
                                                            -----------      ------
       NET LOSS...........................................   (1,361,635)      (7.48)
                                                                             ======
Retained Deficit -- Beginning of Year.....................     (575,929)
                                                            -----------
  RETAINED DEFICIT -- END OF YEAR.........................  $(1,937,564)
                                                            ===========
</TABLE>

See accompanying notes to financial statements and independent auditors' report.

                                      F-95
<PAGE>   196

                                XYZ GROUP, INC.

                            STATEMENT OF CASH FLOWS
                     FOR THE YEARS ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                 1997
                                                              -----------
<S>                                                           <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
  Net loss..................................................  $(1,361,635)
  Adjustments to reconcile net loss to operating cash flows
     Depreciation...........................................      191,608
     Loss on disposal of assets.............................       29,826
     Changes in operating assets and liabilities
       Accounts receivable..................................      674,710
       Inventories..........................................     (259,537)
       Deposit -- inventory consignment.....................      (97,866)
       Prepaid expenses.....................................       49,479
       Accounts payable.....................................    1,297,159
       Accrued liabilities..................................       (3,901)
                                                              -----------
Net cash flows provided by operating activities.............      519,843
                                                              -----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of equipment.....................................     (145,990)
  Proceeds from sale of equipment...........................        8,032
                                                              -----------
Net cash flows used in investing activities.................     (137,958)
                                                              -----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Payments for purchase of treasury stock...................       (1,032)
  Proceeds from bank loans..................................          -0-
  Reductions in bank loans..................................     (360,420)
  Reductions in shareholder loans...........................          -0-
  Checks written in excess of balance.......................          -0-
                                                              -----------
Net cash flows provided by (used in) financing activities...     (361,452)
                                                              -----------
Net Increase (Decrease) in Cash and Cash Equivalents........       20,433
Cash and Cash Equivalents -- Beginning of Year..............        2,673
                                                              -----------
Cash and Cash Equivalents -- End of Year....................  $    23,106
                                                              ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
  Cash paid during the year for interest....................  $   561,468
</TABLE>

See accompanying notes to financial statements and independent auditors' report.

                                      F-96
<PAGE>   197

                                XYZ GROUP, INC.

                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 1997

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

     XYZ Group, Inc. was incorporated in the state of Wisconsin in August, 1990,
to distribute children's books, electronic books and other child related
educational materials throughout the United States.

CASH AND CASH EQUIVALENTS

     For purposes of financial statement reporting, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.

INVENTORIES

     Inventories in 1997 are stated at the lower of cost using the average cost
method. Inventories consist of finished goods. The inventory values at December
31, 1997 contain an allowance of $170,000 for goods expected to be returned. In
addition the December 31, 1997 value includes a reserve for inventory
obsolescence of $250,000.

PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost. Major expenditures for property
and equipment and those which substantially increase useful lives are
capitalized. Maintenance, repairs, and minor renewals are expensed as incurred.
When assets are retired or otherwise disposed of, their costs and related
accumulated depreciation are removed from the accounts and resulting gains or
losses are included in income.

     Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives using both
accelerated and straight-line methods of depreciation. Depreciation expense for
the period ended December 31, 1997 was $191,608.

SALES POLICIES

     The general Company policy on sales is that sales are final and that
merchandise is not returnable, with the exception of defective merchandise and
special Christmas titles. However, there has evolved a Company practice of
accepting returns from its large warehouse retailers on a preapproved basis.
Items returned without a return authorization number are not accepted. In
conjunction with this policy the Company has estimated and recorded a reserve
for the financial impact of the returns. The provision is based on historical
experience with known exceptions and is consistently applied over the periods
presented.

                                      F-97
<PAGE>   198
                                XYZ GROUP, INC.

                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997 -- (CONTINUED)

ADVERTISING COSTS

     Advertising expense is charged to expense as incurred. XYZ Group, Inc. also
receives advertising credits from publishers. Advertising expense for the period
ended December 31, 1997 was $33,868.

S CORPORATION

     Income taxes have not been provided for XYZ Group, Inc. because the
shareholders elected to be treated as a small business corporation for income
tax purposes as provided in Section 1372(a) of the Internal Revenue Code. As
such, the corporation's income or loss is passed to the shareholders and
combined with their other income and deductions to determine taxable income on
their respective tax returns.

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. Actual results could differ from those estimates.

NOTE 2 -- ACCOUNTS RECEIVABLE

     Accounts receivable are aged as follows:

<TABLE>
<CAPTION>
                                                                1997
                                                             ----------
<S>                                                          <C>
 0 - 30 Days...............................................  $  950,705
31 - 60 Days...............................................   1,770,350
61 - 90 Days...............................................     738,258
91 - 120 Days..............................................      95,678
121 Days and Over..........................................     190,755
     Less: Allowance for doubtful accounts.................     (77,731)
     Less: Allowance for currency exchange.................      (2,470)
     Less: Allowance for returns...........................    (200,000)
                                                             ----------
          Net Accounts Receivable..........................  $3,465,545
                                                             ==========
</TABLE>

NOTE 3 -- CONCENTRATION OF CREDIT RISK

     The Company periodically has bank deposits in excess of federally insured
amounts. The Company has not experienced any losses on these deposits.

                                      F-98
<PAGE>   199
                                XYZ GROUP, INC.

                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997 -- (CONTINUED)

     The Company performs ongoing credit evaluations of its customers' financial
condition and requires no collateral from its customers. The Company services
two major warehouse clubs which comprise the vast majority of the Company's
receivables, as follows:

<TABLE>
<CAPTION>
                                                                        PERCENT OF
                                                             1997        BALANCE
                                                          ----------    ----------
<S>                                                       <C>           <C>
Customer A..............................................  $1,843,968       53.2
Customer B..............................................   1,060,005       30.6
                                                          ----------       ----
          Total.........................................  $2,903,973       83.8
                                                          ==========       ====
</TABLE>

     For the year ended December 31, 1997, the Company had the following major
customers each of whose purchases exceeded 10% of total sales. Sales to those
customers were as follows:

<TABLE>
<CAPTION>
                                                                        PERCENT OF
                                                            1997         BALANCE
                                                         -----------    ----------
<S>                                                      <C>            <C>
Customer A.............................................  $10,761,474       59.5
Customer B.............................................    4,052,186       22.4
                                                         -----------       ----
          Total........................................  $14,813,660       81.9
                                                         ===========       ====
</TABLE>

NOTE 4 -- INVENTORY CONSIGNMENT

     XYZ Group, Inc. has entered into an exclusive distributorship agreement
with Magi Publications to distribute books in the United States. The books are
purchased on a consignment basis at 65% of retail price, payable in installments
of $.50 per book when the books are ready for shipment, and an additional $.50
per book is paid when received and inspected by XYZ Group, Inc. The balance due
is paid within 60 days of sale. Magi Publications retains title to the books
until full payment has been received by them. Therefore, advances paid by the
Company are recorded as deposits until the final payment is made. The
distributorship agreement may be terminated upon 180 days written notice by
either party.

NOTE 5 -- NOTE PAYABLE -- FINANCIAL INSTITUTIONS

     A financing agreement was entered into between XYZ Group, Inc. and Republic
Acceptance Corporation on August 1, 1995 and was amended in July 1996. The
agreement shall continue in force until terminated by either party with 30 days
prior written notice. The total amount available to borrow is based on various
percentages of eligible accounts receivable and inventory as defined in the
agreement. The maximum aggregate amount shall not exceed $7,000,000. Interest is
calculated on the net balance owed at the close of each day, computed on the
basis of actual days elapsed at the reference rate publicly announced by First
Bank National Association, plus an incremental interest rate amount of 3.25%.

                                      F-99
<PAGE>   200
                                XYZ GROUP, INC.

                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997 -- (CONTINUED)

     The Republic Acceptance Corporation financing agreement is secured and
collateralized by a general business security agreement including substantially
all assets of the Company, an unlimited personal guarantee by the company's
major shareholder, Gary R. Billings, and the assignment of a life insurance
policy on the life of Gary R. Billings. The principal amount outstanding on this
agreement as of December 31, 1997 was $4,068,155.

NOTE 6 -- NOTE PAYABLE -- SHAREHOLDER

     Note payable -- shareholder at December 31, 1997 consists of a demand note
in the amount of $772,637 payable to the majority shareholder, Gary R. Billings,
bearing interest at prime plus 1%. Interest is payable monthly. A subordination
agreement exists between Gary R. Billings and Republic Acceptance Corporation
with respect to this note.

NOTE 7 -- LEASE COMMITMENTS

     The Company leases office and warehouse facilities at N16 W23390 Stoneridge
Drive, Waukesha, Wisconsin. The lease, which commenced July 1, 1997 and
terminates June 30, 2002, is a triple net lease with base rent as follows:

<TABLE>
<S>                                                           <C>
Commencement through June 30, 1999..........................  $18,734 per month
July 1, 1999 through June 30, 2000..........................  $19,296 per month
July 1, 2000 through June 30, 2001..........................  $20,164 per month
July 1, 2001 through June 30, 2002..........................  $21,072 per month
</TABLE>

     Minimum annual future rental payments for the office and warehouse
facilities are as follows:

<TABLE>
<S>                                                           <C>
1998........................................................  $  224,808
1999........................................................     226,494
2000........................................................     234,156
2001........................................................     244,692
2002........................................................     189,648
                                                              ----------
Total Minimum Payments Required.............................  $1,119,798
                                                              ==========
</TABLE>

     In addition to the base rent the Company is obligated to pay as additional
rent their share, as defined in the lease, of all taxes, utilities, repairs and
maintenance, and impounds for insurance premiums and property taxes.

NOTE 8 -- TREASURY STOCK

     On May 9, 1997, the Company purchased 1,032 shares of common stock which
are recorded in treasury stock at cost for $1,032.

                                      F-100
<PAGE>   201
                                XYZ GROUP, INC.

                         NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 1997 -- (CONTINUED)

NOTE 9 -- PENSION AND PROFIT SHARING PLAN

     XYZ Group, Inc. maintains a 401(k) savings plan for all eligible employees.
The Company matches employee contributions at a rate of twenty five percent of
employee contributions up to a maximum Company contribution of one percent of
includable wages. The total amount contributed by XYZ Group, Inc. for the year
ended December 31, 1997 was $5,665.

NOTE 10 -- RELATED PARTY TRANSACTIONS

     The Company made purchases from Premier Publishing, Inc., a related party,
of $934,465 for the year ended December 31, 1997. The Company's accounts payable
balance owed to Premier Publishing, Inc. as of December 31, 1997 was $93,367.
The Company received $64,542 of rent and management fees from Premier
Publishing, Inc. for the year ended December 31, 1997.

NOTE 11 -- GOING CONCERN

     The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company has sustained substantial
operating losses in recent years. In addition, the Company has used substantial
amounts of working capital in its operations. Further, at December 31, 1997,
current liabilities exceed current assets by $2,275,710 and total liabilities
exceed total assets by $1,763,394. The recorded liabilities include $772,637 of
notes to shareholders.

     The Company, as of October 17, 1997, has entered into an agreement for
purchase and sale of assets with Futech Educational Products, Inc. The agreement
is contingent on the private placement success of Futech, Inc. At the date of
issuance of these statements, no estimate of success of the private placement
and sale of assets can be determined. However, management expects to complete a
successful placement and ultimate sale by June of 1998.

     In view of these matters, realization of a major portion of the assets in
the accompanying balance sheet is dependent upon either continued operations of
the Company or the sale as defined above. Management believes that actions
presently being taken to revise the Company's operating and financial
requirements provide the opportunity for the Company to continue as a going
concern.

                                      F-101
<PAGE>   202

                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
XYZ Group, Inc.
Waukesha, Wisconsin

     We have audited the accompanying balance sheet of XYZ Group, Inc. as of
April 30, 1998 and the statements of operations and retained deficit and cash
flows for the four month period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of XYZ Group, Inc. as of April
30, 1998 and the results of its operations and its cash flows for the four
months then ended in conformity with generally accepted accounting principles.

                                          /s/ VIRCHOW, KRAUSE & COMPANY, LLP

Waukesha, Wisconsin
March 23, 1999

                                      F-102
<PAGE>   203

                                XYZ GROUP, INC.

                                 BALANCE SHEET
                                 APRIL 30, 1998

<TABLE>
<S>                                                           <C>
                                 ASSETS
CURRENT ASSETS
  Accounts receivable.......................................  $ 2,853,436
  Other receivables.........................................        7,838
  Inventories...............................................    3,948,053
  Inventory on consignment..................................      184,241
  Prepaid expenses..........................................        6,542
                                                              -----------
          Total Current Assets                                  7,000,110
                                                              -----------
PROPERTY AND EQUIPMENT
  Vehicles..................................................       70,104
  Machinery.................................................      234,180
  Furniture and fixtures....................................      815,373
  Leasehold Improvements....................................       38,985
     Less: accumulated depreciation.........................     (681,225)
                                                              -----------
       Net Property and Equipment...........................      477,417
                                                              -----------
          TOTAL ASSETS......................................  $ 7,477,527
                                                              ===========
                  LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
  Checks in excess of bank balance..........................  $   348,122
  Accounts payable..........................................    3,861,639
  Accrued liabilities.......................................      338,110
  Note payable -- financial institutions....................    5,855,633
  Note payable -- shareholder...............................      772,637
                                                              -----------
          Total Current Liabilities.........................   11,176,141
                                                              -----------
STOCKHOLDERS' DEFICIT
  Common stock, $1 par, 56,000 shares authorized; 20,632
     shares issued and 19,600 shares outstanding............       20,632
  Treasury stock (1,032 shares at cost).....................       (1,032)
  Additional paid-in capital................................      154,570
  Retained deficit..........................................   (3,872,784)
                                                              -----------
          Total Stockholders' Deficit.......................   (3,698,614)
                                                              -----------
          TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT.......  $ 7,477,527
                                                              ===========
</TABLE>

See accompanying notes to financial statements.

                                      F-103
<PAGE>   204

                                XYZ GROUP, INC.

                  STATEMENT OF OPERATIONS AND RETAINED DEFICIT
                    FOR THE FOUR MONTHS ENDED APRIL 30, 1998

<TABLE>
<S>                                                           <C>
NET SALES...................................................  $ 4,812,204
COST OF GOODS...............................................    5,378,394
                                                              -----------
  Gross Profit..............................................     (566,190)
                                                              -----------
OPERATING EXPENSES
  Selling...................................................      506,550
  Shipping and receiving....................................      361,036
  General and administrative................................      284,678
                                                              -----------
          Total Operating Expenses..........................    1,152,264
                                                              -----------
     Operating Loss.........................................   (1,718,454)
                                                              -----------
OTHER INCOME (EXPENSE)
  Interest expense..........................................     (217,340)
  Miscellaneous income......................................          574
                                                              -----------
     Net Other Income (Expense).............................     (216,766)
                                                              -----------
       NET LOSS.............................................   (1,935,220)
RETAINED DEFICIT -- Beginning of Year.......................   (1,937,564)
                                                              -----------
  RETAINED DEFICIT -- END OF PERIOD.........................  $(3,872,784)
                                                              ===========
</TABLE>

See accompanying notes to financial statements.

                                      F-104
<PAGE>   205

                                XYZ GROUP, INC.

                            STATEMENT OF CASH FLOWS
                    FOR THE FOUR MONTHS ENDED APRIL 30, 1998

<TABLE>
<S>                                                           <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
  Net loss..................................................  $(1,935,220)
  Adjustments to reconcile net loss to net cash flows used
     in operating activities
     Depreciation...........................................       60,961
     Changes in operating assets and liabilities
       Accounts receivable..................................      612,109
       Other receivables....................................       (7,838)
       Inventories..........................................      (60,063)
       Deposit -- inventory consignment.....................      (69,834)
       Prepaid expenses.....................................       (6,348)
       Accounts payable.....................................     (994,433)
       Accrued liabilities..................................      268,022
                                                              -----------
          Net Cash Flows Used in Operating Activities.......   (2,132,644)
                                                              -----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of equipment.....................................      (26,062)
                                                              -----------
          Net Cash Flows Used in Investing Activities.......      (26,062)
                                                              -----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from bank loans..................................    1,787,478
  Reductions in bank loans..................................            0
                                                              -----------
          Net Cash Flows Provided by Financing Activities...    1,787,478
                                                              -----------
          NET DECREASE IN CASH AND CASH EQUIVALENTS.........     (371,228)
CASH AND CASH EQUIVALENTS -- Beginning of Year..............       23,106
                                                              -----------
  CHECKS IN EXCESS OF BANK BALANCE -- END OF PERIOD.........  $  (348,122)
                                                              ===========
Supplemental cash flow disclosures
  Cash paid during the period for interest..................  $   197,861
</TABLE>

See accompanying notes to financial statements.

                                      F-105
<PAGE>   206

                                XYZ GROUP, INC.

                         NOTES TO FINANCIAL STATEMENTS
                                 APRIL 30, 1998

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

     XYZ Group, Inc. was incorporated in the state of Wisconsin in August, 1990,
to distribute children's books, electronic books and other child related
educational materials throughout the United States.

     The Company, as of October 17, 1997, entered into an agreement for the
purchase and sale of its assets with Futech Interactive Products, Inc. As of May
5, 1998 an amended agreement was finalized and the Company sold all of its
assets and most of its liabilities to Futech Interactive Products, Inc. In view
of the sale, it is no longer necessary to address the issue of a going concern
for the Company. Per the agreement, Futech Interactive Products, Inc. received
all inventory, accounts receivable, fixed assets, and other assets of XYZ Group,
as well as assumed all of the liabilities of the Company with the exception of
the officer note to shareholder. The sale was consummated with physical proceeds
exchanged on May 5, 1998.

CASH AND CASH EQUIVALENTS

     For purposes of financial statement reporting, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.

INVENTORIES

     Inventories in 1998, which consist of finished goods, are stated at the
lower of cost or market using the average cost method. The inventory values at
April 30, 1998 contain an allowance of $705,000 for goods expected to be
returned. In addition, the April 30, 1998 value includes a reserve for inventory
obsolescence of $1,115,000.

PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost. Major expenditures for property
and equipment and those which substantially increase useful lives are
capitalized. Maintenance, repairs, and minor renewals are expensed as incurred.
When assets are retired or otherwise disposed of, their costs and related
accumulated depreciation are removed from the accounts and resulting gains or
losses are included in income.

     Depreciation is provided in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives using both
accelerated and straight-line methods of depreciation. Depreciation expense for
the periods ended April 30, 1998 was $60,961.

SALES POLICIES

     The general Company policy on sales is that sales are final and that
merchandise is not returnable, with the exception of defective merchandise and
special Christmas titles. However, there has evolved a Company practice of
accepting returns from its large warehouse retailers on a preapproved basis.
Items returned without a return authorization number are not accepted. In
conjunction with this policy the Company has estimated and

                                      F-106
<PAGE>   207
                                XYZ GROUP, INC.

                         NOTES TO FINANCIAL STATEMENTS
                         APRIL 30, 1998 -- (CONTINUED)

recorded a reserve for the financial impact of the returns. The provisions is
based on historical experience with known exceptions and is consistently applied
over the period presented.

ADVERTISING COSTS

     Advertising costs are charged to expense as incurred. XYZ Group, Inc. also
receives advertising credits from publishers. Advertising expense for the period
ended April 30, 1998 was $10,974.

S CORPORATION

     Income taxes have not been provided for XYZ Group, Inc. because the
shareholder has elected to be treated as a small business corporation for income
tax purposes as provided in Section 1372(a) of the Internal Revenue Code. As
such, the corporation's income or loss is passed to the shareholders and
combined with their other income and deductions to determine taxable income on
their respective tax returns.

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. Actual results could differ from those estimates.

NOTE 2 -- ACCOUNTS RECEIVABLE

     Accounts receivable are aged as follows:

<TABLE>
<S>                                                         <C>
0-30 Days.................................................  $  885,929
31-60 Days................................................   1,473,686
61-90 Days................................................   1,216,942
91-120 Days...............................................     120,529
121 Days and Over.........................................     156,024
                                                            ----------
  Total Aged Accounts Receivable..........................   3,853,110
     Less: Allowance for doubtful accounts................    (149,674)
     Less: Allowance for returns..........................    (850,000)
                                                            ----------
       Net Accounts Receivable............................  $2,853,436
                                                            ==========
</TABLE>

NOTE 3 -- CONCENTRATION OF CREDIT RISK

     The Company periodically has bank deposits in excess of federally insured
amounts. The Company has not experienced any losses on these deposits.

     The Company performs ongoing credit evaluations of its customers' financial
condition and requires no collateral from its customers. The Company services
two major warehouse

                                      F-107
<PAGE>   208
                                XYZ GROUP, INC.

                         NOTES TO FINANCIAL STATEMENTS
                         APRIL 30, 1998 -- (CONTINUED)

clubs which comprise the vast majority of the Company's receivables, as follows
(at Gross):

<TABLE>
<S>                                                      <C>
Customer A.............................................  $3,311,420
Customer B.............................................     404,255
                                                         ----------
          Total........................................  $3,715,675
                                                         ==========
</TABLE>

     For the four months ended April 30, 1998, the Company had the following
major customers each of whose purchases exceeded 10% of total sales. Sales to
those customers were as follows:

<TABLE>
<S>                                                      <C>
Customer A.............................................  $2,788,320
Customer B.............................................     880,571
                                                         ----------
          Total........................................  $3,668,891
                                                         ==========
</TABLE>

NOTE 4 -- INVENTORY CONSIGNMENT

     XYZ Group, Inc. has entered into an exclusive distributorship agreement
with Magi Publications to distribute books in the United States. The books are
purchased on a consignment basis at 65% of retail price, payable in installments
of $.50 per book when the books are ready for shipment, and an additional $.50
per book is paid when received and inspected by XYZ Group, Inc. The balance due
is paid within 60 days of sale. Magi Publications retains title to the books
until full payment has been received by them. Therefore, advances paid by the
Company are recorded as deposits until the final payment is made. The
distributorship agreement may be terminated upon 180 days written notice by
either party.

NOTE 5 -- NOTE PAYABLE -- FINANCIAL INSTITUTIONS

     A financing agreement was entered into between XYZ Group, Inc. and Republic
Acceptance Corporation on August 1, 1995 and was amended in July 1996. The
agreement shall continue in force until terminated by either party with 30 days
prior written notice. The total amount available to borrow is based on various
percentages of eligible accounts receivable and inventory as defined in the
agreement. The maximum aggregate amount shall not exceed $7,000,000. Interest is
calculated on the net balance owed at the close of each day, computed on the
basis of actual days elapsed at the reference rate publicly announced by First
Bank National Association, plus an incremental interest rate amount of 3.25%

     The Republic Acceptance Corporation financing agreement is secured and
collateralized by a general business security agreement including substantially
all assets of the Company, an unlimited personal guarantee by the company's
major shareholder, Gary R. Billings, and the assignment of a life insurance
policy on the life of Gary R. Billings. The principal amount outstanding on this
agreement as of April 30, 1998 was $5,855,633.

NOTE 6 -- NOTE PAYABLE -- SHAREHOLDER

     Note payable -- shareholder at April 30, 1998 consists of a demand note in
the amount of $772,637 payable to the majority shareholder, Gary R. Billings,
bearing interest
                                      F-108
<PAGE>   209
                                XYZ GROUP, INC.

                         NOTES TO FINANCIAL STATEMENTS
                         APRIL 30, 1998 -- (CONTINUED)

at prime plus 1%. Interest is payable monthly. A subordination agreement exists
between Gary R. Billings and Republic Acceptance Corporation with respect to
this note.

NOTE 7 -- LEASE COMMITMENTS

     The Company leases office and warehouse facilities at N16 W23390 Stoneridge
Drive, Waukesha, Wisconsin. The lease, which commenced July 1, 1997 and
terminates June 30, 2002, is a triple net lease with base rent as follows:

<TABLE>
<S>                                           <C>
Commencement through June 30, 1999..........  $18,734 per month
July 1, 1999 through June 30, 2000..........  $19,296 per month
July 1, 2000 through June 30, 2001..........  $20,164 per month
July 1, 2001 through June 30, 2002..........  $21,072 per month
</TABLE>

     Minimum annual future rental payments for the office and warehouse
facilities are as follows:

<TABLE>
<S>                                                    <C>
1998.................................................  $149,872
1999.................................................   228,180
2000.................................................   236,760
2001.................................................   247,416
2002.................................................   126,432
                                                       --------
          Total Minimum Payments Required............  $988,660
                                                       ========
</TABLE>

     Lease expense for the four months ended April 30, 1998 was $74,936. The
lease has subsequently been assumed by Futech as a condition of sale.

     In addition to the base rent the Company is obligated to pay as additional
rent their share, as defined in the lease, of all taxes, utilities, repairs and
maintenance, and impounds for insurance premiums and property taxes.

NOTE 8 -- PENSION AND PROFIT SHARING PLAN

     XYZ Group, Inc. maintains a 401(k) savings plan for all eligible employees.
The Company matches employee contributions at a rate of twenty five percent of
employee contributions up to a maximum Company contribution of one percent of
includable wages. The total amounts contributed by XYZ Group, Inc. for the four
months ended April 30, 1998 were $1,969.

NOTE 9 -- RELATED PARTY TRANSACTIONS

     The Company made purchases from Premier Publishing, Inc., a related party,
of $316,733 for the four months ended April 30, 1998. The Company's accounts
payable balance owed to Premier Publishing, Inc. as of April 30, 1998 was
$11,736. The Company received $15,332 of management fees from Premier
Publishing, Inc. for the four months ended April 30, 1998.

                                      F-109
<PAGE>   210

                             GICK PUBLISHING, INC.

                              FINANCIAL STATEMENTS
<PAGE>   211

                          INDEPENDENT AUDITORS' REPORT

Board of Directors
Gick Publishing, Inc.

We have audited the accompanying balance sheet of GICK PUBLISHING, INC. as of
September 30, 1997 and the related statement of operations, stockholders' equity
and cash flows for the eleven months then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GICK PUBLISHING, INC. as of
September 30, 1997, and the results of its operations and its cash flows for the
eleven months then ended in conformity with generally accepted accounting
principles.

                                          /s/ SPARKS, NELSON & JACOBSON
                                          --------------------------------------
                                              Sparks, Nelson & Jacobson CPAs

Santa Ana, CA
November 5, 1997

                                      F-110
<PAGE>   212

                              GICK PUBLISHING INC.

                                 BALANCE SHEET
                               SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
                                                                 1997
                                                              ----------
<S>                                                           <C>
ASSETS
Current assets
  Cash......................................................  $    1,530
  Accounts receivable -- net of allowance for doubtful
     accounts of $95,000....................................     906,384
  Inventory.................................................     676,264
  Advances to stockholders..................................      36,000
  Prepaid expenses and other current assets.................      25,816
                                                              ----------
     Total current assets...................................   1,645,994
Property, equipment and improvements........................     461,371
Other assets................................................      77,878
                                                              ----------
     Total assets...........................................  $2,185,243
                                                              ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
  Line of credit............................................  $  401,085
  Accounts payable..........................................     378,497
  Accrued liabilities.......................................     190,618
  Income taxes payable......................................      33,425
  Current portion of long-term debt.........................     104,260
                                                              ----------
     Total current liabilities..............................   1,107,885
Long-term debt, net of current portion......................     806,323
Commitments and contingencies...............................          --
Stockholders' equity
  Common stock, no par value, authorized 1,000,000 shares;
     8,400 shares issued; 6,400 shares outstanding..........       6,400
  Retained earnings.........................................     264,635
                                                              ----------
                                                                 271,035
                                                              ----------
     Total liabilities and stockholders' equity.............  $2,185,243
                                                              ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      F-111
<PAGE>   213

                             GICK PUBLISHING, INC.

                            STATEMENT OF OPERATIONS
                 FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
                                                                 1997
                                                              ----------
<S>                                                           <C>
Net sales...................................................  $4,791,751
Cost of goods sold (including inventory write-downs of
  $225,000).................................................   3,365,981
     Gross profit...........................................   1,425,770
Selling, general and administrative expenses................   1,655,508
     Operating income (loss)................................    (229,738)
Other income (expense)
  Federal tax expense.......................................          --
  State tax expense.........................................          --
  Debt forgiveness..........................................          --
  Interest expense -- income taxes..........................          --
  Rental income.............................................      69,300
  Miscellaneous income......................................       7,528
  Interest expense..........................................     (96,640)
  Gain (loss) on sale of assets.............................          --
                                                              ----------
                                                                 (19,812)
                                                              ----------
     Net earnings (loss)....................................  $ (249,550)
                                                              ==========
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      F-112
<PAGE>   214

                             GICK PUBLISHING, INC.

                       STATEMENT OF STOCKHOLDERS' EQUITY
                 FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
                                                            COMMON    RETAINED
                                                            STOCK     EARNINGS
                                                            ------    --------
<S>                                                         <C>       <C>
Balance -- October 31, 1996...............................  $6,400    $514,185
Net loss for eleven months................................            (249,550)
                                                            ------    --------
Balance -- September 31, 1997.............................  $6,400    $264,635
                                                            ======    ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      F-113
<PAGE>   215

                             GICK PUBLISHING, INC.

                            STATEMENT OF CASH FLOWS
                 FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
                                                                1997
                                                              ---------
<S>                                                           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net earnings (loss).......................................  $(249,550)
  Adjustment to reconcile net earnings to net cash used in
     operating activities:
     Forgiveness of debt....................................         --
     Depreciation and amortization..........................    138,017
     Loss on disposition of assets..........................         --
     (Increase) decrease in accounts receivable.............   (172,919)
     (Increase) decrease in inventories.....................    345,987
     (Increase) decrease in prepaid expenses................     (7,074)
     (Increase) decrease in cash surrender value of life
      insurance.............................................     (7,014)
     (Increase) decrease in accounts payable................     51,496
     (Increase) decrease in income tax payable..............    (57,000)
     (Increase) decrease in accrued liabilities.............    (71,865)
                                                              ---------
       Total adjustments....................................    219,628
                                                              ---------
  Net cash used in operating activities.....................    (29,922)
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment........................    (17,774)
  Proceeds from sale of equipment...........................         --
  Proceeds from sale of marketable securities...............         --
  (Payments) refunds of deposits............................     13,013
                                                              ---------
  Net cash used in investing activities.....................     (4,761)
CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments of long-term debt................................    (42,350)
  Net increase (decrease) in line of credit.................      1,084
  Payments of loan fees.....................................     (6,000)
  Stockholder distributions.................................         --
  Stockholder loans.........................................    (36,000)
                                                              ---------
  Net cash used in financing activities.....................    (83,266)
                                                              ---------
Net increase in cash........................................   (117,949)
Cash at beginning of year...................................    119,479
                                                              ---------
Cash at end of year.........................................  $   1,530
                                                              ---------
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      F-114
<PAGE>   216

                             GICK PUBLISHING, INC.

                            STATEMENT OF CASH FLOWS
                 FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
                                                                1997
                                                              --------
<S>                                                           <C>
SUPPLEMENTAL CASH FLOW DISCLOSURES:
  Cash paid during the period for:
     Interest...............................................  $175,000
     Taxes..................................................    57,000
Non-cash investing and financing activities:
  Transfer of trade account payable to note payable.........  $150,000
                                                              --------
  Equipment purchase financed with installment plan.........  $ 10,000
                                                              --------
  IRS payment financed with installment plan................  $ 35,000
                                                              --------
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                      F-115
<PAGE>   217

                             GICK PUBLISHING, INC.

                         NOTES TO FINANCIAL STATEMENTS
                 FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 1997

NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS

     Gick Publishing, Inc. (the Company) is engaged in the distribution as a
"value added" reseller of various arts and crafts materials and greeting cards
to arts and crafts distribution outlets as well as retail outlets throughout the
nation. The Company also conducts business under the following trade or
fictitious names: The Gick Companies, Gick Crafts, Quack-Ups!, Magickal Ink, and
Future Crafts Today.

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
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.

     September 30, 1997 inventories reflect a valuation allowance of $225,000
necessary to reduce certain inventories to their estimated net realizable
values. It is at least reasonably possible that this estimate will change in
1998; however, no estimate can currently be made of any additional loss that is
at least reasonably possible.

CASH AND CASH EQUIVALENTS

     For the purposes of reporting cash flows, the Company considers all cash
and money market accounts which are not subject to withdrawal restrictions or
penalties to be cash or cash equivalents.

INVENTORY

     Inventories are stated at the lower of weighted average cost or market. A
reserve for obsolescence is maintained for inventory items that are slow moving.
The reserve is based on the estimated net realizable value of the inventory in
excess of one year of product sales for each individual item.

                                      F-116
<PAGE>   218
                             GICK PUBLISHING, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                 FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 1997

DEPRECIATION

     Property and equipment are carried at cost. Depreciation is computed using
the straight-line or declining balance method based on the estimated useful life
of the various items as follows:

<TABLE>
<CAPTION>
                                                              USEFUL LIFE
ASSET                                                          IN YEARS
-----                                                         -----------
<S>                                                           <C>
Automobiles.................................................     3 - 5
Furniture and equipment.....................................     5 - 7
Computer equipment..........................................     3 - 7
Machinery and equipment.....................................     5 - 7
Building and improvements...................................    15 - 20
</TABLE>

     When assets are retired, traded or otherwise disposed of, the cost and
related accumulated depreciation are removed from the accounts, and any
resulting gain or loss is included in the statement of operations except for
exchanges. Expenditures for maintenance and repairs are charged to operating
expenses as incurred; betterments are capitalized.

AMORTIZATION

     Loan acquisition costs are being amortized using the straight-line method
over the term of the related loan. Organization and trademark costs are
amortized using the straight-line method over five years.

INCOME TAXES

     Effective November 1, 1989 the Company elected to be taxed under the
provisions of Subchapter S of the Internal Revenue Code and comparable state
regulations. Under those provisions, the Company does not pay federal corporate
income taxes on its taxable income. Instead, the stockholders are liable for
individual federal and state income taxes on their respective share of the
Company's taxable income.

     As an "S" corporation with a Section 444 fiscal year-end election in
effect, the Company is required to have on deposit with the IRS a payment under
Code Section 7519, which is presented as an other current asset.

                                      F-117
<PAGE>   219
                             GICK PUBLISHING, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                 FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 1997

NOTE 2 -- PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

     Property, equipment and leasehold improvements are summarized by major
classifications as follows:

<TABLE>
<CAPTION>
                                                               1997
                                                            -----------
<S>                                                         <C>
Building and improvements.................................  $   718,396
Automobile................................................       18,639
Computer equipment........................................       99,293
Furniture and fixtures....................................       24,149
Machinery and equipment...................................      379,253
Office equipment..........................................       53,472
Tools and dies............................................       86,527
                                                            -----------
                                                              1,379,729
Less accumulated depreciation.............................   (1,249,714)
                                                            -----------
Net book value............................................      130,015
Land......................................................      331,356
                                                            -----------
                                                            $   461,371
                                                            -----------
</TABLE>

NOTE 3 -- LINE OF CREDIT

     The Company has a line of credit with a financial company, secured by
accounts receivable, inventory, equipment and general intangibles and personally
guaranteed by the stockholders. Advances up to $600,000 may be taken, limited to
80% of qualified accounts receivable. Covenants in the agreement include
provisions for limitations on incurring additional debt as well as additions to
fixed assets. There also is an early termination fee of $60,000 if paid before
August 25, 1998. Interest is payable monthly (minimum of $2,500) at the
financial company's reference rate plus 5.25% (the reference rate at September
30, 1997 was 8.5%).

NOTE 4 -- LONG TERM DEBT

     Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                1997
                                                              ---------
<S>                                                           <C>
Note payable to a bank, payable in monthly installments of
  $5,958 including interest adjusted monthly at a rate of
  2.25% above the 11th District Cost of Funds Index Rate,
  with a CAP of 14.17%, current rate of 7.103%, at September
  30, 1997, due and payable on April 3, 2017, secured by a
  trust deed on building occupied by the Company. ..........  $ 740,135
</TABLE>

                                      F-118
<PAGE>   220
                             GICK PUBLISHING, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                 FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
                                                                1997
                                                              ---------
<S>                                                           <C>
Notes payable to a bank, payable in monthly installments
  aggregating $2,340 including interest at prime plus 2
  (10.5% at September 30, 1997) and 10.25% due through
  December 15, 1998, secured by equipment. .................     26,120
Note payable to vendor, payable in monthly installments of
  $6,922 including interest at 10% due September 1999. .....    144,328
                                                              ---------
                                                                910,583
Less current portion........................................   (104,260)
                                                              ---------
Long-term debt..............................................  $ 806,323
                                                              =========
</TABLE>

     Scheduled principal maturities of long-term debt as of September 30, 1997
are as follows:

<TABLE>
<S>                                                           <C>
Year ending October 31,
1997........................................................  $104,260
1998........................................................   104,200
1999........................................................    21,100
2000........................................................    22,600
2001........................................................    24,200
Thereafter..................................................   634,223
                                                              --------
                                                              $910,583
                                                              ========
</TABLE>

NOTE 5 -- COMMITMENTS

     The Company leases approximately 30,200 square feet of warehouse space
under a five-year noncancelable lease expiring June, 1998. There is an option to
renew the lease for an additional 5 years at a rate equivalent to 95% of the
prevailing market rate as of the first day of the option period.

     The following schedule shows the composition of total rental expense for
all operating leases except those with terms of a month or less that were not
renewed:

<TABLE>
<CAPTION>
                                                       ELEVEN MONTHS ENDED
                                                       SEPTEMBER 30, 1997
                                                       -------------------
<S>                                                    <C>
Minimum rentals......................................       $157,200
Less: Sublease rentals...............................        (69,300)
                                                            --------
                                                            $ 87,900
                                                            --------
</TABLE>

     During the period ended September 30, 1997 the Company entered into royalty
agreements, for certain designs, with four individual commercial artists. The
agreements call for payments of 5% and 8% of gross receipts for each of the
individual designs sold. The royalty expense for the period ended September 30,
1997 was $22,000.

                                      F-119
<PAGE>   221
                             GICK PUBLISHING, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
                 FOR THE ELEVEN MONTHS ENDED SEPTEMBER 30, 1997

NOTE 6 -- EMPLOYEE BENEFIT PLANS

     The Company amended their profit sharing plan as of May 1, 1995 and adopted
a 401(k) retirement plan. The plan covers all employees who are at least 21
years of age with one or more years of service. Under the plan the Company may,
at its discretion, make matching contributions of a percentage of each
participant's deferred compensation or lump sum non-elective contribution. The
Company has contributed or accrued contributions to its 401(k) plan $19,500 for
the eleven months ended September 30, 1997.

NOTE 7 -- MAJOR CUSTOMERS

     The Company sells its products nationwide. The Company performs ongoing
credit evaluations of its customers' financial conditions and, generally,
requires no collateral from its customers. The Company's three largest customers
accounts for a material portion of the Company's sales. The three largest
customer sales amounts for the eleven months ended September 30, 1997 were:

<TABLE>
<CAPTION>
                                                        SEPTEMBER 30,
                                                      ------------------
                                                         1997        %
                                                      ----------    ----
<S>                                                   <C>           <C>
Customer 1..........................................  $  850,700    17.8
Customer 2..........................................     550,700    11.5
Customer 3..........................................     342,000     7.1
                                                      ----------    ----
                                                      $1,743,400    36.4
</TABLE>

     Customer 2 has indicated that they will not be continuing to purchase any
product after the Christmas season, resulting in the loss of total sales to this
customer.

NOTE 8 -- CONTINGENCIES

     The shareholders of the Company have entered into an agreement to sell
substantially all of the assets and liabilities of the Company. This factor
creates an uncertainty about the Company's ability to continue its current
operations. The financial statements do not include any adjustments that might
be necessary if the Company is unable to continue its current operations.

                                      F-120
<PAGE>   222

                                                                      APPENDIX A

JANEX INTERNATIONAL, INC.                                     FUNDEX GAMES, LTD.

                            GLOBAL MERGER AGREEMENT

                                      1999

                       FUTECH INTERACTIVE PRODUCTS, INC.

DAMERT COMPANY                                                 TRUDY CORPORATION
<PAGE>   223

                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                              SECTION
                                                              -------
<S>                                                           <C>
                              ARTICLE I
                             THE MERGERS

The Mergers.................................................  1.1
  The Merger of Futech into New Futech......................  1.1.1
  The Merger Into New Futech................................  1.1.2
  The Merger Into New Sub...................................  1.1.3
  Agreement is Conditional on Merger of All Merging
     Companies..............................................  1.1.4
Effective Time..............................................  1.2
Effect of the Mergers.......................................  1.3
Certificate of Incorporation; Bylaws........................  1.4
Directors and Officers......................................  1.5
Consideration for the Merger, Conversion of Securities......  1.6
Shares of Dissenting Holders................................  1.7
Exchange of Securities and Payment of Merger
  Consideration.............................................  1.8
  Exchange Agent............................................  1.8.1
  Exchange Procedures.......................................  1.8.2
  No Further Ownership Rights in Stock of Merging
     Companies..............................................  1.8.3
  Termination of Exchange Fund..............................  1.8.4
  Delivery to a Public Official.............................  1.8.5
Proxy Statements; Registration Statement....................  1.9
Meetings of Stockholders....................................  1.10
Vote Required...............................................  1.11
Appropriate Action; Consents; Filings.......................  1.12
Shareholders' Agreement to Vote.............................  1.13

                             ARTICLE II
                        ADDITIONAL AGREEMENTS

Notification of Certain Matters.............................  2.1
Public Announcements........................................  2.2
Access to Customer Files and Other Records..................  2.3
Due Diligence Investigation.................................  2.4
Confidentiality.............................................  2.5
Interim Events..............................................  2.6
401(k) Plan.................................................  2.7
Employment Agreements.......................................  2.8
</TABLE>


                                        i
<PAGE>   224


<TABLE>
<CAPTION>
                                                              SECTION
                                                              -------
<S>                                                           <C>
Indemnification.............................................  2.9
Revisions of Loans..........................................  2.10
Expenses and Costs of Mergers...............................  2.11
Restrictive Covenants.......................................  2.12
Other Agreements for Particular Parties.....................  2.13
Other Discussions...........................................  2.14
Best Efforts to Register Stock..............................  2.15

                             ARTICLE III
           REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION
                                 OF
                        EACH MERGING COMPANY
                                 AND
                          ITS SHAREHOLDERS

Due Incorporation...........................................  3.1
Capitalization..............................................  3.2
Subsidiaries................................................  3.3
Financial Information.......................................  3.4
Taxes.......................................................  3.5
Material Changes............................................  3.6
Title to Assets; Liens......................................  3.7
Litigation..................................................  3.8
Compliance with Laws........................................  3.9
Insurance...................................................  3.10
Licenses....................................................  3.11
Hazardous Materials.........................................  3.12
Judgments Against the Merging Company and/or Its Business...  3.13
Complete Sale...............................................  3.14
Assets in Good Condition....................................  3.15
Disclosure Materials........................................  3.16
Defaults....................................................  3.17
Material Contracts..........................................  3.18
Outstanding Liabilities.....................................  3.19
Inventory...................................................  3.20
Receivables.................................................  3.21
Employees...................................................  3.22
No Conflicts................................................  3.23
Violations of Law...........................................  3.24
</TABLE>


                                       ii
<PAGE>   225

<TABLE>
<CAPTION>
                                                              SECTION
                                                              -------
<S>                                                           <C>
Condition and Sufficiency of Assets.........................  3.25
Bank Accounts...............................................  3.26
Environmental Matters.......................................  3.27
Intellectual Property.......................................  3.28
Customers and Suppliers.....................................  3.29
Changes to the Merging Company's Documents..................  3.30
Stockholders Agreements and Other Agreements................  3.31
Certain Payments............................................  3.32
Filings Complete............................................  3.33
Products....................................................  3.34
Patents.....................................................  3.35
Indemnification; Survival...................................  3.36

                             ARTICLE IV
                        CONDITIONS OF MERGER

Conditions to Obligation of Each Party to Effect the
  Merger....................................................  4.1
  Stockholder Approval......................................  4.1.1
  No Order..................................................  4.1.2
  No Challenge..............................................  4.1.3
  Representations; Warranties and Covenants.................  4.1.4
  Consents Obtained.........................................  4.1.5
  No Material Adverse Change................................  4.1.6
  Opinions of Counsel.......................................  4.1.7
  Assignments...............................................  4.1.8
  Maintenance of Assets.....................................  4.1.9
  Ordinary Course of Business...............................  4.1.10
Special Conditions for Particular Parties...................  4.2

                              ARTICLE V
                  TERMINATION, AMENDMENT AND WAIVER

Termination.................................................  5.1
Effect of Termination.......................................  5.2
Amendment...................................................  5.3
Waiver......................................................  5.4
</TABLE>

                                       iii
<PAGE>   226


<TABLE>
<CAPTION>
                                                              SECTION
                                                              -------
<S>                                                           <C>
                             ARTICLE VI
                         GENERAL PROVISIONS

Tax Treatment...............................................  6.1
Further Assurances..........................................  6.2
Severability................................................  6.3
Entire Agreement............................................  6.4
Assignment..................................................  6.5
Parties in Interest.........................................  6.6
Successors and Assigns......................................  6.7
Governing Law...............................................  6.8
Modification................................................  6.9
Attorney's Fees.............................................  6.10
Counterparts................................................  6.11
Notices.....................................................  6.12
Paragraph Titles and Headings...............................  6.13
Brokerage, Finder's or Financial Advisor's Commissions......  6.14
Miscellaneous...............................................  6.15
LIST OF EXHIBITS
List of Directors and Officers of New Futech and New Sub....  1.5
Merger Consideration and Conversion of Stock Options........  1.6
  Form of Promissory Notes Constituting Merger
     Consideration..........................................  1.6-A
  Fundex Stock Options and Conversion to Shares of New
     Futech.................................................  1.6-B
Votes Required for Merger Approval..........................  1.11
Terms of Employment Agreements..............................  2.8.1
  Job Description for William Burnham.......................  2.8.1-1
Form for Employment Agreements..............................  2.8.2
Form for Employment Agreements (New Sub)....................  2.8.3
Provisions Regarding Shareholder Loans and Guarantees.......  2.10
Other Agreements for Particular Parties.....................  2.13
DISCLOSURE SCHEDULES
  Disclosure Schedule of DaMert Company.....................  3-A
     DaMert Disclosure Regarding Inventory..................  3A-3.20
     DaMert Disclosure Regarding Employees..................  3A-3.22
     DaMert Disclosure Regarding Bank Accounts..............  3A-3.26
     DaMert Disclosure Regarding Customers and Suppliers....  3A-3.29
     DaMert Disclosure Regarding Patents....................  3A-3.35
</TABLE>


                                       iv
<PAGE>   227


<TABLE>
<CAPTION>
                                                              SECTION
                                                              -------
<S>                                                           <C>
  Disclosure Schedule of Fundex Games, Ltd..................  3-B
     Fundex Disclosure Regarding Capitalization.............  3B-3.2
     Fundex Disclosure Regarding Outstanding Liabilities....  3B-3.19
     Fundex Disclosure Regarding Employees..................  3B-3.22
     Fundex Disclosure Regarding No Conflicts...............  3B-3.23
     Fundex Disclosure Regarding Patents....................  3B-3.35
  Disclosure Schedule of Futech Interactive Products,
     Inc....................................................  3-C
     Futech Disclosure Regarding Stock Options, Warrants,
      etc...................................................  3C-3.2
     Futech Disclosure Regarding Litigation.................  3C-3.8
     Futech Disclosure Regarding Outstanding Liabilities....  3C-3.19
     Futech Disclosure Regarding Employees..................  3C-3.22
     Futech Disclosure Regarding Changes to Futech
      Documents.............................................  3C-3.30
     Futech Disclosure Regarding Patents....................  3C-3.35
  Disclosure Schedule of Janex International, Inc...........  3-D
     Janex Schedule of Exercisable Options and Warrants.....  3D-3.2
     Janex Disclosure Regarding Outstanding Liabilities.....  3D-3.19
     Janex Disclosure Regarding Employees...................  3D-3.22
  Disclosure Schedule of Trudy Corporation..................  3-E
Defaults....................................................  3.17
Allowed Excess Liabilities..................................  3.36
Form of Legal Opinion.......................................  4.1.7
Conditions for Particular Merging Companies.................  4.2
Surviving Provisions of Letters of Intent...................  6.5
Mailing List for Notices....................................  6.13
Brokerage Fees Payable......................................  6.14
</TABLE>


                                        v
<PAGE>   228

                                MERGER AGREEMENT

     THIS MERGER AGREEMENT, dated as of June 4, 1999 (the "Agreement"), is among
Futech Interactive Products, Inc., an Arizona corporation ("FUTECH"), Trudy
Corporation, a Delaware corporation ("TRUDY"), Fundex Games, Ltd., a Nevada
corporation ("FUNDEX"), DaMert Company, a California corporation ("DAMERT"),
Janex International, Inc., a Colorado corporation ("JANEX"), Futech Interactive
Products (Delaware) Inc., a newly formed Delaware corporation ("FUTECH
DELAWARE"), Futech Toys & Games, Inc., a newly formed Nevada corporation ("NEW
SUB") (collectively, the "MERGING COMPANIES"), and those shareholders of Futech,
Trudy, Fundex, DaMert and Janex identified on the signature pages of this
Agreement (the "SHAREHOLDERS"). This Agreement terminates and supersedes the
Agreement and Plan of Merger, dated February 26, 1999, between Futech and Trudy.
This Agreement does not terminate or supersede the letter agreement, dated March
3, 1999, on "Soundprints" letterhead, relating to, among other things, Futech's
obligation to provide Trudy with certain working capital.

     Upon the terms and subject to the conditions of this Agreement (a) Futech
will merge into Futech Delaware, (b) then Trudy, DaMert and Janex will each
merge simultaneously with and into Futech Delaware, which will be the surviving
corporation, and (c) then Fundex will merge with and into New Sub, which will be
the surviving corporation and a wholly-owned subsidiary of Futech Delaware. The
parties intend that said Mergers (the "MERGERS") will qualify as reorganizations
under Section 368 of the Internal Revenue Code of 1986 as amended (the "CODE").

     By executing this Agreement, each of the Merging Companies and their
respective Shareholders represent and warrant to the other Merging Companies and
Shareholders that:

     (i)  the board of directors of the Merging Company has determined that the
          Mergers are fair to the Merging Company and its stockholders,
          including any stockholders that are not parties to this Agreement, and

     (ii) the board of directors of the Merging Company has approved and adopted
          this Agreement and the transactions contemplated by it, and recommends
          approval and adoption of this Agreement by its stockholders.

     NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements in this Agreement, and intending to be legally bound by this
Agreement, the Merging Companies and Shareholders agree as follows:

                                   ARTICLE I

                                  THE MERGERS

     1.1  THE MERGERS.

          1.1.1  The Merger of Futech Into New Futech.  Upon the terms and
     subject to the conditions set forth in this Agreement, and in accordance
     with applicable law, immediately prior to the Effective Time (as defined in
     Section 1.2), Futech will merge with and into Futech Delaware. As a result
     of this merger, the separate corporate existence of Futech will cease and
     Futech Delaware will continue as the surviving corporation of the Merger.

          1.1.2  The Merger into New Futech.  Upon the terms and subject to the
     conditions set forth in this Agreement, and in accordance with applicable
     law, at the

                                       A-1
<PAGE>   229

     Effective Time (as defined in Section 1.2) each of Trudy, DaMert and Janex
     will merge with and into Futech Delaware. As a result of this Merger, the
     separate corporate existence of each of Trudy, DaMert and Janex will cease
     and Futech Delaware will continue as the surviving corporation ("NEW
     FUTECH") of the Merger.


          1.1.3  The Merger into New Sub.  Upon the terms and subject to the
     conditions set forth in this Agreement, and in accordance with applicable
     law, at the Effective Time Fundex will merge with and into New Sub. As a
     result of this Merger, the separate corporate existence of Fundex will
     cease and New Sub will continue as the surviving corporation of this
     Merger.



          1.1.4  Agreement is Conditional on Merger of All Merging
     Companies.  The obligations of each Merging Company under this Agreement
     are conditional upon all of the Merging Companies being included in the
     Mergers.


     1.2  EFFECTIVE TIME.  As promptly as practicable after the satisfaction or,
if permissible, waiver of the conditions set forth in Article IV below, the
Merging Companies and Shareholders will cause the Mergers to be consummated by
filing articles of merger or other appropriate documents with the applicable
government offices or agencies in such form as required by, and executed in
accordance with the relevant provisions of, applicable law (11:59 p.m. on the
date of effectiveness of the last such filing being the "EFFECTIVE TIME").
Immediately prior to the filings, the closing of the Mergers (the "CLOSING")
will be held at the offices of Futech, at 2999 North 44th Street, Suite 225,
Phoenix, Arizona 85018-7247.

     1.3  EFFECT OF THE MERGERS.  At the Effective Time, the effect of each
Merger will be as provided in the provisions of applicable law. Without limiting
the generality of the foregoing, and subject to it, at the Effective Time,
except as otherwise provided in this Agreement:

        (i)   all the property, rights, privileges, powers and franchises of
              Trudy, Futech, Futech Delaware, DaMert and Janex will vest in New
              Futech, and all debts, liabilities and duties of Trudy, Futech,
              Futech Delaware, DaMert and Janex will become the debts,
              liabilities and duties of New Futech; and

        (ii)  all the property rights, privileges, powers and franchises of
              Fundex will vest in New Sub, and all debts, liabilities and duties
              of Fundex will become the debts, liabilities and duties of New
              Sub.

     1.4  CERTIFICATE OF INCORPORATION; BYLAWS.  At the Effective Time, the
Certificate of Incorporation and the Bylaws of Futech Delaware, as in effect
immediately prior to the Effective Time, will be the Certificate of
Incorporation and the Bylaws of New Futech, except that the Certificate of
Incorporation and Bylaws will be revised to change the name of New Futech to
"Futech Interactive Products, Inc." The Articles of Incorporation and Bylaws of
New Sub will not be affected by the Mergers.

     1.5  DIRECTORS AND OFFICERS.  At the Effective Time, the directors and
officers of New Futech and of New Sub will be the persons listed on EXHIBIT 1.5,
each to hold office in accordance with the charter documents of New Futech and
New Sub, respectively, until their successors are duly elected or appointed and
qualified.

     1.6  CONSIDERATION FOR THE MERGER, CONVERSION OF SECURITIES.  At the
Effective Time, by virtue of the Mergers and without any action on the part of
the Merging Companies, the Shareholders or the holders of any of the following
securities, except as provided in Section 1.7 below, each of the issued and
outstanding shares of capital stock of each of the

                                       A-2
<PAGE>   230

Merging Companies (other than shares owned by any of the Merging Companies or by
New Futech or by New Sub, which shares will be canceled, retired and will cease
to exist without the delivery of any consideration) will be converted into the
right to receive that amount of cash, promissory notes of New Futech, or shares
of common stock of New Futech specified in or determined in accordance with
EXHIBIT 1.6 (collectively, the "MERGER CONSIDERATION"). Approximately 70% of the
stock of Janex is owned by Futech, and the shares of New Futech that would
otherwise be issued to shareholders of Janex will be issued directly to
shareholders of Futech as though they owned the Janex stock directly. The
options to acquire capital stock of any of the Merging Companies issued and
outstanding at the Effective Time will be converted into options to acquire
common stock of New Futech to and only to the extent and as specified in or
determined in accordance with EXHIBIT 1.6.

     As of the Effective Time, and except as otherwise provided in Section 1.7
below, the outstanding securities of the Merging Companies will no longer be
outstanding and will automatically be canceled, retired and will cease to exist,
and each holder of a certificate representing any shares of any Merging Company
will cease to have any rights with respect to those shares, except the right to
receive the consideration issuable for those shares upon the surrender of such
certificate in accordance with Section 1.8, without interest.

     The Merging Companies and the Shareholders have agreed upon values of the
stock of New Futech for purposes of determining the number of shares to be
issued under this Agreement as consideration for the Mergers, and also as
consideration under the Employment Agreements described in this Agreement. No
representation or warranty has been made by Futech, Futech Delaware, or New
Futech, or any other person or entity, as to the value of the New Futech stock
to be issued pursuant to this Agreement, and the parties to acquire said stock
take full risk and responsibility as to said value, other than as expressly
provided for in this Agreement.

     Wherever New Futech stock is to be issued, New Futech may in its discretion
pay cash in lieu of issuing fractional shares, based upon a value of $7.50 per
share. Also, New Futech may in its discretion pay cash in lieu of all or a
portion of any amounts due under any Promissory Notes described on EXHIBIT 1.6.

     All New Futech stock issued pursuant to this Agreement, including any stock
issued pursuant to the Employment Agreements referred to herein, shall be
registered with the Securities Exchange Commission, subject to all restrictions
required by law, if any, to be placed on said stock and subject to all
restrictions placed upon said stock by the underwriter(s) of the stock. All such
stock shall be eligible to participate, on the same terms and in the same
proportions as granted to other shareholders of New Futech, in any "piggy-back"
or other registration rights which may be made available, between the Closing
and one year thereafter, to any shareholder of New Futech.

     1.7  SHARES OF DISSENTING HOLDERS.  Any issued and outstanding shares of
any Merging Company held by persons who object to the Mergers and comply with
all provisions of applicable law concerning the right of such holders to dissent
from a Merger and demand appraisal of their shares ("DISSENTING HOLDERS") will
be deemed to be converted, as of the Effective Time, into the right to receive
the amount of cash, promissory notes and common stock of New Futech calculated
in accordance with EXHIBIT 1.6. The consideration to be received by such
Dissenting Holders will be held back and not issued by New Futech until such
time, and in any event not prior to the Effective Time, that such Dissenting
Holder has either withdrawn his demand for appraisal or lost his right of
appraisal, pursuant to the applicable law. After the Dissenting Holder has

                                       A-3
<PAGE>   231

withdrawn his demand for appraisal, or lost his right of appraisal, and upon
surrender, in the manner provided by Section 1.8.2, of the certificate or
certificates that formerly evidenced the shares of stock of a Merging Company
owned by the Dissenting Holder, such Dissenting Holder will be entitled to
receive from New Futech the consideration calculated in accordance with EXHIBIT
1.6, without interest.

     If any Dissenting Holders are entitled to receive payment of the fair value
of such shares held by them in accordance with applicable law, then New Futech
will make such payment in full satisfaction of the Dissenting Holders' rights to
receive the consideration calculated in accordance with EXHIBIT 1.6 and New
Futech will have no obligation to issue the consideration calculated in
accordance with EXHIBIT 1.6 that was to be received by any Dissenting Holder who
received payment of the fair value of such shares held by such Dissenting
Holders.

     Prior to the Effective Time, each Merging Company will give to New Futech
and each other Merging Company notice of any demands by Dissenting Holders.
Futech, prior to the Effective Time, and New Futech after the Effective Time,
will have the right to participate in all negotiations and proceedings with
respect to any such demands. A Merging Company will not, except with the prior
written consent of Futech, prior to the Effective Time, and New Futech after the
Effective Time, voluntarily make any payment with respect to, or settle or offer
to settle, any such demand for payment.

     Futech shall be entitled to terminate this Agreement in its entirety, at
the election of Futech's Board of Directors, if dissenter's rights are exercised
by shareholders who would receive five percent (5%) or more of total
consideration referred to on EXHIBIT 1.6.

     1.8  EXCHANGE OF SECURITIES AND PAYMENT OF MERGER CONSIDERATION.

          1.8.1  Exchange Agent.  As soon as necessary and practicable to permit
     the Exchange Agent to perform its obligations under this Agreement, but in
     no event later than the Closing Date, Futech, Futech Delaware and/or New
     Futech will deposit with American Securities Transfer & Trust, Inc. or such
     other bank or trust company selected by Futech (the "EXCHANGE AGENT"), for
     the benefit of the Shareholders of the Merging Companies, for exchange in
     accordance with this Agreement, cash, promissory notes and common stock of
     New Futech, in amounts equal to the Merger Consideration calculated in
     accordance with EXHIBIT 1.6.

          1.8.2  Exchange Procedures.  As soon as reasonably practicable after
     the Closing Date, the Exchange Agent will mail to each holder of record on
     the Effective Date a certificate or certificates which immediately prior to
     the Closing Date represented outstanding shares of any of the Merging
     Companies (the "OLD CERTIFICATES") whose shares were converted into the
     right to receive a share of the Merger Consideration pursuant to Section
     1.6:

             (i) a letter of transmittal to be executed by the holder (which
                 will specify that delivery of the Old Certificates will be
                 effected, and risk of loss and title to the Old Certificates
                 will pass, only upon delivery of the Old Certificates to the
                 Exchange Agent, and which will be in such form and have such
                 other provisions as New Futech may reasonably specify); and

             (ii) instructions for surrender of the Old Certificates in exchange
                  for the applicable share of the Merger Consideration.

          Upon surrender to the Exchange Agent of an Old Certificate for
     cancellation, together with such letter of transmittal, duly executed by
     the holder, the holder of

                                       A-4
<PAGE>   232

     such Old Certificate will be entitled to receive the portion of the Merger
     Consideration which such holder has the right to receive pursuant to
     Section 1.6, and the Old Certificate so surrendered will be canceled. If a
     transfer of ownership of capital stock has not been registered in the
     transfer records of the Merging Company, then the portion of the Merger
     Consideration payable in respect of that capital stock may be issued to a
     transferee if the Old Certificate representing that capital stock is
     presented to the Exchange Agent, accompanied by all documents required to
     evidence and effect such transfer and by evidence that any applicable stock
     transfer taxes have been paid.

          In the case of any lost, mislaid, stolen or destroyed Old Certificate,
     the holder may be required, as a condition precedent to the delivery to
     such holder of the portion of the Merger Consideration applicable thereto,
     to deliver to New Futech an affidavit and personal indemnity (or a bond in
     a reasonably sufficient amount) with reference to the circumstances of such
     loss or destruction as New Futech may reasonably request.

          Until surrendered as contemplated by this Section 1.8, each Old
     Certificate will be deemed at any time after the Closing Date to represent
     only the right to receive upon such surrender the applicable portion of the
     Merger Consideration as contemplated by this Section 1.8.

          1.8.3  No Further Ownership Rights in Stock of Merging Companies.  The
     payments and deliveries made under this Agreement upon surrender for
     exchange of equity securities of the Merging Companies in accordance with
     the terms of this Agreement will be deemed to have been issued in full
     satisfaction of all rights pertaining to such equity securities of the
     Merging Companies after the Closing Date. If, after the Closing Date, Old
     Certificates are presented to the Surviving Corporation or its transfer
     agent for any reason, such Old Certificates will be canceled and exchanged
     as provided in this Agreement.

          1.8.4  Termination of Exchange Fund.  Any portion of the Merger
     Consideration which remains undistributed to holders of Old Certificates at
     the end of six months after the Closing Date will be delivered to New
     Futech upon demand by New Futech, and any holders of Old Certificates who
     have not complied with this Section 1.8 will then look only to New Futech
     for payment of their claim for the corresponding portion of the Merger
     Consideration.

          1.8.5  Delivery to a Public Official.  None of the parties to this
     Agreement will be liable to any holder of equity securities of the Merging
     Companies for any portion of the Merger Consideration otherwise due under
     this Agreement that is delivered to a public official pursuant to any
     applicable abandoned property, escheat or similar law.

     1.9  PROXY STATEMENTS; REGISTRATION STATEMENT.  As promptly as practicable
after the execution of this Agreement, the Merging Companies will prepare and
file with the SEC preliminary proxy materials which will constitute the Proxy
Statements of those Merging Companies that have securities registered under the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") and the
Registration Statement with respect to the common stock of New Futech to be
issued in connection with the Mergers. Each Merging Company which does not have
securities registered under the Exchange Act will prepare appropriate notices,
disclosure materials and proxies for special stockholder meetings of its
shareholders.

                                       A-5
<PAGE>   233

     As promptly as practicable after comments, if any, are received from the
SEC on the materials filed with the SEC and the furnishing by the Merging
Companies of all required information, the Merging Companies will file with the
SEC a combined Proxy Statement or Proxy Statements and Registration Statement on
Form S-4 promulgated under the Securities Act of 1933, as amended (the
"Securities Act"), and Form 8-A promulgated under the Exchange Act (or on such
other form as will be appropriate), relating to the approval, as and if
required, of the Merger by the stockholders of the Merging Companies, and will
use all reasonable efforts to cause the Registration Statements to become
effective as soon as practicable.

     Subject to the applicable fiduciary duties of directors of the Merging
Companies, as determined by such directors after consultation with independent
legal counsel, the Proxy Statements will include the recommendation of the Board
of Directors of each of the Merging Companies in favor of the Merger.

     1.10  MEETINGS OF STOCKHOLDERS.  Promptly after the S-4 becomes effective,
but subject to Section 1.9 above, each of the Merging Companies will take all
action necessary in accordance with applicable law and its Articles or
Certificate of Incorporation and Bylaws to convene a meeting of their respective
stockholders to consider the Mergers. Each of the Merging Companies will consult
with each other and will use all reasonable efforts to hold the stockholders'
meetings on the same day. Subject to the applicable fiduciary duties of
directors, as determined by such directors after consultation with independent
legal counsel, each of the Merging Companies will use its best efforts to
solicit from its stockholders proxies in favor of the Mergers and will take all
other action necessary or advisable to secure the vote or consent of
stockholders required by applicable law to approve the Mergers.

     1.11  VOTE REQUIRED.  Each of the Merging Companies and its Shareholders
represents and warrants that Exhibit 1.11 accurately describes the only vote or
votes of the holders of any class or series of stock of that Merging Company
that is necessary to approve the Mergers.

     1.12  APPROPRIATE ACTION; CONSENTS; FILINGS.  Each Merging Company and its
Shareholders will use all reasonable efforts to:

        (i) take, or cause to be taken, all appropriate action, and do, or cause
            to be done, all things necessary, proper or advisable under
            applicable law to consummate and make effective the transactions
            contemplated by this Agreement;

        (ii) obtain all consents, licenses, permits, waivers, approvals,
             authorizations or orders required under law (including, without
             limitation, all foreign and domestic federal, state and local
             governmental and regulatory rulings and approvals and from parties
             to contracts) required in connection with the authorization,
             execution and delivery of this Agreement and the consummation by
             them of the transactions contemplated by this Agreement, including,
             without limitation, the Mergers; and

        (iii) make all necessary filings, and thereafter make any other required
              submissions, with respect to this Agreement and the Mergers
              required under (A) the Securities Act and the Exchange Act and the
              rules and regulations thereunder, and any other applicable federal
              or state securities laws, (B) the Hart-Scott-Rodino Act (if
              applicable), and (C) any other applicable law.

                                       A-6
<PAGE>   234

     The Merging Companies and the Shareholders will cooperate with each other
in connection with the making of all such filings, including providing copies of
all such documents upon request to the non-filing parties and their advisors
prior to filing and, if requested, to accept all reasonable additions, deletions
or changes suggested in connection with such filings. Each Merging Company and
its Shareholders will furnish all information required for any application or
other filing to be made pursuant to the rules and regulations of any applicable
law (including all information required to be included in the Proxy Statements
and the Registration Statement) in connection with the transactions contemplated
by this Agreement. If at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, then the
proper officers and directors of each party to this Agreement will use all
reasonable efforts to take all such necessary action.

     1.13  SHAREHOLDERS' AGREEMENT TO VOTE.  Each of the Shareholders hereby
agrees to vote said Shareholder's shares of stock in the Merging Companies in
favor of the Mergers as set out in this Agreement.

                                   ARTICLE II

                             ADDITIONAL AGREEMENTS

     2.1  NOTIFICATION OF CERTAIN MATTERS.  Each Merging Company and its
Shareholders will give prompt notice to the other parties to this Agreement, of:

          (i)  the occurrence, or non-occurrence, of any event the occurrence,
               or non-occurrence, of which would be likely to cause any
               representation or warranty contained in this Agreement to be
               untrue or inaccurate in any material respect; and

          (ii) the failure of the Merging Company to comply with or satisfy any
               material covenant, condition or agreement to be complied with or
               satisfied by it under this Agreement.

     2.2  PUBLIC ANNOUNCEMENTS.  Each Merging Company will consult with the
other Merging Companies before issuing any press release or otherwise making any
public statements with respect to the Mergers, except as may be required by law.

     2.3  ACCESS TO CUSTOMER FILES AND OTHER RECORDS.  For a period of seven
years following the Closing, where there is a legitimate purpose not injurious
to New Futech, or if there is an audit by any taxing authority, other
governmental inquiry, or litigation or prospective litigation to which any
Shareholder is or may become a party, the affected Shareholders will be granted
access, at reasonable times and after reasonable notice, to all customer files
and other records transferred to New Futech pursuant to this Agreement.

     2.4  DUE DILIGENCE INVESTIGATION.  Each Merging Company will have the
period of time up to and through the date of this Agreement (the "DUE DILIGENCE
PERIOD") in which to conduct any due diligence investigations of the other
Merging Companies, including UCC-1 searches, which it may deem necessary or
appropriate to ascertain the financial viability and value of the other Merging
Companies. Throughout the Due Diligence Period, each Merging Company, and its
agents, will have the right to inspect:

          (i) all books, records and computer systems maintained by the other
              Merging Companies, in order to authenticate and audit all
              financial information provided to it;

                                       A-7
<PAGE>   235

          (ii) all equipment and machinery used in the operations of the other
               Merging Companies to verify that it is in an acceptable state of
               repair;

          (iii) all material agreements to which the other Merging Companies are
                parties; and

          (iv) all facilities and physical operations of the other Merging
               Companies, including facilities warehousing inventory.

     Each Merging Company will be given access to the other parties' federal and
state income tax returns, sales tax returns, financial statements (internal and
those issued to third parties), personal property tax returns, and all other
governmental filings, for the three previous years for the purpose of conducting
due diligence investigations.

     Each Merging Company and its respective representatives will further have
the authority to communicate with the creditors, debtors, suppliers, agents and
employees of the other Merging Companies. Each Merging Company agrees to aid the
others in the investigations and evaluations of the operations and financial
condition of the other Merging Companies and their assets, and to provide
whatever information and documents any Merging Company reasonably deems
necessary or appropriate to the making of an informed decision regarding the
Mergers, provided such information or documents are available or can be obtained
without unreasonable efforts or expense.

     2.5  CONFIDENTIALITY.  Between the date of this Agreement and the Closing,
the parties to this Agreement will maintain in confidence, and will cause their
directors, officers, employees, agents, and advisors to maintain in confidence,
and not use to the detriment of the other parties to this Agreement, any
written, oral, or other information obtained in confidence from the other
parties in connection with this Agreement or the transactions contemplated
hereby, unless: (i) such information is already known to such other party or to
others not bound by a duty of confidentiality, or such information becomes
publicly available through no fault of such party, (ii) the use of such
information is necessary or appropriate in making any filing or obtaining any
consent or approval required for the consummation of the transactions
contemplated by this Agreement, or (iii) the furnishing or use of such
information is required by or necessary or appropriate in connection with legal
proceedings.

     If the Mergers are not consummated, then each party hereto will return or
destroy as much of such written information as the other parties hereto may
reasonable request.

     2.6  INTERIM EVENTS.  Each Merging Company agrees that it will take no
action prior to the Closing, other than in the ordinary course of its business,
which would or might have a material adverse effect upon its financial
condition, and no benefits will be paid or incurred to shareholders, officers,
or directors between the date hereof and the Closing other than as is consistent
with past activities and practices or is disclosed on the Merging Company's
Disclosure Schedule (see EXHIBIT 3). Each Merging Company will use its best
efforts to preserve for New Futech the present relationships of the Merging
Company with its employees, customers and others having business relations with
it. Each Merging Company will not allow its trade payables to go unpaid, except
in the ordinary course of its business.

                                       A-8
<PAGE>   236

     Prior to the Closing, and except as otherwise consented to or approved by
all of the Merging Companies in writing, which consent will not be unreasonably
withheld, no Merging Company will:

          (i)  change its Articles or Certificate of Incorporation or Bylaws;

          (ii) change the number of shares of stock issued and outstanding
               (other than to cause its equity securities, including options and
               equity participation interests, to conform to the capitalization
               described in the Merging Company's Disclosure Schedule (see
               Section 3.2 below);

          (iii) merge or consolidate with or into any other corporation or other
                entity;

          (iv) declare or pay any dividend or repurchase or otherwise acquire
               any shares of stock; or

          (v)  except in the ordinary course of business and consistent with
               past practice, increase the compensation payable to or to become
               payable to any shareholder, director, officer, employee or agent,
               or to pay any bonus, severance payment or other compensation to
               any shareholder, director, officer, employee or agent, or enter
               into any agreement of any type which is not terminable by the
               Merging Company on no more than 30 days notice.

     2.7  401(k) PLAN.  New Futech will take all actions necessary immediately
after the Closing of the Merger either: (i) to roll over each Merging Company's
401(k) Plan or similar employee benefit plans, if any, into its 401(k) Plan; or
(ii) to continue the Merging Company's 401(k) Plan as a separate and distinct
plan with no amendments or alterations adverse to the interests of the employees
covered by such Plan.

     2.8  EMPLOYMENT AGREEMENTS.  At the Closing, and subject to the
consummation of the Mergers, New Futech (and New Sub, as the case may be) will
execute and deliver Employment Agreements with the persons and on the terms
described on EXHIBIT 2.8.1. The Employment Agreements will be in the form of
EXHIBIT 2.8.2, except as modified as called for on EXHIBIT 2.8.1.

     2.9  INDEMNIFICATION.  New Futech will indemnify and hold harmless each
Merging Company, and its directors, officers and employees from and against any
liability, obligation, loss, cost and expense, including attorneys' fees,
reasonably incurred by any of them in connection with any claim, arbitration,
mediation or litigation made or commenced against any of them by a shareholder
of that Merging Company in respect of the Mergers, except for claims of breach
of this Agreement by the indemnified party.

     2.10  REVISION OF LOANS.  The amount and terms of certain loans between New
Futech as successor to the Merging Companies and certain Shareholders will be
revised as stated in EXHIBIT 2.10. The revised loans will be evidenced by
promissory notes and related loan agreements reflecting the revised terms.

     New Futech will obtain releases of the personal guaranties of certain
Shareholders, and assume debts owing by certain of the Merging Companies to
certain of the Shareholders, as specified in EXHIBIT 2.10.

     2.11  EXPENSES AND COSTS OF MERGERS.  Futech and New Futech will pay and be
responsible for all costs and expenses (including, without limitation, legal,
accounting, auditing, stock transfer agent, cash and securities disbursing
agent, SEC fees and due diligence) of all of the Merging Companies regarding the
Mergers. Such obligation will be limited to costs and expenses approved in
writing by Futech or New Futech.

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     2.12  RESTRICTIVE COVENANTS.

          2.12.1  The Shareholders shall not, except as representatives of and
     as directed by New Futech, without the prior written consent of New Futech,
     which consent may be withheld for any or no reason, for a period of two (2)
     years following the Closing, directly or indirectly, own, manage, operate,
     control, be employed by, participate in, render services to, make loans to,
     or be connected in any manner with the ownership, management, operation, or
     control of any business located anywhere in the world, in any business
     competitive with the business of New Futech (which shall be deemed to
     include all business operations designing, developing, manufacturing,
     publishing, marketing and/or distributing books, greeting cards, games
     and/or toys, or parts or components thereof); provided, however, that these
     restrictions when applied to Carl E. Voigt, IV and Carl E. Voigt, III shall
     be limited to games and/or toys business operations; and provided further
     however that these restrictions when applied to Fred or Gail DaMert shall
     be limited to the games and toys business being conducted by DaMert as of
     the date of this Agreement.

          In the event of any actual or threatened breach of the provisions of
     this Section, New Futech and/or New Sub shall be entitled to seek an
     injunction restraining the actual or threatened breach, and/or any other
     available remedies for such breach or threatened breach, including pursuing
     a recovery for damages.

          2.12.2  The Shareholders shall not at any time, without the prior
     written consent of New Futech, which consent may be withheld for any or no
     reason, disclose, in any fashion other than as required in the day to day
     affairs of New Futech and/or New Sub, to any person or entity: (i) the
     names of customers of New Futech and/or New Sub or the business, or the
     names of other persons or entities having business dealings with New Futech
     and/or New Sub or the Business, or (ii) any of the business methods or
     confidential information of New Futech and/or New Sub or the business,
     including but not limited to their customer lists, prospective customers,
     customers purchasing habits, customer contact personnel, marketing and
     servicing techniques, financial matters, sales and marketing systems and
     methods, marketing development and business expansion plans and
     projections, personnel training and development programs, customer and
     supplier relationships, and trade secrets. The obligation of
     confidentiality shall not apply to any information which: (i) is in
     possession of the individual Shareholder prior to the receipt thereof from
     the other Merging Companies and/or New Futech; (ii) is available or becomes
     available to the public through no fault of the Shareholder; or (iii) is
     received by the Shareholder from a third party having the right to disclose
     it.

          2.12.3  The Shareholders shall not, at any time within two (2) years
     after the Closing, without the prior written consent of New Futech, which
     consent may be withheld for any reason or no reason, directly or indirectly
     induce, encourage or solicit or assist any person who was or is employed
     (whether as an employee or as an independent contractor) by a Merging
     Company during the two years preceding the Closing, to leave the employ of
     New Futech.

          2.12.4  The parties acknowledge and agree that the restrictions
     contained herein, including but not limited to the time period and
     geographical area restrictions, are fair and reasonable and necessary for
     the successful operation of New Futech's business, that violation of any of
     them would cause irreparable injury, and that the restrictions contained
     herein are not unreasonably restrictive of any party's ability to earn a
     living. If the scope of any restriction in this Section is too broad to
     permit enforcement of

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<PAGE>   238

     such restriction to its fullest extent, then such restriction shall be
     enforced to the maximum extent permitted by law, and all parties hereto
     consent and agree that such scope shall be modified judicially or by
     arbitration in any proceeding brought to enforce such restriction. The
     parties hereto acknowledge and agree that remedies at law for any breach or
     violation of the provisions of this Section would alone be inadequate, and
     agree and consent that temporary and permanent injunctive relief may be
     granted in connection with such violations, without the necessity of proof
     of actual damage, and such remedies shall be in addition to other remedies
     and rights the parties may have at law or in equity. The parties agree that
     no party shall be required to give notice or post any bond in connection
     with applying for or obtaining any such injunctive relief.

          2.12.5  The parties acknowledge and agree that the covenants in this
     Section shall be construed as an agreement independent of any other
     provision of this Agreement, so that the existence of any claim or cause of
     action by a Shareholder against Futech, New Futech, or New Sub, whether
     predicated on this Section or otherwise, shall not constitute a defense to
     the enforcement of this Section.

          2.12.6  If New Futech defaults under its obligations to pay the Fundex
     shareholders as provided for on EXHIBIT 1.6, and the Fundex shareholders as
     a result thereof repossess the stock of New Sub, then the restrictive
     covenant provisions appearing in Sections 2.12.1 and 2.12.3 shall terminate
     as to the Fundex Shareholders as of the date of repossession.

     2.13  OTHER AGREEMENTS FOR PARTICULAR PARTIES.  Certain additional
agreements with particular parties are described on EXHIBIT 2.13.

     2.14  OTHER DISCUSSIONS.  In consideration of the substantial expenditures
of time, effort and expense to be undertaken by the Merging Companies in
connection with their due diligence reviews, the Shareholders and the Merging
Companies agree that they shall not, between the date this Agreement is signed
and the earlier to occur of the Closing and August 30, 1999: (i) actively seek
or otherwise initiate discussions with any other prospective acquirer of the
stock, assets or business of the Merging Company; or (ii) assist or participate
in any due diligence in connection with any such transaction. Additionally,
during such period of time, the Merging Company shall not actively seek or
otherwise initiate discussions with any other company governing the purchase by
the Merging Company of the capital stock or assets of such other company or
concerning a merger, share exchange, consolidation or similar transaction
involving the Merging Company and such other company.

     2.15  BEST EFFORTS TO REGISTER STOCK.  After the Closing, New Futech will
use its best efforts to register the New Futech common stock with the SEC on
Form 8-A and list the common stock on a national securities exchange.

                                  ARTICLE III

                REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION
                  OF EACH MERGING COMPANY AND ITS SHAREHOLDERS

     The following representations, warranties and indemnities are being made,
as of the date hereof and as of the date of the Closing, by each Merging
Company, and the Merging Company's Shareholders (only those shareholders
included in the defined term "Shareholders"), to the other Merging Companies and
their shareholders (not including just those shareholders included in the
defined term "Shareholders"); provided, however, that,
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notwithstanding whether any representation or warranty is made only to the
knowledge of a Merging Company, all representations and warranties of any
Shareholder, unless otherwise specifically identified below, are made only to
the best knowledge of the Shareholder (the representation and warranty of the
Shareholder is to the knowledge of the Shareholder as to the facts presented in
the representation and warranty, and is not as to just the knowledge of the
Merging Company as to those facts). These representations, warranties and
indemnities are subject to any limitations and qualifications or other
disclosures contained in the corresponding sections of the Disclosure Schedule
of the particular Merging Company and its Shareholders, attached hereto as
EXHIBITS 3. A breach of a representation or warranty of a Shareholder of a
Merging Company will be deemed also to be a breach of that representation or
warranty by the Merging Company.

     3.1  DUE INCORPORATION.  Each Merging Company is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its incorporation. Each Merging Company is duly licensed or qualified to do
business and is in good standing in each state where the property owned or held
under lease is such as to require it to be so licensed or qualified, except
those states where the failure to be so licensed or qualified would not have a
material adverse effect on its financial condition or operations or its
business. To the knowledge of the Merging Company and its Shareholders, the
Merging Company has the corporate power and authority to own and operate its
properties and carry on its business as now conducted.

     True, correct and complete copies of the corporate formation documents for
the Merging Company, and all minutes, resolutions and consents, have been or
will be delivered to the Surviving Corporation. To the knowledge of the Merging
Company and its Shareholders, the minute book(s) of the Merging Company
correctly record all resolutions of the directors and shareholders of the
Merging Company, and its stock records correctly reflect the ownership of its
stock.

     3.2  CAPITALIZATION.  Each of the Merging Companies has authorized, issued
and outstanding equity securities only as shown on Section 3.2 of its Disclosure
Schedule. Other than as set forth in Section 3.2 of the Disclosure Schedule for
a specific Merging Company, there are no other rights, subscriptions, options,
warrants, conversion rights or agreements of any kind outstanding to purchase or
otherwise acquire from the Merging Company any shares of its capital stock, or
securities or obligations of any kind convertible into or exchangeable for any
shares of its capital stock. To the knowledge of each Merging Company and its
Shareholders, all issued shares of the Merging Company have been duly
authorized, and the issued and outstanding shares of stock are fully paid,
non-assessable (except with respect to any Merging Company that does business in
Wisconsin, as provided in Wisconsin Statutes sec.180.0622(2), as judicially
interpreted), and were not issued in violation of the terms of any agreement or
other understanding, and were issued in compliance with all applicable federal
and state securities or "blue sky" laws and regulations.

     3.3  SUBSIDIARIES.  Except as set forth in Section 3.3 of its Disclosure
Schedule, no Merging Company owns or has any agreement, whether written or oral,
regarding rights or contracts to acquire any equity securities or other
securities of any company, or any direct or indirect equity or ownership
interest in any other entity.

     3.4  FINANCIAL INFORMATION.  Each Merging Company has furnished the other
parties to this Agreement with true, correct and complete copies of the Merging
Company's financial statements and other books and records. To the knowledge of
the Merging Company and its Shareholders, the Merging Company's year-end
financial statements were

                                      A-12
<PAGE>   240

prepared in accordance with its books and records and in accordance with
generally accepted accounting principles consistently applied, and present
fairly the financial condition of the Merging Company as of their respective
dates and the results of operations and changes in financial positions for the
periods then ended. The financial statements do not contain any material items
of special or non-recurring income or other income not earned in the ordinary
course of business, except as expressly specified therein.

     To the knowledge of the Merging Company and its Shareholders, at the
Closing, all of the books and records of the Merging Company will be in its
possession, other than the capital stock books and stock transfer records which
may be in the possession of the Merging Company's transfer agent and registrar.

     3.5  TAXES.  To the knowledge of the Merging Company and its Shareholders,
except as may be disclosed in Section 3.5 of the Merging Company's Disclosure
Schedule, all federal and state income, excise, franchise, payroll, property,
sales, and other tax returns required to be filed by or with respect to the
Merging Company (except returns not yet due) including returns of the
Shareholders in the case of any Merging Company that is or was qualified as an S
corporation (for the period of such qualification) have been filed, are complete
and accurately reflect in all material respects all matters therein required to
be reflected, and all taxes shown on such returns to be due, and any assessments
received by either the Merging Company or its Shareholders with respect thereto,
have been paid in full.

     3.6  MATERIAL CHANGES.  To the knowledge of the Merging Company and its
Shareholders, except as may be disclosed in Section 3.6 of the Merging Company's
Disclosure Schedule, from the date of the most recent financial statements
provided to the other parties to this Agreement, and through the date hereof,
the business of the Merging Company has been conducted only in the ordinary
course, there have not been any material adverse changes in the financial
condition and operations of said business, and there has been no damage,
destruction or other occurrence (whether or not insured against) to tangible
property which materially adversely affects the financial condition or
operations of said business.

     3.7  TITLE TO ASSETS; LIENS.  To the knowledge of the Merging Company and
its Shareholders, the Merging Company owns all assets it purports to own,
including all assets reflected in its financial statements. Except as may be set
forth in Section 3.7 of its Disclosure Schedule, all assets of the Merging
Company are free and clear of all restrictions, claims, liens, encumbrances or
rights of others, other than those imposed under its Articles or Certificate of
Incorporation or Bylaws, and other than as set forth in the Merging Company's
financial statements, and other than for debts incurred or amended in the
ordinary course of business, including debts to fund Futech acquisitions, since
the date of the most recent financial statements provided by the Merging
Company. The stock of the Merging Companies owned by the Shareholders is free
and clear of any and all liens, claims or encumbrances, except for pledges of
stock securing only the debts of the Merging Companies.

     3.8  LITIGATION.  To the knowledge of the Merging Company and its
Shareholders, and except as disclosed in Section 3.8 of the Merging Company's
Disclosure Schedule, there is no litigation, proceeding, or investigation
pending against the Merging Company and no reasonable grounds to believe there
is any basis for the commencement of any litigation, proceeding or investigation
against it.

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     3.9  COMPLIANCE WITH LAWS.  To the knowledge of the Merging Company and its
Shareholders, the Merging Company is in substantial compliance with all laws
applicable to it or its business including, without limitation, laws prohibiting
discrimination or harassment, regulating working conditions or governing
employment relations and employee benefits. The Merging Company and its
Shareholders are not aware of any investigation or allegations of any person
with respect to any alleged violation of any provision of any federal, state or
local law, regulation, ordinance, order or administrative ruling, relating to
the Merging Company or its business, except as may be set forth in Section 3.9
of its Disclosure Schedule.

     3.10  INSURANCE.  Each Merging Company carries commercially reasonable
insurance against personal injury and property damage to third persons and in
respect of its products and services, and other insurance, including any and all
workman's compensation insurance required by law. Neither the Merging Company
nor its Shareholders have received any notice that the Merging Company is in
default with respect to any provision contained in any insurance policy, and
they are not aware of any such default. The Merging Company has made copies of
all of its insurance policies available to New Futech.

     3.11  LICENSES.  To the knowledge of the Merging Company and its
Shareholders, the Merging Company has any and all material licenses and permits
necessary and/or appropriate to operate its business in the manner in which the
business is currently operated.

     3.12  HAZARDOUS MATERIALS.  To the knowledge of the Merging Company and its
Shareholders, the business of the Merging Company has never dealt in any manner
with any hazardous or toxic materials or waste.

     3.13  JUDGMENTS AGAINST THE MERGING COMPANY AND/OR ITS BUSINESS.  Neither
the Merging Company nor its business is under any governmental investigation, no
such investigation has been threatened, and there are no outstanding judgments
against the Merging Company, its business or its assets.

     3.14  COMPLETE SALE.  All material assets used by the Merging Company in
the operation of its business are reflected in the financial statements of the
Merging Company that have been provided to the other parties to this Agreement.

     3.15  ASSETS IN GOOD CONDITION.  Except as may be stated in Section 3.15 of
the Disclosure Schedule for the Merging Company, each material asset of the
Merging Company which is a tangible asset is in good working order and
condition, reasonable wear and tear excepted.

     3.16  DISCLOSURE MATERIALS.  To the knowledge of the Merging Company and
its Shareholders, all of the information disclosed by the Merging Company to any
of the other parties to this Agreement, as a whole, does not contain any
statement that, as of the date hereof, is false or misleading, and does not omit
to state any material fact (i) necessary to make the statements made, in light
of the circumstances under which they were made, not false or misleading, or
(ii) necessary to provide the other parties to this Agreement with complete and
accurate information as to the assets and financial condition of the business of
the Merging Company.

     3.17  DEFAULTS.  To the knowledge of the Merging Company and its
Shareholders, except as may be described in Section 3.17 of the Merging
Company's Disclosure Schedule, there are no defaults or events that, with the
giving of notice or the passage of

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<PAGE>   242

time, would constitute defaults under any material document under which the
Merging Company is obligated.

     3.18  MATERIAL CONTRACTS.  Except as disclosed in Section 3.18 of its
Disclosure Schedule, the Merging Company is not a party to or bound by any
agreement not made in the ordinary course of its business which is material to
its financial condition or operations.

     3.19  OUTSTANDING LIABILITIES.  To the knowledge of the Merging Company and
its Shareholders, there are no liabilities of the Merging Company other than as
are shown on its most recent balance sheet provided to the other Merging
Companies, and other than (i) matters disclosed in Section 3.19 of its
Disclosure Schedule, and (ii) liabilities arising after the balance sheet date
in the normal course of business out of purchases and sale of goods. There are
no liabilities relating to the Merging Company's business which are more than
ninety (90) days past due, except as otherwise stated in Section 3.19 of its
Disclosure Schedule.

     3.20  INVENTORY.  Except as disclosed in Section 3.20 of its Disclosure
Schedule, the inventory held by the Merging Company is useable and in good
condition, with not more than 3% thereof (plus any inventory reserve set up on
the financial statements of the Merging Company) being obsolete, and all of the
inventory is owned by the Merging Company, none of it being held on consignment.

     3.21  RECEIVABLES.  All accounts receivable of the Merging Company arose in
the regular course of business, and, to the best knowledge of the Merging
Company and its Shareholders, represent valid obligations arising from sales
actually made or services actually performed in the ordinary course of business
and are collectable, subject to the Merging Company's customary bad debt
reserves, and subject to no defenses or counterclaims.

     3.22  EMPLOYEES.  All employee benefits for the Merging Company's employees
are described in Section 3.22 of its Disclosure Schedule. To the knowledge of
the Merging Company and its Shareholders, and except as may be described in
Section 3.22 of the Merging Company's Disclosure Schedule, the Merging Company
is in compliance with all terms of all of its employee benefit plans.

     Prior to the Closing, each Merging Company will provide to the other
Merging Companies a complete and accurate list of the following information for
each employee, including each employee on leave of absence or layoff status:
name, job title, current compensation, vacation and sick pay accrued, and
services credited for purposes of vesting and eligibility to participate in any
of the Merging Company's employee benefit plans.

     Except as may be disclosed in Section 3.22 of the Disclosure Schedule for a
Merging Company, and except as described in Section 2.8 above, all employment
agreements, consulting agreements and related types of agreements between the
Merging Company and its Shareholders shall automatically terminate as of the
Closing, without compensation being due for services rendered thereunder after
the Closing.

     3.23  NO CONFLICTS.  To the knowledge of the Merging Company and its
Shareholders, the execution, delivery and performance of this Agreement and the
other documents and instruments to be executed and delivered pursuant hereto,
and the consummation of the transactions contemplated herein or therein:

     (i) Will not violate or conflict with any applicable material, federal,
         state, foreign, local or other law, ordinance, rule, regulation, or
         governmental requirement or restriction of any kind, including any
         rules, regulations, and orders promulgated

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<PAGE>   243

         thereunder, and any final orders, decrees, consents, or judgments of
         any regulatory agency or court;

     (ii) Will not require any authorization, consent, approval, exemption or
          other action by or notice to any government entity (including, without
          limitation, under any "plant closing" or similar law); the Merging
          Company is not required to give any notice or to obtain any consent
          from any person or entity which is party to a material contract or
          agreement with the Merging Company or from any governmental agency in
          connection with the execution and delivery of this Agreement or the
          consummation of the Mergers, other than the approval of the Board of
          Directors and stockholders of the Merging Company pursuant to the
          applicable law, as required by applicable federal and state securities
          laws and as set forth in Section 3.23 of its Disclosure Schedule;

     (iii) Will not violate or conflict with, or constitute a default (or event
           which, with notice or lapse of time, or both, would constitute a
           default) under, and will not result in the termination of, or
           accelerate the performance required by, or result in the creation of
           any lien, claim or encumbrance upon any of the Merging Company's
           assets under its Articles or Certificate of Incorporation or Bylaws,
           or any material contract, commitment, understanding, arrangement,
           agreement or restriction of any kind or character to which the
           Merging Company is a party or by which the Merging Company or any of
           the Merging Company's assets may be bound or affected, other than
           those material contracts and agreements which require the consent of
           the other party thereto as set forth in Section 3.23 of its
           Disclosure Schedule; and

     (iv) Will not give any governmental body the right to revoke, withdraw,
          suspend, cancel, terminate or modify any governmental authorization
          held by the Merging Company or that otherwise relates to its business,
          except with respect to immaterial circumstances.

     3.24  VIOLATIONS OF LAW.

     (a) To the knowledge of the Merging Company and its Shareholders, none of
         the present or past operations of the Merging Company's business, the
         products of the business, or the Merging Company's assets violate or
         conflict, in any material respect, with any permits, any law (including
         environmental laws, other than as set forth in Section 3.24 of its
         Disclosure Schedule), governmental specification, authorization, or
         requirement, or any decree, judgment, order or similar restriction. To
         the knowledge of the Merging Company and its Shareholders, the Merging
         Company is not the subject of an inspection or inquiry regarding
         violations or alleged violations of any law by any state, federal or
         local agency.

     (b) To the knowledge of the Merging Company and its Shareholders, there are
         no pending administrative or judicial proceedings, threatened
         proceedings, orders, notice of violations, inspection reports, and
         similar occurrences, if any, relating to the conduct of its business or
         the Merging Company's assets.

     (c) The Merging Company has not been the subject of an Occupational and
         Safety Health Administration inspection or found by any agency to be in
         violation of any state or federal occupational safety or health law in
         the conduct of its business.

     3.25  CONDITION AND SUFFICIENCY OF ASSETS.  To the knowledge of the Merging
Company and its Shareholders, and except as may be stated in Section 3.25 of the

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Merging Company's Disclosure Schedule, all material assets of the Merging
Company are in good operating condition and repair, and are adequate for the
uses to which they are being put, and none of such items is in need of
maintenance or repairs, except for ordinary, routine maintenance and repairs
that are not material in nature. To the knowledge of the Merging Company and its
Shareholders, the assets are sufficient for the continued conduct of the Merging
Company's business after the Closing in substantially the same manner as
conducted prior to the Closing.

     3.26  BANK ACCOUNTS.  The Merging Company has disclosed, or will disclose
prior to the Closing, to the other Merging Companies the names and locations of
all banks, trust companies, savings and loan associations and other financial
institutions at which the Merging Company maintains a safe deposit box, lock box
or checking, savings, custodial or other account of any nature, the type and
number of each such account and the signatories therefor, a description of any
compensating balance arrangements, and the names of all individuals authorized
to draw thereon, make withdrawals therefrom or otherwise have access thereto.

     3.27  ENVIRONMENTAL MATTERS.  For purposes of this Section:

     (i)  "Environmental Law" means all federal, state, local, foreign, and
          other applicable jurisdiction laws relating to the environment or the
          use, disposal, existence, or release of any Hazardous Materials,
          including but not limited to any and all laws concerning, affecting,
          controlling, or in any way relating to, whether in whole or in part,
          noise levels, ground vibrations, air pollutants, water pollutants,
          process waste water, or Hazardous Materials;

     (ii)  "Environmental Release" means any release, spill, emission, leaking,
           injection, deposit, disposal, discharge, dispersal, leaching or
           migration into the atmosphere, soil, surface water, groundwater or
           property;

     (iii)  "Hazardous Materials" means: (A) any waste, hazardous waste,
            pollutant, contaminant, or hazardous or toxic substance regulated by
            law; (B) asbestos; (C) formaldehyde; (D) polychlorinated biphenyls;
            (E) radioactive materials; (F) waste oil and other petroleum
            products; and (G) any other substance which constitutes a nuisance
            or hazard to the environment or the public health, safety, or
            welfare.

          3.27.1  Other than as set forth in Section 3.27 of its Disclosure
     Schedule, to the knowledge of the Merging Company and its Shareholders, the
     Merging Company is, and at all times has been, in full compliance with, and
     has not been and is not in violation of or liable under, any Environmental
     Law. The Merging Company has no basis to expect, nor has the Merging
     Company or (to the knowledge of the Merging Company or its Shareholders)
     any other person for whose conduct the Merging Company is or may be held to
     be responsible received, any actual or threatened order, notice, or other
     communication from (i) any governmental body or private citizen acting in
     the public interest, or (ii) the current or prior owner or operator of any
     of the Merging Company's properties or assets, of any actual or potential
     violation or failure to comply with any Environmental Law, or of any actual
     or threatened obligation to undertake or bear the cost of any
     environmental, health and safety liabilities with respect to any of the
     Merging Company's properties or assets (whether real, personal, or mixed)
     in which the Merging Company has had an interest, or with respect to any of
     the Merging Company' properties at or to which Hazardous Materials were
     generated, manufactured, refined, transferred, imported, used or

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<PAGE>   245

     processed by the Merging Company, or (to the knowledge of the Merging
     Company or its Shareholders) any other person for whose conduct the Merging
     Company is or may be held responsible, or from which Hazardous materials
     have been transported, treated, stored, handled, transferred, disposed,
     recycled, or received.

          3.27.2  The Merging Company has delivered to the other Merging
     Companies complete copies and results of any reports, studies, analyses,
     tests, or monitoring possessed or initiated by the Merging Company or its
     Shareholders pertaining to Hazardous Materials or hazardous activities in,
     on, or under the Merging Company's properties or concerning compliance by
     the Merging Company or any other person for whose conduct it is or may be
     held responsible, with Environmental Laws.

     3.28  INTELLECTUAL PROPERTY.

     (a) The Merging Company has provided the other Merging Companies with a
         true correct and complete list of (i) all patents held by the Merging
         Company and all re-examinations, re-issues, divisions, continuations,
         continuations in part and extensions thereof and all pending patent
         applications by the Merging Company, including for each such patent the
         serial or patent number, country, filing and expiration date and title,
         (ii) all registered trademarks of the Merging Company and pending
         trademark registrations by the Merging Company, including for each such
         trademark, the registration number, country, filing and expiration
         date, mark and class, (iii) all registered copyrights of the Merging
         Company and copyright applications by the Merging Company, including
         the service marks, trade names and brand names of the Merging Company,
         used in its business (whether or not registered) (all of the foregoing
         collectively referred to as the "Intellectual Property"). To the
         knowledge of the Merging Company and its Shareholders, all such
         patents, trademarks and copyrights are properly registered, any
         applications therefor have been properly made, and all annuity,
         maintenance, renewal and other fees in connection with any of the
         foregoing are current.

     (b) The Merging Company has provided the other Merging Companies with a
         list of all material licenses, contracts, commitments (including
         without limitation, confidentiality agreements) to which the Merging
         Company is a party or otherwise subject relating to the Intellectual
         Property, including, without limitation, computer software (except for
         standard licensing agreements or provisions from the seller or licensor
         of such software). During the preceding three (3) fiscal years and the
         current fiscal year to date, no claim or allegation of infringement has
         been made by or against the Merging Company, whether relating to any
         item of Intellectual Property or otherwise, no claim or allegation of
         misappropriation or misuse of any item of Intellectual Property has
         been made by or against the Merging Company, and no claim or allegation
         has been asserted against the Merging Company with respect to the
         ownership or use of any of the Intellectual Property by the Merging
         Company or challenging or questioning the validity or effectiveness of
         any such license, contract or commitment, and there does not exist to
         the knowledge of any Shareholder or of the Merging Company any valid
         basis for any such claim or allegation.

     (c) To the knowledge of the Merging Company and its Shareholders, the
         Merging Company has good and valid title to, or otherwise possesses
         rights to use, the Intellectual Property.

                                      A-18
<PAGE>   246

     3.29  CUSTOMERS AND SUPPLIERS.  The Merging Company has provided the other
Merging Companies with a list of its five (5) largest customers in terms of
dollar volume of sales for the three (3) preceding fiscal years and for the
current fiscal year, showing the approximate total dollar amount of sales to
each such customer during each such fiscal year. The Merging Company has
provided the other Merging Companies with a list of the five (5) largest
suppliers in terms of dollar volume of purchases for the last fiscal year and
for the current fiscal year showing the approximate total dollar amount of
purchases from each supplier during each such fiscal year. Except as may be
disclosed in Section 3.29 of its Disclosure Schedule, since January 1, 1997, the
Merging Company has not received any notice from and has not otherwise been
informed or made aware that any such five (5) largest customers or five (5)
largest suppliers will be terminating or curtailing its business with the
Merging Company in a manner that would have a material adverse effect on the
Merging Company.

     3.30  CHANGES TO THE MERGING COMPANY'S DOCUMENTS.  Except as may be
described in Section 3.30 of its Disclosure Schedule, or disclosed in EXHIBIT
1.6, none of the following has occurred within the last twelve months prior to
the date of this Agreement with respect to the Merging Company: (i) any change
in the Articles or Certificate of Incorporation or Bylaws; (ii) any change in
the number of shares of stock issued and outstanding, other than upon exercise
of stock options; (iii) the merger or consolidation of the Merging Company with
or into any other corporation or other entity: (iv) declaration or payment by
the Merging Company of any dividend or any repurchase by the Merging Company of
any shares of its stock; or (v) except in the ordinary course of business and
consistent with the Merging Company's past practice, any increase in the
compensation payable by the Merging Company to any shareholder, director,
officer, employee or agent, or payment of any bonus, severance payment or other
compensation to any shareholder, director, officer, employee or agent, or the
entering into of any agreement of any type which is not terminable by the
Merging Company on no more than 30 days notice.

     3.31  STOCKHOLDERS AGREEMENTS AND OTHER AGREEMENTS.  To the knowledge of
the Merging Company and its Shareholders, there are no stockholder agreements or
similar arrangements restricting voting rights or the transferability of any
interest in the Merging Company relating to the capital stock of the Merging
Company, or otherwise relating to the Merging Company. This representation and
warranty does not include any pledge by a Shareholder or other stockholder of
capital stock of the Merging Company, the terms of which may restrict
transferability of such capital stock. Furthermore, there are no employment
agreements, consulting agreements or similar type agreements relating to the
Merging Company which are not terminable by the Merging Company on not more than
90 days notice.

     3.32  CERTAIN PAYMENTS.  To the knowledge of the Merging Company and its
Shareholders, neither the Merging Company nor any shareholder, director,
officer, agent or employee of the Merging Company, or any other person
associated with or acting for or on behalf of the Merging Company, has directly
or indirectly: (a) made any contribution, gift, bribe, rebate, payoff, influence
payment, kickback, or other payment to any person, private or public, regardless
of form, whether in money, property, or services (i) to obtain favorable
treatment in securing business, (ii) to pay for favorable treatment for business
secured, or (iii) to obtain special concessions or for special concessions
already obtained, for or in respect of the Merging Company, or (iv) in violation
of any law; or (b) established or maintained any fund or asset that has not been
recorded in the books and records of the Merging Company.

                                      A-19
<PAGE>   247

     3.33  FILINGS COMPLETE.  Each Merging Company will cooperate with the other
Merging Companies with respect to all filings that any of the Merging Companies
make in connection with the Mergers and all matters connected therewith.

     3.34  PRODUCTS.  To the knowledge of the Merging Company and its
Shareholders, except as disclosed Schedule 3.34 for the Merging Company, the
products offered currently or in the past by the Merging Company for sale meet
all material product and/or process specifications which they purport or are
required to meet, and satisfy in all material respects all applicable laws where
the products are currently being sold or have been sold within the last five
years, except where the Merging Company has chosen not to sell products because
the products would violate a law of that place.

     3.35  PATENTS.  All patents and patent applications or licenses of the
Merging Company are described in Section 3.35 of the Disclosure Schedule.

     3.36  INDEMNIFICATION; SURVIVAL.  Each Merging Company and its
Shareholders, jointly and severally, hereby agree to indemnify New Futech and
its officers, directors and controlling persons and defend and hold them free
and harmless from and against any liability, obligation, loss, cost and expense,
including attorney's fees, incurred by them in connection with any material
breach by the Merging Company of any of its representations, warranties or
covenants, contained in this Agreement. For this purpose, any breach or
combination of breaches will be considered material only if they exceed in the
aggregate the amount set forth in EXHIBIT 3.36 as to any Merging Company.

     The representations and warranties in this Section, and elsewhere in this
Agreement, and all indemnification provisions in this Agreement, will survive
the Closing for a period of 18 months thereafter, after which they will expire
except as to any claims asserted on or before that date. The rights of New
Futech and the other parties to this Agreement based upon the representations
and warranties of the Merging Company will not be affected by any investigation
conducted with respect thereto, or any knowledge acquired, or capable of being
acquired, at any time, whether before or after the execution of this Agreement,
with respect to the accuracy or inaccuracy of or compliance with, any such
representation or warranty.

     Disclosures made anywhere in this Agreement or its Exhibits shall be deemed
to be disclosures for all purposes of this Agreement.

                                   ARTICLE IV

                              CONDITIONS OF MERGER

     4.1  CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER.  The
respective obligations of each party to effect the Mergers will be subject to
the satisfaction at or prior to the Effective Time of the following conditions,
provided that the failure of Conditions 4.1.4 through 4.1.10 hereof with respect
to any particular Merging Company and its Shareholders will not act as a
condition to the obligations of that Merging Company, or its Shareholders.

          4.1.1  Stockholder Approval.  This Agreement and the Merger to which
     the Merging Company is a party will have been approved and adopted by the
     requisite vote of the stockholders of each Merging Company.

          4.1.2  No Order.  No federal or state governmental or regulatory
     authority or other agency or commission, or federal or state court of
     competent jurisdiction, will have enacted, issued, promulgated, enforced or
     entered any statute, rule, regulation,

                                      A-20
<PAGE>   248

     executive order, decree, injunction or other order (whether temporary,
     preliminary or permanent) which in effect restricts, prevents or prohibits
     the consummation of the transactions contemplated by this Agreement.

          4.1.3  No Challenge.  There will not be pending any action, proceeding
     or investigation before any court or administrative agency or by any
     government agency or any other person: (i) challenging or seeking material
     damages in connection with the Mergers or the conversion of any Merging
     Company's equity securities into New Futech's stock, promissory notes and
     cash pursuant to the Mergers, or (ii) seeking to restrain, prohibit or
     limit the exercise of full rights of ownership or operation by New Futech
     or its subsidiaries of all or any portion of the business or assets of any
     Merging Company, which in either case is reasonably likely to have a
     material adverse effect on any party to this Agreement.

          4.1.4  Representations, Warranties and Covenants.  The representations
     and warranties of each Merging Company and its Shareholders contained in
     this Agreement will be true and correct in all material respects on and as
     of the Effective Time, with the same force and effect as though made on and
     as of the Effective Time. Each Merging Company and its Shareholders will
     have performed or complied in all material respects with all agreements and
     covenants required by this Agreement to be performed or complied with by it
     or them on or prior to the Effective Time. Each Merging Company and its
     Shareholders will have delivered to New Futech and to the other parties to
     this Agreement at the Closing a certificate, dated the Effective Time, to
     the foregoing effect.

          4.1.5  Consents Obtained.  All material consents, waivers, approvals,
     authorizations or orders required to be obtained, and all filings required
     to be made by any Merging Company or its Shareholders for the
     authorization, execution and delivery of this Agreement and the
     consummation by them of the transactions contemplated hereby will have been
     obtained and made.

          4.1.6  No Material Adverse Change.  The operations, assets and
     financial condition of each Merging Company have not suffered a material
     adverse change between the date of this Agreement and the date of Closing.

          4.1.7  Opinions of Counsel.  Each Merging Company will have received
     an opinion of outside counsel for each of the other Merging Companies,
     dated the Closing, substantially to the effect set forth in EXHIBIT 4.1.7.
     Each Merging Company agrees to provide such an opinion letter.

          4.1.8  Assignments.  The assignment of all material permits, licenses
     and contracts, required to be assigned and necessary to continue the
     operations of its business will have been made by each Merging Company.

          4.1.9  Maintenance of Assets.  Each Merging Company will have
     maintained its assets in the same condition as of the date of this
     Agreement (subject only to ordinary wear and tear).

          4.1.10  Ordinary Course of Business.  Each Merging Company will have
     conducted its business diligently and substantially in the same manner as
     prior to the execution of this Agreement and will not have entered into any
     material contract, commitment or transaction not in the usual and ordinary
     course or business.

                                      A-21
<PAGE>   249

     4.2  SPECIAL CONDITIONS FOR PARTICULAR PARTIES.  The obligations of each
Merging Company will be subject to the satisfaction at or prior to the Effective
Time of the conditions set out with respect to that Merging Company on EXHIBIT
4.2.

                                   ARTICLE V

                       TERMINATION, AMENDMENT AND WAIVER

     5.1  TERMINATION.  This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of the matters presented in
connection with the Merger by the stockholders of any Merging Company, by mutual
consent of each Merging Company and its Shareholders.

     5.2  EFFECT OF TERMINATION.  In the event of the termination of this
Agreement pursuant to Section 5.1, this Agreement will forthwith become void and
all rights and obligations of any party hereto will cease.

     5.3  AMENDMENT.  This Agreement may be amended by the Merging Companies and
the Shareholders by action taken by or on behalf of their respective Boards of
Directors, and by such shareholders, at any time prior to the Effective Time;
provided, however, that, after approval of the Merger by the stockholders of any
Merging Company, no amendment may be made which would reduce the amount or
change the type of consideration into which each share of that Merging Company
will be converted pursuant to this Agreement upon consummation of the Mergers.
This Agreement may not be amended except by an instrument in writing signed by
the parties hereto.

     5.4  WAIVER.  At any time prior to the Effective Time, any party hereto
may: (i) extend the time for the performance of any of the obligations or other
duties of the other parties hereto, and (ii) waive compliance with any of the
agreements or conditions contained herein. Any such extension or waiver will be
valid if set forth in an instrument in writing signed by the party or parties to
be bound thereby.

                                   ARTICLE VI

                               GENERAL PROVISIONS

     6.1  TAX TREATMENT.  The transactions contemplated hereby are intended to
qualify as tax-free reorganizations under the provisions of Section 368 of the
Code. Each Merging Company and its Shareholders acknowledges, however, that they
have each been represented by their own tax advisors in connection with this
transaction, that no Merging Company has made any representation or warranty to
any other with respect to the treatment of such transaction or the effect
thereof under applicable tax laws, regulations or interpretations. Each party
agrees to use commercially reasonable efforts to obtain tax-free treatment of
the Mergers to the extent such treatment is available under applicable tax laws.

     6.2  FURTHER ASSURANCES.  From time to time, at any other party's request
and without further consideration, each party will execute and deliver to the
other such documents and take such action as the other party may reasonably
request in order to consummate more effectively the transactions contemplated
hereby.

     6.3  SEVERABILITY.  If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, then all other conditions and provisions of this Agreement will
nevertheless remain in full force and effect so long as

                                      A-22
<PAGE>   250

the economic or legal substance of the transactions contemplated hereby is not
affected in any manner adverse to any party. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto will negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner to the end that transactions contemplated hereby are fulfilled
to the extent possible.

     6.4  ENTIRE AGREEMENT.  This Agreement constitutes the entire agreement of
the parties and supersedes all prior agreements and undertakings, both written
and oral, between the parties, or any of them with respect to the subject matter
hereof and, except as otherwise expressly provided herein, is not intended to
confer upon any other person any rights or remedies hereunder. Notwithstanding
the foregoing, the terms of certain letters of intent survive the execution of
this Agreement to and only to the extent described on EXHIBIT 6.5.

     6.5  ASSIGNMENT.  This Agreement may not be assigned by operation of law or
otherwise.

     6.6  PARTIES IN INTEREST.  This Agreement will be binding upon and inure
solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or will confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement.

     6.7  SUCCESSORS AND ASSIGNS.  This Agreement will be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns.

     6.8  GOVERNING LAW.  This Agreement will be governed by, construed and
enforced in accordance with the laws of the State of Arizona, without giving
effect to the conflicts of laws rules thereof. The courts of the State of
Arizona will have the sole and exclusive jurisdiction and venue in any case or
controversy arising under this Agreement or by reason of this Agreement. The
parties agree that any litigation or arbitration arising from the interpretation
or enforcement of this Agreement will be only in either Maricopa County Superior
Court or in the United States Federal District Court for the District of
Arizona, and shall be only in the United States Federal District Court for the
District of Arizona if such venue is available. Solely for this purpose each
party to this Agreement (and each person who will become a party) hereby
expressly and irrevocably consents to the jurisdiction and venue of such courts.

     6.9  MODIFICATION.  Any modification or waiver of any term of this
Agreement, including a modification or waiver of this term, must be in writing
and signed by the parties to be bound by the modification or waiver.

     6.10  ATTORNEY'S FEES.  Should any party to this Agreement or the
stockholders of any Merging Company institute any action or proceeding to
enforce this Agreement or any provision hereof, or for damages by reason of any
alleged breach of this Agreement, or of any provision hereof, or for a
declaration of rights hereunder, then the prevailing party(s) of such action or
proceeding will be entitled to receive from the other involved party or parties
all costs and expenses, including reasonable attorneys' fees and expert witness
fees incurred by the prevailing party(s) in connection with such action or
proceeding.

     6.11  COUNTERPARTS.  This Agreement may be executed by the parties in one
or more counterparts, and any number of counterparts signed in the aggregate by
the parties will constitute a single instrument. The parties authorize and agree
to accept facsimile

                                      A-23
<PAGE>   251

signatures in counterparts to this Agreement, and that said facsimile signatures
will for all purposes be binding upon the parties as if the same were original
signatures.

     6.12  NOTICES.  Any notice or communication given under the terms of this
Agreement ("Notice") will be in writing and will be delivered in person or
mailed by certified mail, return receipt requested, in the United States Mail,
postage pre-paid, addressed as specified in EXHIBIT 6.13 hereto or at such other
address as a person may from time to time designate by Notice hereunder. Notice
will be effective upon delivery in person, or if mailed, at midnight on the
third business day after the date of mailing.

     6.13  PARAGRAPH TITLES AND HEADINGS.  The titles and headings of sections
of this Agreement are for the convenience of reference only, and are not
intended to define, limit, or describe the scope or intent of any provision of
this Agreement, and will not affect the construction of any provision of this
Agreement.

     6.14  BROKERAGE, FINDER'S OR FINANCIAL ADVISOR'S COMMISSIONS.  The parties
each represent and warrant that all negotiations relevant to this Agreement have
been carried out by them directly, without the intervention of any person, other
than as specified on EXHIBIT 6.14. Any other brokerage, finder's or financial
advisor's fee that should arise from this transaction will be paid by the party
who contracted with such person. That party will indemnify and hold harmless the
other party against and in respect to any claim for such fee relative to this
Agreement, or to the transaction contemplated hereby.

     6.15  MISCELLANEOUS.  The parties agree that each party and its counsel
have reviewed and revised this Agreement, or had an opportunity to review and
revise this Agreement, and that any rule of construction to the effect that
ambiguities are to be resolved against the drafting party will not apply to the
interpretation of this Agreement or any amendments or exhibits hereto. No waiver
of any provision of this Agreement will be effective unless made in writing. The
parties do not intend to confer any benefit upon any person, firm, or
corporation other than the parties hereto. No representation or warranty herein
may be relied upon by any person not a party to this Agreement.

                                      A-24
<PAGE>   252

     IN WITNESS WHEREOF, each of the Merging Companies have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized, and each of the Shareholders have executed
this Agreement on their own behalf.

<TABLE>
  <S>                  <C>

  FUTECH:              Futech Interactive Products, Inc., an Arizona
                       corporation
                       By /s/ VINCENT W. GOETT
                       --------------------------------------------------
                          Vincent W. Goett, CEO

  FUTECH               Futech Interactive Products (Delaware), Inc., a
  DELAWARE:            Delaware corporation
                       By /s/ VINCENT W. GOETT
                       --------------------------------------------------
                          Vincent W. Goett, CEO

  NEW SUB:             Futech Toys & Games, Inc., a Nevada corporation
                       By /s/ CARL E. VOIGT, IV
                       --------------------------------------------------
                          Carl E. Voigt, IV, President

  FUNDEX:              Fundex Games, Ltd., a Nevada corporation
                       By /s/ CARL E. VOIGT, IV
                       --------------------------------------------------
                          Carl E. Voigt, IV, President and CEO

  JANEX:               Janex International, Inc., a Colorado corporation
                       By /s/ VINCENT W. GOETT
                       --------------------------------------------------
                          Vincent W. Goett, President
</TABLE>

                                      A-25
<PAGE>   253
<TABLE>
  <S>            <C>

  TRUDY:         Trudy Corporation, a Delaware corporation
                 By /s/ WILLIAM W. BURNHAM
                 -----------------------------------------------
                 William W. Burnham, Chairman and CEO

  DaMERT:        DaMert Company, a California corporation
                 By /s/ FREDERICK A. DAMERT
                 --------------------------------------------------
                 Frederick A. DaMert, Chairman
 </TABLE>

  SHAREHOLDERS:

<TABLE>
  <S>            <C>

  DaMert:        /s/ FREDERICK A. DAMERT
                 ---------------------------------------------------
                 Frederick A. DaMert, Trustee of the DaMert Trust,
                 UTD September 28, 1998
                 /s/ GAIL PATTON DAMERT
                 ---------------------------------------------------
                 Gail Patton DaMert, Trustee of the DaMert Trust,
                 UTD September 28, 1998

  Fundex:        /s/ CARL E. VOIGT, IV
                 ---------------------------------------------------
                 Carl E. Voigt, IV
                 /s/ CARL E. VOIGT, III
                 ---------------------------------------------------
                 Carl E. Voigt, III

  Futech:        /s/ VINCENT W. GOETT
                 ---------------------------------------------------
                 Vincent W. Goett

  Trudy:         /s/ WILLIAM W. BURNHAM
                 ---------------------------------------------------
                 William W. Burnham
</TABLE>

                                      A-26
<PAGE>   254

                       AGREEMENT OF CERTAIN SHAREHOLDERS
                             TO VOTE FOR THE MERGER

     The undersigned shareholders of the Merging Companies hereby agree to vote
their shares of the Merging Companies in favor of the Mergers. The signatures
appearing below bind the undersigned shareholders only to the obligation
appearing in the preceding sentence, and not to the entire Agreement appearing
above or any provision contained therein.

<TABLE>
  <S>            <C>

  Trudy:         /s/ ALICE B. BURNHAM
                 ---------------------------------------------------
                 Alice B. Burnham
                 /s/ ELISABETH T. PRIAL
                 ---------------------------------------------------
                 Elisabeth T. Prial
</TABLE>

                                      A-27
<PAGE>   255

                                MERGER AGREEMENT

                                    EXHIBITS

                                      A-28
<PAGE>   256

                                  EXHIBIT 1.5

                                       TO

                                MERGER AGREEMENT

           (LIST OF DIRECTORS AND OFFICERS OF NEW FUTECH AND NEW SUB)

<TABLE>
<S>  <C>  <C>                            <C>
I.   New Futech:
     A.   Directors:                     Vincent W. Goett
                                         Roderick L. Turner
                                         Carl E. Voigt, IV
                                         William W. Burnham
                                         Robert J. Rosepink
                                         Gary A. Oman
                                         F. Keith Withycombe
     B.   Officers:
          CEO:                           Vincent W. Goett
          President:                     Vincent W. Goett
          Vice-President of the Toys/    Carl E. Voigt, IV
          Games Division:
          Secretary:                     Frederick B. Gretsch, Sr.
          Treasurer:                     Frederick B. Gretsch, Sr.
II.  New Sub:
     A.   Directors:                     Vincent W. Goett
                                         Frederick B. Gretsch, Sr.
                                         Carl E. Voigt, IV
     B.   Officers:
          President:                     Carl E. Voigt, IV
          Vice President:                Carl E. Voigt, III
          Secretary:                     Frederick B. Gretsch, Sr.
          Treasurer:                     Frederick B. Gretsch, Sr.
</TABLE>

                                      A-29
<PAGE>   257

                                  EXHIBIT 1.6

                                       TO

                                MERGER AGREEMENT

             (MERGER CONSIDERATION AND CONVERSION OF STOCK OPTIONS)

     The references appearing below on this Exhibit in the form "[1]" correlate
to the similar references appearing in the form of the Promissory Note attached
as EXHIBIT 1.6A.

A.  DAMERT.

     1. $312,000 cash (plus $200,000 cash paid to CorDev Corporation (Bob
Oliver) under Section A of EXHIBIT 6.14). $12,000 of the $312,000 is to be paid
to Greg McVey.

     2. $2,600,000 Promissory Note (referred to in this Section as the "NOTE")
in the form of EXHIBIT 1.6-A.

        [1]$2,600,000.00 (with $100,000.00 thereof being payable to Greg McVey).

        [2]The date of the Closing.

        [3]Frederick A. DaMert and Gail Patton DaMert, as trustees, and their
           successors in trust, under the DaMert Trust, UTD September 28, 1998.

        [4]Two Million Six Hundred Thousand Dollars ($2,600,000)

        [5]Zero percent (0%)

        [6]1609 Fourth Street, Berkeley, California 94710 [or addresses provided
           by individual shareholders]

        [7] The text after the words "as follows," is as follows:

             (a) $520,000 (with $20,000.00 thereof being payable to Greg McVey)
                 within thirty (30) days after the Closing (the "Closing") of
                 the merger of DaMert Company into Maker; and

             (b) $2,080,000 (with $80,000.00 thereof being payable to Greg
                 McVey) within seven (7) months after the "Closing."

        [8]Shall read as follows:

           7.  SECURITY.  As security for Maker's performance under this Note,
           Maker hereby grants Payee a security interest in the assets of Maker
             which were acquired by Maker from DaMert Company in the merger of
             DaMert Company into Maker, which assets are identified on Exhibit
             "A" attached hereto and hereby made a part hereof. In the event of
             default by Maker hereunder, Payee shall have all rights with
             respect to such collateral as are available to a secured party
             under the Uniform Commercial Code in the State of Arizona, as the
             same may from time to time be changed.

             Until the Note is fully paid, Maker agrees not to encumber the
             assets identified on Exhibit "A" (other than refinancing of
             existing debt (including any available but unused credit and
             including any ability to borrow against a borrowing base), which
             will be allowed, but only on terms not less favorable to Maker than
             the terms of the refinanced debt (except that the interest rate may
             increase to then-existing market rates)). The holder of this Note
             shall subordinate this debt to the debts described in this
             paragraph.

                                      A-30
<PAGE>   258

             A list of the assets of DaMert as of the Closing will be attached
             to the Note as Exhibit "A" thereto.

             The following is added at the end of Section 4 of the Note:

             If the principal, or any other amount due under this Note, or under
             any other agreement between Maker and Payee pertaining to the
             indebtedness evidenced hereby, shall not be paid within ten (10)
             days after due, then: (i) the whole sum of principal shall become
             due and shall thereafter bear interest at the annual rate of 10%,
             and (ii) New Futech shall issue to the Payee 10,000 shares of New
             Futech's common stock for each six-month period, or portion
             thereof, for which said payment amount and all interest accrued
             thereon shall remain unpaid in full.

     3. 671,147 shares of New Futech common stock of which 25,813 shares goes to
        Greg McVey.

B.  FUNDEX.

     1. Fundex shareholders will be granted the option to accept cash at the
        Closing in lieu of the consideration described in Section 2 below (the
        "CASH OPTION"). The Fundex shareholders electing the Cash Option will be
        entitled to receive $2.84 per Fundex share surrendered pursuant to this
        Agreement. Carl E. Voigt, IV and Carl E. Voigt, III by their signatures
        to this Agreement, irrevocably agree not to elect the Cash Option. Any
        Fundex shareholder electing the Cash Option shall forfeit any other
        rights to which such shareholder would otherwise be entitled pursuant to
        the Merger Agreement.

     2. The consideration to be paid to the shareholders of Fundex not electing
        the Cash Option is a promissory note (referred to in this Section as the
        "NOTE") in the form of EXHIBIT 1.6-A, with the terms summarized below,
        and the New Futech common stock as described in Section 3 below.

        [1]$4,500,000.00 minus the total consideration paid in connection with
           the Cash Option pursuant to Section 1 above.

        [2]The date of the Closing.

        [3]Carl E. Voigt, IV, in trust for the Fundex shareholders [or at New
           Futech's election, New Futech may have as many Notes as there are
           Fundex shareholders, with each of said Notes being payable directly
           to a Fundex shareholder, in the amount of the share of the debt
           payable to said shareholder]. The shareholders of Fundex will
           authorize such a trust arrangement, or individual notes will be
           issued to each shareholder.

        [4]Four Million Five Hundred Thousand Dollars ($4,500,000.00) minus the
           total consideration paid in connection with the Cash Option pursuant
           to Section 1 above.

        [5]Ten percent (10%)

        [6]2237 Directors Row, Indianapolis, Indiana 46241 [or addresses
           provided by individual shareholders]

        [7]in full on or before the date which is one year after the date of
           this Note, but with interest only payable on a calendar quarter basis
           by the tenth day

                                      A-31
<PAGE>   259

           after the end of each calendar quarter, commencing with the first
           calendar quarter after the date of this Note.

        [8]Shall read as follows:

             7.  SECURITY.  As security for Maker's performance under this Note,
             Maker hereby grants Payee a security interest in all capital stock
             of [New Sub], a Nevada corporation, now owned or hereafter
             acquired, which corporation is a 100% owned subsidiary of Maker. In
             the event of default by Maker hereunder, Payee shall have all
             rights with respect to such collateral as are available to a
             secured party under the Uniform Commercial Code in the State of
             Arizona, as the same may from time to time be changed. The stock
             shall be held in escrow by Mitchell Roth, legal counsel for Payee,
             endorsed in blank, until this Note is paid in full.

             Until the Note is fully paid, the undersigned guarantor agrees not
             to encumber its stock of New Sub.

             Payment under the Note, and New Sub's obligations regarding liens
             against Phase 10 as set out on Exhibit 2.13 below, will be secured
             by the guarantee and pledge of assets of New Sub, with language
             added at the end of the Note as follows:

                  The faithful and timely performance by Maker under the Note
                  appearing above is hereby guaranteed by the undersigned. The
                  undersigned further agrees that any action may be bought and
                  prosecuted by Payee against the undersigned guarantor whether
                  or not any action is brought against Maker, and whether or not
                  Maker or any other parties are joined in such action. The
                  undersigned guarantor specifically agrees to be liable to
                  Payee for the obligations of Maker as set out above, even if
                  Payee or any successor-in-interest releases any or all rights
                  of any sort against the Maker. The undersigned guarantor
                  hereby consents to any such release, which release shall be
                  without effect on the undersigned guarantor's liability for
                  said obligations. The undersigned guarantor waives any right
                  to require Payee to proceed against Maker or pursue any other
                  remedy in Payee's power. The undersigned guarantor waives any
                  defense arising by reason of any disability or other defense
                  of Maker by reason of the cessation from any cause whatsoever
                  (other than performance in full) of the liability of Maker
                  under the Note appearing above. The prevailing party in any
                  litigation, arbitration or other proceeding arising out of
                  this guarantee shall be entitled to reimbursement from the
                  other party for all reasonable costs and expenses incurred in
                  such proceeding, including reasonable attorney's fees.

                  The undersigned hereby grants Payee a security interest in all
                  of the undersigned's assets, now owned or hereafter acquired,
                  as security for: (i) the guarantee appearing immediately
                  above; and (ii) the undersigned's obligations set out in
                  Exhibit 2.13, Section B of that certain Merger Agreement,
                  dated [the date of this Merger Agreement]. The security
                  interest created in (i) above shall continue until the Note is
                  fully paid. The security interest in (ii) above shall continue
                  until, and only until: (i) Phase 10 is collaterally assigned,
                  free and clear of all

                                      A-32
<PAGE>   260

                  liabilities, to the Fundex shareholders as security for the
                  obligations of New Sub and/or New Futech under Exhibit 2.13 of
                  the Merger Agreement described above; or (ii) the Phase 10
                  Option terminates as called for in the Merger Agreement. In
                  the event of default by the undersigned under the obligations
                  secured as described above, Payee shall have all rights with
                  respect to such collateral as are available to a secured party
                  under the Uniform Commercial Code in the State of Arizona, as
                  the same may from time to time be changed. Financing
                  statements will be filed evidencing the liens described above
                  in such jurisdictions as reasonably determined by the Fundex
                  shareholders.

                  Until the obligations secured as described above are fully
                  performed, the undersigned guarantor agrees: (i) not to
                  encumber its assets after the date of this guaranty (other
                  than refinancing of existing debt (including any available but
                  unused credit and including any ability to borrow against a
                  borrowing base), which will be allowed, but only on terms not
                  less favorable to the undersigned guarantor than the terms of
                  the refinanced debt (except that the interest rate may
                  increase to then-existing market rates)); and (ii) not to pay
                  any dividends to its shareholder (Futech Interactive Products,
                  Inc.).

                  DATED the date first hereinabove written:

                  [New Sub], Inc., a Nevada corporation

                  By
       -------------------------------------------------------------------------
                     Carl E. Voigt, IV, President

             New Futech agrees to retain New Sub as a separate subsidiary of New
             Futech at least as long as the security interest created above
             survives.

             The following replaces Section 4 of the Note:

             4.  DEFAULT.  The occurrence of any one of the following events
             shall constitute a default ("EVENT OF DEFAULT") under this Note:

             (a) If Maker, after 10 days written notice, fails to pay the
                 principal or interest due under this Note, or under any other
                 agreement between Maker and Payee pertaining to the
                 indebtedness evidenced hereby.

             (b) If Maker fails to perform, keep or observe any term, provision,
                 condition, warranty or representation contained in this Note,
                 which is required to be performed, kept or observed by Maker,
                 if such failure continues for 20 days after written notice
                 thereof is received by Maker.

             (c) The occurrence of a default or an Event of Default under any
                 agreement, instrument or document heretofore, now or any time
                 hereafter delivered by or on behalf of Maker to Payee;

             (d) The occurrence of a default or an Event of Default under any
                 instrument or document heretofore, now or at any time delivered
                 to Payee by any guarantor of Maker's liabilities hereunder;

                                      A-33
<PAGE>   261

             (e) If any of Maker's or New Futech's assets are attached, seized,
                 subjected to a writ of distress, warrant, or levied upon or
                 become subject to any lien or come within the possession of any
                 receiver, trustee, custodian or assignee for benefit of
                 creditors;

             (f) If Maker or New Futech becomes insolvent or generally fails to
                 pay or admits in writing its inability to pay debts as they
                 become due, if a petition under any section or chapter of the
                 Bankruptcy reform Act of 1978 or any similar law or regulation
                 is filed by or against Maker or New Futech, if Maker or New
                 Futech shall make as assignment for benefit of creditors, if
                 any case or proceeding is filed by or against Maker or New
                 Futech for its dissolution or liquidation, or upon the death or
                 incapacity of Vincent Goett.

             If a liability pursuant to this Note is not paid at the due date,
             then the unpaid amount of liabilities shall bear interest after the
             due date until paid at a rate equal to 18%.

             Upon the occurrence of an Event of Default, without notice by Payee
             to or demand by Payee of Maker: (i) all the principle and interest
             under this Note shall be due and payable forthwith; and (ii) Payee
             may exercise any one or more of the rights and remedies accruing to
             a secured party under the Uniform Commercial Code in the State of
             Arizona.

             All Payee's rights and remedies under this Note are cumulative and
             non-exclusive. The acceptance by Payee of any partial payment made
             hereunder after the time when any liabilities become due and
             payable will not establish a custom, or waive any rights of Payee
             to enforce prompt payment thereof. Any waiver of an Event of
             Default hereunder shall not suspend, waive, or effect any other
             Event of Default hereunder, Maker and every endorser waive
             presentment, demand and protest and notice of presentment, protest,
             default, non-payment, maturity, release, compromise, settlement,
             extension or renewal of this Note, and ratify and confirm whatever
             Payee may do in this regard. Other than set forth in this Note,
             Maker further waives any and all notice or demand to which Payee
             might be entitled with respect to this Note by virtue of any
             applicable statute or law.

     3. Those Fundex shareholders not electing the Cash Option will receive
        their prorata share of New Futech shares of common stock equal to
        600,000 shares minus .184635 for each share of Fundex common stock
        exchanged for cash pursuant to the Cash Option in Section 1 above.

     4. Fundex has issued stock options to certain employees and directors of
        Fundex pursuant to Fundex's 1996 Stock Option Plan. The total options
        issued under the Plan as of the Closing will be as identified on EXHIBIT
        1.6-B. As soon as practicable after the Closing, all such options will
        be converted to options to acquire New Futech common stock as described
        on EXHIBIT 1.6-B.

C.  FUTECH.

     1. 4,121,920 (including 607,728 in respect of the Janex stock owned by
        Futech) shares of New Futech common stock for Futech common stock, plus
        the number of shares otherwise issuable pursuant to options or warrants
        as described in Section 2 appearing immediately below that are exercised
        prior to the Closing.

                                      A-34
<PAGE>   262

     2. Futech has issued stock options and warrants to certain employees and
        directors of Futech, and certain others. As soon as practicable after
        the Closing, all such options and warrants will be converted to rights
        to acquire 6,933,066 shares of New Futech common stock, at prices
        ranging from $1.50 to $4.50, minus the amount issued in respect of
        options or warrants exercised prior to the Closing. Options and warrants
        outstanding at the time of the Closing shall be appropriately adjusted
        for a 30 to 1 ratio of Futech shares to New Futech shares.

D.  JANEX.

     1. 162,230 shares of New Futech common stock will be issued for the Janex
        common stock, which reflects the cancellation of shares of Janex owned
        by Futech, plus the number of shares otherwise issuable pursuant to
        options or warrants as described in Section 2 appearing immediately
        below that are exercised prior to the Closing.

     2. Janex has issued stock options and warrants to certain employees of
        Janex and another party. As soon as practicable after the Closing, all
        such options and warrants will be converted to rights to acquire 4,833
        shares of New Futech common stock, minus the amount issued in respect of
        options or warrants exercised prior to the Closing. Options and warrants
        outstanding at the time of the Closing shall be appropriately adjusted
        for a 30 to 1 ratio of Janex shares to New Futech shares.

E.  TRUDY.

     1. $456,330.00 cash (plus $43,670.00 cash paid to James P. McGough under
        Section E of EXHIBIT 6.14).

     2. 400,000 shares (modifiable under EXHIBIT 2.13) of New Futech common
        stock.

     3. At the Effective Time, each outstanding and unexercised Trudy stock
        option shall cease to represent a right to acquire shares of Trudy stock
        and shall be converted automatically into an option to purchase, for
        each share of Trudy common stock covered by such option, that number of
        shares of New Futech common stock and cash into which each share of
        Trudy common stock is converted pursuant to subparagraphs 1 and 2
        appearing immediately above. Said number of shares and said cash are
        part of the shares and cash to be received described in Section 1.6
        above, and do not increase the number of shares or cash involved in the
        Merger. The shares allocated to the option rights shall be held by New
        Futech and issued to the party exercising the option only after the
        option is exercised. The cash allocated to the option rights shall be
        payable to the party exercising the option only after the option is
        exercised. Appropriate adjustments shall be made by New Futech, if
        required, to the terms of any such option to accomplish the foregoing.
        The duration and other terms of the new option shall be the same as the
        original option except that all references to Trudy shall be deemed to
        be references to New Futech.

     4. Trudy has advised the Merging Companies and the Merging Companies agree
        that Trudy will provide options, stock grants or other equity
        participation to certain directors, officers, agents and employees of
        Trudy at or prior to the Closing of the Merger, covering an aggregate of
        31,350,000 shares of Trudy common stock and options for 14,680,000
        shares (see EXHIBIT 3-E, SECTION 3.2).

                                      A-35
<PAGE>   263

                                 EXHIBIT 1.6-A

                                       TO
                                MERGER AGREEMENT

          (FORM OF PROMISSORY NOTES CONSTITUTING MERGER CONSIDERATION)

                                PROMISSORY NOTE

$[1]                                                                   As of [2]
                                                                Phoenix, Arizona

     THIS NOTE is made as of the date stated above by Futech Interactive
Products, Inc., a Delaware corporation ("Maker") to the order of [3]
(collectively "Payee").

     1.  PAYMENT.  For value received, Maker promises to pay to Payee or Payee's
order, without offset, the principal sum of [4], together with interest
calculated at [5] per annum, as hereinafter set forth. Principal and interest
are payable in lawful money of the United States of America at [6], or at such
other address as the holder hereof may from time to time designate in writing,
as follows:

        [7]

All payments made hereunder shall be applied to interest and principal in that
order.

     2.  PREPAYMENT.  Maker has the privilege, at any time, to prepay the whole
or any part of the unpaid balance hereof without penalty or forfeiture.

     3.  INTEREST.  All interest payable pursuant to this Note shall be computed
on the basis of a 365-day year. In no event shall the aggregate of the interest
herein provided to be paid over the contractual term of the loan exceed the
highest rate to which a borrower and lender may agree in writing under the laws
of the State of Arizona.

     4.  DEFAULT.  If the principal or interest due under this Note, or under
any mortgage, deed of trust, security agreement, or other agreement between
Maker and Payee pertaining to the indebtedness evidenced hereby shall not be
paid within 10 days after the date upon which such payment is due, or if Maker
fails to comply with all of the other terms and conditions of this Note or any
instrument securing this Note, and such failure (other than a payment
obligation) shall continue for 20 days after written notice thereof is received
by Maker, then the entire principal and interest sum due hereunder shall, at the
option of Payee, become immediately due and payable without further notice.

     5.  COLLECTION COSTS.  Maker agrees to reimburse Payee for all costs and
expenses, including without limitation, all reasonable attorneys' fees incurred
in the enforcement or collection of this Note or any judgment obtained hereon.

     6.  WAIVER, CONSENT, ETC.  Maker and each endorser hereof severally waive
diligence, demand, presentment for payment and protest, and consent to the
extension of time of payment of this Note without notice.

     7.  SECURITY.  [8].

     8.  MISCELLANEOUS.  The provisions of this Note shall be binding upon Maker
and Maker's personal representatives, successors and assigns, and shall inure to
the benefit of Payee and Payee's successors and assigns. This Note shall be
governed by and construed and enforced in accordance with the laws of the State
of Arizona. The courts of the State of Arizona shall have the sole and exclusive
jurisdiction and venue in any case or

                                      A-36
<PAGE>   264

controversy arising under this Note or by reason of this Note. The parties agree
that any litigation or arbitration arising from the interpretation or
enforcement of this Note shall be only in either Maricopa County Superior Court
or in the United States Federal District Court for the District of Arizona, and
for this purpose each party to this Note (and each person who shall become a
party) hereby expressly and irrevocably consents to the jurisdiction and venue
of such courts. This Note shall be construed according to its fair meaning and
neither for nor against the drafting party. Time is of the essence of this Note
and each and every term and provision hereof.

     DATED the date first hereinabove written.

                                          Futech Interactive Products, Inc., a
                                          Delaware corporation

                                          By

                                            ------------------------------------
                                             Vincent W. Goett, CEO

                                      A-37
<PAGE>   265

                                 EXHIBIT 1.6-B

                                       TO

                                MERGER AGREEMENT

         (FUNDEX STOCK OPTIONS AND CONVERSION TO SHARES OF NEW FUTECH)

                               See Exhibit 3B-3.2

                                      A-38
<PAGE>   266

                                  EXHIBIT 1.11

                                       TO

                                MERGER AGREEMENT

                      (VOTES REQUIRED FOR MERGER APPROVAL)

A.  DAMERT.

     Majority.

B.  FUNDEX.

     Majority.

C.  FUTECH.

     Majority.

D.  JANEX.

     Majority.

E.  TRUDY.

     Majority.

                                      A-39
<PAGE>   267

                                 EXHIBIT 2.8.1

                                       TO

                                MERGER AGREEMENT

                        (TERMS OF EMPLOYMENT AGREEMENTS)

     I.  The references appearing below on this Exhibit to Sections correlate to
the Sections in the form of the Employment Agreement attached as EXHIBIT 2.8.2.

A.  DAMERT.

     1.  Frederick A. DaMert

        [1]  The date of the Closing.

        [2]  New Futech

        [3]  Frederick A. DaMert

        [4]  Vice-President of Research and Development

        [5]  three (3) years

        [6]  $120,000.00

        [7]  Subparagraph 4(d) is to be deleted.

        [8]  Subparagraph 4(d) is to be deleted.

        [9]  $0.

        [10] 20 days.

        [11] the lesser of the remaining term of this Agreement or one year.

        [12] Futech Interactive Products, Inc., a Delaware corporation, 2999
             North 44th Street, Suite 225, Phoenix, Arizona 85018-7247.

        [13] Frederick A. DaMert, 1609 Fourth Street, Berkeley, California
             94710.

        [14] Insure that all current proprietary technology is fully developed
             and to seek out or create new proprietary technology that can be
             shared by the divisions of Futech. To coordinate corporate
             technology information by making sure that all current and new
             innovations are clearly communicated to the appropriate product
             development and marketing teams of Futech. To create product
             concepts and opportunities for all divisions of Futech including
             innovations for E-commerce.

             The scope of the activities restricted in the non-compete
             provisions in subparagraph 8(b) of the form shall be limited to the
             toys and games business being conducted by DaMert as of the date of
             the Agreement.

             The employee shall be based at Employer's operating unit in
             Berkeley, California, or at such other location as Employer and
             Employee mutually agree to relocate in order to fulfill Employee's
             obligations under the Employment Agreement.

             No less than 120 days notice of termination without cause will be
             given to the employee.

                                      A-40
<PAGE>   268

     2.  Gail Patton DaMert

        [1]  The date of the Closing.

        [2]  New Futech

        [3]  Gail Patton DaMert

        [4]  Vice-President of Integration and Business Analysis

        [5]  three (3) years

        [6]  $120,000.00

        [7]  Subparagraph 4(d) is to be deleted.

        [8]  Subparagraph 4(d) is to be deleted.

        [9]  $0.

        [10] 20 days.

        [11] the lesser of the remaining term of this Agreement or one year.

        [12] Futech Interactive Products, Inc., a Delaware corporation, 2999
             North 44th Street, Suite 225, Phoenix, Arizona 85018-7247.

        [13] Gail Patton DaMert, 1609 Fourth Street, Berkeley, California 94710.

        [14]Intentionally Omitted.

        The scope of the activities restricted in the non-compete provisions in
        subparagraph 8(b) of the form shall be limited to the toys and games
        business being conducted by DaMert as of the date of the Agreement.

        The employee shall be based at Employer's operating unit in Berkeley,
        California, or at such other location as Employer and Employee mutually
        agree to relocate in order to fulfill Employee's obligations under the
        Employment Agreement.

        No less than 120 days notice of termination without cause will be given
        to the employee.

B.  FUNDEX.

     See II below.

C.  FUTECH.

     All employment agreements of Futech pass through and survive as obligations
of New Futech, notwithstanding Section 3.22 of the Merger Agreement.

D.  JANEX.

     No new Employment Agreements as a result of the merger. All employment
agreements of Futech pass through and survive as obligations of New Futech,
notwithstanding Section 3.22 of the Merger Agreement.

E.  TRUDY.

     1.  William W. Burnham

         [1] The date of the Closing.

                                      A-41
<PAGE>   269

         [2] New Futech

         [3] William W. Burnham

         [4] Vice-President -- Specialty.

         [5] three (3) years

         [6] $100,000.00

         [7] 6,667

         [8] $7.50

         [9] $10,000

        [10] 20 days.

        [11] the greater of the remaining term of this Agreement or one year.

        [12] Futech Interactive Products, Inc., a Delaware corporation, 2999
             North 44th Street, Suite 225, Phoenix, Arizona 85018-7247.

        [13] William W. Burnham, 353 Main Avenue, Norwalk, Connecticut
             06851-1552

        [14] See EXHIBIT 2.8.1-1.

     II.  The references appearing below on this Exhibit to Sections correlate
to the Sections in the form of the Employment Agreement attached as EXHIBIT
2.8.3.

B.  FUNDEX.

     1.  Carl E. Voigt, IV

         [1] The date of the Closing.

         [2] Carl E. Voigt, IV

         [3] President of [New Sub]. [and also Vice President of the Toys/Games
             Division of New Futech]

         [4] Participation in any benefit programs adopted from time to time by
             Employer or Futech Interactive Products, Inc., for the benefit of
             its senior executive employees (which benefits shall be similar to
             those offered by Futech Interactive Products., Inc.). Employee
             shall receive such other fringe benefits as may be granted to
             Employee from time to time by Employer or Futech Interactive
             Products to its senior executives.

        Vincent W. Goett shall during the term of this Employment Agreement vote
        his shares in New Futech for Carl E. Voigt, IV being a member of the
        Board of Directors of New Futech.

     2.  Carl E. Voigt, III

         [1] The date of the Closing.

         [2] Carl E. Voigt, III

         [3] Vice President of [New Sub]

         [4] Participation in any benefit programs adopted from time to time by
             Employer or Futech for the benefit of its employees (which benefits
             shall be similar to those offered by Futech).

                                      A-42
<PAGE>   270


                                EXHIBIT 2.8.1-1



                                       TO



                                MERGER AGREEMENT



                     (JOB DESCRIPTION FOR WILLIAM BURNHAM)



TITLE: VICE PRESIDENT OF THE SPECIALTY PRODUCTS DIVISION



     Key responsibilities:



     - Norwalk, Connecticut distribution facility which will fulfill e-commerce,
       direct mail, and special market trade orders.



     - Sales and marketing of all Futech products in the following areas:



        - Specialty trade



        - Supplemental education



        - Premium incentive and ad specialty



        - Foreign rights and international distribution



        - Dealer catalogs



        - Consumer and school & library mail order catalogs



     - Product development and publishing for supplemental education market
       including teaching manipulatives to be either acquired through a merger
       and integrated into the Futech organization or adapted from existing
       publishing and toy division products.



     - Additional responsibilities will include assisting the chairman in
       corporate development, merger and acquisition strategy, and the execution
       and integration of mergers and acquisitions.


                                      A-43
<PAGE>   271

                                 EXHIBIT 2.8.2

                                       TO

                                MERGER AGREEMENT

                        (FORM FOR EMPLOYMENT AGREEMENTS)

                              EMPLOYMENT AGREEMENT

     THIS AGREEMENT (the "Agreement") effective as of [1] is by and between [2]
("Employer"), and [3] ("Employee").

     A. Employer is engaged in the business of designing, manufacturing,
distributing and marketing books, greeting cards, electronic devices, games and
toys.

     B. Employer desires to hire the services of Employee, and Employee is
willing to provide those services to Employer, on the terms and conditions
hereinafter set forth.

     In consideration of the recitals and mutual agreements hereinafter set
forth, the parties agree as follows:

          1.  Employment.  Employer hires Employee on a full-time basis, in
     accordance with the terms and conditions set forth herein, and Employee
     agrees to accept such full-time employment in accordance with said terms
     and conditions. Employee's title shall be "[4]." Employee's title and
     duties may be changed from time to time in the discretion of Employer's
     Board of Directors (the "Board"), President or Chief Executive Officer.
     Employee agrees to devote Employee's full time, skill, knowledge and
     attention to the business of Employer and the performance of Employee's
     duties under this Agreement.

          2.  Term.  The term of employment under this Agreement shall commence
     on [1] (the "Effective Date") and shall continue thereafter for a period of
     [5], unless earlier terminated as set forth in Section 7 below.

          3.  Duties.  Employee shall be responsible for all of the duties
     associated with Employee's position with Employer, including without
     limitation those identified on Exhibit "A" attached hereto and hereby made
     a part hereof, and such other duties as may be determined by Employer.

          4.  Compensation.

             (a) Base Salary.  Employer agrees to pay Employee a base salary,
        before deducting all applicable withholdings, at the rate of not less
        than $[6]per year, which shall be payable in accordance with Employer's
        standard payroll policies, which policies may be revised from time to
        time.

             (b) Deductions.  Employer shall deduct from the payments made to
        Employee hereunder any federal, state or local withholding or other
        taxes or charges which Employer is required to deduct under applicable
        law, and all amounts payable to Employee under this Agreement are stated
        before any such deductions. Employer shall have the right to rely upon
        written opinion of counsel if any questions arise as to any deductions.

                                      A-44
<PAGE>   272

             (c) Bonus.  From time to time, Employee may be eligible for a bonus
        at Employer's sole discretion.

             (d) Stock Options.  If Employee has been continuously employed by
        Employer between the date of this Agreement and the date which is twelve
        months thereafter, and has not been in default under the terms of this
        Agreement, then Employee shall as of the date which is twelve months
        after the date of this Agreement have the right to purchase up to [7]
        shares of Employer's common stock.

             If Employee has been continuously employed by Employer between the
        date of this Agreement and the date which is twenty-four months
        thereafter, and has not been in default under the terms of this
        Agreement, then Employee shall as of the date which is twenty-four
        months after the date of this Agreement have the right to purchase up to
        [7] shares of Employer's common stock.

             If Employee has been continuously employed by Employer between the
        date of this Agreement and the date which is thirty-six months
        thereafter, and has not been in default under the terms of this
        Agreement, then Employee shall as of the date which is thirty-six months
        after the date of this Agreement have the right to purchase up to [7]
        shares of Employer's common stock.

             The purchase price of common stock purchased under the three
        preceding paragraphs shall be $ [8] per share, payable in full in cash
        at the time the option is exercised. The options may be exercised only
        by written notice given to Employer, or Employer's successors and
        assigns. The options shall expire on the date which is ten (10) years
        after the date of this Agreement, if not exercised by that date.

             Employer's common stock shall be subject to all of the terms and
        restrictions of said stock, and Employer shall no obligation under this
        Agreement to register Employer's stock or to make registered stock
        available to Employee under this Agreement. No representation, warranty
        or guaranty is made by Employer as to the value of the stock to be
        issued pursuant to this subparagraph, and Employee takes full risk and
        responsibility as to said value.

             Employee hereby makes the representations and warranties set out in
        Exhibit "B" attached hereto and hereby made part hereof. On said Exhibit
        "B" Employee is referred to as the "Subscriber," Employer is referred as
        the Corporation, and the shares of stock to be acquired by Employee
        under this Section are referred to as the "Shares." Employee
        acknowledges and understands the meaning and legal consequences of the
        representations and warranties contained herein and agrees to indemnify
        and defend and hold harmless the other parties hereto, and Employer's
        directors, officers, agents, employees, and attorneys, from and against
        any and all claims, loss, damage, liability, cost or expense, including
        attorneys' fees and court costs, due to or arising out of or connected
        directly or indirectly with or to any breach of any such representation
        or warranty made by Employee. Employee's representations and warranties
        appearing herein are made as of the date hereof and as of the date of
        issuance of stock pursuant to this subparagraph (d). Employee's
        acceptance of stock under this Section 4 shall constitute Employee's
        confirmation of the representations and warranties appearing herein as
        of the date of the acceptance.

                                      A-45
<PAGE>   273

             Employee shall be entitled to have Employer issue Employee stock
        under this Section 4 not more than twice in any calendar year.

             Notwithstanding the foregoing provisions which require Employee to
        be employed by Employer for the stock options to vest, if Employer
        terminates Employee's employment in violation of this Agreement, or if
        there is a material change in Employee's duties to be performed by
        Employee for Employer under this Agreement and those changes are
        unacceptable to Employee and Employee as a result thereof terminates
        employment with Employer, then so long as Employee has not been in
        default under the terms of this Agreement, the stock options described
        above which have not yet vested shall immediately vest.

             (e) Signing Bonus.  Employer shall pay Employee a one-time bonus in
        the amount of $ [9] within sixty days after completion of the merger of
        Trudy Corporation into Employer.

          5.  Benefits.

             (a) Insurance.  In addition to the compensation described above,
        while Employee is employed hereunder, Employer shall pay for and provide
        Employee with life, health and disability insurance consistent with what
        is provided from time to time to Employer's other executive employees
        during the term of this Agreement.

             (b) Expense Reimbursement.  In addition to the compensation and
        benefits provided above, Employer shall, upon receipt of appropriate
        documentation, reimburse Employee each month for Employee's reasonable
        travel, lodging and other ordinary and necessary business expenses
        consistent with Employer's policies as in effect from time to time.

             (c) Retirement.  Employee shall be entitled to participate in any
        retirement savings or benefits plan offered by Employer to its
        employees, as revised by Employer from time to time.

          6.  Vacation.  Employee shall be entitled to up to [10] days of
     vacation with full pay per full calendar year, in addition to such holidays
     as Employer may approve for its employees.

          7.  Termination.  Employer may terminate Employee's employment prior
     to the expiration of the initial term of employment or any extension
     thereof, in the manner provided in Section 7(a). Additionally, if
     Employee's employment is terminated by Employer without Cause (as defined
     below), Employee shall be entitled to compensation as provided in Section
     7(d).

             (a) For Cause.  Employer may terminate this Agreement for Cause,
        with a written notice to Employee stating the facts constituting such
        Cause, provided that Employee shall have 10 days following such notice
        to cure any conduct or act, if curable, alleged to provide grounds for
        termination for Cause hereunder. In the event of termination for Cause,
        Employer shall be obligated to pay the Employee only the salary due
        Employee through the date of termination pursuant to Section 4(a).
        "Cause" shall include material neglect of duties; willful failure to
        abide by material instructions or policies from, or set by, Employer in
        good faith; conviction of a felony, or conviction of another offense or
        pleading guilty or nolo contendere to a crime involving moral turpitude
        which may have an adverse

                                      A-46
<PAGE>   274

        impact on Employer's reputation or standing in the community; Employee's
        material breach of this Agreement; Employee's breach of any other
        material obligation to Employer; or upon the bankruptcy, receivership,
        dissolution or cessation of business of Employer.

             (b) Disability.  If during the term of this Agreement, Employee
        fails to perform Employee's duties hereunder because of physical or
        mental illness or other incapacity for 30 consecutive days, or for 45
        days during any 120-day period, then Employer shall have the right to
        terminate this Agreement without further obligation hereunder, except
        for any amounts payable pursuant to disability or workers' compensation
        insurance plans generally applicable to Employer's employees. Employer
        shall provide Employee with notice of commencement of the disability
        period, which period cannot commence more than 14 days prior to the date
        of the notice. If there is any dispute as to whether Employee is or was
        physically or mentally disabled under this Agreement, whether Employee's
        disability has ceased or whether Employee is able to resume Employee's
        duties, such question shall be submitted to a licensed physician agreed
        upon by Employer and Employee. Employee shall submit to such
        examinations and provide information as such physician may request, and
        the determination of such physician as to Employee's physical or mental
        condition shall be binding and conclusive on the parties. Employer
        agrees to pay the cost of any such physician's services, tests and
        examinations.

             (c) Death.  If the Employee dies during the term of this Agreement,
        this Agreement shall terminate immediately, and Employee's legal
        representatives or estate shall be entitled to receive the base salary
        due to Employee through the last day of the calendar month in which
        Employee's death occurs and any other death benefits generally
        applicable to Employer's employees.

             (d) Termination Without Cause; Severance Pay.  Employer may
        terminate this Agreement without Cause with a written notice to
        Employee. If Employer terminates this Agreement before the end of the
        term of the Agreement for any reason other than those described in
        Sections 7(a), 7(b) or 7(c) above, then Employer shall pay to Employee,
        as the same shall become due, Employee's base salary, less applicable
        withholdings (the "Severance Pay"), for [11].

             (e) Termination by Employee; Severance Pay.  If Employee terminates
        this Agreement prior to the end of the term hereof, Employee shall give
        written notice to Employer at least 30 days prior to termination.
        Employee shall not be entitled to the Severance Pay: (i) if Employee
        terminates this Agreement for any reason other than for Employer's
        material breach of this Agreement; or (ii) if Employee's employment is
        terminated for the reasons described in Sections 7(a), 7(b) or 7(c).

          8.  Confidential Information; Exclusivity of Employee's Services.

             (a) Confidential Information.  Employee acknowledges that Employee
        may receive, or contribute to the production of, Confidential
        Information. For purposes of this Agreement, Employee agrees that
        "Confidential Information" shall mean information or material
        proprietary to Employer or designated as Confidential Information by
        Employer or its clients or customers and not generally known by
        non-Employer personnel, which Employee develops or of, or to, which
        Employee

                                      A-47
<PAGE>   275

        may obtain knowledge or access through, or as a result of, Employee's
        relationship with Employer (including information conceived, originated,
        discovered or developed in whole or in part by Employee). Confidential
        Information includes, but is not limited to, the following types of
        information and other information of a similar nature (whether or not
        reduced to writing) related to Employer's business: discoveries,
        inventions, ideas, concepts, research, development, processes,
        procedures, "know-how", formulae, marketing techniques and materials,
        marketing and development plans, business plans, customer names,
        employee names and other information related to customers, price lists,
        pricing policies, financial information, employee compensation, and
        computer programs and systems. Confidential Information also includes
        any information described above which Employer obtains from another
        party and which Employer treats as proprietary or designates as
        Confidential Information, whether or not owned by or developed by
        Employer. Employee acknowledges that the Confidential Information
        derives independent economic value, actual or potential, from not being
        generally known to, and not being readily ascertainable by proper means
        by, other persons who can obtain economic value from its disclosure or
        use. Information publicly known without breach of this Agreement that is
        generally employed by the trade at or after the time Employee first
        learns of such information, or generic information or knowledge which
        Employee would have learned in the course of similar employment or work
        elsewhere in the trade, shall not be deemed part of the Confidential
        Information. Employee further agrees:

             (i)  To furnish Employer on demand, at any time during or after
                  employment, a complete list of the names and addresses of all
                  present, former and potential customers and other contacts
                  gained while an Employee of Employer in Employee's possession,
                  whether or not in the possession or within the knowledge of
                  Employer.

             (ii)  That all notes, memoranda, documentation and records in any
                   way incorporating or reflecting any Confidential Information
                   shall belong exclusively to Employer, and Employee agrees to
                   turn over all copies of such materials in Employee's control
                   to Employer upon request or upon termination of Employee's
                   employment with Employer.

             (iii) That while employed by Employer and thereafter Employee will
                   hold in confidence and not directly or indirectly reveal,
                   report, publish, disclose or transfer any of the Confidential
                   Information to any person or entity, or utilize any of the
                   Confidential Information for any purpose, except in the
                   course of Employee's work for Employer.

             (iv)  That any idea in whole or in part conceived of or made by
                   Employee during the term of his employment, consulting, or
                   similar relationship with Employer which relates directly or
                   indirectly to Employer's current or planned lines of business
                   and is made through the use of any of the Confidential
                   Information of Employer or any of Employer's equipment,
                   facilities, trade secrets or time, or which results from any
                   work performed by Employee for Employer, shall belong
                   exclusively to Employer and shall be deemed a part of the
                   Confidential Information for purposes of this Agreement.
                   Employee hereby assigns and agrees to assign to Employer all
                   rights in and to such Confidential Information whether for
                   purposes of obtaining patent or copyright protection or

                                      A-48
<PAGE>   276

                   otherwise. Employee shall acknowledge and deliver to
                   Employer, without charge to Employer (but at its expense)
                   such written instruments and do such other acts, including
                   giving testimony in support of Employee's authorship or
                   inventorship, as the case may be, necessary (in the opinion
                   of Employer) to obtain patents or copyrights or to otherwise
                   protect or vest in Employer the entire right and title in and
                   to the Confidential Information.

             (b) Exclusivity of Employee's Services.  During Employee's
        employment by Employer and for a period of two years thereafter [but
        with regard to the two years thereafter, this Section 8(b) shall apply
        only if this Agreement is terminated for Cause pursuant to Section 7(a)
        or due to Employee resigning or otherwise terminating Employee's
        employment before the end of the term of this Agreement], Employee
        agrees that Employee shall not, except as an owner of less than two
        percent of a publicly-traded corporation's stock, enter into or engage,
        directly or indirectly, whether on Employee's own account or as a
        shareholder, partner, joint venturer, employee, consultant, advisor,
        and/or agent, of any person, firm, corporation, or other entity other
        than Employer, in any or all of the following activities:

             (i)  Engaging in the business of designing, manufacturing,
                  distributing and marketing books, greeting cards, electronic
                  devices, games and/or toys in the United States of America or
                  anywhere else in the entire world.

             (ii)  Soliciting the past or existing joint venturers, partners,
                   customers, clients, suppliers, or business patronage of
                   Employer or any of its predecessors, affiliates or
                   subsidiaries.

             (iii) Soliciting the employment of any employees of Employer or any
                   of its affiliates or subsidiaries.

             (iv)  Promoting or assisting, financially or otherwise, any person,
                   firm, association, corporation, or other entity engaged in
                   the business of designing, manufacturing, distributing and
                   marketing books, greeting cards, electronic devices, games
                   and/or toys in the United States of America or anywhere else
                   in the entire world.

             (v)  Using any Confidential Information [as defined in Section
                  8(a)] for the purpose of, or which results in, direct
                  competition with Employer or any of its affiliates or
                  subsidiaries.

             (c) Injunctions.  Employer and Employee agree that the restrictions
        contained in this Section 8 are reasonable, but it is recognized that
        damages in the event of the breach of any of the restrictions may be
        difficult or impossible to ascertain; and, therefore, Employee agrees
        that, in addition to and without limiting any other right or remedy
        Employer may have, Employer shall have the right to an injunction
        against Employee issued by a court of competent jurisdiction enjoining
        any such breach without showing or proving any actual damage to
        Employer.

                                      A-49
<PAGE>   277

             (d) Employee Acknowledgements.  Employee also agrees, acknowledges,
        covenants, represents and warrants as follows:

             (i)  That Employee has read and fully understands the foregoing
                  restrictions and that he has been advised to consult with a
                  competent attorney regarding the uses and enforceability of
                  restrictive covenants;

             (ii) That Employee is aware that there may be defenses to the
                  enforceability of the foregoing restrictive covenants based on
                  time or territory considerations, and that Employee knowingly,
                  consciously, intentionally and entirely voluntarily,
                  irrevocably waives any and all such defenses and will not
                  assert the same in any action or other proceeding brought by
                  Employer for the purpose of enforcing the restrictive
                  covenants or in any other action or proceeding involving
                  Employee and Employer;

            (iii) That Employee is fully and completely aware that, and further
                  understands that, the foregoing restrictive covenants are an
                  essential part of the consideration for Employer entering
                  into this Agreement and has entered into this Agreement in
                  full reliance on these acknowledgments, covenants,
                  representations and warranties; and

             (iv) That the existence of any claim or cause of action by Employee
                  against Employer, if any, whether predicated upon this
                  Agreement or otherwise, shall not constitute a defense to the
                  enforcement by Employer of the foregoing restrictive covenants
                  which shall be litigated separately, except when Employee's
                  employment is terminated pursuant to Section 7(a) herein and a
                  court of competent jurisdiction determines subsequently that
                  Employee was not terminated for Cause.

             (e) Reformation.  If any of the provisions of this Section 8 should
        ever be deemed by a court of competent jurisdiction to exceed the
        temporal, geographic or occupational limitations permitted by applicable
        laws, those provisions shall be and are hereby reformed to the maximum
        temporal, geographic, and/or occupational limitations permitted by law.

             (f) Survival.  The obligations described in Sections 8(a), (c), (d)
        and (e), above, shall survive any termination of this Agreement or any
        termination of the employment relationship created hereunder.

          9.  Inventions and Creations.

             (a) Employee agrees that all inventions, discoveries, developments,
                 improvements, ideas, distinctive marks, symbols or phrases,
                 copyrightable creations, works of authorship, mask works and
                 other contributions including but not limited to software,
                 advertising, design, art work, manuals and writings
                 (collectively referred to as "Creations"), whether or not
                 protected by statute, which have been, or are in the future
                 conceived, created, made, developed or acquired by Employee,
                 either individually or jointly, while Employee is retained by
                 Employer and relate in any manner to Employee's work for
                 Employer, the research or business of Employer or fields into
                 which the business of Employer may extend, belong to and are
                 the property of Employer.

                                      A-50
<PAGE>   278

             (b) Employee agrees and warrants that the Creations will be
                 Employee's original work and will not improperly or illegally
                 incorporate any material created by or belonging to others.

             (c) Employee hereby sells, assigns and transfers to Employer
                 exclusively and irrevocably, without further compensation, all
                 ownership, title and rights in and to all of the Creations.
                 Employee further agrees to promptly and fully disclose the
                 Creations to Employer in writing, if requested by Employer, and
                 to deliver promptly to Employer whenever reasonably requested
                 and also upon completion of this Agreement, any and all
                 originals and copies of manuscripts, programs, writings,
                 pictorial materials, drafts and notes of the Creations,
                 regardless of the media in which they might exist. Employee
                 agrees to execute and deliver any and all lawful applications,
                 assignments and other documents which Employer requests for
                 protecting the Creations in the United States or any other
                 country. Employer shall have the full and sole power to
                 prosecute such applications and to take all other actions
                 concerning the Creations, and Employee agrees to cooperate
                 fully, at the expense of Employer, in the preparation and
                 prosecution of all such applications and any legal actions and
                 proceedings concerning the Creations.

             (d) Without diminishing in any way the rights granted to Employer
                 above, if a Creation is described in a patent, copyright or
                 trademark application, or is disclosed to a third party by
                 Employee within two years after Employee's employment with
                 Employer is terminated, Employee agrees that it is to be
                 presumed that the Creation was conceived, created, made,
                 developed or acquired by Employee during the period of his
                 employment with Employer, unless Employee can prove otherwise
                 by clear and convincing evidence.

          10.  Governing Law and Venue.  Arizona law shall govern the
     construction and enforcement of this Agreement and the parties agree that
     any claim or cause of action pertaining to this Agreement shall lie only in
     courts of competent jurisdiction located in Maricopa County, Arizona.

          11.  Construction.  The language in all parts of this Agreement shall
     in all cases be construed as a whole according to its fair meaning and not
     strictly for nor against any party. The parties agree that each party has
     reviewed this Agreement and that any rule of construction to the effect
     that ambiguities are to be resolved against the drafting party shall not
     apply in the interpretation of this Agreement or any amendment or any
     exhibits thereof.

          12.  Nondelegability of Employee's Rights; Employer Assignment
     Rights.  The obligations, rights and benefits of Employee hereunder are
     personal and may not be delegated, assigned or transferred in any manner
     whatsoever, nor are such obligations, rights or benefits subject to
     involuntary alienation, assignment or transfer. Upon reasonable notice to
     Employee, Employer may transfer Employee to an affiliate of Employer, which
     affiliate shall assume the obligations of Employer under this Agreement.
     This Agreement shall be assigned automatically to any entity merging with
     or acquiring Employer or its business.

                                      A-51
<PAGE>   279

          13.  Severability.  If any term or provision of this Agreement is
     declared by a court of competent jurisdiction to be invalid or
     unenforceable for any reason, this Agreement shall remain in full force and
     effect, and either (a) the invalid or unenforceable provision shall be
     modified to the minimum extent necessary to make it valid and enforceable
     or (b) if such a modification is not possible, this Agreement shall be
     interpreted as if such invalid or unenforceable provision were not a part
     hereof.

          14.  Attorneys' Fees.  Except as otherwise provided herein, if any
     party hereto institutes an action or other proceeding to enforce any rights
     arising out of this Agreement, the party prevailing in such action or other
     proceeding shall be paid all reasonable costs and attorneys' fees by the
     non-prevailing party, such fees to be set by the court and not by a jury
     and to be included in any judgment entered in such proceeding.

          15.  Consideration.  It is expressly understood and agreed that this
     document sets forth the entire consideration for this Agreement, and that
     said consideration for this Agreement is contractual and not a mere
     recital.

          16.  Gender and Number.  All terms used in one number or gender shall
     be construed to include any other number or gender as the context may
     require.

          17.  Counterparts.  This Agreement may be executed in any number of
     counterparts, all such counterparts shall be deemed to constitute one and
     the same instrument, and each of said counterparts shall be deemed an
     original hereof.

          18.  Section Headings.  The section headings used in this Agreement
     are inserted for convenience only and shall not affect the meaning or
     construction of this Agreement.

          19.  Notices.  All notices required or permitted hereunder shall be in
     writing and shall be deemed duly given upon receipt if either personally
     delivered, sent by certified mail, return receipt requested, sent by
     telefacsimile with a copy by first-class U.S. mail, or sent by a
     nationally-recognized overnight courier service, addressed to the parties
     as follows:

<TABLE>
<C>                      <S>
   If to Employer:       [12]
   If to Employee:       [13]
</TABLE>

     or to such other address and/or telefacsimile number as any party may
     provide to the other in accordance with this Section.

          20.  Entire Agreement.  This Agreement constitutes the entire
     agreement between the parties with respect to the subject matter hereof
     (i.e., Employee's employment by Employer) and supersedes all prior or
     contemporaneous offers, understandings or agreements in regard thereto.

          21.  Modification of Agreement.  No modification or addition to this
     Agreement shall be valid unless in writing, specifically referring to this
     Agreement and signed by all parties hereto.

          22.  Waiver.  No waiver of any rights under this Agreement shall be
     valid unless in writing and signed by the party to be charged with such
     waiver. No waiver of any term or condition contained in this Agreement
     shall be deemed or construed as

                                      A-52
<PAGE>   280

     a further or continuing waiver of such term or condition, unless the waiver
     specifically provides otherwise.

          23.  Contracts.  Notwithstanding any provisions to the contrary in
     this Agreement, Employee shall not enter into any contracts or agreements,
     written or oral, for or on behalf of Employer without Employer's prior
     written consent.

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first hereinabove written.

<TABLE>
<C>                                    <S>
                          EMPLOYER:    [2]

                                       By: /s/
                                       --------------------------------------------------
                                           Its
                                        --------------------------------------------------

                           EMPLOYEE    [3]
</TABLE>

List of Exhibits:

<TABLE>
<S>                                  <C>
Job Description....................   "A"

Subscriber Representations and
  Warranties.......................   "B"
</TABLE>

                                      A-53
<PAGE>   281

                                  EXHIBIT "A"

                                JOB DESCRIPTION

                                      [14]

                                      A-54
<PAGE>   282

                                  EXHIBIT "B"

                   SUBSCRIBER REPRESENTATIONS AND WARRANTIES

     Subscriber hereby represents, warrants and acknowledges to the Corporation
as follows:

     1.  The Shares will be acquired by Subscriber for Subscriber's own account
and not with the view to, or for resale in connection with, any distribution,
public offering or transfer thereof within the meaning of the Securities Act of
1933, as amended (the "1933 Act"), and Subscriber is not, directly or
indirectly, participating in an underwriting of any such distribution, offering,
or transfer.

     2.  Subscriber understands that the Shares have not been registered under
the 1933 Act by reason of issuance in transactions exempt from the registration
and prospectus delivery requirements of the 1933 Act pursuant to Section 4(2)
thereof.

     3.  Subscriber understands that the Shares have not been registered under
the 1933 Act or any state securities laws, that they are "restricted securities"
in the hands of Subscriber with the meaning of the Act, and that any future sale
of the Shares will be regulated by the Act and applicable state securities laws.
Subscriber understands that the Shares may not be sold, transferred or otherwise
disposed of without registration under the 1933 Act or an exemption therefrom,
and that in the absence of an effective registration statement covering the
Shares, or an available exemption from registration under the 1933 Act, the
Shares must be held indefinitely.

     4.  Subscriber will not sell or otherwise transfer or dispose of any of the
Shares: (A) except in strict compliance with (1) the provisions of the Agreement
to which this Exhibit is attached, and (2) the restrictions on transfer
described herein, and (B) unless such securities are (X) registered under the
1933 Act, and any applicable state securities laws, or (Y) Subscriber represents
that such securities may be sold in reliance on an exemption from such
registration requirements.

     5.  No federal or state agency, including the Securities and Exchange
Commission or the securities regulatory agency of any state, has approved or
disapproved the Shares, passed upon or endorsed the merits of the Shares, or
made any finding or determination as to the fairness of the Shares for private
investment.

     6.  The investment in the Shares is being made in reliance on specific
exemptions from the registration requirements of federal and state securities
laws, and the Corporation is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgements and understandings set
forth herein in order to establish such exemptions.

     7.  Subscriber agrees to deliver to the Corporation, if requested by the
Corporation, an investment letter in customary form.

     8.  Based on personal knowledge and experience in financial and business
matters in general, Subscriber understands the nature of this investment, is
fully aware of and familiar with the business operations of the Corporation, and
is able to evaluate the merits and risks of an investments in the Shares.

     9.  Subscriber has been given the opportunity to ask questions about the
Corporation and has been granted access to all information, financial and
otherwise, with respect to the Corporation which has been requested, has
examined such information, and is satisfied with respect to the same.

                                      A-55
<PAGE>   283

     10.  Subscriber has been encouraged to rely upon the advice of Subscriber's
legal counsel and accountants or other financial advisors with respect to the
tax and other considerations relating to the acquisition of the Shares.

     11.  Subscriber, in determining to acquire the Shares, has relied solely
upon: (A) the advice of Subscriber's legal counsel and accountants or other
financial advisers with respect to the tax, economic and other consequences
involved in acquiring the Shares, and (B) Subscriber's own independent
evaluation of the business, operations and prospects of the Corporation and the
merits and risks of the acquisition of the Shares.

     12.  Subscriber has been advised and understands that this investment is,
by its nature, very speculative.

     13.  Subscriber has sufficient income and net worth such that Subscriber
does not contemplate being required to dispose of any portion of the investment
in the Shares to satisfy any existing or expected undertaking or indebtedness.
Subscriber is able to bear the economic risks of an investment in the Shares,
including, without limiting the generality of the foregoing, the risk of losing
all or any part of the investment and probable inability to sell or transfer the
Shares for an indefinite period of time.

     14.  Subscriber is an "accredited investor" within the meaning of Rule 501
of Regulation D promulgated by the Securities and Exchange Commission, as
presently in effect.

     15.  The investment in the Shares has been privately proposed to Subscriber
without the use of general solicitation or advertising.

     16.  Subscriber understands that the certificates representing the Shares
may bear restrictive legends as to the restricted nature of such securities and
may bear a legend substantially in the following form, and agrees to will hold
the Shares subject thereto:

       THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
       THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES
       LAWS. NEITHER THIS SECURITY NOR ANY PORTION HEREOF OR INTEREST HEREIN MAY
       BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS
       THE SAME IS REGISTERED UNDER SAID ACT AND APPLICABLE STATE SECURITIES
       LAWS OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE AND THE
       COMPANY SHALL HAVE RECEIVED, AT THE EXPENSE OF THE HOLDER HEREOF,
       EVIDENCE OF SUCH EXEMPTION REASONABLY SATISFACTORY TO THE COMPANY (WHICH
       MAY INCLUDE, AMONG OTHER THINGS, AN OPINION OF COUNSEL SATISFACTORY TO
       THE COMPANY).

                                      A-56
<PAGE>   284

                                 EXHIBIT 2.8.3

                                       TO

                                MERGER AGREEMENT

                        (FORM FOR EMPLOYMENT AGREEMENTS)

                              EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT ("AGREEMENT") is entered into effective
     [1]     , by and between      [2]     ("EMPLOYEE") and [New Sub], a Nevada
corporation ("EMPLOYER") and Futech Interactive Products, Inc., a Delaware
corporation (with its successors, "FUTECH")

                                R E C I T A L S:

     A.  Employee has been employed by Fundex Games, Ltd., a Nevada corporation
("FUNDEX"), which manufactures and distributes children's games and toys (the
"BUSINESS").

     B.  On even date herewith, Employer, a wholly owned subsidiary of Futech,
has acquired all the stock of Fundex pursuant to the terms of that certain
Merger Agreement by and between Fundex and Futech (and others) (the "MERGER
AGREEMENT").

     C.  Employer desires to employ Employee, and Employee desires to accept
employment, upon the terms and conditions set forth in this Agreement.

     D.  Futech desires to guarantee Employer's performance of this Agreement as
an enducement to Employee to execute this Agreement on the terms and conditions
set forth herein.

                                   T E R M S:

     NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties agree as follows:

     1.  EMPLOYMENT.  Employer hereby hires and employs Employee for the
position of "     [3]     " of Employer, or such other additional title with
Futech as the Chairman of Futech shall reasonably determine. Employee shall be
vested with such powers and responsibilities, and shall perform such functions
and duties, as Employer shall from time to time prescribe.

     Employee will devote on an exclusive basis Employee's full time, energy and
skill to the performance of Employee's duties for Employer and for the benefit
of Employer and/or Futech. Employee shall at all times faithfully,
industriously, and to the best of Employee's ability, experience and talent,
perform Employee's duties under this Agreement. Employee will exercise due
diligence and care in the performance of Employee's duties to Employer under
this Agreement.

     Employee will be based at Employer's operating unit in Indianapolis,
Indiana, or such other location as Employer and Employee reasonably agree to so
relocate in order to fulfill Employee's obligations hereunder.

     2.  EMPLOYMENT PERIOD.  The period of employment shall commence on the date
of this Agreement, and end on the date which is three (3) years thereafter
("EXPIRATION DATE"), unless sooner terminated in accordance with the provisions
of this Agreement. The

                                      A-57
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period of time commencing on Employee's first day of employment with Employer,
and ending on the effective date of the termination of employment of Employee
under this Agreement, is sometimes referred to herein as the "Employment
Period."

     3.  COMPENSATION.  As compensation for services rendered by Employee under
this Agreement, Employer shall pay Employee as follows, and Employee agrees that
said payments shall be in full payment for Employee's services and promises to
Employer (specifically including the covenant not to compete as set out in
Section 8 below and the proprietary information provisions in Section 9 below):

          (a) Base Salary.  Employee shall receive compensation installments
     based on an annual salary of One Hundred Fifty Thousand Dollars
     ($150,000.00) ("BASE SALARY"). Employee's Base Salary shall be payable in a
     manner and on the timetable which Employer's payroll is customarily
     handled, but no less often than semi-monthly installments.

          (b) Common Stock Option.  If Employee has been continuously employed
     by Employer between the date of this Agreement and the date which is one
     year thereafter, or is terminated by Employer during that period without
     Cause (as hereinafter defined) and has not been in material default under
     the terms of this Agreement, then Employee shall as of the date which is
     one year after the date of this Agreement have the right to purchase up to
     11,111 shares of Futech's common stock.

          If Employee has been continuously employed by Employer between the
     date of this Agreement and the date which is two years thereafter, or is
     terminated by Employer during that period without Cause, and has not been
     in material default under the terms of this Agreement, then Employee shall
     as of the date which is two years after the date of this Agreement have the
     right to purchase up to an additional 11,111 shares of Futech's common
     stock.

          If Employee has been continuously employed by Employer between the
     date of this Agreement and the date which is three years thereafter, or is
     terminated by Employer during that period without Cause, and has not been
     in material default under the terms of this Agreement, then Employee shall
     as of the date which is three years after the date of this Agreement have
     the right to purchase up to 11,111 shares of Futech's common stock.

          The purchase price of common stock purchased under the three preceding
     paragraphs shall be $4.50 per share, payable in full in cash at the time
     the option is exercised. The options may be exercised only by written
     notice given to Employer, or Employer's successors and assigns. The options
     shall expire on the date which is ten (10) years after the date of this
     Agreement, if not exercised by that date.

          The common stock purchased pursuant to this Section shall be subject
     to all of the terms and restrictions of said stock, which shall be
     commensurate with the restrictions restricting other Futech common stock.
     No representation, warranty or guaranty is made by Employer as to the value
     of the stock to be issued pursuant to this subparagraph, and Employee takes
     full risk and responsibility as to said value.

          Employee hereby makes the representations and warranties set out in
     Exhibit "A" attached hereto and hereby made part hereof. On said Exhibit
     "A" Employee is referred to as the "Subscriber," Futech is referred as the
     Corporation, and the shares of stock to be acquired by Employee under this
     Section are referred to as the

                                      A-58
<PAGE>   286

     "Shares." Employee acknowledges and understands the meaning and legal
consequences of the representations and warranties contained herein and agrees
     to indemnify and defend and hold harmless the other parties hereto, and
     Employer's directors, officers, agents, employees, and attorneys, from and
     against any and all claims, loss, damage, liability, cost or expense,
     including attorneys' fees and court costs, due to or arising out of or
     connected directly or indirectly with or to any breach of any such
     representation or warranty made by Employee. Employee's representations and
     warranties appearing herein are made as of the date hereof and as of the
     date of issuance of stock pursuant to this subparagraph (b). Employee's
     acceptance of stock under this Section 3 shall constitute Employee's
     confirmation of the representations and warranties appearing herein as of
     the date of the acceptance.

          Employee shall be entitled to have Futech issue Employee stock under
     this Section 3 not more than twice in any calendar year.

          Notwithstanding the foregoing provisions which require Employee to be
     employed by Employer for the stock options to vest, if Employer terminates
     Employee's employment in violation of this Agreement, or if there is a
     material change in Employee's duties to be performed by Employee for
     Employer under this Agreement and those changes are unacceptable to
     Employee and Employee as a result thereof terminates employment with
     Employer, then so long as Employee has not been in default under the terms
     of this Agreement, the stock options described above which have not yet
     vested shall immediately vest.

          (c) Vacation and Fringe Benefit Programs.  During the term of this
     Agreement, Employee shall be entitled to the following:

             (i)   Twenty days of vacation per full year worked, to be taken in
                   accordance with the policies and directives of Employer.

             (ii)  [4]Employee shall receive such other fringe benefits as may
                   be granted to Employee from time to time by Employer or
                   Futech. Employee's participation in such employee benefits of
                   Employer or Futech shall be based upon Employee's tenure
                   classification under rules established by Employer from time
                   to time, and Employee shall be credited towards his tenure
                   for the time employed by Fundex.

             (iii) Employee shall be entitled to be reimbursed by Employer for
                   all reasonable and necessary expenses incurred by Employee in
                   carrying out his duties under this Agreement in accordance
                   with Employer's standard policy regarding such
                   reimbursements, including, without limitation, car phone,
                   airfare, hotel, meals and other reasonable travel expenses.

          (d) Payroll Taxes.  Employee's compensation and other benefits shall
     be subject to all payroll and withholding deductions as may be required by
     law.

          (e) Permitted Activities.  Notwithstanding anything to the contrary
     herein contained, Employee (i) may make passive investments and hold
     positions as director, trustee, or similar capacity in other entities
     insofar as such positions and investments do not conflict with this
     Agreement, Employee's full-time duties and loyalties to Employer and its
     affiliates or any of Employer's written policies; and (ii) may hold
     positions in charitable and other organizations so long as they are not
     inappropriate in light of or conflict with his duties hereunder
     (collectively, the "PERMITTED ACTIVITIES").

                                      A-59
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          4.  DEATH OR DISABILITY.  If during the Employment Period Employee
     shall become "disabled", and as a result thereof become unable to continue
     the proper performance of Employee's duties hereunder on a full-time basis,
     then Employee's employment hereunder shall thereupon at the option of
     Employer automatically terminate. This Agreement shall automatically
     terminate upon the death of Employee. For purposes of this Agreement,
     disability shall mean the failure by Employee on account of a medical
     disability to substantially perform employee's duties of employment and
     achieve expected customary results for a period of 90 consecutive days and
     the finding by Employer in the exercise of its reasonable discretion,
     confirmed by written opinion of a medical doctor after a detailed exam,
     that Employee will not be able to substantially perform Employee's duties
     for at least a period of an additional 90 days during the term of this
     Agreement.

          5.  TERMINATION BY EMPLOYER.

          (a) Termination for Cause.  Employer may terminate this Agreement at
     any time for "Cause". The existence of Cause shall be reasonably determined
     by Employer. Any termination for Cause shall be, at Employer's election,
     immediate. The term "Cause" as used herein shall include, but not be
     limited to, the following meanings:

             (i)    The failure of Employee to timely discharge or perform
                    Employee's material duties and obligations under this
                    Agreement with due diligence and care for a period of thirty
                    (30) days after written notice of such failure is given to
                    Employee by Employer; provided, however, that said thirty
                    (30) day period shall not apply to violations of Sections 8
                    or 9 below;

             (ii)   The refusal of Employee to implement or adhere to material
                    policies or directives of Employer, which are known to
                    Employee, for a period of thirty (30) days after written
                    notice of such is given to Employee by Employer;

             (iii)  Conviction of a felony under state or federal law, or the
                    conviction of a lesser offense involving moral terpitude
                    which may have an adverse impact on Employer's reputation or
                    standing in the community;

             (iv)   Conduct which is a material violation of Employee's common
                    law duty of loyalty to Employer and/or Futech;

             (v)    Fraudulent conduct in connection with the business affairs
                    of Employer regardless of whether said conduct is designed
                    to defraud Employer or others. Fraudulent conduct shall not
                    include negligence, recklessness, bad judgment or any
                    unintentional acts of Employee;

             (vi)   Conduct which is a material violation of any provision of
                    this Agreement for a period of thirty (30) days after which
                    notice to Employee of such violation is given Employee by
                    Employer;

             (vii)  The taking by the Employee of actions (excluding Permitted
                    Activities) in conflict with any interest of the Employer,
                    Futech or their subsidiaries or affiliates, provided that
                    Employee shall have ten (10) days after written notice
                    thereof to cure such breach;

             (viii) A material breach by Employee of any representation,
                    warranty, covenant or agreement contained in this Agreement;
                                      A-60
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             (ix)  Employee's knowing breach or default of any of the
                   representations contained in that certain "Merger Agreement"
                   of even date herewith (the "MERGER AGREEMENT"), by and among
                   Carl E. Voigt, III, Carl E. Voigt, IV, Futech, Fundex Games,
                   Ltd., and others, relating to, among other things, certain of
                   the capital stock of Fundex Games, Ltd., which breach or
                   default has a material adverse effect on the business of
                   Fundex;

             (x)   If Employee intentionally materially misrepresents any
                   statement to Employer or Futech; or

             (xi)  If Employee terminates this Agreement.

     6.  TERMINATION BY EMPLOYEE.  Employee shall have the right to terminate
this Agreement at any time after at least ninety (90) days prior written notice
given to Employer. Employee agrees to provide Employer with ninety (90) days
prior written notice of any such termination.

     7.  EFFECT OF TERMINATION.

          (a) Proper Termination.  Upon proper termination of this Agreement by
     Employer or Employee, any amounts payable between the parties for periods
     prior to termination shall remain payable, and the covenant not to compete
     set forth in Section 8 below, and the proprietary information provisions of
     Section 9 below, shall survive any said termination and shall continue to
     bind Employee for the period of time stated therein.

          (b) Termination Without Cause.  Upon the occurrence of a termination
     by Employer without Cause or "Constructive Termination" by Employer, this
     Agreement shall terminate upon the date of such termination without Cause
     and the Employee shall (i) be paid, within 10 days thereafter, any unpaid
     portion of the Base Salary as then in effect, through the Expiration Date;
     (ii) receive (within 120 days after the end of the relevant fiscal year of
     Futech) any bonus payments, prorated to such date of termination, Employee
     would be entitled to but for such termination without Cause, and (iii) be
     entitled to vesting of all options to purchase common stock of Futech
     granted to Employee, and such options shall become immediately exercisable
     as set forth in Section 3 herein. Upon such termination without Cause or
     Constructive Termination, the restrictions in Section 8 and Section 9 (with
     respect only to Fundex) below shall automatically terminate and shall be of
     no further force or effect (this provision shall not effect any
     restrictions appearing in the Merger Agreement). For purposes of this
     Agreement, Constructive Termination shall mean:

             (i)   a material change in Employee's title, authorities or duties
                   as set forth in Section 1 of this Agreement;

             (ii)  Employer's continuing breach of the terms of this Agreement
                   for a period of 30 days after its receipt of written notice
                   of such breach from Employee specifying the alleged breach;

             (iii) Goett shall no longer be Chairman and/or Chief Executive
                   Officer of Futech at any time prior to the earlier to occur
                   of one year after the date of this Agreement or the date of
                   any secondary public offering by Futech or its successor;

                                      A-61
<PAGE>   289

             (iv) a default by Futech in the payment of any installment of the
                  Promissory Note executed in accordance with Section B of
                  EXHIBIT 1.6 of the Merger Agreement; or

             (v)  a material default by Futech in any representation, warranty
                  or covenant made by Futech in the Merger Agreement, after
                  written notice of such default from Employee to Futech
                  specifying the alleged breach and 30 days to cure such breach.

     8.  RESTRICTIVE COVENANTS.  Employee acknowledges that Employee will have
access to confidential information about Employer and Futech, and that Employee
will have access to other "proprietary information" (as defined in Section 9
below) acquired by Employer or Futech at the expense of Employer or Futech for
use in the business of Employer and/or Futech. Accordingly, by execution of this
Agreement:

        (a)  Employee agrees that commencing the date of this Agreement, and
             continuing for one (1) year following Employee's termination of
             employment with Employer pursuant to Section 6 or for Cause,
             Employee shall not violate the provisions of subparagraph 8(b)
             below. Employee agrees that the one-year period referred to in the
             preceding sentence shall be extended by the number of days included
             in any period of time during which Employee is or was engaged in
             activities constituting a breach of subparagraph 8(b).

        (b)  During the time period specified in subparagraph (a) above,
             Employee shall not:

             (i)   Directly or indirectly induce, encourage or assist any other
                   individual who was employed by Employer or Futech during
                   Employee's employment with Employer, or during the one (1)
                   year period referred to in subparagraph (a) above, to leave
                   the employ of Employer or Futech. If Employee has any control
                   over, or responsibility with respect to, the hiring of
                   employees, agents or consultants at any other facility or
                   with any other employer, Employee shall use reasonable
                   efforts to preclude the hiring or retention by such other
                   employer or facility of any individual who was employed by
                   Employer or Futech during Employee's employment period with
                   Employer or Futech or during the one (1) year period referred
                   to in subparagraph (a) above.

             (ii)  Directly or indirectly solicit (or take other actions which
                   could reasonably have the same effect as such solicitation)
                   any individual or entity who is or was a customer of Employer
                   or Futech during Employee's employment with Employer or
                   Futech to obtain services from Employee or any other
                   individual or entity, if such services are similar to, or the
                   same as, the services provided to such individual or entity
                   by Employer or Futech during Employee's employment with
                   Employer or Futech, and the services and/or goods solicited
                   are in the toys and/or games business.

             (iii) Directly or indirectly own, manage, operate, control, be
                   employer by, participate in, or be connected in any manner
                   with the ownership, management, operation, or control of any
                   business offering services in competition with those of
                   Employer or Futech and located anywhere in the world.

                                      A-62
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        (c)  Employee agrees, prior to employment, to provide a copy of this
             Section 8 to each and every other employer or facility at which
             Employee is retained or employed during the period specified in
             subparagraph 8(a) above.

        (d)  Employee expressly agrees and acknowledges that these restrictive
             covenants are necessary for Employer's and Futech's protection
             because of the nature and scope of Employer's and Futech's
             business, the highly technological-intensive nature of Employer's
             business, and Employee's position with and services rendered for
             Employer and/or Futech, Employee expressly agrees and acknowledges
             that this covenant not to compete is reasonable as to time, scope
             of activities restricted, and geographical area, does not place any
             unreasonable burden upon Employee, and does not prevent Employee
             from earning a living. Employee and Employer agree that the general
             public will not be harmed as a result of enforcement of this
             covenant not to compete.

        (e)  If the scope of any restriction in this Section is too broad to
             permit enforcement of such restriction to its fullest extent, then
             such restriction shall be enforced to the maximum extent permitted
             by law, and the parties hereto consent and agree that such scope
             may be modified judicially or by arbitration in any proceeding
             brought to enforce such restriction. Further, Employee acknowledges
             that any breach of this covenant not to compete would result in
             irreparable damage to Employer and/or Futech. Employee acknowledges
             and agrees that remedies at law for any breach or violation of the
             provisions of this Section would alone be inadequate, and agrees
             and consents that temporary and permanent injunctive relief may be
             granted in connection with such violations, without the necessity
             of proof of actual damage, and such remedies shall be in addition
             to other remedies and right Employer may have at law or in equity.
             Employee agrees that neither Employer nor Futech shall not be
             required to give notice or post any bond in connection with
             applying for or obtaining any such injunctive relief.

        (f)  Subject to Section 7 herein, Employee agrees that the covenants in
             this Section 8 shall be construed as an agreement independent of
             any other provision of this Agreement so that the existence of any
             claim or cause of action by Employee against Employer or Futech,
             whether predicated on this Section or otherwise, shall not
             constitute a defense to the enforcement of this Section.

        (h)  Employee acknowledges that Employee has had the opportunity to have
             Employee's personal legal counsel review these restrictive
             covenants, and all of the other provisions in this Agreement.

        (i)  Employee acknowledges that Employee understands and hereby agrees
             to each and every term and condition of these restrictive
             covenants.

     9.  PROPRIETARY INFORMATION.  It is understood and agreed that, in the
course of Employee's employment hereunder and through Employee's activities for
and on behalf of Employer or Futech, Employee will receive, deal with and have
access to Employer's and/or Futech's "proprietary information," defined below,
and that Employee holds and is to hold said proprietary information in trust and
confidence for Employer and Futech. Employee agrees that Employee shall not,
during the term of this Agreement or thereafter, in any fashion, form or manner,
directly or indirectly, retain, make copies of, divulge, disclose or communicate
to any person, in any manner whatsoever, or authorize anyone

                                      A-63
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else to take such actions, except when necessary or required in the normal
course of Employee's employment hereunder and for the benefit of Employer or
Futech, or with the express written consent of Employer and Futech, any of
Employer's or Futech's proprietary information or any information of any kind,
nature or description whatsoever concerning any matters affecting or relating to
Employer's or Futech's business.

     For purposes of this Agreement, "proprietary information" means and
includes the following: the identity of customers or potential customers of
Employer or Futech; any written, typed or printed lists or other materials
identifying the customers of Employer or Futech; any information supplied by
customers of Employer or Futech; any and all data or information involving the
techniques, programs, methods or contacts employed by Employer or Futech in the
conduct of its business; any lists, documents, manuals, records, forms, or other
materials used by Employer or Futech in the conduct of its/their business; any
descriptive materials describing the methods and procedures employed by Employer
or Futech in the conduct of its business; any other secret or confidential
information concerning Employer's or Futech's business or affairs. The terms
"list," "document," or their equivalent, as used in this paragraph, are not
limited to a physical writing or compilation but also include any and all
information whatsoever regarding the subject matter of the "list" or "document"
whether or not such compilation has been reduced to writing. For purposes of
this Agreement, proprietary information shall not include information that (i)
becomes generally available to the public, other than as a result of disclosure
by Employee or his agents, representatives; (ii) becomes available on a non-
confidential basis from a source other than a member of Employer, Futech or
their affiliates or agents, provided such source lawfully obtains such
information and is not bound by a confidentiality agreement with any member of
Employer or Futech; or (iii) is required to be disclosed by law.

     The parties hereby stipulate as between themselves that this requirement of
confidentiality is vital to the effective and successful operation of Employer's
and Futech's business, and that any breach of the terms of this Section 9 shall
be a material breach of this Agreement. In the event of Employee's actual or
threatened breach of this Section 9, Employer and/or Futech shall be entitled,
in addition to any and all available remedies for such breach or threatened
breach, to the recovery of damages from Employee and to injunctive relief.

     If during the term of Employee's employment with Employer Employee develops
or discovers any innovative technique, method, or process relating to the
Business, or receives any patents relating to the Business, then such
techniques, methods, processes and patents shall be the property of Employer.

     Upon termination of this Agreement for any reason, Employee shall
immediately turn over to Employer any proprietary information. Employee shall
have no right to retain any copies of any material qualifying as proprietary
information for any reason whatsoever after termination of Employee's employment
hereunder without the express prior written consent of Employer.

     Subject to Section 7 herein, Employee agrees that the covenants in this
Section 9 shall be construed as an agreement independent of any other provision
of this Agreement so that the existence of any claim or cause of action by
Employee against Employer or Futech, whether predicated on this Section or
otherwise, shall not constitute a defense to the enforcement of this Section.

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     10.  TERMINATION OF PRIOR AGREEMENTS.  This Agreement terminates and
supersedes any and all prior agreements and understandings between the parties
with respect to employment or with respect to the compensation of Employee by
Employer, other than as called for in the Agreement described in subparagraph
5(b)(ix) above.

     11.  SUCCESSORS; BENEFIT.  This Agreement is personal in its nature and
Employee shall not, without the consent of Employer, assign, transfer or
delegate this Agreement or any rights or obligations hereunder. The rights and
obligations of Employer hereunder shall inure to the benefit of and shall be
binding upon the successors and assigns of Employer.

     12.  GOVERNING LAW.  This Agreement and the legal relations thus created
between the parties hereto shall be governed by and construed and enforced under
and in accordance with the laws of the State of Arizona.

     13.  JURISDICTION.  The courts of the State of Arizona shall have the sole
and exclusive jurisdiction in any case or controversy arising under this
Agreement or by reason of this Agreement. The parties agree that any litigation
or arbitration arising from the interpretation or enforcement of this Agreement
shall be in the United States Federal Court for the District of Arizona, if
available, and if not available, then in the Maricopa County Superior Court, and
for this purpose each party to this Agreement (and each person who shall become
a party) hereby expressly and irrevocably consents to the jurisdiction of such
courts.

     14.  ENTIRE AGREEMENT; MODIFICATION.  This Agreement embodies the entire
agreement of the parties respecting the matters within its scope. Except as
otherwise expressly set forth in this Agreement, or in the Agreement described
in subparagraph 5(b)(ix) above, this Agreement contains all the terms and
conditions agreed to by the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties, if any, with respect
thereto. This Agreement may not be amended or modified except by an agreement in
writing duly executed by Employee, Employer and Futech. The parties do not
intend to confer any benefit hereunder on any person or firm other than the
parties hereto. No representation or warranty herein may be relied upon by any
person not a party to this Agreement.

     15.  WAIVER.  Failure to insist upon strict compliance with any of the
terms, covenants or conditions hereof shall not be deemed a waiver of such term,
covenant or condition, nor shall any waiver or relinquishment of, or failure to
insist upon strict compliance with, any right or power hereunder at any one or
more times be deemed a waiver or relinquishment of such right or power at any
other time or times.

     16.  ATTORNEY'S FEES.  Employee and Employer agree that in any arbitration
or legal proceeding arising out of this Agreement the prevailing party shall be
entitled to its reasonable attorney's fees and costs of litigation, determined
by the judge and not the jury in which the action is brought, in addition to any
other relief granted.

     17.  SEVERABILITY.  In the event that any court of competent jurisdiction
determines that any portion of this Agreement is in violation of any statute or
public policy, then only the portions of this Agreement which violate such
statute or public policy shall be stricken. All portions of this Agreement which
do not violate any statute or public policy shall continue in full force and
effect. Further, any court order striking any portion of this Agreement shall
modify the stricken terms as narrowly as possible to give as much effect as
possible to the intentions of the parties under this Agreement.

                                      A-65
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     18.  NOTICES.  Any notice or other communication given under the terms of
this Agreement ("Notice") shall be in writing and shall be delivered in person
or mailed by certified mail, return receipt requested, in the United States
mail, postage pre-paid, addressed as follows:

             If to Employer:  [New Sub]
                              Attention: Frederick B. Gretsch, Sr.
                              2999 North 44th Street, Suite 225
                              Phoenix, Arizona 85018-7247

                                   and

                              Futech Interactive Products, Inc.
                              Attention: Vincent W. Goett
                              2999 North 44th Street, Suite 225
                              Phoenix, Arizona 85018-7247

             If to Employee:  [2]
                              2237 Directors Row
                              Indianapolis, Indiana 46241

             Copy to:         Much Shelist Freed Denenberg Ament &
                              Rubenstein, P.C.
                              200 North LaSalle Street, Suite 2100
                              Chicago, Illinois 60601
                              Attention: Mitchell S. Roth
                              Phone: (312)346-3100
                              Fax: (312)621-1750

or at such other address as a party may from time to time designate by Notice
hereunder. Notice shall be effective upon delivery in person, or if mailed, at
midnight on the third business day after the date of mailing.

     19.  MISCELLANEOUS.  The parties agree to do such further acts and things
and execute and deliver such additional agreements and instruments as either
party may reasonably require to consummate, evidence, or confirm any agreement
contained herein in the manner contemplated hereby. This Agreement shall be
construed according to its fair meaning, and neither for nor against the
drafting party. The titles and headings of sections of this Agreement are for
the convenience of reference only, are not intended to define, limit, or
describe the scope or intent of any provision of this Agreement, and shall not
affect the construction of any provision of this Agreement.

     20.  INDEMNIFICATION.  Employer and Futech agree to indemnify the Employee
(and his successors, assigns, estate, administrators, executors, and legal
representatives) and to advance monies to such persons to pay expenses relating
to indemnifiable events, in each case to the fullest extent permitted by the
laws of the State of Arizona and Employee shall be entitled to the protection of
any insurance policies Employer or Futech may elect to maintain generally for
the benefit of their directors and officers, against all costs, charges and
expenses whatsoever incurred or sustained by Employee or his successors,
assigns, estate, administrators, executors and legal representatives in
connection with any action, suit or proceeding to which any such persons may be
made a party by reason of the Employee being or having been a director or
officer of the Employer, Futech or any of their subsidiaries and affiliates;
provided, however, that the provisions of this Section 20 shall not apply to
liabilities indemnified against by Employee in that certain Merger

                                      A-66
<PAGE>   294

Agreement, by and among Futech, Trudy Corporation, Futech Interactive Products,
Inc., an Arizona corporation, DaMert Company, Janex International, Inc., Fundex
Games, Ltd., Employer, and certain individuals (subject to the limitations on
liability set out in Exhibit 3.36 of the Merger Agreement).

     DATED the date first hereinabove written.

                               EMPLOYER:     [New Sub],
                                             a Nevada corporation

                                             By:
                                              ----------------------------------
                                                 Vincent W. Goett, CEO

                               EMPLOYEE:
                                            ------------------------------------
                                             [2]

ACCEPTED AND AGREED TO
as of the date first hereinabove written,
by:

Futech Interactive Products, Inc., a Delaware corporation

By
-----------------------------------------------
   Vincent W. Goett, C.E.O.

   List of Exhibits:

   Representations and Warranties
   Regarding Stock................."A"

                                      A-67
<PAGE>   295

                                  EXHIBIT "A"

                   SUBSCRIBER REPRESENTATIONS AND WARRANTIES

     Subscriber hereby represents, warrants and acknowledges to the Corporation
as follows:

 1. The Shares will be acquired by Subscriber for Subscriber's own account and
    not with the view to, or for resale in connection with, any distribution,
    public offering or transfer thereof within the meaning of the Securities Act
    of 1933, as amended (the "1933 Act"), and Subscriber is not, directly or
    indirectly, participating in an underwriting of any such distribution,
    offering, or transfer.

 2. Subscriber understands that the Shares have not been registered under the
    1933 Act by reason of issuance in transactions exempt from the registration
    and prospectus delivery requirements of the 1933 Act pursuant to Section
    4(2) thereof.

 3. Subscriber understands that the Shares have not been registered under the
    1933 Act or any state securities laws, that they are "restricted securities"
    in the hands of Subscriber with the meaning of the Act, and that any future
    sale of the Shares will be regulated by the Act and applicable state
    securities laws. Subscriber understands that the Shares may not be sold,
    transferred or otherwise disposed of without registration under the 1933 Act
    or an exemption therefrom, and that in the absence of an effective
    registration statement covering the Shares, or an available exemption from
    registration under the 1933 Act, the Shares must be held indefinitely.

 4. Subscriber will not sell or otherwise transfer or dispose of any of the
    Shares: (A) except in strict compliance with (1) the provisions of the
    Agreement to which this Exhibit is attached, and (2) the restrictions on
    transfer described herein, and (B) unless such securities are (X) registered
    under the 1933 Act, and any applicable state securities laws, or (Y)
    Subscriber represents that such securities may be sold in reliance on an
    exemption from such registration requirements.

 5. No federal or state agency, including the Securities and Exchange Commission
    or the securities regulatory agency of any state, has approved or
    disapproved the Shares, passed upon or endorsed the merits of the Shares, or
    made any finding or determination as to the fairness of the Shares for
    private investment.

 6. The investment in the Shares is being made in reliance on specific
    exemptions from the registration requirements of federal and state
    securities laws, and the Corporation is relying upon the truth and accuracy
    of the representations, warranties, agreements, acknowledgments and
    understandings set forth herein in order to establish such exemptions.

 7. Subscriber agrees to deliver to the Corporation, if requested by the
    Corporation, an investment letter in customary form.

 8. Based on personal knowledge and experience in financial and business matters
    in general, Subscriber understands the nature of this investment, is fully
    aware of and familiar with the business operations of the Corporation, and
    is able to evaluate the merits and risks of an investments in the Shares.

 9. Subscriber has been given the opportunity to ask questions about the
    Corporation and has been granted access to all information, financial and
    otherwise, with respect to the Corporation which has been requested, has
    examined such information, and is satisfied with respect to the same.

                                      A-68
<PAGE>   296

 10. Subscriber has been encouraged to rely upon the advice of Subscriber's
     legal counsel and accountants or other financial advisors with respect to
     the tax and other considerations relating to the acquisition of the Shares.

 11. Subscriber, in determining to acquire the Shares, has relied solely upon:
     (A) the advice of Subscriber's legal counsel and accountants or other
     financial advisers with respect to the tax, economic and other consequences
     involved in acquiring the Shares, and (B) Subscriber's own independent
     evaluation of the business, operations and prospects of the Corporation and
     the merits and risks of the acquisition of the Shares.

 12. Subscriber has been advised and understands that this investment is, by its
     nature, very speculative.

 13. Subscriber has sufficient income and net worth such that Subscriber does
     not contemplate being required to dispose of any portion of the investment
     in the Shares to satisfy any existing or expected undertaking or
     indebtedness. Subscriber is able to bear the economic risks of an
     investment in the Shares, including, without limiting the generality of the
     foregoing, the risk of losing all or any part of the investment and
     probable inability to sell or transfer the Shares for an indefinite period
     of time.

 14. Subscriber is an "accredited investor" within the meaning of Rule 501 of
     Regulation D promulgated by the Securities and Exchange Commission, as
     presently in effect.

 15. The investment in the Shares has been privately proposed to Subscriber
     without the use of general solicitation or advertising.

 16. Subscriber understands that the certificates representing the Shares may
     bear restrictive legends as to the restricted nature of such securities and
     may bear a legend substantially in the following form, and agrees to will
     hold the Shares subject thereto:

        THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
        UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE
        SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY PORTION HEREOF OR
        INTEREST HEREIN MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE
        DISPOSED OF UNLESS THE SAME IS REGISTERED UNDER SAID ACT AND APPLICABLE
        STATE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS
        AVAILABLE AND THE COMPANY SHALL HAVE RECEIVED, AT THE EXPENSE OF THE
        HOLDER HEREOF, EVIDENCE OF SUCH EXEMPTION REASONABLY SATISFACTORY TO THE
        COMPANY (WHICH MAY INCLUDE, AMONG OTHER THINGS, AN OPINION OF COUNSEL
        SATISFACTORY TO THE COMPANY).

                                      A-69
<PAGE>   297

                                  EXHIBIT 2.10

                                       TO

                                MERGER AGREEMENT

            (PROVISIONS REGARDING SHAREHOLDER LOANS AND GUARANTEES)

A.  DAMERT.

     New Futech will, by the Closing, do the following:

     (i)  Obtain releases of Frederick A. DaMert and Gail Patton DaMert of their
          personal guarantees of their following DaMert Company's obligations:
          (1) loans from Wells Fargo Bank with aggregate current balances of
          approximately $2,824,000; and (2) all obligations under that certain
          real property lease dated July 27, 1995 for the premises located at
          1609 fourth street, Berkeley, California.

     (ii)  Arrange for the pay-off of all the debt obligations of DaMert Company
           to Wells Fargo Bank, consisting of a credit facility of $2,500,000,
           an additional loan of $300,000, and a term equipment loan with an
           approximate current balance of $24,000; and

     (iii) Assume repayment of the loans owing by DaMert to Frederick A. DaMert
           in the aggregate principal amount of $128,849.

B.  FUNDEX.

     New Futech will, by the Closing, obtain releases of Carl E. Voigt, IV and
Carl E. Voigt, III, and their spouses, of their personal guarantees of the
following Fundex debts: (i) $2,500,000.00 revolving credit line of Fundex with
Norwest Business Credit, Inc.; and (ii) $1,000,000.00 term loan of Fundex with
Liberty Bidco Investment Corporation ("Bidco"). New Futech will, by the Closing,
also obtain releases of the shares of stock of Fundex which are pledged to Bidco
as collateral for the $1,000,000.00 term loan.

C.  FUTECH.

     Not Applicable.

D.  JANEX.

     Within 30 days after the Closing, New Futech is to obtain releases of Les
Friedland, Dan Lesnick, and Howard W. Moore from their personal obligations or
guarantees of the Janex line of credit with Tinton Falls State Bank, up to a
maximum amount of $300,000.00.

E.  TRUDY.

     At the Closing, New Futech will assume repayment of the loans owing by
Trudy to William W. Burnham and two of his family members. The aggregate
principal and interest owing as of January 31, 1999 on all of said debts is
agreed by the parties to be the sum of $800,000.00. Interest will accrue only on
the debt owing to the family members ($172,253.00 balance at April 30, 1999)
between April 30, 1999 through the Closing. No interest will accrue on the debts
owing to William W. Burnham between February 1, 1999 through the Closing. After
the Closing, interest will accrue on all of said debts at and only at four
percent (4%) per annum. At the Closing, twenty five percent (25%) of the

                                      A-70
<PAGE>   298

principal balance due as of the Closing, plus interest accrued to the date of
Closing (on the debt to the family members only), shall be repayable on said
debts, and twenty five percent (25%), plus interest accrued to the date of each
payment (at four percent (4%) per annum) from the date of Closing (regardless of
what interest rate was agreed upon by Trudy and the lender), shall be payable on
each of three consecutive six (6) month anniversaries after the Closing. Trudy
will cause William W. Burnham to forever forgive and discharge the debts owing
to him to the extent necessary to obtain the balances due as described above,
and William W. Burnham hereby agrees to so forgive and discharge said debts to
said extent.

     Within thirty (30) days after the Closing, New Futech will obtain releases
of William W. Burnham of his personal guaranty of the following Trudy debts: (i)
Trudy's revolving credit agreement with First Union, with an outstanding balance
as of April 30, 1999 of $795,000.00; and (ii) Trudy's four year Term Note with
First Union, with an outstanding balance as of April 30, 1999 of $195,650.00.

                                      A-71
<PAGE>   299

                                  EXHIBIT 2.13

                                       TO

                                MERGER AGREEMENT

                   (OTHER AGREEMENTS FOR PARTICULAR PARTIES)

A.  DAMERT.


     New Futech will assume the obligations of DaMert to deliver cash,
promissory notes and stock to Greg McVey, president of DaMert, in accordance
with DaMert's Special Executive Incentive Compensation Plan, in the amount of 4%
of the DaMert net consideration (after paying the broker) for the Merger under
Section 1.6.


B.  FUNDEX.

     1.  Phase 10 Option.

     Fundex owns all rights to a product identified as "Phase 10." For a short
time period after three years have elapsed after the Closing, if certain stock
price performance criterion have not been satisfied, all as set out below, then
the Fundex shareholders, acting jointly but not severally, will have an option
(the "Phase 10 Option"), on the terms set out herein, to exchange all of the
stock in New Futech that they acquired pursuant to the Mergers for all ownership
rights to Phase 10. This provision does not prevent Fundex shareholders from
selling their stock, but requires them to own and exchange the same amount of
stock they would have had if the stock had not been sold.

     New Futech and New Sub will maintain Phase 10 free and clear of any liens,
claims or encumbrances not existing as of the Closing, so long as the Phase 10
Option is exercisable. New Futech and New Sub will obtain releases of any liens
against Phase 10 (even those existing as of the Closing), upon the earlier of
the following, unless prior to that time the Phase 10 Option is terminated as
provided for in the paragraph appearing immediately below: (i) twenty-four
months after the Closing, or (ii) a refinancing by New Futech of the Fundex
credit facility. If the Phase 10 Option is exercised, New Futech and New Sub
will deliver Phase 10 as called for in this provision free and clear of all
liens.

     See Exhibit 1.6 for provisions creating security for the obligations of New
Futech and New Sub regarding Phase 10.

     The Phase 10 Option must be exercised, if at all, within and during the 60
day period after the expiration of three (3) years after the Closing. The Phase
10 Option shall terminate if either or both of the following occur and the
Promissory Note payable to the Fundex shareholders (described in Section B of
EXHIBIT 1.6 above) is paid in full:

        (a) After the expiration of any lockup period specified in the
            underwriting agreement for any public stock offering prohibiting the
            Fundex shareholders from selling the New Futech stock acquired in
            the Mergers, for any 15 consecutive trading day period the average
            daily closing price, on a principle national public market on which
            such stock is traded, of the stock of New Futech acquired by the
            Fundex shareholders in the Mergers is such that said stock is valued
            at not less than $7.50 per share, and the average number of shares
            traded daily during said 15 days was at least 40,000; or

        (b) New Futech offers to buy, or presents a party who offers to buy, the
            stock acquired by the Fundex shareholders pursuant to the Mergers,
            at a purchase

                                      A-72
<PAGE>   300

            price of at least $7.50 per share, and with a closing date of not
            more than 60 days after the offer is made (if the offer is accepted,
            the closing must actually occur within said time, or fail to occur
            through the fault of the sellers), whether or not said offer is
            accepted; provided, however, that said offer may not be made until
            at least twelve months after the Closing.

        If the Phase 10 Option is exercised, then the Employment Agreements for
        Carl E. Voigt, IV and Carl E. Voigt, III shall thereupon automatically
        terminate, which terminations will be terminations for "Cause" and will
        be governed by the terms of the Employment Agreements; provided,
        however, that the non-compete provisions of the Employment Agreements
        shall thereafter not restrict Carl E. Voigt, IV and/or Carl E. Voigt,
        III from using the Phase 10 product, even if that use competes with New
        Futech.

        Futech will use its best efforts to obtain a valuation of the Phase 10
        Option prior the Closing, at Futech's cost. If the result of the
        valuation is such that the value of the New Futech shares to be issued
        in the Merger to the Fundex shareholders is less than the value which
        would be necessary to qualify the Merger as a tax-free transaction, then
        the parties agree to negotiate in good faith to adjust the consideration
        payable to the Fundex shareholders in the Merger so that the Merger
        qualifies as a tax free transaction.

     2.  Fundex Key Employees.  Jim Money, George Propsom, Eric Voigt and
Barrett Powers will be considered for stock options of New Futech as part of New
Futech's employee stock option plan, if any.

     3.  Election to Board of Directors.  At the Closing, subject to the
applicable fiduciary duties, New Futech's Chairman and Chief Executive Officer
shall recommend the election of Carl E. Voigt, IV to the Board of Directors of
New Futech and use his best efforts to assure New Futech's management will
recommend the reelection of Carl E. Voigt, IV to the Board, at the appropriate
times, so long as Carl E. Voigt, IV is party to an employment agreement with New
Sub.

     4.  Termination of Representations and Warranties.  If New Futech defaults
under its obligations to pay the Fundex shareholders the Promissory Note as
called for on EXHIBIT 1.6 above, and the Fundex shareholders as a result thereof
repossess the stock of New Sub as allowed on EXHIBIT 1.6 above, then the
representations and warranties of Fundex and the Fundex Shareholders in this
Agreement shall, effective at the time of the repossession, terminate; provided,
however, that New Futech's failure to make payments due under said Note as a
result of a violation of representations and/or warranties by Fundex or the
Fundex Shareholders shall not cause a termination of the representations and
warranties of Fundex or its Shareholders.

     5.  Shareholder Voting.  Notwithstanding anything in this Agreement to the
contrary, if Futech is in default under that certain License Agreement, dated of
even date with this Agreement, between Futech and Fundex, then each of the
Fundex Shareholders may vote such Shareholder's shares of stock in Fundex not in
favor of the Mergers as set out in this Agreement.

     Notwithstanding anything in this Agreement to the contrary, the Fundex
Shareholders will not vote on the Merger until: (i) an appraisal of the Phase 10
Option has been completed; and (ii) the parties have taken such action as is
necessary to assure that the Merger qualifies as a tax free reorganization for
Fundex and the Fundex shareholders under Section 368(a) of the Internal Revenue
Code.

                                      A-73
<PAGE>   301

C.  FUTECH.

     None.

D.  JANEX.

     None.

E.  TRUDY.

     1.  Guarantee of Value of Futech Stock.

        (a) If as of the Effective Time New Futech common stock has become
            "Public" (meaning for purposes of this Agreement that said stock is
            then publicly traded and listed on a U.S. registered securities
            exchange, such as the NASDAQ National Market System), then effective
            at the Closing the Trudy shareholders will instead of receiving in
            the Merger 400,000 shares of New Futech common stock (as described
            on EXHIBIT 1.6) they will receive shares of New Futech common stock
            in the aggregate amount of the greater of 400,000 shares or that
            number of shares necessary to equal a $3,000,000 value, determined
            using the average of the closing trading prices of the New Futech
            common stock as of the fifteen days immediately prior to the
            Closing.

        (b) If as of the Effective Time New Futech common stock has not become
            Public, but does become Public within five years after the Effective
            Time, then the closing trading price of the New Futech common stock
            shall be determined for the day after New Futech becomes Public and
            for each of the fourteen days thereafter, and the average of those
            fifteen numbers (hereinafter the "Opening Public Value") shall be
            calculated. If and only if the Opening Public Value is less than
            $7.50 per share, then additional New Futech common stock will be
            issued to the Trudy shareholders in the number of shares necessary
            so that New Futech common stock worth $3,000,000 (valued at the
            Opening Public Value) has been issued to the Trudy shareholders
            pursuant to this Agreement.

            The provisions of this subparagraph (b) assume that: (i) there will
            be no stock splits or reverse splits of New Futech stock between the
            Closing date and the date New Futech becomes Public; and (ii) the
            issuance of the additional stock is exempt from federal and state
            securities registration requirements or can be registered by New
            Futech. If a stock split or reverse stock split occurs between the
            Closing date and the date New Futech becomes Public, then the $7.50
            value used in this subparagraph shall be changed as necessary so
            that each share of New Futech common stock originally acquired in
            the Merger at the Closing, if held until New Futech goes Public, is
            guarantied a value of at least $7.50 when New Futech becomes Public.
            New Futech agrees to use its best efforts to register the shares
            covered by this subparagraph under applicable securities laws, if
            necessary.

        (c) If the New Futech common stock has not become Public within five
            years after the Effective Time, then the Trudy shareholders will
            have the right at any time after said five year period but prior to
            the date which is six months thereafter, to exchange New Futech
            common shares, acquired pursuant to

                                      A-74
<PAGE>   302

            Section 1.6 of this Agreement and still held, for a New Futech
            debenture with a principal amount equal to the aggregate principal
            amount of New Futech common shares surrendered at a value of $7.50
            per New Futech common share. The debenture would be payable in full
            within five (5) years after the origination date of the debenture,
            with interest at the publicly announced prime rate of interest of
            Bank One, Arizona, N.A., as such rate may from time to time change.
            At Futech's election, Futech may instead of issuing any said
            debenture pay any person entitled to such a debenture cash in the
            amount at which the debenture would be issued to such person.

            The provisions of this subparagraph (c) assume that: (i) there will
            be no stock splits or reverse splits of New Futech stock between the
            Closing date and the date a debenture is issued under this
            provision; and (ii) the issuance of such debentures is exempt from
            federal and state securities registration requirements or can be
            registered by New Futech. If a stock split or reverse stock split
            occurs between the Closing date and the date a debenture is issued,
            then the $7.50 value used in this subparagraph shall be changed as
            necessary so that each share of New Futech common stock originally
            acquired in this Merger at the Closing, if replaced with a debenture
            under this subparagraph, is guarantied a value of at least $7.50
            when the debenture is issued. New Futech agrees to use its best
            efforts to register the debentures covered by this subparagraph
            under applicable securities laws, if necessary.

     2.  Enforcement.  The Merging Companies acknowledge and agree that the
provisions of Section 1 immediately above are for the benefit of the Trudy
shareholders and the holders as they may exist from time to time of the New
Futech stock acquired by said shareholders pursuant to the Merger, and that such
Trudy shareholders and such holders have legally enforceable rights against New
Futech in respect thereof. It shall be the burden of the shareholder to trace
his/her stock as being stock acquired by a Trudy shareholder pursuant to the
Merger.

     3.  Board Position.  At the Effective Time, subject to the applicable
fiduciary duties, New Futech's Chairman and Chief Executive Officer shall
recommend the election of William W. Burnham to the Board of Directors of New
Futech and use his best efforts to assure New Futech's management will recommend
the reelection of William W. Burnham to the Board, at the appropriate times, so
long as Willaim W. Burnham is party to an employment agreement with New Futech.

     4.  Trudy Key Employees.  Bill Carney will be considered for stock options
of New Futech as part of New Futech's employee stock option plan, if any.

     5.  Environmental Indemnification.  Effective automatically at the Closing,
without the necessity of any additional documents, William W. Burnham
("Burnham") agrees as follows:

          Burnham is, directly or indirectly, an owner of real property located
     at 353 Main Avenue, Norwalk, Connecticut (the "PROPERTY"), which property
     is currently leased by Trudy. There are, have been, or may have been
     potential hazardous liability problems with the Property. The Merging
     Companies are not willing to assume any potential hazardous waste liability
     that currently exists.

          Burnham is owed money by Trudy, which debts are compromised as called
     for in EXHIBIT 2.10.

                                      A-75
<PAGE>   303

          Burnham hereby agrees to indemnify, defend and hold harmless New
     Futech, and New Futech's officers, directors, attorneys, and agents, from
     and against any and all claims of any type, including attorneys' fees and
     costs, arising out or relating to any claim relating to hazardous waste
     associated with the Property relating to all periods of time prior to the
     Closing of the Merger.

          Burnham releases and forever discharges New Futech from the debts
     owing to Burnham by Trudy, to and only to the extent called for in EXHIBIT
     2.10.

          New Futech may offset any amount owing to it under this provision or
     any other provision of this Agreement against any amount owing by New
     Futech to Burnham; provided, however, that if the liability to be offset
     relates to items other than the environmental indemnification, then prior
     to such offset: (i) New Futech and Burnham shall mutually agree as to the
     amount of the liability; and (ii) New Futech will give Burnham thirty days
     after written notice to eliminate the liability.

     6.  Deterioration of Financial Condition.  The Merging Companies agree: (i)
that any continued deterioration in the operations, assets and financial
condition of Trudy between the date of the Merger Agreement and the Closing
shall not constitute a failure by Trudy to fulfill the condition to Closing set
forth in Section 4.1.6 of the Merger Agreement; and (ii) the entering by Trudy
into any loan or financing arrangement, contract, commitment or transaction
between the date of the Merger Agreement and the Closing shall not constitute a
failure by Trudy to fulfill the condition to Closing set forth in Section 4.1.10
of the Merger Agreement, so long as Futech is given advance notice where
practical and prompt notice otherwise.

                                      A-76
<PAGE>   304

                                  EXHIBIT 3-A

                                       TO

                                MERGER AGREEMENT

                    (DISCLOSURE SCHEDULE OF DAMERT COMPANY)

     The paragraph numbering below corresponds to the paragraph numbering in
Article III of the Merger Agreement.

     3.1  DUE INCORPORATION.

     No exceptions.

     3.2  CAPITALIZATION.

     Common Shares Authorized: 5,000 shares, no par value.

     Common Shares Issued and Outstanding: 1,000

     Series A Preferred Authorized: Not Applicable.

     Series A Preferred Issued and Outstanding: Not Applicable.

     The following summarizes stock options, warrants, subscriptions, conversion
rights and similar rights:

     One stock option for the purchase of 52.63 shares of common stock,
     exercisable for a total price of $1.00, is issued to Lynne McDonald. Fred
     and/or Gail DaMert will cause the option to be exercised simultaneously
     with the Closing of the Merger, and the stock issued in connection with
     such exercise shall receive its share of the consideration to be paid to
     the DaMert shareholders in the Merger.

     Stock appreciation rights entitling holders to payment equivalent to the
     increase in value of units designed to be equal to 7% of the aggregate of
     DaMert's outstanding stock and those units. Fred and/or Gail DaMert have
     bought out three percentage points of these rights prior to the Closing,
     leaving 4% to be assumed by New Futech as described in Section A of EXHIBIT
     2.13.

     3.3  SUBSIDIARIES.

     None

     3.4  FINANCIAL INFORMATION.

     No exceptions.

     3.5  TAXES.

     The 1998 federal and state income tax returns of the shareholder of the
corporation are currently on extension.

     3.6  MATERIAL CHANGES.

     See 3.30 below.

     3.7  TITLE TO ASSETS; LIENS.

     The liens of Wells Fargo Bank.

                                      A-77
<PAGE>   305

     3.8  LITIGATION.

     (1) DaMert has received a written claim of infringement with regard to a
         product name and the use of a slogan including the word "rainbow" in
         connection with the packaging and advertising of certain of its toy
         products. DaMert disputes that it is infringing upon the property
         rights of the claimant.

     (2) The Defendant in an action by DaMert for collection of an unpaid
         invoice ($4,672) has filed a cross-complaint against DaMert, alleging
         $3,000 in damages on account of the action of DaMert in shipping goods
         prematurely to the Cross-Complainant. DaMert disputes the validity of
         the cross-complaint.

     3.9  COMPLIANCE WITH LAWS.

     No exceptions.

     3.10  INSURANCE.

     No exceptions.

     3.11  LICENSES.

     No exceptions.

     3.12  HAZARDOUS MATERIALS.

     DaMert used hazardous materials, specifically polyester resins and
solvents, from 1973 until April 1989 to produce optical prisms and tabletop
sculptures. In April of 1989 it ceased manufacturing and moved from that
location. The company has not used hazardous materials since.

     3.13  JUDGMENTS AGAINST THE MERGING COMPANY AND/OR ITS BUSINESS.

     None.

     3.14  COMPLETE SALE.

     No exceptions.

     3.15  ASSETS IN GOOD CONDITION.

     DaMert's local area network of PC's will require software upgrades and some
hardware replacement in order to be Year 2000 compliant. Outdated workstations
need to be replaced to conform to Y2K compliance (estimated $30,000 to $40,000
expense).

     3.16  DISCLOSURE MATERIALS.

     No exceptions.

     3.17  DEFAULTS.

     DaMert is not in compliance with certain covenants in the credit agreement
with Wells Fargo Bank related to promissory notes in the original principal
amounts of $2,500,000 and $400,000.

     3.18  MATERIAL CONTRACTS.

     (i)   July 27, 1995 office lease for the property located at 1609 Fourth
           St., Berkeley, CA.

     (ii)  June 1, 1997 License Agreement with L.J. Liff & Associates Limited.

     (iii)  January 28, 1999 distribution agreement with Equity Toys.

                                      A-78
<PAGE>   306

     (iv)  November 1, 1994 Master License Agreement with Dan Gilbert, Inc., and
           related product license agreements

     (v)   April 21, 1998 Licensing Agreement with Brian W. Walker and Rodney A.
           Dahl

     (vi)  1995 License Agreement with John A.L. Osborn.

     (vii)  April 14, 1997 and April 11, 1997 License Agreements with Relinda
            Recio dba X Libris.

     (viii) October 4, 1995 License Agreement with Nico Smith.

     (ix)  November 17, 1998 Licensing and Distribution Agreement with Crystal
           Lines (International) Pty, Ld.

     3.19  OUTSTANDING LIABILITIES.

     See 3.30 and 3.22.

     3.20 INVENTORY.


     $15,649 of obsolete inventory on books. $12,183 of inventory of fantasy
characters whose license has expired. $16,465 of inventory in good condition not
presented in 1998 catalog. $15,299 of inventory in good condition but old
packaging. Total inventory value of $1,262,556. See Exhibit 3A-3.22


     3.21  RECEIVABLES.

     DaMert estimates it will have approximately $63,000 in uncollectible
accounts receivable, thereby exceeding its $50,000 reserve.

     3.22  EMPLOYEES.

     See Exhibit 3A-3.22.

     DaMert has entered into an employment agreement with Julie Nunn, Director
of Product Development, which will survive the Closing.

     3.23  NO CONFLICTS.

     The following material agreements of DaMert require consent or notice in
connection with the Mergers:

        (i)  July 27, 1995 office lease for 1609 Fourth Street, Berkeley,
             California between the Merging Company and Cedar/Fourth Street
             Partners (notice to Lessor required);

        (ii)  June 1, 1997 License Agreement between DaMert and L.J. Liff &
              Associates Limited (consent for merger required, which consent
              shall not be unreasonably withheld by the Licensor).

        (iii) December 15, 1998 loan agreement with Wells Fargo Bank (consent
              required).

        (iv)  November 1, 1994 Master License Agreement with Dan Gilbert, Inc.,
              and related product license agreements.

        (v)  November 17, 1998 Licensing and Distribution Agreement with Crystal
             Lines (International) Pty, Ltd (notice required).

                                      A-79
<PAGE>   307

     3.24  VIOLATIONS OF LAW.

     None.

     3.25  CONDITION AND SUFFICIENCY OF ASSETS.

     See 3.15 above.

     3.26  BANK ACCOUNTS.

     See Exhibit 3A-3.26.

     3.27  ENVIRONMENTAL MATTERS.

     None.

     3.28  INTELLECTUAL PROPERTY.


     See 3.35 below.


     3.29  CUSTOMERS AND SUPPLIERS.

     No exceptions. See Exhibit 3A-3.29

     3.30  CHANGES TO THE MERGING COMPANY'S DOCUMENTS.

     DaMert has entered into compensation agreements not in the ordinary course
of business with Julie Nunn, Director of Product Development; Tom Santilena,
Controller; William Hanlon, Senior Product Developer; and Lawrence Waide, former
Director of Operations. In each case, compensation is payable following or as a
result of a change in control of DaMert. Any amounts payable to said persons
under said arrangements as a result of the Merger shall be paid from the
compensation otherwise payable to Fred and/or Gail DaMert under Section 1.6 of
the Merger Agreement.

     3.31  STOCKHOLDERS AGREEMENTS AND OTHER AGREEMENTS.

     The employment agreement of Julie Nunn can be terminated within one year of
a change in control only with payment of 4 months severance.

     3.32  CERTAIN PAYMENTS.

     No exceptions.

     3.33  FILINGS COMPLETE.

     No exceptions.

     3.34  PRODUCTS.

     No exceptions.

     3.35  PATENTS.


     See Exhibit 3A-3.35.


     3.36  INDEMNIFICATION; SURVIVAL.

                                      A-80
<PAGE>   308

                                EXHIBIT 3A-3.22

3.20  INVENTORY

     As of 4/30/98

     A.  There is $10,949 of obsolete parts on the books with no further use or
         market value.

     B.  There is $12,183 of inventory in good condition of fantasy characters
         whose license has expired. We are seeking permission from the licensor
         to sell these off.

     C.  There is $16,465 of inventory in good condition not presented in the
         1998 catalog.

     D.  There is $15,299 of inventory in good condition presented in the 1999
         catalog but in old packaging.

     E.  Total Inventory Value $1,262,556

         Under GAAP, item A is obsolete and B if permission to sell off is not
         granted. We feel there is a market for items C and D.

3.22  EMPLOYEES

VACATIONS

     All full-time employees are eligible for vacation. Temporary employees and
part-time employees working less than 1000 hours per year are not eligible for
vacation.

     Vacation days and portions of days thereof, are accrued from the first day
of employment and are "banked" monthly. Employees may only take as many vacation
days as are in their "Bank". Annual vacations are determined by length of
service and are accrued as follows:

<TABLE>
<CAPTION>
                                               DAYS OF
                                              VACATION
                                               ACCRUED
             LENGTH OF SERVICE                ANNUALLY
             -----------------                --------
<S>                                           <C>
1 to 5 years................................   10 days
6 years to 10 years.........................   15 days
11 years to 15 years........................   20 days
over 15 years and up........................   25 days
</TABLE>

     Vacation days will be accrued at a rate equal to the employees average
number of hours/day over the previous 12 months of service as defined by payroll
records. Example: employee that averages 8 hours/day will be paid 8 hours on
Vacation; employee that averages 6 hours/day will be paid 6 hours on Vacation.
Vacations may be taken at any time during the year, except that they MUST be
scheduled to avoid conflicts with other employees' vacations. DaMert Company
discourages employees from taking Vacation time during the company's busy period
of the year (September-November). Check with your supervisor for the best times
to take Vacation. Specific vacation dates must be approved by the employee's
supervisor at least 30 days prior to the anticipated vacation. Requests should
be in writing. Employees with the most seniority will have first priority as to
the dates of their vacation request. New employees cannot take Vacation during
their first 30 days of employment although their Vacation benefits accrue from
date of hire. Any requested Vacation period in excess of two consecutive weeks
requires special management

                                      A-81
<PAGE>   309

approval. Single days off should be approved at least one week in advance of the
requested date.

     A maximum of 10 additional vacation days may be carried over at the
employee's anniversary date of hire. Financial compensation in lieu of vacation
is not allowed. In the interest of maintaining their physical and mental health,
employees are encouraged to use all their vacation time annually. All vacation
earned will be paid out at the time of termination. Vacation is not earned while
an employee is on a leave of absence.

HOLIDAYS

     Full-time and part-time employees working at least 1000 hours per year are
eligible for holiday pay. Employees will be paid for the amount of hours they
would be normally scheduled to work that day.

     The following paid holidays will be observed in 1999:

<TABLE>
<S>                   <C>
Memorial Day                       5/31/99
Independence Day                   7/5/99
Labor Day                          9/6/99
Thanksgiving                     11/25-11/26
Christmas Day                    12/23-12/24
New Years                        12/30-12/31
New Year's Day                    Labor Day
Memorial Day                  Thanksgiving Day
Independence Day                Christmas Day
</TABLE>

     Employees may not elect financial compensation in lieu of taking time off
for a holiday. If an exempt employee is requested to work on a holiday, an
alternate day off will be allowed in lieu of taking the holiday. If a non-exempt
employee is requested to work on a holiday, he/she will be paid at the
applicable overtime rate.

     Employees who do not report to work on the day prior to, or the day
immediately following the holiday, without prior approval, will not be paid for
the holiday. Employees on a Leave of Absence are not eligible for holiday pay.
Temporary employees, independent consultants, and similar classifications are
not eligible for holiday pay.

     If a holiday falls on a weekend, the holiday will be observed on the
closest Friday or Monday, or on the customary day.

     DaMert will make a reasonable accommodation to employees who wish time off
to observe religious holidays. Those employees needing such time should make
their request in writing to their department head.

     Ownership, solely at its discretion, may choose to provide additional paid
Company holidays. A company "shop calendar" identifying all holidays and dates
will be published annually.

                                      A-82
<PAGE>   310

SICK/DISABILITY LEAVE

     All permanent full-time and part-time employees are eligible to accrue Sick
Leave bank hours as follows:

          On January 1 of each year, each employee is given a Sick Leave bank of
     time corresponding to 8 days worth of hours each employee is regularly
     scheduled to work. Full-time employees, i.e., those scheduled to work 8
     hours a day, will receive a bank of 64 hours. A part-time employee, who is
     scheduled to work six hours a day will receive 48 hours. Sick Leave hours
     must be taken in half-day (4 Hour) increments.

          The purpose of the Sick Leave hours is to allow employees a reasonable
     accumulation of time to be used for bonafide reasons to be away from the
     job. An example would be the use of Sick Leave in the middle of the day for
     a doctor appointment. Examples of such reasons are occasional illness,
     medical and dental appointments, or personal business that cannot be
     conducted outside working hours.

          Sick Leave hours may not be used to supplement employee scheduled
     vacation time or in conjunction (day before or day after) a company
     scheduled Holiday.

          The exception to this rule is if the employee comes to work and must
     leave "sick". "Telephoned" sick leave calls the day before or after
     Vacation or Holiday leave are not acceptable to receive sick leave pay.

          New employees are not awarded sick time until after 30 days of
     employment. At that date, the amount of hours of Sick Leave banked will be
     prorated for the period of time remaining in the current 12 month cycle.

          Once an employee has used up all of their Sick Leave in a given 12
     month period, all Sick time off will be unpaid, unless prior arrangements
     are made with their supervisor to use earned Vacation days. There is no
     "borrowing" of Sick Leave days from the next 12 month cycle. There is no
     payout of unused Sick Leave hours at termination.

          All Sick Leave hours not used by December 31 will be rolled forward
     into a Disability Bank for the employee. The Disability Bank will be
     allowed to accumulate from year to year to a maximum bank of 6 calendar
     weeks (30 work days). The purpose of the "Disability" time is to allow
     employees wage compensation in the event of an illness or accident that
     would keep them away from the job for more than 5 work days. Use of this
     Disability time bank always requires a written explanation from a
     physician. "Disability" days may not be used for occasional illness even if
     the employee has used up their entire sick leave pool. There is no payout
     of Disability hours at termination.

          A maximum of 2 sick days may be taken for family illnesses. Employees
     may not take Disability days for this purpose. In the event 3 or more days
     are necessary for a family illness, Vacation time may be used.

          Employees who are unable to report to work because of illness must
     contact their department head within one hour of their scheduled start
     time. Any absence of 3 days or more will require a physician's note.

          Temporary employees are not granted paid sick or paid personal leave.

                                      A-83
<PAGE>   311

FAMILY LEAVE

     After the first year of continuous employment, DaMert Company will provide
unpaid leaves of absence for family care up to a total of four months in a 24
month period. Leave may be granted for the birth or adoption of an employee's
child, or to care for a parent or spouse who has a serious health condition.

     Any employee taking a family care leave will receive the same benefits as
provided under the Disability Leave Policy. You must give your supervisor
written notice of your request for family leave as soon as you learn that leave
is necessary. DaMert Company may deny a request for family leave if it is
necessary to prevent undue hardship to the Company. In addition, no family leave
will be granted to care for a child when the child's other parent is taking
leave or is otherwise unemployed.

     A request for family leave must be accompanied by a medical certificate
from the attending physician, which includes the date on which the medical
condition commenced, the probable duration of the condition, the estimated time
the patient will require the employee's care, and a statement that the
employee's participation in the treatment care of the patient is warranted by
the medical condition. Upon expiration of the time estimated by the doctor, the
employee must obtain another medical certificate if additional leave is
required.

     DaMert Company will make reasonable efforts to return you to your prior
position, if available, or similar job for which you are qualified, at the same
salary rate held prior to the leave of absence.

     Failure to notify the Company of your availability for work when it occurs,
failure to return to work when called by the Company, or your continued absence
from work because your leave must extend beyond the maximum time allowed, may be
deemed a voluntary termination of your employment with DaMert Company.

LEAVES OF ABSENCE

     A leave of absence is an extended period of time absent from work without
loss of employment. Leave of absence is without pay. During the first 30 days of
a leave of absence the company continues to pay company-paid benefits; the
employee must pay premiums for dependent coverage in advance to the company.

     A written request for a leave of absence, providing full explanation of the
circumstances, must be presented to the employee's immediate supervisor at least
two weeks before the start date of the leave of absence. Failure to report to
work on the first day after the expiration of the leave of absence, without
approval, will be considered a voluntary termination of employment.

PERSONAL LEAVE OF ABSENCE

     DaMert Company has a policy of granting personal leaves of absence in a few
well-defined cases. A personal leave of absence may be granted by DaMert up to a
maximum of 30 days. An extension beyond 30 days may be considered in the event
of serious or extenuating circumstances. If possible, at least 6 weeks notice
must be given for such leave.

     For time off in a non-pay status, an employee must submit a request for a
leave of absence in writing to their manager. Managers will forward the request
to ownership with the Manager's recommendation. The final approving authority is
an Owner. Managers at

                                      A-84
<PAGE>   312

any level are not authorized to approve or promise an employee, in any way, that
the request has been or will be approved until concurrence has been received.

JURY DUTY

     If you receive a jury summons, you must inform your supervisor immediately.
DaMert Company will pay the difference between your regular earnings and the fee
you receive for jury service.

     You must report to work on days or parts of days when you are not required
to serve. If you do not return to work immediately after an approved leave for
jury duty, the Company may assume you have voluntarily quit your job.

WITNESS DUTY

     You may be required by law to appear in court as a witness. If you give
reasonable advance notice to your supervisor, you will be allowed to take time
off. Regular full-time employees may be paid for up to two (2) days. All leave
thereafter will be unpaid.

MEDICAL LEAVE OF ABSENCE FOR NONOCCUPATIONAL MEDICAL DISABILITY, INCLUDING
PREGNANCY OR CHILDBIRTH OR RELATED MEDICAL CONDITION

     Medical leaves up to four (4) months may be granted for any nonoccupational
medical disability, including disability because of pregnancy or childbirth or
related medical condition.

     The Company reserves the right to require written proof from a licensed
doctor that your disability has started or ended before it allows you to take a
leave or return from leave. It is your responsibility to provide your supervisor
with the following information as soon as you know you need to take a leave of
absence: 1) how long you expect to be on disability leave; 2) a doctor's
certificate or other medical proof acceptable to the Company showing the
expected dates of your disability; and 3) regular updates at least every week
regarding your medical status and the date you expect to return to work.
Applications for leaves of absence for disability because of pregnancy of birth
should be submitted at least two weeks before the start date of such leave, if
possible.

MEDICAL LEAVE OF ABSENCE FOR OCCUPATIONAL DISABILITY

     If you are injured at work, you may be allowed to take an unpaid leave of
absence until 1) a recognized medical professional certifies that you are
allowed to resume all of the duties of your former position; 2) you are unable
to come back to work in your position (i.e. your condition is permanent and
stationary); or 3) you resign, quit, or otherwise indicate that you are not
going to return to your job.

MILITARY LEAVE OF ABSENCE

     An employee who is drafted for service in the armed forces is eligible for
military leave of absence. Upon return from service, the employee will be
eligible for re-employment and will be reinstated in the same of substantially
similar position.

     An employee who is a member of the Armed Forces Reserve or the National
Guard and who is required to attend annual active duty for training or other
short-term reserve or Guard duty (i.e. forest fire fighting, police duty for
natural disaster, etc.) is eligible for a military leave of absence. Such time
off will not be considered vacation time. If the employee's military pay for the
training is less than his/her average company earnings for

                                      A-85
<PAGE>   313

a like period DaMert Company will pay the difference to the employee for a
period not exceeding two (2) weeks.

BEREAVEMENT LEAVE OF ABSENCE

     In the event of a death in your immediate family, you may have time needed
up to three working days, with pay, to handle family affairs and attend the
funeral. "Immediate family" is defined as: father, mother, sister, brother,
spouse, child, mother-in-law, father-in-law, grandparents, grandchildren,
nieces, nephews, sisters-and-brothers-in-law, and domestic partners.

     If the funeral is beyond 250 miles of your home, up to 2 additional days
may be approved. These additional days will be taken from the employees
Disability Leave bank. Employees should notify their department heads as soon as
possible of their need for such leave.

VOTING

     DaMert Company policy is to encourage its employees to participate in the
election of government leaders. Therefore, adequate time off is allowed from the
beginning or end of the workday to exercise this right. If the employee
otherwise will be unable to vote, he/she may wish to inquire of their Registrar
of Voters about the possibility of voting by absentee ballot.

     Please be sure to schedule this time off with your supervisor to ensure
proper coverage of your work station. Registered voters may take up to a maximum
of 2 hours to vote.

LIFE THREATENING DISEASES

     DaMert Company is committed to keeping your work environment healthy and
safe for all employees, and has established these rules which you should follow
if you or one of your co-workers has or contracts a life-threatening illness:

        1) DaMert Company will treat all life-threatening illnesses the same as
           other illnesses in terms of all our employee policies and benefits.

        2) If you have or contract a life-threatening illness, you will be
           allowed to keep working, as long as a) you can meet the Company's
           performance standards; b) your illness does not actually endanger the
           health or safety of other employees or customers; and c) you will not
           make your illness worse by continuing to work.

        3) You may not refuse to work because you are afraid of contracting a
           non contagious life-threatening illness from a co-worker. You may not
           harass or otherwise discriminate against a co-worker who has a
           life-threatening illness. Employees who refuse to work with or who
           harass or discriminate against any employee with a life-threatening
           illness will be disciplined, up to and including discharge.

        4) In this handbook, "life-threatening illness" includes cancer, Lou
           Gehrig's Disease, AIDS, and other illnesses of a severely
           degenerative nature.

                                      A-86
<PAGE>   314

GROUP INSURANCE

Medical Insurance

     All employees working 30 hours per week are eligible for medical insurance.
Temporary and part-time employees are not eligible on the DaMert Company plan.
Benefits begin on the first regular work day following a 30-day waiting period.

     The cost for medical insurance is paid as follows:

          Employees -- a minimum of 80% of the premium cost to be paid by the
     Company, the balance to be paid by employees through payroll deduction.

          Dependents -- 100% of the premium cost to be paid by the employee
     through payroll deduction. DaMert Company does not contribute to the cost
     for dependents.

     This Medical Plan was selected to ensure the employees are not burdened
with extreme medical costs. This policy was developed for the benefit of all
full-time employees. You are encouraged to take sick leave for medical
appointments.

     The specific coverage of DaMert Company Medical Plan are located in your
medical handbook published by the insurance carrier.

Dental Insurance

     All employees working 30 hours per week are eligible for dental insurance.
Temporary and part-time employees are not eligible on DaMert Company plan.
Benefits begin on the first regular work day following a 30-day waiting period.

     The cost for dental insurance is paid as follows:

<TABLE>
<CAPTION>
                                     EMPLOYEE   DEPENDENTS
                                     --------   ----------
<S>                                  <C>        <C>
Company pays.......................    60%           0%
Employee pays......................    40%         100%
</TABLE>

     This Dental Plan was selected to ensure that employees are not burdened
with extreme dental costs. The intention of this benefit is to encourage
employees to take preventive dental care. You are encouraged to take sick leave
for dental appointments.

     The specific coverage of the this dental plan are located in the dental
handbook provided by the insurance carrier.

Life Insurance

     A group Life Insurance Plan has been provided to give basic protection to
all full-time employees working 30 hours per week. Temporary and part-time
employees are not eligible on the DaMert Company Group Life Insurance plan. This
Group Policy is in force on the first regular work day following a 30-day
employment period.

     The total cost of this Group Insurance Plan is paid by DaMert Company.

     The specific term insurance coverage of the plan is in the amount of
$10,000 for all employees. Details are in the handbook as provided by the
insurance carrier.

                                      A-87
<PAGE>   315

401(k) Plan

     The company has a 401(k) plan. The employee may make elective contributions
to the plan as prescribed by law. The company will make a 10% matching
contribution which the employee vests 100% at the time on the match.

     The company has a profit sharing plan attached to the 401(k) plan. Profit
sharing is discretionary and based on the company's performance and achievement
of goals. The profit sharing contribution vest over six years as follows: 20%
after 2 years, 40% after 3 years, 60% after 4 years, 80% after 5 years and 100%
after 6 years. In the event of a major change in ownership employee profit
sharing contribution vest 100%.

OVERTIME

     All overtime must have prior approval.

Hours

     Office hours are from 8:00 AM to 4:30 PM. Variations from this must have
approval of a supervisor.

Compensation

     The compensation package is comprised of four basic areas.

        1. Base salary
        2. Benefits Package
        3. Individual Merit Award
        4. Year End Bonus

     Each area is defined as follows:

          Base Salary:  The base salary is determined by the salary range within
     a given grade. The amount of wages given within the grade is determined the
     job skill brought to that grade. It is DaMert Company's intent to
     compensate each person fairly based on the employee's contribution within
     there particular pay grade. Increases to base salary are changed when there
     is a change in contribution or responsibility within the grade or a change
     to a higher grade. Increases are not automatic and are not tied to a
     particular time frame. Increases in base salary can occur at any time.
     Effective January 1, the entire payroll will be increased for a Cost of
     Living Allowance (C.O.L.A.). The amount of the C.O.L.A. will be at the
     discretion of the owners.

          Benefits Package:  It is the intent of DaMert Company to provide a
     comprehensive benefits package. The Benefits package will be reviewed
     annually. A summary of the benefits package will be provided as soon as
     possible after year end. The summary will report both governmental mandated
     contributions as well as company discretionary benefits.

          Individual Merit Award (I.M.A.):  The I.M.A. compensation is tied to
     the annual performance appraisal. During the performance appraisal process
     certain goals will be established between the supervisor and employee. A
     pool of dollars will be determined during the annual budget process. The
     amount of I.M.A. received depends on the level of goals achieved. For
     example, if the management team establishes a 3% I.M.A. pool, an employee
     can earn up to 3% of their annual salary if all the goals are achieved that
     were agreed upon at the performance appraisal. The first year is a

                                      A-88
<PAGE>   316

     transition year and the amount of I.M.A. received will be based on prior
     years performance and time in service. The I.M.A. will be distributed as a
     separate check on the first pay period in May. Remember, base salary is not
     increased.

          Year End Bonus:  The Year End Bonus will be determined as a part of
     the annual budget process. The management team establishes company goals
     for the coming year. If the goals of the company are achieved the
     pre-determined bonus amounts will be distributed to all employees on
     payroll as of the last payroll in December. This program replaces the
     annual "Christmas Bonus", which was originally a discretionary award to
     employees and has evolved into a perceived entitlement. In short, if the
     company achieves its goals it will share them with the employees. This is a
     win win participation. The Company goals and Year End Bonus amount will be
     published at the completion of the budget process.

                                      A-89
<PAGE>   317

                                EXHIBIT 3A-3.26

3.26  BANK ACCOUNTS

     Account #4121089916     Operating Account     Wells Fargo Bank

     Signatories     Fred DaMert
                     Gail DaMert
                     Greg McVey
                     Tom Santilena
                     Lynne McDonald

     Account #4121091425     Payroll Account     Wells Fargo Bank

     Signatories     Fred DaMert
                     Gail DaMert
                     Tom Santilena
                     Wells Fargo Payroll Service

     Account #4121093959     Petty Checking     Wells Fargo Bank

     Signatories     Fred DaMert
                     Gail DaMert
                     Greg McVey
                     Tom Santilena
                     Lynne McDonald
                     Bill Hanlon
                     Don Bee

     Account #114026734     401(k)     Clearing Account     The Mechanics Bank

     Signatories     Fred DaMert
                     Gail DaMert
                     Tom Santilena

                                      A-90
<PAGE>   318

                                EXHIBIT 3A-3.29

3.29  CUSTOMERS AND SUPPLIERS

<TABLE>
<S>                                          <C>
TOP FIVE CUSTOMERS AS OF 14 MAY 1999
Natural Wonders............................    $111,705
HCM Kinzel GmbH............................      78,057
Ames.......................................      49,832
Pierre Belvedere Inc. .....................      47,336
Discovery Channel Stores...................      37,125
1998
HCM Kinzel GmbH............................     405,459
Natural Wonders............................     319,338
Zany Brainy................................     237,850
World of Science...........................     181,380
Store of Knowledge.........................     176,911
1997
Natural Wonders............................     416,678
Store of Knowledge.........................     323,734
HCM Kinzel GmbH............................     260,350
Sharper Image..............................     254,994
Pierre Belvedere...........................     244,099
1996
Natural Wonders............................     943,786
Zany Brainy................................     341,721
Nature Company.............................     322,616
Pierre Belvedere...........................     319,396
Books-A-Million............................     259,424

TOP FIVE SUPPLIERS AS OF 30 APRIL 1999
Lorelei Commodity..........................     246,012
Hopstech Industries Ltd. ..................     116,473
Equity Marketing...........................      71,441
Inter. Procurement Systems.................      70,734
Cantel Manufacturing Ltd. .................      38,186
1998
Lorelei Commodity..........................   1,351,844
Hopstech Industries........................     880,194
Edaron, Inc. ..............................     140,681
Valiant Printing...........................      89,491
Kling Magnetics Inc. ......................      82,484
</TABLE>

                                      A-91
<PAGE>   319
<TABLE>
<S>                                          <C>
1997
Lorelei Commodity..........................   1,211,775
Hopstech Industries........................     728,713
Edaron, Inc. ..............................     351,498
Valiant Printing...........................     291,052
Elpete Trading Co. ........................     119,958
1996
Hopstech Industries........................   1,031,911
Edaron, Inc. ..............................     840,486
Valiant Printing...........................     304,232
White Eagle................................     227,934
Elpete Trading Co. ........................     202,208
</TABLE>

     All products previously produced at Valiant Printing are now produced at
General Glory Company.

                                      A-92
<PAGE>   320


                                EXHIBIT 3A-3.35


UNITED STATES PATENT   [19]                   [11] PATENT NUMBER:   DES. 316,882
HANLON, III                                    [45] DATE OF PATENT: MAY 14, 1991
                                       -

<TABLE>
<C>   <C>        <C>      <S>             <C>
[54]  RETURN TOP
[75]  Inventor:    William M. Hanlon, III,
                   Castro Valley, Calif.
[73]  Assignee:    DaMert Company, San Leandro,
                   Calif.
[**]  Term:       14 Years
[21]  Appl. No.:   391,859
[22]  Filed:        Aug. 10, 1989
[52]  U.S. Cl. .........................  D31/99
[58]  Field of Search...    D21/99, 100, 98, 95;
                446/245, 242, 248, 249, 261, 262

[56]           References Cited

             U.S. PATENT DOCUMENTS
  D.     61,134   7/1922  Fletcher......  D21/98
  D.    139,743  12/1994  Davidson......  D21/99
  D.    156,582  12/1949  Tomarun.......  D21/99
  D.    200,586   3/1965  Parente.......  D21/98
        288,265  11/1883  Shourda.......  D21/98
      1,419,690   6/1922  Samour........  446/248

            FOREIGN PATENT DOCUMENTS
          30913   6/1917  Fed. Rep. of
                          Germany.......  446/248
          20426  of 1898  United
                          Kingdom.......  446/247

Primary Examinee--Charles A. Rademaker
Attorney Agent, or Firm--Harris Zimmerman

[37]                CLAIM
The ornamental design for a return top, as shown
and described.

                  DESCRIPTION
FIG. 1 is a top plan view of a return top
showing any new design;
FIG. 2 is a side elevational view thereof, the
side opposite being identical; and
FIG. 3 is an end elevational view thereof, the
end opposite being identical.
</TABLE>

                          [ILLUSTRATION OF RETURN TOP]

                                      A-93
<PAGE>   321

INT. CL.: 28

PRIOR U.S. CLS.: 22, 23, 38, AND 50
                                                              REG. NO. 2,233,014

UNITED STATES PATENT AND TRADEMARK OFFICE               REGISTERED MAR. 16, 1999
--------------------------------------------------------------------------------

                                   TRADEMARK
                               PRINCIPAL REGISTER

                                   METROPOLIS

<TABLE>
<S>                                                 <C>
DAMERT COMPANY (CALIFORNIA CORPORATION)               FIRST USE 4-10-1998; IN COMMERCE 4-10-1998.
1609 FOURTH STREET
BERKELEY, CA 94710
                                                      SN 75-366,918, FILED 10-2-1997.
  FOR:  THREE DIMENSIONAL ASSEMBLY PUZZLE IN THE
SHAPE OF A CITY, IN CLASS 28 (U.S. CLS. 22, 23, 38
AND 50).                                            LAURA KOVAISKY, EXAMINING ATTORNEY
</TABLE>

                                      A-94
<PAGE>   322

INT. CL.: 28

PRIOR U.S. CLS.: 22, 23, 38, AND 50
                                                              REG. NO. 2,234,702

UNITED STATES PATENT AND TRADEMARK OFFICE               REGISTERED MAR. 23, 1999
--------------------------------------------------------------------------------

                                   TRADEMARK
                               PRINCIPAL REGISTER

                                 KLIK-KLAK-BLOX

<TABLE>
<S>                                                 <C>
DAMERT COMPANY (CALIFORNIA CORPORATION)               FIRST USE 3-3-1997; IN COMMERCE 3-3-1997.
1609 FOURTH STREET
BERKELEY, CA 94710
                                                      SN 75-136,411, FILED 7-22-1996.
  FOR:  MANIPULATIVE PUZZLE, IN CLASS 28 (U.S.
CLS. 22, 23, 38 AND 50).                            KARLA PERKINS, EXAMINING ATTORNEY
</TABLE>

                                      A-95
<PAGE>   323

INT. CL.: 28

PRIOR U.S. CLS.: 22
                                                              REG. NO. 1,589,123

UNITED STATES PATENT AND TRADEMARK OFFICE               REGISTERED MAR. 27, 1990
--------------------------------------------------------------------------------

                                   TRADEMARK
                               PRINCIPAL REGISTER

                                 TURBO SPARKLER

<TABLE>
<S>                                                 <C>
DAMERT COMPANY (CALIFORNIA CORPORATION)               FIRST USE 7-22-1989; IN COMMERCE 7-22-1989.
900 75TH AVENUE
OAKLAND, CA 94621
                                                      SER. NO. 73-818,912, FILED 8-14-1989.
  FOR:  TOY YO YOS, IN CLASS 28 (U.S. CL. 22).      CORA ANN MOORHEAD, EXAMINING ATTORNEY
</TABLE>

                                      A-96
<PAGE>   324

                                  EXHIBIT 3-B

                                       TO

                                MERGER AGREEMENT

                  (DISCLOSURE SCHEDULE OF FUNDEX GAMES, LTD.)

     The paragraph numbering below corresponds to the paragraph numbering in
Article III of the Merger Agreement.

     3.1  DUE INCORPORATION.

     No exceptions.

     3.2  CAPITALIZATION.

     Common Shares Authorized: 8,000,000 shares, $.0001 par value.
     Common Shares Issued and Outstanding: 1,624,824
     Series A Preferred Authorized: Not Applicable.
     Series A Preferred Issued and Outstanding: Not Applicable.

     The following summarizes stock options, warrants, subscriptions, conversion
rights and similar rights:

        See Exhibit 3B-3.2

     3.3  SUBSIDIARIES.

     None

     3.4  FINANCIAL INFORMATION.

     No exceptions.

     3.5  TAXES.

     (i)  Form 5500 not filed for tax years 1994-1998

     (ii) Company currently under audit for income tax year ending 12/31/96

     3.6  MATERIAL CHANGES.

     No exceptions.

     3.7  TITLE TO ASSETS; LIENS.

     No exceptions.

     3.8  LITIGATION.

     None

     3.9  COMPLIANCE WITH LAWS.

     No exceptions.

     3.10  INSURANCE.

     No exceptions.

     3.11  LICENSES.

     No exceptions.

                                      A-97
<PAGE>   325

     3.12  HAZARDOUS MATERIALS.

     No exceptions.

     3.13  JUDGMENTS AGAINST THE MERGING COMPANY AND/OR ITS BUSINESS.

     None.

     3.14  COMPLETE SALE.

     No exceptions.

     3.15  ASSETS IN GOOD CONDITION.

     No exceptions.

     3.16  DISCLOSURE MATERIALS.

     No exceptions.

     3.17  DEFAULTS.

     None.

     3.18  MATERIAL CONTRACTS.

     None.

     3.19  OUTSTANDING LIABILITIES.

     See Exhibit 3B-3.19.

     3.20  INVENTORY.

     No exceptions.

     3.21  RECEIVABLES.

     No exceptions.

     3.22  EMPLOYEES.

     See Exhibit 3B-3.22.

     3.23  NO CONFLICTS.

     See Exhibit 3B-3.23.

     3.24  VIOLATIONS OF LAW.

     None.

     3.25  CONDITION AND SUFFICIENCY OF ASSETS.

     No exceptions.

     3.26  BANK ACCOUNTS.

     No exceptions.

     3.27  ENVIRONMENTAL MATTERS.

     None.

     3.28  INTELLECTUAL PROPERTY.

     No exceptions.

                                      A-98
<PAGE>   326

     3.29  CUSTOMERS AND SUPPLIERS.

     No exceptions.

     3.30  CHANGES TO THE MERGING COMPANY'S DOCUMENTS.

     No changes.

     3.31  STOCKHOLDERS AGREEMENTS AND OTHER AGREEMENTS.

     None.

     3.32  CERTAIN PAYMENTS.

     No exceptions.

     3.33  FILINGS COMPLETE.

     No exceptions.

     3.34  PRODUCTS.

     No exceptions.

     3.35  PATENTS.

     See Exhibit 3B-3.35.

     3.36  INDEMNIFICATION; SURVIVAL.

                                      A-99
<PAGE>   327

                                 EXHIBIT 3B-3.2

                               FUNDEX GAMES, LTD

                              OPTIONS AND WARRANTS

<TABLE>
<CAPTION>
                                                              NUMBER         EXERCISE PRICE
                                                              ------         --------------
<S>                                                           <C>            <C>
DIRECTORS OPTIONS PURSUANT TO 1996 OPTION PLAN
Sheldon Drobny
  96........................................................    2,000            $ 4.0
  97........................................................    2,000              4.0
  98........................................................    2,000              3.0
William Prophater
  96........................................................    2,000            $ 4.0
  97........................................................    2,000              4.0
  98........................................................    2,000              3.0
Dennis Weidannor
  96........................................................    2,000            $ 4.0
  97........................................................    2,000              3.0
                                                              -------
                                                               16,000
                                                              -------
PRIVATE PLACEMENT BRIDGE CONVERSION
Jay Gale....................................................    2,380            $4.20
Howard Simons...............................................      270             4.20
Aric & Corey Simons.........................................    7,150             4.20
Sharon Gonsky Pension Fund..................................    7,440             4.20
Jerry Schacter..............................................    7,440             4.20
Harbour Court LP I..........................................   14,880             4.20
P.C. Goldslick Revocable Trust..............................   14,880             4.20
Steve Levy..................................................   14,880             4.20
Richard Goulding............................................    8,928             4.20
Dennis Goby.................................................    7,440             4.20
Stacy Rosenberg.............................................    3,720             4.20
Sarah Schwartz..............................................    3,720             4.20
Paradigm Venture............................................   29,762             4.20
                                                              -------
                                                              122,890(1)
</TABLE>

                                      A-100
<PAGE>   328

<TABLE>
<CAPTION>
                                                              NUMBER         EXERCISE PRICE
                                                              ------         --------------
<S>                                                           <C>            <C>
MERRIL WEBBER AS PLACEMENT AGENT -- 5 YR. WARRANTS
(ISSUED 3/97 IN PRIVATE PLACEMENT)
                                                                2,458(1)          4.20
                                                                4,142             4.20
                                                                1,346             5.50
                                                                    0             6.30
                                                              -------
                                                                7,946
                                                              -------
</TABLE>

-------------------------
(1) Upon any exercise of the 4.20 warrants, Merril Webber is entitled to receive
    additional warrants exercisable at $4.20 per share in an amount equal to 2%
    of the gross amount received upon exercise divided by $4.20 up to a maximum
    of 2,458 Fundex warrants.

TOY PARADISE DEAL

     75,000 Warrants not convertible to Futech Warrants. Need 20 days notice
prior to merger to exercise (see sec. 11.2 of Warrant)

<TABLE>
<CAPTION>
                                                      NUMBER                 EXERCISE PRICE
                                                      ------                 --------------
<S>                                                   <C>                    <C>
Aaron Fisher........................................   14,550                     9.60
Sheldon Drobney.....................................   14,550                     9.60
Randall Goulding....................................      750                     9.60
Reevy Rosenberg.....................................    7,275                     9.60
Stewart Shiman......................................   14,550                     9.60
Gordon Ballin.......................................   13,050                     9.60
Bob Noto............................................    3,000                     9.60
Buzz Simons.........................................    7,275
                                                      -------
                                                       75,000
                                                      -------
</TABLE>

                                      A-101
<PAGE>   329

<TABLE>
<CAPTION>
                                                      NUMBER                 EXERCISE PRICE
                                                      ------                 --------------
<S>                                                   <C>                    <C>
EMPLOYEE STOCK OPTIONS VIA 1996 NONSTATUTORY OPTION PLAN
1997 OPTIONS
Carl E. Voigt, IV...................................   10,000                    $4.40
Carl E. Voigt, III..................................   10,000                     4.40
Richard Bowden......................................  [10,000expired](2)
Eric J. Voigt.......................................   10,000                     4.00
George Propsom......................................    7,000                     4.00
Karen Patterson.....................................    2,000                     4.00
Cristen Rabriach....................................   [2,000expired](2)
Tom Fultz...........................................    2,000                     4.00
                                                      -------
                                                       41,000
                                                      -------
</TABLE>

-------------------------
(2) Left employ prior to vesting.

<TABLE>
<S>                                                   <C>                    <C>
1998 OPTIONS
Carl E. Voigt, IV...................................   20,000                     3.30
Carl E. Voigt, III..................................   20,000                     3.30
Jim Money...........................................   10,000                     3.00
Eric Voigt..........................................   10,000                     3.00
George Propsom......................................   10,000                     3.00
Karen Patterson.....................................    3,000                     3.00
Tom Fultz...........................................    3,000                     3.00
                                                      -------
                                                       76,000
                                                      -------
EXERCISABLE OPTIONS AND WARRANTS TO BE CONVERTED TO   338,836
  FUTECH OPTIONS....................................  =======
</TABLE>

                                      A-102
<PAGE>   330

                                EXHIBIT 3B-3.19

                                 SCHEDULE 3.19

FUNDEX GAMES, LTD.
O/S ACCOUNTS PAYABLE > 90 DAYS

<TABLE>
<CAPTION>
            VENDOR                TOTAL          +90                      DISPOSITION
            ------                -----          ---                      -----------
<S>                             <C>           <C>           <C>
Carl E. Voigt III.............   12,947.25     12,947.25    Due by December 31, 1999
Carl E. Voigt IV..............    5,343.43      5,195.39    Due by December 31, 1999
KCET PBS Television...........   22,200.00     22,200.00    $2,220.00 due on first of month until
                                                            paid in full (03/01/00)
Kyce Enterprise...............   31,097.04     31,097.04    $6,000.00 due first and third week of
                                                            month until paid in full (July 1999)
Max-Key Enterprises...........   89,672.60     65,139.80    $10,000.00 due last week of month until
                                                            paid in full (November 1999)
Jack of All Games.............   43,600.20     43,600.20    $14,677.25 due 15th of month until paid
                                                            in full (July 15, 1999)
WKOP PBS Television...........   11,916.67     11,916.67    $1,083.33 due on first of month until
                                                            paid in full (04/01/00)
Meyer Fredericks..............   13,300.65     13,300.65    $3,500.00 due 15th of month until paid
                                                            in full (July 15, 1999)
Much Shelist Rubenstein.......   64,100.04     11,579.42    $11,579.42 due on May 31, 1999
Playtoy Industries............    1,300.20      1,300.20    Commissions due on bankrupt customer
Paine Webber..................   49,000.00     49,000.00    Money Purchase Plan settlement -- due
                                                            June 30, 1999
                                344,478.08    267,276.62
</TABLE>

                                      A-103
<PAGE>   331


                                EXHIBIT 3B-3.22


HOURLY PAID EMPLOYEES

      1. Medical Benefits -- Company covers 88% of cost for individual and
         family upon election by employee. Employees are eligible after 30 days
         of employment.

      2. Cafeteria Plan -- Employees are eligible to participate in the
         cafeteria plan, which includes universal life, short-term disability,
         dental and a variety of flex plans, upon 90 days of employment. The
         employees cover 100% of the cost.

      3. Long-term Disability -- Company covers 100% of cost after 30 days of
         employment.

      4. Life Insurance -- Company covers 100% of cost of $10,000 term policy
         after 30 days of service.

      5. Vacation -- Two weeks paid per annum, three weeks after five years of
         service.

      6. Holidays -- seven paid holidays upon employment. Holiday pay is not
         granted if there is an unexcused absence the day preceding or following
         the holiday. These holidays are generally included though they may
         change by letter memo at the beginning of each calendar year: New Years
         Day, Memorial Day, Fourth of July, Labor Day, Thanksgiving,
         Thanksgiving Friday, Christmas.

      7. Sick Days -- Five days are earned each year and are granted on the
         first day of the calendar year.

      8. Bonus -- Discretionary by management.

      9. Stock Options -- ?

     10. Simple IRA Plan -- Employees may contribute up to 15% percent of their
         salary, with a cap of $6,000 per annum, after 90 days of service.
         Company will match up to 3%.

     11. Hours -- Warehouse: 7:00 AM to 4:00 PM with two 15 minute breaks and 30
         minutes for lunch; Office: Flexible, but must work nine hours between
         7:00 AM to 5:30 PM with a 1 hour lunch.

     12. Overtime -- None unless approved by supervisor.

     13. Absences -- All absences must be excused by your supervisor. Personal
         days are used to cover excused absences.

SALARIED EMPLOYEES

     same

                                      A-104
<PAGE>   332

                               EXHIBIT 3B -- 3.23

<TABLE>
<CAPTION>
NAME                     RELATIONSHIP           ADDRESS
----                     ------------           -------
<S>                      <C>                    <C>
Wells Fargo Business
  Credit...............  Line of Credit         111 East Wayne Street, Fort Wayne, IN 46801
                         Facility
Liberty BIDCO
  Investment Corp. ....  Mezzanine Note         3000 Town Center, Suite 830, Southfield, MI
                                                48075-1177
Duke Reality
  Investment, Inc. ....  Warehouse Lease        281 Fortune Circle East, Suite M,
                                                Indianapolis, IN 46241
200 Fifth Avenue
  Associates...........  Showroom Lease         60 East 42nd Street, 53rd Floor, New York, NY
                                                10010
Performance
  Unlimited............  License Agreement      1710 General George Patton Drive, Suite 110,
                                                Brentwood, TN 37027
NBD Bank, N.A. ........  Equipment Lease        151 N. Delaware Street, #850, Indianapolis,
                                                IN 46158
IKON Capital...........  Copier/Fax Lease       P.O. Box 9115, Macon, GA 31208-9115
Pitney Bowes Credit
  Corp. ...............  Postage Machine Lease  P.O. Box 5151, Shelton, CT 06484-7151
Active International...  Media Barter           1 Blue Hill Plaza, Pearl River, NY 10965
Management Computer
  Systems..............  Computer Service       7301 N. Shadeland Ave, Suite B, Indianapolis,
                                                IN 46250
Software Solutions.....  Accounting Software    c/o Management Computer Systems, 7301 N.
                                                Shadeland Ave, Suite B, Indianapolis, IN
                                                46250
Commercial Union
  Insurance............  Property Casualty      c/o Agency Associates, 4545 Northwestern Hwy,
                         Ins.                   Zionsville, IN 46067
</TABLE>


     Fundex has a dispute with Toys R Us over a $70,000 chargeback made by Toys
R Us on product ordered with an unreasonable ship date.


                                      A-105
<PAGE>   333


                                EXHIBIT 3B-3.35


LICENSE AGREEMENTS:

-  Anjar Company -- "Kreskin's Amazing Oracle Game" license dated October 5,
   1998

-  Baron Design & Development -- "Water Bopper" license dated September 9, 1997

-  George Castanis & Delaney Product Development -- "Peanut Butter and Jelly
   Game" license dated November 1, 1996

-  Gordon Barlow Design -- "A-Z" license dated March 20, 1996

-  Gordon Barlow Design -- "Clowning Around" license dated August 19, 1996

-  Gordon Barlow Design -- "Comfy Couch" license dated August 19, 1996

-  Gordon Barlow Design -- "Disc Shooter Target Set" license dated March 20,
   1996

-  Gordon Barlow Design -- "Giggling Ghosts" license dated August 19, 1996

-  Gordon Barlow Design -- "Limbo Splash" license dated August 19, 1996

-  Gordon Barlow Design -- "Spaghetti Train" license dated August 19, 1996

-  Gordon Barlow Design -- "5 in 1 Game" license dated September 10, 1997

-  Gordon Barlow Design -- "Telephone Game" license dated August 19, 1996

-  Gordon Barlow Design -- "Tug-of-War Game" license dated March 20, 1996

-  Gordon Barlow Design -- "Fishin' Fun" license dated May 19, 1997

-  Hollywood Ventures Corporation -- "Big Comfy Couch" license dated November 1,
   1995

-  Hollywood Ventures Corporation -- "Inflatable Big Comfy Couch" license dated
   June 1, 1996

-  Ken Johnson -- "Phase 10" license dated December 1, 1986, as amended

-  Lydia Freilich & Randy Lister -- "Triangle with Ball Skill Game" license
   dated November 28, 1997

-  M Design -- "Piranha Game" license dated

-  Meyer/Glass Design -- "Big Shots" license dated November 1, 1996

-  Performance Unlimited -- "Beginner's Bible/Dovetales" dated November 8, 1993

-  Performance Unlimited -- "The Beginners Bible" license dated November 15,
   1997

-  Random Games -- "Big Comfy Couch Hidden Treasures" license dated February 27,
   1996

-  Random Games -- "Heroes of the Bible" game license dated December 13, 1993

-  Random Games -- "King of the Jungle" game license dated January 6, 1994

-  Random Games -- "Phase 10 Dice" license dated May 21, 1993

-  Random Games -- "Pocahontas Harvest" license dated December 12, 1994

-  Random Games -- "The Jungle Animals Game" dated December 13, 1993

-  Random Games -- "Tortoise and the Hare" game license dated December 13, 1993

-  Royal Tee Inc. and Brainchild Games, Inc. license dated January 1, 1996

                                      A-106
<PAGE>   334

-  Seven Towns Ltd. -- "Penguin Panic" license dated July 1, 1998

-  Theora Design -- "Search 4" licensing agreement dated January 11, 1999

-  Yurkovic Design -- "Chairs Game" license dated November 4, 1998

PATENTS/TRADEMARKS:

-  Patent #5,873,727 Apparatus for Moving Pieces During a Game Playing Period
   and an Associated Method of Playing a Game -- application filed September 9,
   1997

-  Patent Pending -- Multipurpose Game Assembly -- application filed September
   3, 1998

-  Trademark "Upsets" -- registration date August 19, 1997

-  Trademark "Toot 'R Ville Express" -- registration date June 30, 1998

-  Trademark "Telephone Tag" -- registration date June 30, 1998

-  Trademark "Big Shot" -- registration date November 11, 1996

-  Trademark "Limbo Splash" -- registration date January 19, 1999

-  Trademark "Piranha" -- registration date February 2, 1999

-  Trademark "Penguin Pileup" -- registration date pending

-  Trademark "Down And Out" -- registration date pending

-  Trademark "Search 4" -- registration date pending

-  Trademark "Squeezed Out" -- registration date pending

-  Trademark "Chairs" -- registration date pending

-  Trademark "Pegs & Jokers" -- registration date pending

-  Trademark "Sound Zone" -- registration date pending

-  Trademark "Child's First" -- registration date pending

                                      A-107
<PAGE>   335

                                  EXHIBIT 3-C

                                       TO

                                MERGER AGREEMENT

           (DISCLOSURE SCHEDULE OF FUTECH INTERACTIVE PRODUCTS, INC.)

     The paragraph numbering below corresponds to the paragraph numbering in
Article III of the Merger Agreement.

     3.1  DUE INCORPORATION.

     No exceptions.

     3.2  CAPITALIZATION.

     Common Shares Authorized: 235,000,000 shares, no par value.
     Common Shares Issued and Outstanding: 87,339,078
     Series A Preferred Authorized: 100,000,000 shares, no par value
     Series A Preferred Issued and Outstanding: 3,750,000

     The following summarizes stock options, warrants, subscriptions, conversion
rights and similar rights:

        See EXHIBIT 3C-3.2.

     3.3  SUBSIDIARIES.

     Janex International, Inc.

     Gold Star Publishing, LLC.

     3.4  FINANCIAL INFORMATION.

     No exceptions.

     3.5  TAXES.

     No exceptions.

     3.6  MATERIAL CHANGES.


     No exceptions.


     3.7  TITLE TO ASSETS; LIENS.

     No exceptions.

     3.8  LITIGATION.

     On May 1, 1998, Futech acquired substantially all of the assets of XYZ
Group Inc. ("XYZ"), a wholesaler and distributor of books and various book
products including children's electronic toys and book and toy combination
products for consideration of $10,200,000, including a $4,000,000 note payable
to the former owner and $2,867,334 payable either in cash or with 14,336,670
shares of Futech's common stock. The $2,867,334 has not been paid and the
certificates for common stock has not been issued. The note payable accrues
interest at 10% per annum, and was due May 1, 1999. According to the agreement,
an additional $1,000,000 is due as of May 1, 1999, and $100,000 interest is
added to the total due. Additional consideration of $2,332,666 was contingent on
XYZ's sales performance. Futech's position is that the contingencies were not
met.

                                      A-108
<PAGE>   336

     See EXHIBIT 3C-3.8.

     3.9  COMPLIANCE WITH LAWS.

     No exceptions.

     3.10  INSURANCE.

     No exceptions.

     3.11  LICENSES.

     No exceptions.

     3.12  HAZARDOUS MATERIALS.

     No exceptions.

     3.13  JUDGMENTS AGAINST THE MERGING COMPANY AND/OR ITS BUSINESS.

     None.

     3.14  COMPLETE SALE.

     No exceptions.

     3.15  ASSETS IN GOOD CONDITION.

     No exceptions.

     3.16  DISCLOSURE MATERIALS.

     No exceptions.

     3.17  DEFAULTS.

     None.

     3.18  MATERIAL CONTRACTS.

     None.

     3.19  OUTSTANDING LIABILITIES.

     See EXHIBIT 3C-3.19.

     3.20  INVENTORY.

     No exceptions.

     3.21  RECEIVABLES.

     No exceptions.

     3.22  EMPLOYEES.

     See EXHIBIT 3C-3.22.

     3.23  NO CONFLICTS.

     None.

     3.24  VIOLATIONS OF LAW.

     None.

                                      A-109
<PAGE>   337

     3.25  CONDITION AND SUFFICIENCY OF ASSETS.

     No exceptions.

     3.26  BANK ACCOUNTS.

     No exceptions.

     3.27  ENVIRONMENTAL MATTERS.

     None.

     3.28  INTELLECTUAL PROPERTY.

     No exceptions.

     3.29  CUSTOMERS AND SUPPLIERS.

     No exceptions.

     3.30  CHANGES TO THE MERGING COMPANY'S DOCUMENTS.

     See EXHIBIT 3C-3.30.

     3.31  STOCKHOLDERS AGREEMENTS AND OTHER AGREEMENTS.

     None.

     3.32  CERTAIN PAYMENTS.

     No exceptions.

     3.33  FILINGS COMPLETE.

     No exceptions.

     3.34  PRODUCTS.

     No exceptions.

     3.35  PATENTS.

     See EXHIBIT 3C-3.35.

     3.36  INDEMNIFICATION; SURVIVAL.

                                      A-110
<PAGE>   338


                                 EXHIBIT 3C-3.2



                         STOCK OPTIONS, WARRANTS, ETC.



                       FUTECH INTERACTIVE PRODUCTS, INC.



                          SCHEDULE OF CONVERTIBLE DEBT



                               AS OF MAY 23, 1999



<TABLE>
<CAPTION>
                                                                    TOTAL       CONVERSION
                                ORIGINAL                          PRINCIPAL        RATE      CONVERSION
                                  LOAN      INTEREST   DATE OF   AND INTEREST      (PER      EXPIRATION
                                 AMOUNT       RATE      LOAN      DUE 3-1-99      SHARE)        DATE
                                ---------   --------   -------   ------------   ----------   ----------
<S>                             <C>         <C>        <C>       <C>            <C>          <C>
LENDER:
Vincent W. Goett & Roderick
  Turner......................  2,500,000    10.00%     1/2/98    63,551.86        0.05       6/15/00
Vincent W. Goett & Roderick
  Turner......................  1,500,000    10.00%     5/5/98    38,131.12        0.05       6/15/00
Vincent W. Goett & Roderick
  Turner......................  1,000,000    10.00%    6/24/98    25,224.45        0.05       6/15/00
Vincent & Melissa Goett.......  2,000,000    10.00%    8/10/98    25,420.75        0.05       2/10/00
</TABLE>



     On 3-31-98 Vincent Goett provided a personal guarantee in the amount of
$3,600,000 for a bank loan. Goett and Futech agreed that if Goett is required to
pay the debt personally, he may be repaid by Futech in cash or in stock at the
rate of $0.05 per share.


                                      A-111
<PAGE>   339

                                 EXHIBIT 3C-3.8


COMMITMENTS AND CONTINGENCIES


     In 1998, the former owner of XYZ filed a lawsuit in Wisconsin against the
Company, alleging the breach of an employment agreement. The parties have agreed
to arbitration in Arizona, and the lawsuit was dismissed. Although the outcome
of this matter cannot be determined at this time, management does not believe it
will be material to the operations, financial position, or cash flows of the
Company.

     On December 22, 1998, Premier Publishing, Inc. filed a complaint in
Wisconsin against the Company alleging, among other things, conversion and
breach of contract. Discovery is currently ongoing. The outcome of this matter
cannot be determined at this time.

     The Company is a party to other litigation in the ordinary course of
business. Management, after taking into account the opinion of counsel, believes
the ultimate outcome of such matters will not have a material adverse effect on
the Company's financial position.

     In December 1997, Goett personally settled a lawsuit against the Company
and certain of its shareholders regarding certain patent rights. The Company
originally agreed to pay Goett $10,000 per month from July 1, 1998 through June
30, 1999 and an additional payment of $1,500,000 on June 30, 1999 to acquire the
rights to the patents and to reimburse Goett for the cost of the settlement. On
December 9, 1998, the agreement was revised to omit the $10,000 per month
payment in exchange for an advance payment on the $1,500,000, and to change the
due date to June 1, 1999. The balance owing at December 31, 1998 is $850,000.

                                      A-112
<PAGE>   340

                                EXHIBIT 3C-3.19

     The following is a listing of the liabilities relating to the companies
business which are more than ninety (90) days past due:

<TABLE>
<S>                                                           <C>
Airtouch Cellular...........................................      127.90
William Charles Bundren & Associates, P.C. .................   38,517.51
Chase Manhatten Bank........................................   98,850.69
Digital Industries..........................................    1,334.00
Ernst & Young...............................................   11,237.00
James W. Gick...............................................   13,379.61
Hebert, Schenk & Johnsen....................................    4,807.56
Knobbe, Martens, Olsen & Bear, LLP..........................    3,544.12
Leonard, Dicker, & Schreiber................................    2,244.87
Marvel Entertainment Group, Inc. ...........................   30,000.00
Stephen McTaggert...........................................   17,909.50
MetroTel Business Systems...................................      112.50
Quarles & Brady.............................................  157,857.48
Squire, Sanders & Dempsey...................................   43,636.75
Taylor Design...............................................    3,000.00
Virchow, Krause & Company, LLP..............................    3,500.00
H. C. Wainwright & Company..................................   20,000.00
                                                              ----------
Total liabilities more than 90 days past due................  450,059.49
                                                              ==========
</TABLE>

(ii) LIABILITIES ARISING AFTER THE BALANCE SHEET DATE THAT ARE OUTSIDE THE
     NORMAL COURSE OF BUSINESS.

     The Company has an additional liability in the amount of $1,400,000.00 as
of April 29, 1999 for the following contingency in the purchase agreement
between the Company and XYZ Group Inc. for the purchase of XYZ Group Inc.:

          "That if the entire $4,000,000.00 is not paid by one year after the
     Closing, then: (1) interest shall be added to the amount due, calculated on
     the outstanding balance at the rate of ten percent (10%) per annum from the
     date of the Closing under paid in full; and (ii) $1,000,000.00 shall be
     added to the amount payable, as a penalty and said $1,000,000.00 shall
     accrue interest at the rate of ten percent (10%) per annum for the date
     which is one year after the Closing until paid in full.

                                      A-113
<PAGE>   341

                                EXHIBIT 3C--3.22

     3.22  Employees

     1.  Medical/Dental Benefits

         Company pays 100% of cost for individual and family effective the first
         month following 30 days of employment. Dental insurance is also
         available to employees in Wisconsin at a cost to the employee.

     2.  Vacation

         Two weeks paid per annum, 5 days every six months available after 6
         months of employment.

         a.  Two weeks (10 days)
             (Accrue 5 days every 6 months from date of hire)

         b.  Three weeks (15 days) after five year anniversary
             (Accrue 7 1/2 days every 6 months from date of hire)

         c.  Four weeks (20 days) after ten year anniversary
             (Accrue 10 days every 6 months from date of hire)

     3.  Eight Holidays with Pay

         These holidays are generally included though they may change at the
         discretion of management.

                     New Year's Day
                     Good Friday
                     Memorial Day
                     Fourth of July
                     Labor Day
                     Thanksgiving
                     Thanksgiving Friday
                     Christmas

     4.  Stock Options

         Eligibility:  At the discretion of management. Consideration for
         Options: Performance, salary level, and tenure.

     5.  401 K Plan

         Company contribution at the rate of 25% of employee paid in amount up
         to 4% of one's salary. Vesting and other restriction apply.

     6.  Personal Days/Sick Days

         Each employee has 5 fully paid personal days per year, either in time
         off or payroll. All employees are entitled to 5 fully paid days per
         year for major illness requiring hospitalization of 3 days or more.

                                      A-114
<PAGE>   342

                                EXHIBIT 3C-3.30

     (i)  any changes in Articles of Certificate of incorporation or bylaws.

     NONE

     (ii)  any change in the numbers of shares of stock issued and outstanding.

     Please refer to the following schedule:

<TABLE>
<CAPTION>
                                             COMMON STOCK                         PREFERRED
                                  ----------------------------------   -------------------------------
                                    SHARES     DOLLARS     ISSUABLE     SHARES     DOLLARS    ISSUABLE
                                  ----------   --------   ----------   ---------   --------   --------
<S>                               <C>          <C>        <C>          <C>         <C>        <C>
Common Stock issuable in
  connection with XYZ Company
  acquisition...................  14,336,670              $2,867,334
Preferred stock issued in
  connection with acquisition of
  Janex shares..................                                       3,750,000   $750,000
Roderick L. Turner Debt
  conversion, $350,000 loan plus
  accrued interest, 3/1/99......   2,780,555   $417,083
Roderick L. Turner Debt
  conversion, $300,000 loan plus
  accrued interest, 3/1/99......   2,097,342    314,601
Elizabeth D. Pickard Debt
  conversion, $100,000.00 loan
  plus accrued interest,
  3/1/99........................     808,416    121,262
Dyer Holdings, LLC Debt
  conversion, $300,000 loan plus
  accrued interest, 3/1/99......     565,892     84,884
Nehring Family Trust Debt
  conversion, $100,000.00 loan
  plus accrued interest,
  3/1/99........................     808,416    121,262
</TABLE>

     (iii)  the merger or consolidation of the Merging Company with any or into
            any other corporation or other entity.

     On March 31, 1998 the Company acquired substantially all of the assets of
Gick Publishing, Inc. ("Gick"), for cash consideration of $2,020,000 plus the
assumption of certain liabilities totaling $940,452. Gick manufactures and sells
foam-based greeting cards and products.


     On May 1, 1998 the Company acquired substantially all of the assets of XYZ
Group Inc. ("XYZ"), a wholesaler and distributor of books and various book
products including children's electronic toys and book and toy combination
products, for consideration of $10,200,000, including a $4,000,000 note payable
to the former owner and $2,867,334 payable either in cash or with 14,336,670
shares of the Company's common stock. The note payable is due April 29, 1999 and
bears interest at 10 percent. Consideration of $2,332,666 was contingent based
on XYZ's future performance. However, these contingencies were not met. On April
29, 1999, an additional $1,400,000.00 is due from this transaction (please see
Section 3.19(ii) for more on this liability).


     On December 11, 1998 the Company acquired approximately 73 percent of the
outstanding common stock and 100 percent of the outstanding preferred stock of
Janex International, Inc., ("Janex"), a developer, marketer and seller of toys
and children's products, for consideration of $1,500,000, consisting of a
$750,000 note payable and $750,000 payable with 3,750,000 shares of the
Company's preferred stock. The note bears interest at 10 percent and is payable
30 days after the
                                      A-115
<PAGE>   343

merger of Futech into Janex. Janex is a publicly traded New Jersey based Nasdaq
"pink sheet" company which trades under the symbol "JANX".


     On February 5, 1999, the Company filed Articles of Organization to form
Gold Star Publishing, LLC ("Gold Star" or "the LLC") (dba SuperStar Kids' Club),
a limited liability company. Under the terms of the operating agreement, the
Company will own 49 percent of Gold Star and will manage the financial and
business functions of the LLC while the other member will manage the creative
functions. The Company has committed to provide $500,000 to Gold Star as
contribution to the company as needed and to loan to Gold Star any additional
funds needed for its first 21 months of operations. Futech contributed $200,000
to the LLC, which was used to extinguish debt of the LLC. The LLC creates and
publishes children's books which will be sold in the mass market and via the
SuperStar Kids' Club Internet web site.


     (iv)  NONE

     (v)  The employment agreement between the Company and Chairman of the
          Board, Vincent W. Goett has a salary for the calendar year 1999 of
          $350,000. The Company has recorded and paid this obligation of only an
          annualized salary of $250,000. The error has been corrected and a
          payment retroactive to January 1, 1999 will be paid on the payroll of
          May 28, 1999.

                                      A-116
<PAGE>   344

                                EXHIBIT 3C-3.35

                       FUTECH MASTER PATENT STATUS CHART

                            U.S. PATENT APPLICATIONS

<TABLE>
<CAPTION>
           Q&B                                                       FILING           RELATIONAL
         REF. NO.                 TITLE            SERIAL NO.         DATE               DATA                    STATUS
         --------                 -----            ----------        ------           ----------                 ------
<S>                         <C>                 <C>               <C>            <C>                    <C>
370100.90156..............  Scroll Toy          Not Yet Assigned  Not Yet Filed  --                     No application prepared
                                                                                                        or filed per client
                                                                                                        request.
370100.90172..............  Baby Baton          Not Yet Assigned  Not Yet Filed  --                     Ask client for
                                                                                                        instructions as to filing
                                                                                                        01/99.
370100.90181..............  Decorative Novelty  09/025,351        02/18/98       Divisional(1)          Should receive 1st Office
                            Articles                                             Application of Serial  Communication by 08/99.
                                                                                 No. 08/577,609         Status check 08/99.
370100.90245..............  Decorative Novelty  Not Yet Assigned  Not Yet Filed  Continuation In        Under client review
                            Articles                                             Part(2)                (1/13/99).
                            w/Audiovisual                                        (CIP) of Serial No.
                            Enhancements and                                     09/025,351
                            Method Therefor
                            (musical postcard)
370100.90377..............  An Accordion-Type   09/216,612        12/18/98       CIP of Serial No.      Filing Receipt (FR)
                            Electronic Book                                      08/898,056             received with PTO error;
                            and a Method of                                                             expected corrected FR by
                            Manufacture                                                                 06/99.
                            Therefor
370100.90393..............  Apparatus for       08/898,056        07/22/97       Continuation(3) of     Amendment submitted
                            Presenting Visual                                    08/474,707             1/14/99. Check status
                            Material with                                                               07/99.
                            Identified Sensory
                            Material
</TABLE>

                                      A-117
<PAGE>   345
                FUTECH MASTER PATENT STATUS CHART -- (CONTINUED)

                            REGISTERED U.S. PATENTS

<TABLE>
<CAPTION>
                Q&B                                                    ISSUE         RELATIONAL
             REF. NO.                      TITLE         PATENT NO.     DATE            DATA                     STATUS
             --------                      -----         ----------    -----         ----------                  ------
<S>                                  <C>                 <C>          <C>       <C>                     <C>
370100.90032.......................  Electronic Book     5,417,575    05/23/95  CIP of Patent No.       2nd Maintenance Fee due
                                                                                5,167,508               11/23/02.
370100.90041.......................  Apparatus for       5,484,292    01/16/96  CIP of Serial No.       1st Maintenance Fee due
                                     Combining Audio                            07/685,278              07/16/99.
                                     and Visual Indicia
370100.90059.......................  Electronic Book     5,167,508    12/01/92  CIP of Serial No.       2nd Maintenance Fee due
                                                                                396,129                 06/01/00.
370100.90067.......................  Method of           5,609,488    03/11/97  Divisional of Serial    1st Maintenance Fee due
                                     Combining Audio                            No. 07/980,649          09/11/00.
                                     and Visual Indicia
370100.90091.......................  Game Board          5,772,208    06/30/98           --             1st Maintenance Fee due
                                     Incorporating                                                      12/30/01.
                                     Apparatus for
                                     Selectively
370100.90105.......................  Model Motor         5,782,186    07/21/98           --             1st Maintenance Fee due
                                     Vehicle Track                                                      01/21/02.
                                     System
370100.90181.......................  Decorative Novelty  5,735,453    04/07/98           --             1st Maintenance Fee due
                                     Articles                                                           10/07/01.
370100.90385.......................  Squeeze Flashlight  5,434,761    07/18/98           --             2nd Maintenance Fee due
                                                                                                        01/18/03.
370100.90407.......................  Activated Work and  4,656,469    04/07/87           --             3rd Maintenance Fee due
                                     Method of Forming                                                  04/07/99.
                                     Same
370100.90415.......................  Visual and Audible  4,703,573    11/03/87           --             3rd Maintenance Fee due
                                     Activated Work and                                                 05/03/99.
                                     Method of Forming
                                     Same
</TABLE>

                          FOREIGN PATENT APPLICATIONS
<TABLE>
<CAPTION>
Q&B REFERENCE               TITLE                 COUNTRY     APPLICATION NO.  FILING DATE         RELATIONAL DATA
-------------               -----                 -------     ---------------  -----------         ---------------
<S>             <C>                            <C>            <C>              <C>            <C>
370100.90041... Apparatus for Combining Audio  PCT            PCT/US93/10705   11/04/93       Corresponds to U.S. Patent
                and Visual Indicia                                                            No.: 5,484,292
370100.90041... Apparatus for Combining Audio  Europe         94901300.7       06/24/95       PCT/US93/10705
                and Visual Indicia
370100.90041... Apparatus for Combining Audio  Canada         2,150,013        05/23/95       PCT/US93/10705
                and Visual Indicia
370100.90041... Apparatus for Combining Audio  India          1253/Del/93      11/09/93       PCT/US93/10705
                and Visual Indicia
370100.90041... Apparatus for Combining Audio  Japan          513158/94        06/24/95       PCT/US93/10705
                and Visual Indicia
370100.90059... Electronic Book                PCT            PCT/US92/03056   04/14/92       US Serial No. 07/685,278
370100.90059... Electronic Book                Europe         92911059.1       04/14/92       PCT/US92/03056
370100.90059... Electronic Book                Canada         2,108,554        10/15/93       PCT/US92/03056

<CAPTION>
Q&B REFERENCE              STATUS
-------------              ------
<S>             <C>
370100.90041..  Completed.

370100.90041..  Response to Office Action
                filed 12/06/98; check status
                06/99.
370100.90041..  Office Action Response Due
                05/12/99.
370100.90041..  Check status 06/99.

370100.90041..  Request for Examination due
                11/04/00.
370100.90059..  Completed.
370100.90059..  Response filed with EPO
                12/98; check status 06/99.
370100.90059..  Annuity and Request for
                Examination due 04/14/99.
                Need client instructions by
                02/14/99.
</TABLE>

                                      A-118
<PAGE>   346
                FUTECH MASTER PATENT STATUS CHART -- (CONTINUED)
<TABLE>
<CAPTION>
Q&B REFERENCE               TITLE                 COUNTRY     APPLICATION NO.  FILING DATE         RELATIONAL DATA
-------------               -----                 -------     ---------------  -----------         ---------------
<S>             <C>                            <C>            <C>              <C>            <C>
370100.90059... Electronic Book                S. Korea       18,887/92        10/14/92       PCT/US92/03056
370100.90059... Electronic Book                Japan          510057/92        04/14/92       PCT/US92/03056
370100.90059... Electronic Book                India          886/Del/92       09/30/92       PCT/US92/03056
370100.90059... Electronic Book                Kazakhstan     Not Yet          11/15/93       PCT/US92/03056
                                                              Assigned
370100.90083... Laminated Sheet Product        PCT            PCT/US97/21276   11/18/97       U.S. Serial No.:
                Containing                                                                    60/031,184
370100.90091... Game Board Incorporating       PCT            PCT/US96/17589   11/05/96       U.S. Serial No: 08/554,734
                Apparatus for Selectivity
370100.90091... Game Board Incorporating       Canada         2,236,891        11/05/96       PCT/US96/17589
                Apparatus for Selectively
370100.90091... Game Board Incorporating       Europe         96938731.5       11/05/96       PCT/US96/17589
                Apparatus for Selectively
370100.90091... Game Board Incorporating       India          2436/Del/96      11/06/96       U.S. Serial No.:
                Apparatus for Selectively                                                     08/554,734
370100.90105... Model Motor Vehicle Track      PCT            PCT/US97/23943   12/24/97       U.S. Serial No.:
                System                                                                        08/775,956
370100.90181... Decorative Novelty Articles    PCT            PCT/US96/18098   11/08/96       U.S. Serial No.:
                                                                                              08/557,609
370100.90181... Decorative Novelty Articles    Europe         96939659.7       11/08/96       PCT/US96/18098

<CAPTION>
Q&B REFERENCE              STATUS
-------------              ------
<S>             <C>
370100.90059..  Request for Examination
                filed; check status 03/99.
370100.90059..  Request for Examination due
                04/14/99. Per client
                instructions, will permit
                ABANDONMENT on 04/14/99.
370100.90059..  Check status 01/99.
370100.90059..  Check status 01/99.
370100.90083..  National Phase filing due
                5/19/99.
370100.90091..  Completed.
370100.90091..  Maintenance Fee due 11/05/99.
                Request for Examination due
                11/05/99.
370100.90091..  Follow up by 03/99 on request
                for status sent 02/99.
370100.90091..  Check status due 03/99.
370100.90105..  National Phase filing due
                07/03/99.
370100.90181..  Completed.
370100.90181..  Renewal due 11/30/99. Need
                client instruction by 09/99.
</TABLE>

                           REGISTERED FOREIGN PATENTS
<TABLE>
<CAPTION>
Q&B REFERENCE               TITLE                 COUNTRY       PATENT NO.      ISSUE DATE         RELATIONAL DATA
-------------               -----                 -------       ----------      ----------         ---------------
<S>             <C>                            <C>            <C>              <C>            <C>
370100.90059... Electronic Book                Australia      664,701          03/19/96       PCT/US92/03056

<CAPTION>
Q&B REFERENCE              STATUS
-------------              ------
<S>             <C>
370100.90059..  Annuity due 04/14/99.
</TABLE>

                             ABANDONED APPLICATION
<TABLE>
<CAPTION>
                                                     SERIAL       FILING                         RELATIONAL
    REFERENCE                  TITLE                   NO.         DATE       COUNTRY               DATA
    ---------                  -----                 ------       ------      -------            ----------
<S>                <C>                            <C>            <C>        <C>            <C>
FUT04-0370.......  Apparatus for Combining Audio  08/474,707     06/07/95   U.S.           Parent application to
                   and Visual Material                                                     pending continuation
                                                                                           application 08/898,056
370100.90041.....  Apparatus for Combining Audio  702092/1995    05/24/95   South Korea    PCT/US93/10705
                   and Visual Indicia
370100.90041.....  Apparatus for Combining Audio  None.          None.      Brazil         PCT/US93/10705
                   and Visual Indicia
370100.90059.....  Electronic Book                9211105.0      10/14/92   China          PCT/US92/03056
370100.90059.....  Electronic Book                93058476/09    10/15/93   Russia         PCT/US92/03056
370100.90059.....  Electronic Book                9400697.2      08/09/94   Uzbekistan     PCT/US92/03056
370100.90083.....  Laminated Sheet Product        97/10411       11/19/97   South Africa   U.S. Serial No.:
                   Containing                                                              60/031,184

<CAPTION>

    REFERENCE              STATUS
    ---------              ------
<S>                <C>
FUT04-0370.......  File kept with Serial
                   No. 08/898,056.

370100.90041.....  ABANDONED per client
                   instructions.
370100.90041.....  Filing deadline missed
                   by prior firm.
370100.90059.....  ABANDONED per client
                   instructions.
370100.90059.....  ABANDONED per client
                   instructions.
370100.90059.....  ABANDONED per client
                   instructions.
370100.90083.....  ABANDONED per client
                   instruction.
</TABLE>

                                      A-119
<PAGE>   347
                FUTECH MASTER PATENT STATUS CHART -- (CONTINUED)
<TABLE>
<CAPTION>
                                                     SERIAL       FILING                         RELATIONAL
    REFERENCE                  TITLE                   NO.         DATE       COUNTRY               DATA
    ---------                  -----                 ------       ------      -------            ----------
<S>                <C>                            <C>            <C>        <C>            <C>
370100.90083.....  Printed Speaker for            60/031,184     11/19/96   U.S.           PCT/US97/21276
                   Incorporation into a           (Provisional)
                   Laminated Sheet Product
370100.90083.....  Printed Battery for            60/031,185     11/19/96   U.S.           PCT/US97/21276
                   Incorporation into a           (Provisional)
                   Laminated Sheet Product
370100.90105.....  Model Motor Vehicle Track      98/0027        01/05/98   South Africa   U.S. Serial No.:
                   System                                                                  08/775,956

<CAPTION>

    REFERENCE              STATUS
    ---------              ------
<S>                <C>
370100.90083.....  ABANDONED after filing
                   PCT application.
370100.90083.....  ABANDONED after filing
                   PCT application.
370100.90105.....  ABANDONED per client
                   instructions.
</TABLE>

                               ABANDONED PATENTS
<TABLE>
<CAPTION>
                                                     PATENT       ISSUE                          RELATIONAL
    REFERENCE                  TITLE                   NO.         DATE       COUNTRY               DATA
    ---------                  -----                 ------       -----       -------            ----------
<S>                <C>                            <C>            <C>        <C>            <C>
370100.90041.....  Apparatus Combining Audio and  10815          02/23/96   Sri Lanka      PCT/US93/10705
                   Visual Indicia
370100.90041.....  Apparatus Combining Audio and  673,219        02/18/97   Australia      PCT/US93/10705
                   Visual Indicia
370100.90059.....  Electronic Book                178,299        06/07/95   Mexico         PCT/US92/03056
370100.90059.....  Electronic Book                57,656         09/01/90   Taiwan         U.S. Serial No.
                                                                                           07/396,129

<CAPTION>

    REFERENCE              STATUS
    ---------              ------
<S>                <C>
370100.90041.....  ABANDONED per client
                   instructions.
370100.90041.....  ABANDONED per client
                   instructions.
370100.90059.....  ABANDONED per client
                   instructions.
370100.90059.....  ABANDONED per client
                   instructions.
</TABLE>

                                      A-120
<PAGE>   348
                FUTECH MASTER PATENT STATUS CHART -- (CONTINUED)

                      [PATENT MARKING GUIDELINES TO COME]

                                      A-121
<PAGE>   349
                FUTECH MASTER PATENT STATUS CHART -- (CONTINUED)

                     PATENT MARKING GUIDELINES (CONTINUED)

     f. In summary, assume a product is covered by U.S. Patent 1,234,567 and
        several patent applications pending in the U.S. and abroad. Here, the
        product should be marked as: "U.S. Patent 1,234,567. U.S. and Foreign
        Patents Pending."

                                      A-122
<PAGE>   350
                FUTECH MASTER PATENT STATUS CHART -- (CONTINUED)

     1.  Divisional Application:  As a beginning proposition, under U.S. Patent
Law, you can protect only one invention per patent. Occasionally, a Patent
Examiner will allege that an applicant is attempting to protect more than one
invention in a single patent application. In response, the applicant must select
which one of the inventions to prosecute in the patent application. Then, the
applicant can file what is known as a "divisional application" to prosecute
claims directed to the other invention.

     2.  Continuation In Part Application:  Assuming you have a patent
application A that discloses the details of an invention, you can file a CIP
application that adds "new matter" (details of the invention not in application
A). Claims in the CIP application that depend on only the disclosure from
application A for support are granted application A's filing date; however,
claims in the CIP application that rely on material first disclosed in the CIP
application will get the later filing date of the CIP application.

     3.  Continuation Application:  Assume you have an application A that a
Patent Examiner is not ready to allow as a patent. We have three options,
namely, abandon the application, appeal the Examiner's determination, or file a
continuation application. The continuation application permits us to continue
arguing the merits of the invention by narrowing the claims to get around the
prior art in hopes of obtaining a patent. A continuation application is like a
CIP application without any new matter. In other words, application A and its
continuation application have the same disclosure and effective filing date,
though they may have claims of different scope.

                                      A-123
<PAGE>   351

                                  EXHIBIT 3-D

                                       TO

                                MERGER AGREEMENT

               (DISCLOSURE SCHEDULE OF JANEX INTERNATIONAL, INC.)

     The paragraph numbering below corresponds to the paragraph numbering in
Article III of the Merger Agreement.

     3.1  DUE INCORPORATION.

     No exceptions.

     3.2  CAPITALIZATION.
     Common Shares Authorized: 20,000,000 shares, no par value.
     Common Shares Issued and Outstanding: 18,098,750
     Series A Preferred Authorized: 5,000,000 shares, no par value
     Series A Preferred Issued and Outstanding: 5,000,000

     The following summarizes stock options, warrants, subscriptions, conversion
rights and similar rights: See EXHIBIT 3D-3.2.

     45,000 stock options outstanding, one share per option
     100,000 warrants outstanding -- $.64 exercise price

     3.3  SUBSIDIARIES.

     Janex Corporation, With Design In Mind, Malibu Fun Stuffed, Pro Gains
Company Limited, Malibu Fun Stuffed International Limited.

     3.4  FINANCIAL INFORMATION.

     No exceptions.

     3.5  TAXES.


     No exceptions.


     3.6  MATERIAL CHANGES.

     No exceptions.

     3.7  TITLE TO ASSETS; LIENS.

     UCC-1 favoring Howard Moore, UCC-1 favoring Tinton Falls Bank, and UCC-1
favoring the State of California.

     3.8  LITIGATION.

     None

     3.9  COMPLIANCE WITH LAWS.

     No exceptions.

     3.10  INSURANCE.

     No exceptions.

                                      A-124
<PAGE>   352

     3.11  LICENSES.

     No exceptions.

     3.12  HAZARDOUS MATERIALS.

     No exceptions.

     3.13  JUDGMENTS AGAINST THE MERGING COMPANY AND/OR ITS BUSINESS.

     None.

     3.14  COMPLETE SALE.

     No exceptions.

     3.15  ASSETS IN GOOD CONDITION.

     No exceptions.

     3.16  DISCLOSURE MATERIALS.

     No exceptions.

     3.17  DEFAULTS.

     None.

     3.18  MATERIAL CONTRACTS.

     None.

     3.19  OUTSTANDING LIABILITIES.

     See attached Exhibit 3D-3.19.

     3.20  INVENTORY.

     No exceptions.

     3.21  RECEIVABLES.

     No exceptions.

     3.22  EMPLOYEES.

     See attached Exhibit 3D-3.22.

<TABLE>
<CAPTION>
EMPLOYEE                         JOB TITLE     COMPENSATION/YEAR
--------                         ----------    -----------------
<S>                              <C>           <C>
Daniel Lesnick.................  Former COO       $104,000.00
Michael Handelman..............  Former CFO       $103,500.00
</TABLE>

     3.23  NO CONFLICTS.

     None.

     3.24  VIOLATIONS OF LAW.

     None.

     3.25  CONDITION AND SUFFICIENCY OF ASSETS.

     No exceptions.

                                      A-125
<PAGE>   353

     3.26  BANK ACCOUNTS.

     No exceptions.

     3.27  ENVIRONMENTAL MATTERS.

     None.

     3.28  INTELLECTUAL PROPERTY.

     No exceptions.

     3.29  CUSTOMERS AND SUPPLIERS.

     No exceptions.

     3.30  CHANGES TO THE MERGING COMPANY'S DOCUMENTS.

     No changes.

     3.31  STOCKHOLDERS AGREEMENTS AND OTHER AGREEMENTS.

     None.

     3.32  CERTAIN PAYMENTS.

     No exceptions.

     3.33  FILINGS COMPLETE.

     No exceptions.

     3.34  PRODUCTS.

     No exceptions.

     3.35  PATENTS.

<TABLE>
<S>                       <C>                  <C>
                          Patent #5,434,761    To Daniel Lesnick
Squeeze Flashlight                             Assigned to With Design In Mind
                                               Reassigned to Janex International,
                                               Inc.
</TABLE>

     3.36  INDEMNIFICATION; SURVIVAL.

                                      A-126
<PAGE>   354


                                 EXHIBIT 3D-3.2



Janex International, Inc.


Schedule of Exerciseable Options and Warrants


Remaining Contractual Life for Options and Warrants Outstanding


as of May 19, 1999



<TABLE>
<CAPTION>
                                    NO. OF          GRANT      EXERCISE    EXPIRATION
                               OPTIONS/WARRANTS      DATE       PRICE         DATE
                               ----------------    --------    --------    ----------
<S>                            <C>                 <C>         <C>         <C>
OPTIONS:*
M. Manahan...................       20,000         04/01/95     $2.13       03/31/00
M. Handelman.................       25,000         07/01/96     $1.25       06/30/01
                                   -------
Totals: .....................       45,000
WARRANTS:*
Deco Disc....................      100,000         03/26/96     $0.64       03/26/01
</TABLE>


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


* Each warrant and option is exerciseable for one share of common stock.


                                      A-127
<PAGE>   355

                                EXHIBIT 3D-3.19

SECTION 3.19  OUTSTANDING LIABILITIES

Janex International, Inc.
Accounts Payable 90 days or over

as of 8-31-99



<TABLE>
<CAPTION>
VENDOR                                                          AMOUNT
------                                                          ------
<S>                                                           <C>
Advantage Merchandise.......................................  $  9,052.99
BDO Seidman, LLP............................................       210.00
Beverly Cannady Licensing...................................     5,089.49
State of California.........................................     5,523.94
Caterpillar, Inc. ..........................................    45,000.00
Character Connections.......................................     3,096.00
Children's Television Workshop..............................    30,000.00
Les Friedland & Associates..................................    92,622.03
Reicher Goerdt..............................................       372.69
International Business Directories..........................       186.50
Imperial Financial Printing.................................       575.50
Intertoy....................................................     2,686.53
Jim McCafferty Productions..................................     7,355.04
Kelly Bauserfeld Lowry & Kelly..............................       185.00
Lionel LLC..................................................     7,500.00
MCA/Universal...............................................    24,395.29
Not Just Fun & Games........................................     1,245.47
RIA Group...................................................       552.20
Sunbelt Marketing...........................................     1,488.00
United Parcel Service.......................................       103.00
Arbor Toys..................................................    24,535.01
China Star..................................................    31,088.32
Fullyweal...................................................     3,048.36
Guide Kingtime..............................................    17,703.46
Li & Fung...................................................     5,646.05
Rich Garden.................................................    11,043.50
Sin Nung....................................................    74,287.87
Vital.......................................................   164,050.48
Vun Fat.....................................................    59,739.18
Wai Lee.....................................................   115,175.24
World Wide Licenses.........................................     8,318.83
Others......................................................    31,040.18
                                                              -----------
          TOTAL.............................................  $782,916.15
                                                              ===========
</TABLE>


                                      A-128
<PAGE>   356

                                EXHIBIT 3D-3.22

3.22  EMPLOYEES.

Salaried Employees:

     1.  Medical/Dental Benefits

         Company pays 100% of cost for individual and family coverage effective
         the first month following 30 days of employment.

     2.  Vacation

         Vacation accrual begins with the first month of hire. Monthly accrual
         rates are determined by the employee's anniversary date. Vacation
         accrues at a rate of 6.25 hours each month of full-time service (10
         days for every 12 months) up through the first year of continuous
         employment. Accrual rates thereafter are as follows:

<TABLE>
<CAPTION>
                                       HOURS ACCRUED
            DURING YEAR                  PER MONTH      YEARLY TOTAL
            -----------                -------------    ------------
<S>                                    <C>              <C>
 2 to 5.............................        6.25          10 days
 6 to 10............................        9.38          15 days
11 to 15............................       12.50          20 days
16 plus.............................       15.63          25 days
</TABLE>

         If the employee's 5th, 10th, or 15th anniversary date falls on or
         before the last working day of the month, the employee will accrue the
         higher rate for that month. Vacation is not earned while an employee is
         on a leave of absence. Employees may take total "available" vacation at
         any time throughout the year, subject to supervisor approval. All
         vacations must be scheduled in advance with the employee's supervisor.
         An employee's vacation time vests when it is accrued, excepting that
         vacation time accrued during the first six month period, and can be
         carried over to future calendar years if not taken. This means that the
         earned vacation is permanently credited to the employee.

         An employee cannot take more than 15 consecutive days of vacation
         (excluding Saturdays, Sundays, and Holidays) in any one calendar year
         without the approval of the President. Upon termination, the employee's
         accrued, but not taken vacation hours, will be added to the final
         paycheck using the employee's then current, straight-time hourly rate
         for conversion.

         The Company reserves the right to cash out, i.e., payoff, any accrued
         vacation benefits at any time on the basis of an employee's
         compensation rate at the time of the cash out.

     3.  Holidays

         Janex International, Inc. provides ten paid holidays each year. The
         Company is officially closed on New Years Day, Martin Luther King Day,
         President's Day, Memorial Day, Independence Day, Labor Day,
         Thanksgiving Day, the day after Thanksgiving, Christmas Eve, and
         Christmas Day.

     4.  Hours

         Office: 8:00am to 5:00pm with 1 hour lunch, Monday through Friday.

                                      A-129
<PAGE>   357

     5.  Absences

         Non-emergency doctor or dentist appointments to be scheduled after
         business hours or on Saturday, if possible, otherwise all absences must
         be excused by your supervisor.

     All insurance must be provided by a recognized insurance company having a
Best's Rating of no less than AA. As proof of such insurance, a fully paid
certificate of insurance naming Futech as an additional insured shall be
submitted to Futech's office as and when requested by Futech, within thirty (30)
days after written request is made therefor. Futech shall be entitled throughout
the term of this Agreement, to a copy of the prevailing policies of insurance.
The policies of insurance must be non-cancelable except after thirty (30) days
prior written notice to Futech.

                                      A-130
<PAGE>   358

                                  EXHIBIT 3-E

                                       TO

                                MERGER AGREEMENT

                   (DISCLOSURE SCHEDULE OF TRUDY CORPORATION)

     The paragraph numbering below corresponds to the paragraph numbering in
Article III of the Merger Agreement.

     3.1  DUE INCORPORATION.

     No exceptions.

     3.2  CAPITALIZATION.

     Common Shares Authorized: 850,000,000 shares, $.0001 par value.
     Common Shares Issued and Outstanding: 331,222,249
     Series A Preferred Authorized: Not Applicable.
     Series A Preferred Issued and Outstanding: Not Applicable.

     The following summarizes stock options, warrants, subscriptions, conversion
rights and similar rights:

     - Stock Options, stock grants or other equity participation rights granted
       to certain directors, officers, agents and employees of Trudy
       Corporation, covering an aggregate of 31,350,000 shares of common stock.

     - Other stock options for 14,680,000 shares of common stock.

     - There is an agreement with one director of Trudy Corporation to provide
       compensation in the form of stock options or grants with a value of
       $10,000.00 per year.

     3.3  SUBSIDIARIES.

     None

     3.4  FINANCIAL INFORMATION.

     No exceptions.

     3.5  TAXES.

     No exceptions.

     3.6  MATERIAL CHANGES.

     Trudy has experienced a continuing deterioration in its financial
condition. On May 13, 1999, Trudy was notified by First Union Bank of defaults
in Trudy's obligations under Trudy's debt instruments with said bank.

     3.7  TITLE TO ASSETS; LIENS.

     No exceptions.

     3.8  LITIGATION.

     No exceptions.

     3.9  COMPLIANCE WITH LAWS.

     No exceptions.

                                      A-131
<PAGE>   359

     3.10  INSURANCE.

     No exceptions.

     3.11  LICENSES.

     No exceptions.

     3.12  HAZARDOUS MATERIALS.

     No exceptions.

     3.13  JUDGMENTS AGAINST THE MERGING COMPANY AND/OR ITS BUSINESS.

     None.

     3.14  COMPLETE SALE.

     No exceptions.

     3.15  ASSETS IN GOOD CONDITION.

     No exceptions.

     3.16  DISCLOSURE MATERIALS.

     No exceptions.

     3.17  DEFAULTS.

     On May 13, 1999, Trudy was notified by First Union Bank of defaults in
Trudy's obligations under Trudy's debt instruments with said bank.

     3.18  MATERIAL CONTRACTS.

     Lease between Trudy and Noreast Management LLC, covering 353 Main Avenue,
Norwalk, CT 06851.

     3.19  OUTSTANDING LIABILITIES.

             As to Trudy, Section 3.19 is replaced with the following:

        To the knowledge of Trudy, there are no liabilities of Trudy other than
        as are shown on the Trudy balance sheet as of April 30, 1999, and other
        than: (i) a possible contingent liability for $30,000.00 for sub-right
        royalties to the Smithsonian Institute; (ii) liabilities arising after
        the balance sheet date in the normal course of business out of purchases
        and sale of goods; and (iii) expected borrowings after April 30, 1999
        and until the time of the Merger in the amount of approximately
        $375,000. There are no liabilities relating to the Business which are
        more than ninety (90) days past due, other than approximately $12,657
        owed to WWB for unreimbursed business expenses, $1,876 owing to Emerald
        Accounting, $43,863 owing to Smithsonian for royalties, $6,000 owing to
        The Nature Conservancy, and miscellaneous liabilities not material to
        Trudy in the aggregate. Depending on Trudy's ability to borrow or
        otherwise obtain capital until the Merger closes, other liabilities may
        become past due.

     3.20  INVENTORY.

     No exceptions. Trudy's obsolete inventory percentage shall be 10% instead
of 3% as called for in Section 3.20 of the Agreement.

                                      A-132
<PAGE>   360

     3.21  RECEIVABLES.

     No exceptions.

     3.22  EMPLOYEES.

     Hourly Paid Employees

     1.  Medical/Dental Benefits.

         Company shares 50/50 in cost for individual and family effective the
         first month following 30 days of employment.

     2.  Vacation.

        Two weeks paid per annum, available after 6 months of employment.
        Accrued months are June through March. No days accrued in April or May.
        Vacation is to be taken during the calendar year in which it is accrued.

        a.  Two weeks (10 days)
            (Accrue 1 day/month from date of hire.)
            (Must work 6 months before vacation can be taken or prearranged
            differently at time of hire.)

        b.  Three weeks (15) days after five year anniversary
            (Accrue 1 1/2 days/month)

        c.  Four weeks (20 days) after 10 years
            (Accrue 2 days/month)

     3.  Nine Holidays with pay after one month of service.

         Holiday pay is not granted if there is an unexcused absence the day
         preceding or following the holiday. These holidays are generally
         included though they may change by Letter Memo at the beginning of each
         calendar year.

         New Years Day
         Good Friday
         Memorial Day
         Fourth of July
         Labor Day
         Thanksgiving
         Thanksgiving Friday
         Christmas
         One Additional Holiday (to be determined each year)

     4. Sick Days.

        None

     5.  Bonus.

         Eligibility:  Over one year tenure as of December 31 for full benefit.
         For employment less than one year, bonus will be prorated on length of
         employment over 90 days.

                                      A-133
<PAGE>   361

     6. Stock Options.

        Eligibility:  Must be employed for 2 years. Consideration for
        Options:  Performance, salary level, attendance and tenure.

     7. 401 K Plan.

        Company contribution at the rate of 50% of employee paid in amount up to
        3% of one's salary. Vesting and other restrictions apply.

     8. Hours.

        Office:  8:30 AM to 5:00 PM with 45 minute lunch hour-Monday through
        Friday.

        Plant:  7:30 AM to 3:30 PM with 30 minute lunch hour at 12:30 PM Monday-
        Thursday; 7:30 AM to 12:30 PM Friday

        Shipping:  7:30 AM to 4:45 PM with 30 minute lunch at 12:30 PM Monday-
        Thursday; 7:30 AM to 12:30 PM Friday

     9. Overtime.

        None unless preapproved by W.W.B.

     10.Absences.

        Non-emergency doctor or dentist appointments to be scheduled after
        business hours or on Saturday, if possible. Otherwise, all absences must
        be excused by your supervisor. There are no other authorized paid
        absences.

Effective: December 2, 1998

     Salaried Employees

     1. Medical/Dental Benefits

        Company shares 50/50 in cost for individual and family effective the
        first month following 30 days of employment.

     2. Vacation

        Two weeks paid per annum, available after 6 months of employment.
        Accrued months are June through March. No days are accrued in April or
        May. Vacation is to be taken during the calendar year in which it is
        accrued.

        a.  Two weeks (10 days)
            (Accrue 1 day/month from date of hire)
            Must work 6 months before vacation can be taken or prearranged
            differently at time of hire.)

        b.  Three weeks (15 days) after five year anniversary
            (Accrue 1 1/2 days/month)

        c.  Four weeks (20 days) after 10 years
            (Accrue 2 days/month)

                                      A-134
<PAGE>   362

     3. Nine Holidays with pay after one month of service

        Holiday pay is not granted if there is an unexcused following the
        holiday. These holidays are generally included though they may change by
        Letter Memo at the beginning of each calendar year.

        New Year's Day
        Good Friday
        Memorial Day
        Fourth of July
        Labor Day
        Thanksgiving
        Thanksgiving Friday
        Christmas
        One Additional Holiday (to be determined each year)

     4. Bonus

        Eligibility:  Employed for one year as of December 31 for full benefit.
        For employment less than one year, bonus will be prorated on length of
        employment over 90 days. Bonus is predicated on anticipated Company
        profits for the current year.

     5. Stock Options

        Eligibility:  Must be employed for 2 years. Considerations for Options:
        Performance, salary level, attendance and tenure.

     6. 401 K Plan

        Company contribution at the rate of 50% of employee paid in amount up to
        3% of one's salary. Vesting and other restrictions apply.

     7. Hours

        Office:  8:30 AM to 5:00 PM with 45 minute lunch hour-Monday through
        Friday (Hours other than above must be prearranged with supervisor)

     8. Absences

        Non-emergency doctor or dentist appointments to be scheduled after
        business hours or on Saturday, if possible. Otherwise, all absences must
        be excused by your supervisor.

        Consulting Agreements with Suzanne Glazer and Judy Gittenstein, copies
        of which have been supplied to Futech.

     3.23  NO CONFLICTS.

     1. License Agreement, dated June 17, 1997, between the Smithsonian
        Institution and Soundprints, a division of Trudy Corporation.

     2. Letter Agreement, dated December 5, 1994, between The Nature Conservancy
        and Soundprints, a division of Trudy Corporation. Note, however, that
        this Letter Agreement does not expressly require the consent or any
        other action of The Nature Conservancy in respect of the Merger and is
        included in this Exhibit E to advise Futech that it may be advisable for
        Trudy to give notice of the proposed

                                      A-135
<PAGE>   363

        Merger and to obtain such consent simply because the Letter Agreement is
        a material agreement of Trudy.

     3. Revolving Credit Agreement, dated March 30, 1998, with First Union for a
        maximum amount of $1.2 million.

     4. Term Note, dated March 30, 1998, with First Union in the amount of
        $250,000.

     5. Loan from First Union to Noreast Management LLC, covering 353 Main
        Avenue and guaranteed by Trudy.

     3.24  VIOLATIONS OF LAW.

     At the time of the purchase by Noreast Management LLC of the building and
land at 353 Main Avenue, Norwalk, CT (the "Property"), currently leased by Trudy
from Noreast for Trudy's principal offices, the Connecticut Department of
Environmental Protection ("DEP") approved all remediation of the Property with
the exception of the northern portion of the Property. As to the northern
portion, HRP, a Connecticut state EPA license contractor, was authorized to
perform final remediation. A Plan of Remediation was to have been submitted to
the DEP by August 1998. Noreast applied to the DEP for a one year extension of
such date to August 1999.

     The HRP remediation plan which will cost $27,000 is as follows:

     1. Drilling a monitoring well to check for the presence of lead in water;
        and

     2. Remediating an abandoned oil tank by removing it from an underground
        site.

     The remediation under this plan is expected to be completed by August 1,
1999.

     Trudy is of the view that it bears no monetary or other responsibility for
the remediation in its role as a lessee or otherwise.

     3.25  CONDITION AND SUFFICIENCY OF ASSETS.

     No exceptions.

     3.26  BANK ACCOUNTS.

     No exceptions.

     3.27  ENVIRONMENTAL MATTERS.

     See disclosure for Section 3.24 above.

     3.28  INTELLECTUAL PROPERTY.

     No exceptions.

     3.29  CUSTOMERS AND SUPPLIERS.

     Sales to Advance Marketing Services have decreased from $1,700,000 in 1997
to $850,000 in 1998 to $0 in 1999.

     3.30  CHANGES TO THE MERGING COMPANY'S DOCUMENTS.

     No changes.

     3.31  STOCKHOLDERS AGREEMENTS AND OTHER AGREEMENTS.

     None.

                                      A-136
<PAGE>   364

     3.32  CERTAIN PAYMENTS.

     No exceptions.

     3.33  FILINGS COMPLETE.

     No exceptions.

     3.34  PRODUCTS.

     No exceptions.

     3.35  PATENTS.

     None.

     3.36  INDEMNIFICATION; SURVIVAL.

                                      A-137
<PAGE>   365

                                  EXHIBIT 3.17

                                       TO

                                MERGER AGREEMENT

                                   (DEFAULTS)

A.  DAMERT.

     See Section 3.17 of Exhibit 3-A.

B.  FUNDEX.

     No Exceptions.

C.  FUTECH.

     No Exceptions.

D.  JANEX.

     No Exceptions.

E.  TRUDY.

     Trudy has a dispute involving royalties under sub-licensing rights, as to
which Trudy does not admit that there is or may be a default, but is disclosing
this matter in the spirit of full disclosure to the other Merging Companies. The
other party involved in this matter has been given written notice of the issue
and the issue has been, and is being, discussed with the other party with the
expectation of a successful resolution thereof.

                                      A-138
<PAGE>   366

                                  EXHIBIT 3.36

                                       TO

                                MERGER AGREEMENT

                          (ALLOWED EXCESS LIABILITIES)

A.  DAMERT.

     $100,000.00; provided, however, that there shall also be a limit on the
liability of DaMert and its Shareholders under the representations and
warranties in this Agreement in the amount of $2,000,000.00 for items for which
DaMert and its Shareholders were not aware as of the time of the Closing.

B.  FUNDEX.

     $100,000.00; provided, however, that there shall also be a limit on the
liability of Fundex and its Shareholders under the representations and
warranties in this Agreement in the amount of $2,000,000.00 for items for which
Fundex and its Shareholders were not aware as of the time of the Closing.

C.  FUTECH.

     $100,000.00; provided, however, that there shall also be a limit on the
liability of Futech and its Shareholders under the representations and
warranties in this Agreement in the amount of $2,000,000.00 for items for which
Futech and its Shareholders were not aware as of the time of the Closing.

D.  JANEX.

     $100,000.00; provided, however, that there shall also be a limit on the
liability of Janex and its Shareholders under the representations and warranties
in this Agreement in the amount of $2,000,000.00 for items for which Janex and
its Shareholders were not aware as of the time of the Closing.

E.  TRUDY.

     $100,000.00; provided, however, that there shall also be a limit on the
liability of Trudy and its Shareholders under the representations and warranties
in this Agreement in the amount of $2,000,000.00 for items for which Trudy and
its Shareholders were not aware as of the time of the Closing.

                                      A-139
<PAGE>   367

                                 EXHIBIT 4.1.7

                              TO MERGER AGREEMENT

                            (FORM OF LEGAL OPINION)

                                 [LETTER HEAD]

[DATE]

Futech Interactive Products, Inc.
Attention: Vincent W. Goett, CEO
2999 North 44th Street, Suite 225
Phoenix, Arizona 85018-7247

     Re:  Merger Transaction (the "TRANSACTION") Among Futech Interactive
          Products, Inc., an Arizona corporation ("FUTECH"), Trudy Corporation,
          a Delaware corporation ("TRUDY"), Fundex Games, Ltd., a Nevada
          corporation ("FUNDEX"), DaMert Company, a California corporation
          ("DAMERT"), Janex International, Inc., a Colorado corporation
          ("JANEX"), Futech Interactive Products (Delaware) Inc., a newly formed
          Delaware corporation ("FUTECH DELAWARE"), [New Sub], a newly formed
          Nevada corporation ("NEW SUB") (collectively, the "MERGING
          COMPANIES"), and those shareholders (the "SHAREHOLDERS") of Futech,
          Trudy, Fundex, DaMert and Janex identified on the signature pages of
          the Merger Agreement, dated May  ____________ , 1999 (the "MERGER
          AGREEMENT").

Gentlemen:

     We have acted as special counsel to  ____________ (hereinafter the
"CORPORATION") in connection with the Transaction. You have requested an opinion
regarding certain matters relating to the Merger Agreement and related
documents, and the Transaction. Capitalized terms used in this letter, and not
otherwise defined in this letter, shall have the meaning given to them in the
Documents (defined below). This opinion is limited to the merger of the
Corporation into Futech Interactive Products, Inc., a Delaware corporation [New
Sub -- for Fundex], and that portion of the Transaction relating to such merger
and does not address, cover or relate to any other merger of any company or any
other portion of the Transaction

     For purposes of this opinion, we have examined such questions of law and
fact as we have deemed necessary or appropriate, and have relied upon such
agreements, documents, instruments, records, certificates, opinions and other
statements of government officials and representatives of the Corporation as we
deemed applicable to the Transaction and necessary as a basis for our opinion
(collectively, the "DOCUMENTS").

     As to any question of fact material to our opinion, we have relied solely
upon copies of the Corporation's Certificate or Articles of Incorporation, filed
with  ____________ (the "Commission") on  ____________ , 19__, and  ________
     , filed with the Commission on  ________ , 19__, the Bylaws of the
Corporation certified by an officer of the Corporation as in effect on the
Closing of the Transaction, a certificate of good standing of the Corporation
from the Commission, dated immediately prior to the Closing, and representations
and warranties of the Corporation contained in the Merger Agreement and the
Documents.

                                      A-140
<PAGE>   368

     Based on the foregoing, and subject to the qualifications set forth below,
we are of the opinion that:

      1.  The Corporation is duly organized, validly existing, and in good
          standing under the laws of the State of  ____________ .

      2.  To the best of our knowledge, the Corporation's authorized capital is
          as is disclosed in the Merger Agreement.

      3.  To the best of our knowledge, the Corporation has the requisite
          corporate power and corporate authority: (i) to own and operate its
          properties and assets; (ii) to carry out its business as such business
          is currently being conducted; and (iii) to carry out the terms and
          conditions applicable to it under the Merger Agreement. The execution,
          delivery and performance of the Merger Agreement by the Corporation
          have been duly authorized by all requisite corporate action on the
          part of the Corporation and the Merger Agreement has been duly
          executed and delivered by the Corporation.

      4.  We have no knowledge of any pending or threatened litigation or other
          legal proceeding against the Corporation, other than as may be
          disclosed in the Merger Agreement.

      5.  To our knowledge, the execution and delivery of the Merger Agreement,
          and consummation of the Transaction by the Corporation, will not
          conflict with or result in a violation of any applicable law or rule
          affecting the Corporation.

      6.  To our knowledge, no consent, approval, authorization, or other action
          by, or filing with, any federal, state, or local governmental
          authority is required in connection with the execution and delivery by
          the Corporation of the Merger Agreement and the consummation of the
          Transaction by the Corporation, other than filings required by federal
          and state securities laws, or, if any of the foregoing is required, it
          has been obtained.

      7.  The execution and delivery of the Merger Agreement and consummation of
          the Transaction by the Corporation will not conflict with or result in
          a violation of the Corporation's Articles of Incorporation or Bylaws.

      8.  To the best of our knowledge, the execution and delivery of the Merger
          Agreement and consummation of the Transaction by the Corporation will
          not conflict with or result in a violation of any judgment, order, or
          decree of any court or governmental agency to which the Corporation is
          a party or by which the Corporation is bound.

      9.  We are not aware of any judgment, order or decree of any court or
          governmental agency to which the Corporation is a party or by which
          the Corporation is bound.

     10.  To our knowledge, the execution and delivery of the Merger Agreement,
          and consummation of the Transaction by the Corporation, will not
          conflict with or result in a violation of any contract, indenture,
          instrument, or other agreement to which the Corporation is a party or
          by which the Corporation is bound.

     11.  We are not aware of any reason why the Merger Agreement would not
          constitute the legal, valid, and binding obligations of the
          Corporation, enforceable in accordance with its terms.

                                      A-141
<PAGE>   369

     In rendering the foregoing opinions, we have assumed: (i) the genuineness
of the signatures not witnessed, the authenticity of documents submitted as
originals, and the conformity to originals of documents submitted as copies;
(ii) the legal capacity of the natural person executing the documents; (iii)
that the documents accurately describe and contain the mutual understanding of
the parties, and that there are no oral or written statements or agreements that
modify, amend, or vary, or purport to modify, amend, or vary, any of the terms
of the Documents; (iv) that the Corporation owns all of the property, assets and
rights purported to be owned by it; and (v) the Merger Agreement, related
documents and all of the Documents to which any person other than the
Corporation is a party are the legal, valid and binding obligations of such
party, enforceable against such party in accordance with their respective terms.

     The opinions set forth above are subject to the following qualifications
and limitations:

     (i)   The enforceability of the Documents may be subject to or limited by
           bankruptcy, insolvency, reorganization, moratorium, fraudulent
           conveyance, arrangement, or other similar laws relating to or
           affecting the rights of creditors generally; and

     (ii)  The enforceability of the Documents is subject to general principles
           of equity, including principles of fair dealing, good faith and
           commercial reasonableness.

     (iii) Whenever this opinion with respect to the existence or absence of
           facts is indicated to be based on our "knowledge" or awareness or
           lack thereof, it is intended to signify that during the course of our
           representation of the Corporation, this constitutes only the
           information which has come to the attention of any lawyer of our firm
           who has active involvement in the Transaction or who is primarily
           responsible for providing a response to a particular opinion issue or
           confirmation regarding a particular factual finding which would give
           the firm actual knowledge or notice of the existence or absence of
           such facts. Insofar as this opinion relates to factual matters, we
           relied upon inquiries made of the corporation and its officers.
           Although nothing has come to our attention leading us to question the
           accuracy of the responses to our inquiries, we have not, except as
           specifically noted in this opinion, made any independent inquiry or
           investigation.

     We are members of the Bar of the State of  ____________ , and, except as
expressly set forth herein, our opinion is limited to matters governed by
 ____________ law including the portion of such law dealing with corporations.
The opinions expressed in this letter are based upon the law of such
jurisdiction in effect on the date hereof, and we assume no obligation to revise
or supplement this opinion should such law be changed by legislative action,
judicial decision, or otherwise.

     We authorize and agree to accept facsimile signatures to this letter as if
the same were originals.

Yours Truly,

[LAW FIRM]
[LAWYER]

                                      A-142
<PAGE>   370

                                  EXHIBIT 4.2

                                       TO

                                MERGER AGREEMENT

                 (CONDITIONS FOR PARTICULAR MERGING COMPANIES)

A.  DAMERT.

     New Futech shall have executed and delivered to Fred DaMert and Gail Patton
DaMert at the Closing Employment Agreements as described in EXHIBIT 2.8.1.

     New Futech shall have obtained the releases as called for in Section A. of
EXHIBIT 2.10.

B.  FUNDEX.

     New Futech shall have executed and delivered to Carl E. Voigt, IV and Carl
E. Voigt, III at the Closing Employment Agreements as described in EXHIBIT
2.8.1.

     New Futech shall have obtained the releases of guaranties as called for in
Section B. of EXHIBIT 2.10.

     New Sub shall have executed and delivered to Carl E. Voigt, IV UCC-1
Financing Statements as called for in EXHIBIT 1.6.

C.  FUTECH.

     Fred DaMert, Gail Patton DaMert, Carl E. Voigt, IV, Carl E. Voigt, III, and
William W. Burnham shall have executed and delivered to New Futech at the
Closing Employment Agreements as described in EXHIBIT 2.8.1.

D.  JANEX.

     Not Applicable.

E.  TRUDY.

     New Futech shall have executed and delivered to William W. Burnham at the
Closing an Employment Agreement as described in EXHIBIT 2.8.1.

                                      A-143
<PAGE>   371

                                  EXHIBIT 6.5

                                       TO

                                MERGER AGREEMENT

                  (SURVIVING PROVISIONS OF LETTERS OF INTENT)

A.  DAMERT.

     Those provisions of the Letter of Intent between DaMert and Futech, dated
March 24, 1999, which are specifically designated as legally binding upon the
parties shall continue to be binding upon the parties thereto.

B.  FUNDEX.

     Those provisions of the Letter of Intent between Fundex and Futech, dated
March 4, 1999, which are specifically designated as legally binding upon the
parties shall continue to be binding upon the parties thereto.

C.  FUTECH.

     Not Applicable.

D.  JANEX.

     Not Applicable.

E.  TRUDY.

     Those provisions of the Letter of Intent between Trudy and Futech, dated
December 16, 1998, which are specifically designated as legally binding upon the
parties shall continue to be binding upon the parties thereto.

                                      A-144
<PAGE>   372

                                  EXHIBIT 6.13

                                       TO

                                MERGER AGREEMENT

                           (MAILING LIST FOR NOTICES)

A.  DAMERT.

<TABLE>
<S>                          <C>
If to DaMert:                DaMert Company
                             1609 Fourth Street
                             Berkeley, California 94710
                             Attn: Fred and Gail DaMert
with copy to:                Peter Whitman
                             1717 Embarcadero Road
                             Palo Alto, California 94303
If to Fred DaMert:           Fred DaMert
                             1609 Fourth Street
                             Berkeley, California 94710
If to Gail Patton DaMert:    Gail Patton DaMert
                             1609 Fourth Street
                             Berkeley, California 94710
</TABLE>

B.  FUNDEX.

<TABLE>
<S>                          <C>
If to Fundex:                Fundex Games, Ltd.
                             2237 Directors Row
                             Indianapolis, Indiana 46241
                             Attn: Carl E. Voigt, IV
with copy to:                Mitchell Roth
                             200 North LaSalle, #2100
                             Chicago, Illinois 60601
If to Carl E. Voigt, IV:     Carl E. Voigt, IV
                             2237 Directors Row
                             Indianapolis, Indiana 46241
If to Carl E. Voigt, III:    Carl E. Voigt, III
                             2237 Directors Row
                             Indianapolis, Indiana 46241
</TABLE>

C.  FUTECH.

<TABLE>
<S>                          <C>
If to Futech:                Futech Interactive Products, Inc.
                             2999 North 44th Street, Suite
                             Phoenix, Arizona 85018-7247
                             Attn: Vincent W. Goett
</TABLE>

                                      A-145
<PAGE>   373
<TABLE>
<S>                          <C>
with copy to:                Thomas R. Lofy
                             9445 North 37th Street
                             Phoenix, Arizona 85028
</TABLE>

D.  JANEX.

<TABLE>
<S>                          <C>
If to Janex:                 Janex International, Inc.
                             c/o Futech Interactive Products, Inc.
                             2999 North 44th Street, Suite
                             Phoenix, Arizona 85018-7247
                             Attn: Vincent W. Goett
with copy to:                Quarles & Brady, LLP.
                             Attn: Mark Briggs
                             One East Camelback Road, Suite 400
                             Phoenix, Arizona 85012
</TABLE>

E.  TRUDY.

<TABLE>
<S>                          <C>
If to Trudy:                 Trudy Corporation
                             353 Main Avenue
                             Norwalk, Connecticut 06851-1552
                             Attn: William W. Burnham
with copy to:                Charles E. Barnett
                             McGovern & Associates
                             One Lafayette Place
                             Greenwich, Connecticut 06830
If to Elisabeth T. Prial:    Elisabeth T. Prial
                             353 Main Avenue
                             Norwalk, Connecticut 06851-1552
If to William W. Burnham:    William W. Burnham
                             353 Main Avenue
                             Norwalk, Connecticut 06851-1552
If to Alice B. Burnham:      Alice B. Burnham
                             353 Main Avenue
                             Norwalk, Connecticut 06851-1552
</TABLE>

                                      A-146
<PAGE>   374

                                  EXHIBIT 6.14

                                       TO

                                MERGER AGREEMENT

                            (BROKERAGE FEES PAYABLE)

A.  DAMERT.

     DaMert has entered into an agreement with CorDev Corporation (Bob Oliver)
relating to the sale of DaMert. The amount paid will be $200,000 cash and 21,333
shares of New Futech common stock which will be paid by New Futech.

B.  FUNDEX.

     Not Applicable.

C.  FUTECH.

     Not Applicable.

D.  JANEX.

     Not Applicable.

E.  TRUDY.

     Trudy's financial advisor, James P. McGough, represents Trudy in connection
with the Mergers, and shall be compensated by Trudy paying him cash in the
amount of $43,670, and by Trudy issuing him Trudy stock, which will participate
in the Merger consideration ($16,330 of the cash and 14,314 shares of the New
Futech common stock), for services rendered with respect to the negotiation and
closing of the Mergers.

                                      A-147
<PAGE>   375

                                                                    (APPENDIX B)

                          CERTIFICATE OF INCORPORATION
                                       OF
                  FUTECH INTERACTIVE PRODUCTS (DELAWARE) INC.

     1.  Name.  The name of the Corporation is Futech Interactive Products
(Delaware) Inc.

     2.  Registered Office and Agent.  The address of its registered office in
the State of Delaware is 1209 Orange Street, Wilmington, New Castle County,
Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.

     3.  Purpose.  The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware (the "DGCL").

     4.  Authorized Stock.  The total number of shares of stock which the
Corporation shall have authority to issue is Fifty Million (50,000,000) shares,
having a par value of one-tenth of one cent ($.001) per share. The authorized
shares shall be comprised of Forty-Five Million (45,000,000) shares designated
as "Common Stock" and Five Million (5,000,000) shares designated as "Preferred
Stock".

     The Preferred Stock may be divided into and issued in series, and authority
is hereby expressly granted to the Board of Directors, by resolution or
resolutions adopted by the Board of Directors, to divide, from time to time, any
and all of such Preferred shares into series and to fix and determine the
relative rights and preferences of the shares of any series so established,
including (a) the rate of dividend payable thereon and whether such dividends
shall be cumulative, noncumulative or partially cumulative; (b) the extent to
which such dividends are payable on a parity with or in preference to the
dividends payable on the shares of any other class or series of stock; (c) the
amount which shall be paid to the holders thereof in the event of voluntary or
involuntary liquidation; (d) the terms and conditions on which the holders
thereof may convert the same into any other class or series of stock, if the
shares of any series are issued with the privilege of conversion; (e) the price
at and the terms and conditions on which the shares may be redeemed and the
terms or amount of any sinking fund provided for the purchase or redemption
thereof; (f) the voting rights, if any, of the holders thereof; and (g) such
other provisions as may be permitted to be fixed by the Board of Directors of
the corporation pursuant to the laws of the State of Delaware, as in effect at
the time of the creation of any such series.

     5.  Incorporator.  The name and mailing address of the incorporator is as
follows:

<TABLE>
<CAPTION>
NAME                                  MAILING ADDRESS
----                                  ---------------
<S>                                   <C>
Leezie Kim                            One East Camelback Road
                                      Suite 400
                                      Phoenix, Arizona 85012-1649
</TABLE>

     6.  Number of Directors.  The number of directors of the Corporation, and
the division of directors into classes (if any), shall be fixed by, or in the
manner provided in, the Bylaws.

     7.  Elimination of Certain Liability of Directors.  No director of the
Corporation shall be held personally liable to the Corporation or its
stockholders for monetary damages

                                       B-1
<PAGE>   376

of any kind for breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL, or (iv) for any transaction from which the director derived an
improper personal benefit. If the DGCL is amended to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director of the Corporation shall be eliminated or limited to the
fullest extent permitted by the DGCL as so amended. No amendment to or repeal of
this Section 7 shall adversely affect any right or protection of any director of
the Corporation existing at the time of such amendment or repeal for or with
respect to acts or omissions of such director prior to such amendment or repeal.

     8.  Amendments to Bylaws.  In furtherance and not in limitation of the
powers conferred by the DGCL, the Board of Directors is expressly authorized to
make, alter or repeal the Bylaws of the Corporation.

     9.  Amendments to Certificate.  The Corporation reserves the right to
amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by the DGCL, and all
rights conferred upon stockholders herein are granted subject to this
reservation.

     I, THE UNDERSIGNED, being the Incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the DGCL, do make this Certificate,
hereby declaring and certifying that this is my act and deed and the facts
herein stated are true, and accordingly have hereunto set my hand this 7th day
of June, 1999.

                                          /s/ LEEZIE KIM
                                          --------------------------------------
                                          Leezie Kim, Sole Incorporator

                                       B-2
<PAGE>   377

                                     BYLAWS

                                       OF

                  FUTECH INTERACTIVE PRODUCTS (DELAWARE) INC.

                                    ADOPTED

                                  JUNE 7, 1999
<PAGE>   378

                                   ARTICLE I

                                    OFFICES

     1.01.  Registered Office.  The registered office shall be in the City of
Wilmington, County of New Castle, State of Delaware.

     1.02.  Principal Business Office.  The corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation may
require.

                                   ARTICLE II

                                  STOCKHOLDERS

     2.01.  Place of Meeting.  All meetings of the stockholders for the election
of directors shall be held at such place either within or without the State of
Delaware as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in duly executed
waiver of notice thereof.

     2.02.  Annual Meeting.  Annual meetings of stockholders shall be held on
the last Tuesday of April if not a legal holiday, and if a legal holiday, then
on the next secular day following, at 10:00 a.m., or at such other date and time
as shall be designated from time to time by the Board of Directors. At such
annual meeting, the stockholders shall elect by a plurality vote, by written
ballot, a Board of Directors and shall transact such other business as may
properly be brought before the meeting.

     2.03  Notice of Meeting.  Written notice of the annual meeting stating the
place, date and hour of the meeting shall be given to each stockholder entitled
to vote at such meeting not less than ten nor more than sixty days before the
date of the meeting.

     2.04  Closing of Transfer Books or Fixing Record Date.  The officer who has
charge of the stock ledger of the corporation shall prepare and make, at least
ten days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten days prior to the meeting, either
at a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at the
time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.

     In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or to express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which shall not be
more than sixty nor less than ten days before the date of such meeting, nor more
than sixty days prior to any other action. A determination of stockholders of
record entitled to notice of or to vote at a meeting of stockholders shall apply
to any adjournment of the
<PAGE>   379

meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.

     2.05.  Special Meeting.  Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the Chairman of the Board and CEO
or President and shall be called by the President or Secretary at the request in
writing of a majority of the Board of Directors, or at the request in writing of
stockholders owning a majority in amount of the entire capital stock of the
corporation issued and outstanding and entitled to vote. Such request shall
state the purpose or purposes of the proposed meeting.

     2.06.  Notice of Meeting.  Written notice of a special meeting stating the
place, date and hour of the meeting and the purpose or purposes for which the
meeting is called, shall be given not less than ten nor more than sixty days
before the date of the meeting, to each stockholder entitled to vote at such
meeting. The business transacted at any special meeting of stockholders shall be
limited to the purposes stated in the notice.

     2.07.  Quorum.  Except as otherwise provided by statute or by the
Certificate of Incorporation, the holders of a majority of the shares of stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If, however, such quorum shall not
be present or represented at any meeting of the stockholders, the stockholders
entitled to vote thereat, present in person or represented by proxy, shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented any
business may be transacted which might have been transacted at the meeting as
originally notified. If the adjournment is for more than thirty days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.

     2.08.  Voting of Shares.  When a quorum is present at any meeting, the vote
of the holders of a majority of the shares of stock having voting power present
in person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which by express provision of the
statutes or of the Certificate of Incorporation, a different vote is required in
which case such express provision shall govern and control the decision of such
question.

     Unless otherwise provided in the Certificate of Incorporation, each
stockholder shall at every meeting of stockholders be entitled to one vote in
person or by proxy for each share of the capital stock having voting power held
by such stockholder, but no proxy shall be voted on after three years from its
date, unless the proxy provides for a longer period.

     At all elections of directors of the corporation each stockholder having
voting power shall be entitled to exercise the right of cumulative voting as
provided in the Certificate of Incorporation.

     2.09.  Action by Written Consent.  Unless otherwise provided in the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of stockholders of the corporation, or any action which may be
taken at any annual or special meeting of such stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding shares of stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all
<PAGE>   380

shares entitled to vote thereon were present and voted. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing.

                                  ARTICLE III

                                   DIRECTORS

     3.01.  General Powers and Number.  The business of the corporation shall be
managed by or under the direction of its Board of Directors which may exercise
all such powers of the corporation and do all such lawful acts and things as are
not by statute or by the Certificate of Incorporation or by these bylaws
directed or required to be exercised or done by the stockholders or by others.

     The number of directors which shall constitute the whole Board shall be
nine (9), and directors shall be classified with respect to the time for which
they shall hold office by dividing them into three (3) classes, each class to
consist of three (3) directors. The directors of the first class shall hold
office for an initial term expiring at the annual meeting of stockholders in
2000, the directors of the second class for an initial term expiring at the
annual meeting of stockholders in 2001, and the directors of the third class for
an initial term expiring at the annual meeting of stockholders in 2002. At the
close of each annual meeting of this corporation, the successors to the class of
directors whose terms expire that year shall be elected by the stockholders and
shall commence to hold office for a term of three (3) years, or until their
successors have been elected and qualified, or until their prior death,
resignation or removal.

     The number of directors may be increased or decreased from time to time by
amendment to this Section, adopted by the stockholders, but no decrease shall
have the effect of shortening the term of an incumbent director. In the event of
an increase in the number of directors, the stockholders or the remaining
directors shall assign the newly created directorship(s) to the appropriate
class or classes so that the three (3) classes shall continue to consist of, as
nearly as possible, an equal number of directors.

     3.02.  Vacancies.  Vacancies and newly created directorships resulting from
any increase in the authorized number of directors may be filled by a majority
of the directors then in office, though less than a quorum, or by a sole
remaining director, and the directors so chosen shall hold office until the next
annual election and until their successors are duly elected and shall qualify,
unless sooner displaced. If there are no directors in office, then an election
of directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole Board (as constituted
immediately prior to any such increase), the Court of Chancery may, upon
application of any stockholder or stockholders holding at least ten percent of
the total number of the shares at the time outstanding having the right to vote
for such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office.

     3.03.  Annual Meeting.  The first meeting of each newly elected Board of
Directors shall be held at such time and place as shall be fixed by the vote of
the stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time
<PAGE>   381

and place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.

     3.04.  Regular Meetings.  Regular meetings of the Board of Directors may be
held within or without the State of Delaware without notice, at such time and at
such place as shall from time to time be determined by the Board.

     3.05.  Special Meetings.  Special meetings of the Board may be held within
or without the State of Delaware and may be called by the Chairman of the Board
and CEO or President on forty-eight hours notice to each director, either
personally or by mail or by telegram; special meetings shall be called by the
President or Secretary in like manner and on like notice on the written request
of two directors.

     3.06.  Quorum.  At all meetings a majority of the number of directors as
provided in Section 3.01 shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the Board of Directors, except as may be otherwise specifically provided by
statute or by the Certificate of Incorporation. If a quorum shall not be present
at any meeting of the Board of Directors the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.

     3.07.  Action By Unanimous Written Consent.  Unless otherwise restricted by
the Certificate of Incorporation or these bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writings are
filed with the minutes of proceedings of the Board or committee.

     3.08.  Participation By Conference Telephone.  Unless otherwise restricted
by the Certificate of Incorporation or these bylaws, members of the Board of
Directors, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors, or any committee, by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at the meeting.

     3.09.  Committees of Directors.  The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the Board of Directors, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers which may require it; but no
such committee shall have the power or authority in reference to amending the
Certificate of Incorporation (except that a committee may, to
<PAGE>   382

the extent authorized in the resolutions providing for the issuance of shares of
stock adopted by the board of directors as provided in Section 151(a) fix any of
the preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
corporation), adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
bylaws of the corporation; and, unless the resolution or the Certificate of
Incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock or to
adopt a certificate of ownership and merger. Such committee or committees shall
have such name or names as may be determined from time to time by resolution
adopted by the Board of Directors. Each committee shall keep regular minutes of
its meetings and report the same to the Board of directors when required.

     3.10.  Compensation.  Unless otherwise restricted by the Certificate of
Incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.

     3.11.  Removal of Directors.  Unless otherwise restricted by the
Certificate of Incorporation or by law, any director or the entire Board of
Directors may be removed from office by the stockholders, but only for cause and
only by the holders of a majority of shares entitled to vote at an election of
directors.

                                   ARTICLE IV

                                    NOTICES

     4.01.  Notice.  Whenever, under the provisions of the statutes or of the
Certificate of Incorporation or of these bylaws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram.

     4.02.  Waiver of Notice.  Whenever any notice is required to be given under
the provisions of the statutes or of the Certificate of Incorporation or of
these bylaws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.

                                   ARTICLE V

                                    OFFICERS

     5.01.  Number.  The officers of the corporation shall be chosen by the
Board of Directors and shall be a Chairman of the Board and CEO, a President, a
Vice President, a
<PAGE>   383

Secretary and a Treasurer. The Board of Directors may also choose additional
Vice Presidents, and one or more assistant secretaries and assistant treasurers.
Any number of offices may be held by the same person, unless the Certificate of
Incorporation or these bylaws otherwise provide.

     5.02.  Election and Term of Office.  The Board of Directors at its first
meeting after each annual meeting of stockholders shall choose a Chairman of the
Board and CEO, a President, one or more Vice Presidents, a Secretary and a
Treasurer. The officers of the corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the Board
of Directors may be removed at any time by the affirmative vote of a majority of
the Board of Directors. Any vacancy occurring in any office of the corporation
shall be filled by the Board of Directors.

     5.03.  The Chairman of the Board and CEO.  The Chairman of the Board and
CEO shall be the chief executive officer of the corporation. He or she shall
preside at all meetings of the stockholders and the Board of Directors and shall
have executive management of the business of the corporation and see that all
orders and resolutions of the Board of Directors are carried into effect. The
Chairman of the Board and CEO shall direct the affairs and policies of the
corporation, subject to any direction which may be given by the Board of
Directors. The Chairman of the Board and CEO shall have authority to designate
the duties and powers of the officers and delegate specialpowers and duties to
specified officers, so long as such designations shall not be inconsistent with
applicable laws, these bylaws, or action of the Board of Directors. The Chairman
of the Board and CEO shall have such other powers and duties as may, from time
to time, be prescribed by these bylaws or by resolution of the Board of
Directors.

     5.04  The President.  The President shall be the chief operating officer of
the corporation and, subject to the control of the Board of Directors and
Chairman of the Board and CEO, shall in general supervise and control all of the
day-to-day business and affairs of the corporation. In the absence of the
Chairman of the Board and CEO, the President shall preside at all meetings of
the stockholders and the Board of Directors. The President shall execute bonds,
mortgages and other contracts requiring a seal, under the seal of the
corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the corporation. The President shall have such other powers and duties as may,
from time to time, be prescribed by these bylaws or by the Board of Directors or
Chairman of the Board and CEO.

     5.05  The Vice Presidents.  In the absence of the President or in the event
of his inability or refusal to act, the Vice President (or in the event there be
more than one Vice President, the Vice Presidents in the order designated by the
directors, or in the absence of any designation, then in the order of their
election) shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President. The Vice Presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.

     5.06  The Secretary.  The Secretary shall attend all meetings of the Board
of Directors and all meetings of the stockholders and shall record all the
proceedings of the meetings of the corporation and of the Board of Directors in
a book to be kept for that purpose. The Secretary shall perform like duties for
the standing committees when required. The Secretary shall give, or cause to be
given, notice of all meetings of the stockholders and special meetings of the
Board of Directors, and shall perform such other
<PAGE>   384

duties as may be prescribed by the Board of Directors or President, under whose
supervision he or she shall be. The Secretary shall have custody of the
corporate seal of the corporation (if one is adopted by the Board of Directors)
and the Secretary, or an assistant secretary, shall have authority to affix the
same to any instrument requiring it. When so affixed, the corporate seal may be
attested by the Secretary's signature or by the signature of such assistant
secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the corporation and to attest the affixing by his
or her signature.

     5.07  The Treasurer.  The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors. The Treasurer
shall disburse the funds of the corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the President and the Board of Directors, at its regular meetings, or when the
Board of Directors so requires, an account of all his or her transactions as
Treasurer and of the financial condition of the corporation. If required by the
Board of Directors, the Treasurer shall give the corporation a bond (which shall
be renewed every six years) in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors for the faithful performance of
the duties of the office and for the restoration to the corporation, in case of
the Treasurer's death, resignation, retirement or removal from office, of all
books, papers, vouchers, money and other property of whatever kind in the
Treasurer's possession or under his or her control belonging to the corporation.

     5.08  Assistant Secretaries and Assistant Treasurers.  There shall be such
number of assistant secretaries and assistant treasurers as the Board of
Directors may appoint as it shall deem necessary. The assistant secretary, or if
there be more than one, the assistant secretaries in the order determined by the
Board of Directors (or if there be no such determination, then in the order of
their election) may sign with the President or a Vice President certificates for
shares of the corporation the issuance of which shall have been authorized by a
resolution of the Board of Directors, and shall, in the absence of the Secretary
or in the event of the Secretary's inability or refusal to act, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe. The assistant secretary or assistant treasurer, in general,
shall, in the absence of the Secretary or Treasurer, as appropriate, or in the
event of their inability or refusal to act, perform the duties and exercise the
powers of the Secretary or Treasurer, as appropriate, and shall perform such
other duties and have such other powers as the Board of Directors may from time
to time prescribe.

     5.09.  Other Assistants and Acting Officers.  The Board of Directors may,
from time to time appoint such other officers and agents as it shall deem
necessary who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board.

     5.10.  Salaries.  The salaries of all officers and agents of the
corporation shall be fixed by the Board of Directors.
<PAGE>   385

                                   ARTICLE VI

                        CERTIFICATE FOR SHARES OF STOCK
                               AND THEIR TRANSFER

     6.01.  Certificate for Shares.  The shares of the corporation may be
represented by a certificate or may be uncertificated. Certificates shall be
signed by, or in the name of the corporation by, the chairman or vice chairman
of the Board of Directors, if any, or the President or a Vice President and the
Treasurer or an assistant treasurer, or the Secretary or an assistant secretary
of the corporation, certifying the number of shares owned by such holder in the
corporation.

     Upon the face or back of each stock certificate issued to represent any
partly paid shares, or upon the books and records of the corporation in the case
of uncertificated partly paid shares, shall be set forth the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.

     If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in Section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.

     Within a reasonable time after the issuance or transfer of uncertificated
stock, the corporation shall send to the registered owner thereof a written
notice containing the information required to be set forth or stated on
certificates pursuant to Sections 151, 156, 202(a) or (218)(a) or a statement
that the corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.

     6.02.  Facsimile Signatures.  Any of or all the signatures on the
certificate may be facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if that person were such officer, transfer agent or registrar at the date of
issue.

     6.03.  Lost Certificates.  The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his or her legal representative, to advertise the same in such
manner as it shall require and/or to give the
<PAGE>   386

corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the corporation with respect to the certificate alleged
to have been lost, stolen or destroyed.

     6.04.  Transfers of Shares.  Upon surrender to the corporation or the
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.

     6.05.  Registered Stockholders.  The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as owner of
shares to receive dividends, and to vote as such owner, and to hold liable for
calls and assessments a person registered on its books as the owner of shares.
The corporation shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of the State of Delaware.

                                  ARTICLE VII

               INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
                                AND OTHER AGENTS

     7.01.  Indemnification of Directors and Officers.  The corporation shall,
to the maximum extent and in the manner permitted by the General Corporation Law
of Delaware as the same now exists or may hereafter be amended, indemnify any
person against expenses (including attorneys' fees), judgments, fines, and
amounts paid in settlement actually and reasonably incurred in connection with
any threatened, pending or completed action, suit, or proceeding in which such
person was or is a party or is threatened to be made a party by reason of the
fact that such person is or was a director or officer of the corporation. For
purposes of this Section 7.01, a "director" or "officer" of the corporation
shall mean any person (i) who is or was a director or officer of the
corporation, (ii) who is or was serving at the request of the corporation as a
director or officer of another corporation, partnership, joint venture, trust or
other enterprise, or (iii) who was a director or officer of a corporation which
was a predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation.

     The corporation shall be required to indemnify a director or officer in
connection with an action, suit, or proceeding (or part thereof) initiated by
such director or officer only if the initiation of such action, suit, or
proceeding (or part thereof) by the director or officer was authorized by the
board of Directors of the corporation.

     The corporation shall pay the expenses (including attorneys' fees) incurred
by a director or officer of the corporation entitled to indemnification
hereunder in defending any action, suit or proceeding refereed to in this
Section 7.01 in advance of its final disposition; provided, however, that
payment of expenses incurred by a director or officer of the corporation in
advance of the final disposition of such action, suit or proceeding shall be
made only upon receipt of an undertaking by the director or officer to repay all
amounts advanced if it should ultimately be determined that the director or
officer is not entitled to be indemnified under this Section 7.01 or otherwise.

     The rights conferred on any person by this Article shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the
<PAGE>   387

corporation's Certificate of Incorporation, these bylaws, agreement, vote of the
stockholders or disinterested directors or otherwise.

     Any repeal or modification of the foregoing provisions of this Article
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.

     7.02.  Indemnification of Others.  The corporation shall have the power, to
the maximum extent and in the manner permitted by the General Corporation Law of
Delaware as the same now exists or may hereafter be amended, to indemnify any
person (other than directors and officers) against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incorrect in connection with any threatened, pending or completed
action, suit, or proceeding in which such person was or is a party or is
threatened to be made a party by reason of the fact that such person is or was
an employee or agent of the corporation. For purposes of this Section 7.02, an
"employee" or "agent" of the corporation (other than a director or officer)
shall mean any person (i) who is or was an employee or agent of the corporation,
(ii) who is or was serving at the request of the corporation as an employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, or (iii) who was an employee or agent of a corporation which was a
predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation.

     7.03.  Insurance.  The corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
her and incurred by him or her in any such capacity, or arising out of his or
her status as such, whether or not the corporation would have the power to
indemnify him or her against such liability under the provisions of the General
Corporation Law of Delaware.

                                  ARTICLE VIII

                               GENERAL PROVISIONS

     8.01.  Dividends.  Dividends upon the capital stock of the corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the Certificate of Incorporation. Before
payment of any dividend, there may be set aside out of any funds of the
corporation available for dividends such sum or sums as the directors from time
to time, in their absolute discretion, think proper as a reserve or reserves to
meet contingencies, or for equalizing dividends, or for repairing or maintaining
any property of the corporation, or for such other purpose as the directors
shall think conducive to the interest of the corporation, and the directors may
modify or abolish any such reserve in the manner in which it was created.

     8.02.  Annual Statement.  The Board of Directors shall present at each
annual meeting, and at any special meeting of the stockholders when called for
by vote of the stockholders, a full and clear statement of the business and
condition of the corporation.

     8.03.  Checks.  All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
<PAGE>   388

     8.04.  Fiscal Year.  The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors.

     8.05.  Seal.  The corporation may have a seal which shall have inscribed
thereon the name of the corporation and the words "Corporate Seal, Delaware."
The seal may be used by causing it or a facsimile thereof to be impressed or
affixed or reproduced or otherwise.

                                   ARTICLE IX

                                   AMENDMENTS

     These bylaws may be altered, amended or repealed or new bylaws may be
adopted by the stockholders or by the Board of Directors, when such power is
conferred upon the Board of Directors by the Certificate of Incorporation, at
any regular meeting of the stockholders or of the Board of Directors or at any
special meeting of the stockholders or of the Board of Directors if notice of
such alteration, amendment, repeal or adoption of new bylaws be contained in the
notice of such special meeting. Notwithstanding the foregoing, Sections 3.01 and
3.11 and Article VII of these bylaws may not be altered, amended or repealed by
the Board of Directors. If the power to adopt, amend or repeal bylaws is
conferred upon the Board of Directors by the Certificate of Incorporation, it
shall not divest or limit the power of the stockholders to adopt, amend or
repeal bylaws.
<PAGE>   389

                                                                      APPENDIX 1

                        ARIZONA BUSINESS CORPORATION ACT

                               DISSENTERS' RIGHTS

10-1301.  DEFINITIONS

     In this article, unless the context otherwise requires:

          1.  "Beneficial shareholder" means the person who is a beneficial
     owner of shares held in a voting trust or by a nominee as the record
     shareholder.

          2.  "Corporation" means the issuer of the shares held by a dissenter
     before the corporate action or the surviving or acquiring corporation by
     merger or share exchange of that issuer.

          3.  "Dissenter" means a shareholder who is entitled to dissent from
     corporate action under section 10-1302 and who exercises that right when
     and in the manner required by article 2 of this chapter.

          4.  "Fair value" with respect to a dissenter's shares means the value
     of the shares immediately before the effectuation of the corporate action
     to which the dissenter objects, excluding any appreciation or depreciation
     in anticipation of the corporate action unless exclusion is inequitable.

          5.  "Interest" means interest from the effective date of the corporate
     action until the date of payment at the average rate currently paid by the
     corporation on its principal bank loans or, if none, at a rate that is fair
     and equitable under the circumstances.

          6.  "Record shareholder" means the person in whose name shares are
     registered in the records of a corporation or the beneficial owner of
     shares to the extent of the rights granted by a nominee certificate on file
     with a corporation.

          7.  "Shareholder" means the record shareholder or the beneficial
     shareholder.

10-1302.  RIGHT TO DISSENT

     A.  A shareholder is entitled to dissent from and obtain payment of the
fair value of the shareholder's shares in the event of any of the following
corporate actions:

          1.  Consummation of a plan of merger to which the corporation is a
     party if either:

             (a) Shareholder approval is required for the merger by section
        10-1103 or the articles of incorporation and if the shareholder is
        entitled to vote on the merger.

             (b) The corporation is a subsidiary that is merged with its parent
        under section 10-1104.

          2.  Consummation of a plan of share exchange to which the corporation
     is a party as the corporation whose shares will be acquired, if the
     shareholder is entitled to vote on the plan.

          3.  Consummation of a sale or exchange of all or substantially all of
     the property of the corporation other than in the usual and regular course
     of business, if the
                                       A-1
<PAGE>   390

     shareholder is entitled to vote on the sale or exchange, including a sale
     in dissolution, but not including a sale pursuant to a court order or a
     sale for cash pursuant to a plan by which all or substantially all of the
     net proceeds of the sale will be distributed to the shareholders within one
     year after the date of sale.

          4.  An amendment of the articles of incorporation that materially and
     adversely affects rights in respect of a dissenter's shares because it
     either:

             (a) Alters or abolishes a preferential right of the shares.

             (b) Creates, alters or abolishes a right in respect of redemption,
        including a provision respecting a sinking fund for the redemption or
        repurchase, of the shares.

             (c) Alters or abolishes a preemptive right of the holder of the
        shares to acquire shares or other securities.

             (d) Excludes or limits the right of the shares to vote on any
        matter or to cumulate votes other than a limitation by dilution through
        issuance of shares or other securities with similar voting rights.

             (e) Reduces the number of shares owned by the shareholder to a
        fraction of a share if the fractional share so created is to be acquired
        for cash under section 10-604.

          5.  Any corporate action taken pursuant to a shareholder vote to the
     extent the articles of incorporation, the bylaws or a resolution of the
     board of directors provides that voting or nonvoting shareholders are
     entitled to dissent and obtain payment for their shares.

     B.  A shareholder entitled to dissent and obtain payment for his shares
under this chapter may not challenge the corporate action creating the
shareholder's entitlement unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.

     C.  This section does not apply to the holders of shares of any class or
series if the shares of the class or series are redeemable securities issued by
a registered investment company as defined pursuant to the investment company
act of 1940 (15 United States Code section 80a-1 through 80a-64).

     D.  Unless the articles of incorporation of the corporation provide
otherwise, this section does not apply to the holders of shares of a class or
series if the shares of the class or series were registered on a national
securities exchange, were listed on the national market systems of the national
association of securities dealers automated quotation system or were held of
record by at least two thousand shareholders on the date fixed to determine the
shareholders entitled to vote on the proposed corporate action.

10-1303.  DISSENT BY NOMINEES AND BENEFICIAL OWNERS

     A.  A record shareholder may assert dissenters' rights as to fewer than all
of the shares registered in the record shareholder's name only if the record
shareholder dissents with respect to all shares beneficially owned by any one
person and notifies the corporation in writing of the name and address of each
person on whose behalf the record shareholder asserts dissenters' rights. The
rights of a partial dissenter under this subsection are determined as if the
shares as to which the record shareholder dissents and the record shareholder's
other shares were registered in the names of different shareholders.

                                       A-2
<PAGE>   391

     B.  A beneficial shareholder may assert dissenters' rights as to shares
held on the beneficial shareholder's behalf only if both:

          1.  The beneficial shareholder submits to the corporation the record
     shareholder's written consent to the dissent not later than the time the
     beneficial shareholder asserts dissenters' rights.

          2.  The beneficial shareholder does so with respect to all shares of
     which the beneficial shareholder is the beneficial shareholder or over
     which the beneficial shareholder has power to direct the vote.

10-1320.  NOTICE OF DISSENTERS' RIGHTS

     A.  If proposed corporate action creating dissenters' rights under section
10-1302 is submitted to a vote at a shareholders' meeting, the meeting notice
shall state that shareholders are or may be entitled to assert dissenters'
rights under this article and shall be accompanied by a copy of this article.

     B.  If corporate action creating dissenters' rights under section 10-1302
is taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights.

10-1321.  NOTICE OF INTENT TO DEMAND PAYMENT

     A.  If proposed corporate action creating dissenters' rights under section
10-1302 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights shall both:

          1.  Deliver to the corporation before the vote is taken written notice
     of the shareholder's intent to demand payment for the shareholder's shares
     if the proposed action is effectuated.

          2.  Not vote the shares in favor of the proposed action.

     B.  A shareholder who does not satisfy the requirements of subsection A of
this section is not entitled to payment for the shares under this article.

10-1322.  DISSENTERS' NOTICE

     A.  If proposed corporate action creating dissenters' rights under section
10-1302 is authorized at a shareholders' meeting, the corporation shall deliver
a written dissenters' notice to all shareholders who satisfied the requirements
of section 10-1321.

     B.  The dissenters' notice shall be sent no later than ten days after the
corporate action is taken and shall:

          1.  State where the payment demand must be sent and where and when
     certificates for certificated shares shall be deposited.

          2.  Inform holders of uncertificated shares to what extent transfer of
     the shares will be restricted after the payment demand is received.

          3.  Supply a form for demanding payment that includes the date of the
     first announcement to news media or to shareholders of the terms of the
     proposed corporate action and that requires that the person asserting
     dissenters' rights certify whether or not the person acquired beneficial
     ownership of the shares before that date.

                                       A-3
<PAGE>   392

          4.  Set a date by which the corporation must receive the payment
     demand, which date shall be at least thirty but not more than sixty days
     after the date the notice provided by subsection A of this section is
     delivered.

          5.  Be accompanied by a copy of this article.

10-1323.  DUTY TO DEMAND PAYMENT

     A.  A shareholder sent a dissenters' notice described in section 10-1322
shall demand payment, certify whether the shareholder acquired beneficial
ownership of the shares before the date required to be set forth in the
dissenters' notice pursuant to section 10-1322, subsection B, paragraph 3 and
deposit the shareholder's certificates in accordance with the terms of the
notice.

     B.  A shareholder who demands payment and deposits the shareholder's
certificates under subsection A of this section retains all other rights of a
shareholder until these rights are canceled or modified by the taking of the
proposed corporate action.

     C.  A shareholder who does not demand payment or does not deposit the
shareholder's certificates if required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
article.

10-1324.  SHARE RESTRICTIONS

     A.  The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions are released under section 10-1326.

     B.  The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.

10-1325.  PAYMENT

     A.  Except as provided in section 10-1327, as soon as the proposed
corporate action is taken, or if such action is taken without a shareholder
vote, on receipt of a payment demand, the corporation shall pay each dissenter
who complied with section 10-1323 the amount the corporation estimates to be the
fair value of the dissenter's shares plus accrued interest.

     B.  The payment shall be accompanied by all of the following:

          1.  The corporation's balance sheet as of the end of a fiscal year
     ending not more than sixteen months before the date of payment, an income
     statement for that year, a statement of changes in shareholders' equity for
     that year and the latest available interim financial statements, if any.

          2.  A statement of the corporation's estimate of the fair value of the
     shares.

          3.  An explanation of how the interest was calculated.

          4.  A statement of the dissenter's right to demand payment under
     section 10-1328.

          5.  A copy of this article.

                                       A-4
<PAGE>   393

10-1326.  FAILURE TO TAKE ACTION

     A.  If the corporation does not take the proposed action within sixty days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.

     B.  If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it shall send a new
dissenters' notice under section 10-1322 and shall repeat the payment demand
procedure.

10-1327.  AFTER-ACQUIRED SHARES

     A.  A corporation may elect to withhold payment required by section 10-1325
from a dissenter unless the dissenter was the beneficial owner of the shares
before the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.

     B.  To the extent the corporation elects to withhold payment under
subsection A of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares plus accrued interest and shall pay
this amount to each dissenter who agrees to accept it in full satisfaction of
his demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest was
calculated and a statement of the dissenters' right to demand payment under
section 10-1328.

10-1328.  PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER

     A.  A dissenter may notify the corporation in writing of the dissenter's
own estimate of the fair value of the dissenter's shares and amount of interest
due and either demand payment of the dissenter's estimate, less any payment
under section 10-1325, or reject the corporation's offer under section 10-1327
and demand payment of the fair value of the dissenter's shares and interest due,
if either:

          1.  The dissenter believes that the amount paid under section 10-1325
     or offered under section 10-1327 is less than the fair value of the
     dissenter's shares or that the interest due is incorrectly calculated.

          2.  The corporation fails to make payment under section 10-1325 within
     sixty days after the date set for demanding payment.

          3.  The corporation, having failed to take the proposed action, does
     not return the deposited certificates or does not release the transfer
     restrictions imposed on uncertificated shares within sixty days after the
     date set for demanding payment.

     B.  A dissenter waives the right to demand payment under this section
unless the dissenter notifies the corporation of the dissenter's demand in
writing under subsection A of this section within thirty days after the
corporation made or offered payment for the dissenter's shares.

10-1330.  COURT ACTION

     A.  If a demand for payment under section 10-1328 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and shall petition the court to determine the fair value of the
shares and accrued

                                       A-5
<PAGE>   394

interest. If the corporation does not commence the proceeding within the sixty
day period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.

     B.  The corporation shall commence the proceeding in the court in the
county where a corporation's principal office or, if none in this state, its
known place of business is located. If the corporation is a foreign corporation
without a known place of business in this state, it shall commence the
proceeding in the county in this state where the known place of business of the
domestic corporation was located.

     C.  The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding as in an
action against their shares, and all parties shall be served with a copy of the
petition. Nonresidents may be served by certified mail or by publication as
provided by law or by the Arizona rules of civil procedure.

     D.  The jurisdiction of the court in which the proceeding is commenced
under subsection B of this section is plenary and exclusive. There is no right
to trial by jury in any proceeding brought under this section. The court may
appoint a master to have the powers and authorities as are conferred on masters
by law, by the Arizona rules of civil procedure or by the order of appointment.
The master's report is subject to exceptions to be heard before the court, both
on the law and the facts. The dissenters are entitled to the same discovery
rights as parties in other civil proceedings.

     E.  Each dissenter made a party to the proceeding is entitled to judgment
either:

          1.  For the amount, if any, by which the court finds the fair value of
     his shares plus interest exceeds the amount paid by the corporation.

          2.  For the fair value plus accrued interest of the dissenter's
     after-acquired shares for which the corporation elected to withhold payment
     under section 10-1327.

10-1331.  COURT COSTS AND ATTORNEY FEES

     A.  The court in an appraisal proceeding commenced under section 10-1330
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of any master appointed by the court. The court shall
assess the costs against the corporation, except that the court shall assess
costs against all or some of the dissenters to the extent the court finds that
the fair value does not materially exceed the amount offered by the corporation
pursuant to sections 10-1325 and 10-1327 or that the dissenters acted
arbitrarily, vexatiously or not in good faith in demanding payment under section
10-1328.

     B.  The court may also assess the fees and expenses of attorneys and
experts for the respective parties in amounts the court finds equitable either:

          1.  Against the corporation and in favor of any or all dissenters if
     the court finds that the corporation did not substantially comply with the
     requirements of article 2 of this chapter.

          2.  Against the dissenter and in favor of the corporation if the court
     finds that the fair value does not materially exceed the amount offered by
     the corporation pursuant to sections 10-1325 and 10-1327.

          3.  Against either the corporation or a dissenter in favor of any
     other party if the court finds that the party against whom the fees and
     expenses are assessed acted arbitrarily, vexatiously or not in good faith
     with respect to the rights provided by this chapter.

                                       A-6
<PAGE>   395

     C.  If the court finds that the services of an attorney for any dissenter
were of substantial benefit to other dissenters similarly situated and that the
fees for those services should not be assessed against the corporation, the
court may award to these attorneys reasonable fees to be paid out of the amounts
awarded the dissenters who were benefitted.

                                       A-7
<PAGE>   396

                       FUTECH INTERACTIVE PRODUCTS, INC.
                             2999 NORTH 44TH STREET
                                   SUITE 225
                          PHOENIX, ARIZONA 85018-7247
                           -------------------------

                   NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
                        TO BE HELD                , 1999
                           -------------------------

     You are invited to attend a Special Meeting of Stockholders of Futech
Interactive Products, Inc., that will be held at      a.m. local time on
               , 1999 at                                  . The Futech
Interactive Products, Inc. Board of Directors has called this special meeting
for the following purposes:

     - To consider and vote upon a proposal to approve and adopt the Merger
       Agreement dated as of June 7, 1999, by and among Futech Interactive
       Products, Inc., Janex International, Inc., Trudy Corporation, Fundex
       Games, Ltd., DaMert Company, and two newly formed companies that we are
       referring to as "New Futech" and "New Sub." Under the Merger Agreement,
       first Futech and then Janex, Trudy, and DaMert will merge with and into
       New Futech, which will survive the merger, and Fundex will merge into New
       Sub, which will survive as a wholly-owned subsidiary of New Futech.
       Assuming that none of the currently outstanding options or warrants for
       Futech common stock are exercised prior to the mergers, each share of
       Futech common stock outstanding immediately prior to the mergers (other
       than dissenting shares) will be converted into the right to receive
       approximately .0391 shares of New Futech common stock.

     - To consider and vote upon a proposal to approve the 1999 Stock Option
       Plan.

     - To transact such other business as may properly come before the special
       meeting or any adjournment or postponement of the special meeting.

     These matters are more fully described in the prospectus/proxy statement
and related prospectus/proxy statement supplement that are attached to this
Notice.

     We, the board of directors of Futech, recommend that you vote FOR the
mergers and FOR approval of the 1999 Stock Option Plan.

     You will be entitled to vote at the special meeting or any adjournment or
postponement of the special meeting only if you are a holder of record of Futech
common stock at the close of business on              , 1999.

                                        BY ORDER OF THE BOARD OF DIRECTORS

                                        Vincent W. Goett
                                        Chairman

Phoenix, Arizona
             , 1999

                                   IMPORTANT

     We cordially invite all stockholders to attend the special meeting in
person.

     Whether or not you plan to attend the special meeting in person, in order
to assure your representation at the meeting, we urge you to complete, sign and
date the enclosed proxy card, which is being solicited by the board of
directors, and promptly return it in the self-addressed return envelope enclosed
for that purpose. You may revoke your proxy at any time prior to the vote at the
meeting by telling us that you want to do so.
<PAGE>   397


                  Subject To Completion, Dated October 8, 1999



                  FUTECH INTERACTIVE PRODUCTS (DELAWARE) INC.


                           FUTECH TOYS & GAMES, INC.


                       FUTECH INTERACTIVE PRODUCTS, INC.



                     PROSPECTUS/PROXY STATEMENT SUPPLEMENT



     The board of directors of Futech Interactive Products, Inc. has called a
special meeting of stockholders to consider and vote upon (1) a proposal to (a)
merge Futech with Futech Interactive Products (Delaware) Inc., a newly-formed
company, so that New Futech is a Delaware corporation, (b) merge three other
companies into New Futech, and (c) merge a fourth company into a subsidiary so
that it becomes a subsidiary of New Futech, and (2) a proposal to adopt the 1999
Stock Option Plan, which will continue in effect after the mergers. This
prospectus/proxy statement supplement and the accompanying prospectus/proxy
statement are intended to give you important information about the special
meeting and about the proposed mergers and the combined company that would
result from the mergers. PLEASE READ THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS/PROXY STATEMENT TOGETHER WITH EACH OTHER AS IF
THEY WERE A SINGLE DOCUMENT. THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT ALONE
DOES NOT INCLUDE ALL OF THE INFORMATION THAT WE BELIEVE MAY BE IMPORTANT TO YOU.



     Under the merger agreement, first Futech and then Janex International,
Inc., Trudy Corporation, and DaMert Company will merge with and into New Futech,
and Fundex Games, Ltd. will merge into the newly formed subsidiary, Futech Toys
& Games, Inc. ("New Sub"), which will survive as a wholly-owned subsidiary of
New Futech. Each share of outstanding stock of any of the merging companies
immediately prior to the mergers, other than dissenting shares, is expected to
be converted into the right to receive cash, shares of New Futech stock,
promissory notes of New Futech or New Sub, or a combination of these things, in
the amounts specified on the cover page of the prospectus/proxy statement, but
subject to changes in accordance with the elections and conditional rights
described under "Description of the Mergers and the Merger Agreement" in the
prospectus/proxy statement beginning at page 12. The table does not include
outstanding options and warrants of Futech, Janex and Fundex, which would be
converted into New Futech options and warrants in the mergers.



     There is no trading market for any Futech securities. We expect the New
Futech common stock to trade on the OTC Bulletin Board or on other markets after
the mergers, but we cannot be sure it will do so and we cannot predict what the
price might be. We do not expect a trading market to develop for any of the
other securities of New Futech or New Sub.



     THESE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROSPECTUS/PROXY STATEMENT
SUPPLEMENT AND THE RELATED PROSPECTUS/PROXY STATEMENT. THE PROPOSED MERGERS ARE
COMPLEX TRANSACTIONS. WE STRONGLY URGE YOU TO READ AND CONSIDER CAREFULLY THIS
PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE PROSPECTUS/PROXY STATEMENT IN
THEIR ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO UNDER "RISK FACTORS"
BEGINNING ON PAGE 6 OF PROSPECTUS/PROXY STATEMENT.


     Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus/proxy statement supplement or the accompanying prospectus/proxy
statement is truthful or complete. Any representation to the contrary is a
criminal offense.


     This prospectus/proxy statement supplement and the related prospectus/proxy
statement are first being mailed to stockholders of Futech, Janex, Trudy, Fundex
and DaMert on or about        , 1999.


      The date of this prospectus/proxy statement supplement is        , 1999.
<PAGE>   398

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS/PROXY STATEMENT. WE HAVE NOT, AND NEW FUTECH AND NEW SUB HAVE NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. NEW FUTECH AND NEW SUB ARE NOT MAKING AN OFFER TO SELL THESE SECURITIES IN
ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME
THAT THE INFORMATION APPEARING IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS/PROXY STATEMENT IS ACCURATE AS OF THE DATE ON THE
FRONT OF THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT ONLY. OUR BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE
THAT DATE.

                      WHERE YOU CAN FIND MORE INFORMATION


     We will send to you, without charge, any material information that we have
or can obtain without unreasonable effort or expense concerning Futech or any
other merging company, concerning the merger agreement and related contracts or
concerning the proposed management and operations of New Futech. You may direct
requests for additional information regarding DaMert, Futech, Trudy, Fundex, or
Janex to Frederick B. Gretsch, Sr. at 2999 N. 44th Street, suite 225, Phoenix,
Arizona 85018-7247, (602) 808-8765.



     TO OBTAIN TIMELY DELIVERY OF THESE DOCUMENTS, YOU MUST MAKE YOUR REQUEST NO
LATER THAN              , 1999, FIVE BUSINESS DAYS BEFORE THE DATE OF THE FUTECH
STOCKHOLDERS MEETING.


                                        i
<PAGE>   399

                               TABLE OF CONTENTS


<TABLE>
<S>                                                           <C>
Summary Information -- Q&A..................................     1
  Why are the five companies proposing to merge?............     1
  What will I receive in the mergers?.......................     1
  What risks should I consider?.............................     1
  What stockholder vote is required to approve the
     mergers?...............................................     1
  What circumstances might prevent the mergers?.............     2
  How will the mergers be treated for accounting
     purposes?..............................................     2
  When do you expect the mergers to be completed?...........     2
  What are the tax consequences of the mergers to me?.......     2
  Will I have dissenters' rights?...........................     2
  How do I vote and how are the votes counted?..............     2
  Should I send in my stock certificates now?...............     3
Other Information About The Mergers.........................     3
  The Companies.............................................     3
  The Special Meeting.......................................     3
  The Merger Agreement......................................     4
  The 1999 Stock Option Plan................................     4
The Mergers and Related Transactions........................     5
  General...................................................     5
  Effects of the Mergers....................................     5
  Futech's Board Recommendation.............................     6
  Related Agreements; Interests of Certain Futech Affiliates
     in the Mergers.........................................     6
  Regulatory Matters........................................     6
  Federal Income Tax Consequences...........................     6
  Accounting Treatment......................................     8
Rights of Dissenting Shareholders...........................     8
New Futech and Futech Shares................................    10
  New Futech Common Stock...................................    10
  Futech Capital Stock......................................    10
  Common Stock..............................................    10
  Preferred Stock...........................................    10
Comparison of the Rights of Holders of Futech Common Stock
  and New Futech Common Stock...............................    11
Management's Discussion and Analysis or Plan of Operation...    19
  Overview..................................................    19
  Results of Operations of the Company......................    20
  Seasonality and Quarterly Fluctuations....................    23
  Liquidity and Capital Resources...........................    23
</TABLE>


                                       ii
<PAGE>   400

<TABLE>
<S>                                                           <C>
  Inflation.................................................    27
  Year 2000.................................................    27
  Forward-Looking Statements and Associated Risks...........    28
Description of Futech's Business............................    29
  General; Recent Developments..............................    29
  Products..................................................    30
  Marketing, Distribution and Customers.....................    32
  Manufacturing.............................................    33
  Product Design and Selection..............................    33
  Competition...............................................    34
  Trade Publishing..........................................    34
  Specialty Products........................................    34
  Distribution..............................................    35
  Patents and Trademarks....................................    35
  Governmental Regulations..................................    36
  Employees.................................................    36
  Properties................................................    36
  Legal Proceedings.........................................    36
Futech Management...........................................    38
  Directors and Executive Officers..........................    38
  Employment Arrangements...................................    39
  Stock Option Plan and Executive Compensation Matters......    41
  Limitation of Liability and Indemnification...............    43
Futech Stockholders.........................................    46
Certain Relationships and Related Transactions..............    48
Appendices
Appendix A -- Arizona Business Corporation Act Dissenters'
  Rights....................................................   A-1
</TABLE>


                                       iii
<PAGE>   401

                           SUMMARY INFORMATION -- Q&A


     This summary highlights selected information from this document and may not
contain all the information that is important to you. For a more complete
understanding of the mergers, you should carefully read the entire
prospectus/proxy statement in addition to this prospectus/proxy statement
supplement and the additional documents we mention. You should pay special
attention to the "Risk Factors" section beginning on page 8 of the
prospectus/proxy statement.


WHY ARE THE FIVE COMPANIES PROPOSING TO MERGE?


     The five companies are proposing to merge because the directors of each
company believe the combination will provide significant benefits to their
stockholders. We believe the mergers will enable us to take advantage of the
complementary strategic fit of our respective businesses by marketing through
additional channels of distribution. We also hope and believe the mergers will
improve the likelihood that stockholders will have a more liquid market should
they wish to sell their stock and that the combined companies will be able to
more efficiently access the markets for debt and equity when appropriate. To
review the background and reasons for the mergers in greater detail, see
"Background of the Mergers" in the prospectus/proxy statement.


WHAT WILL I RECEIVE IN THE MERGERS?


     You and all Futech stockholders will receive common stock of New Futech in
exchange for your Futech stock. Stockholders of the other merging companies will
receive cash, promissory notes and/or common stock of New Futech. Certain
employment contracts and other agreements with affiliates of the merging
companies are also part of the deal. See "Description of the Mergers and the
Merger Agreement" in the prospectus/ proxy statement.


WHAT RISKS SHOULD I CONSIDER?


     You should review "Risk Factors" beginning on page 6 of the
prospectus/proxy statement.


WHAT STOCKHOLDER VOTE IS REQUIRED TO APPROVE THE MERGERS?

     The following table shows the proportions of the outstanding shares whose
affirmative vote is required to approve of the mergers, together with the
proportion of the outstanding shares that are held by directors, executive
officers and their affiliates, all whom have indicated that they intend to vote
in favor of the mergers.


<TABLE>
<CAPTION>
                            SHARES OWNED BY DIRECTORS,
COMPANY  VOTE REQUIRED   EXECUTIVE OFFICERS AND AFFILIATES
-------  -------------   ---------------------------------
<S>      <C>             <C>
DaMert     Majority                    100.0%
Fundex     Majority                     70.8%
Futech     Majority                     56.4%
Janex      Majority                     79.2%
Trudy      Majority                     60.9%
</TABLE>



     The presence in person or by proxy of a majority of the outstanding shares
of each company constitutes a quorum for business to be conducted at the
meeting. Abstentions and broker non-votes will be treated as present for
purposes of determining a quorum for


                                        1
<PAGE>   402


each company's stockholders' meeting, but since they will not be counted as
votes in favor of the merger, they will have the same effect as votes against
the merger.


WHAT CIRCUMSTANCES MIGHT PREVENT THE MERGERS?


     New Futech has the right to terminate the merger agreement if stockholders
from all of the merging companies combined exercise dissenters' rights with
respect to more than 5% of the aggregate merger consideration to be issued in
the mergers. See "Description of the Mergers and the Merger Agreement Conditions
to Closing" in the prospectus/proxy statement for a description of the other
conditions to the mergers.


HOW WILL THE MERGERS BE TREATED FOR ACCOUNTING PURPOSES?

     We expect the mergers to be treated as purchases by Futech, which means
that the amount by which the total merger consideration received by stockholders
of the other merging companies plus the amount of their liabilities exceeds the
fair market value of their identifiable assets will initially be treated as
goodwill by New Futech for accounting purposes.

WHEN DO YOU EXPECT THE MERGERS TO BE COMPLETED?


     We are working to complete the mergers during the fourth quarter of 1999.
However, the Merger Agreement does not include any express deadline for the
mergers to proceed.


WHAT ARE THE TAX CONSEQUENCES OF THE MERGERS TO ME?


     We and the other merging companies have structured the merger agreement
with the intent and expectation that the exchange of common shares by Futech
shareholders will be tax-free for federal income tax purposes. You should review
the more detailed description of federal tax consequences that appears in
"Certain Federal Tax Matters" in this prospectus/proxy statement supplement.
State and local taxes may also become due as a result of the mergers.


     The precise tax consequences of the mergers will depend on your own
situation. You should consult your tax advisor for a full understanding of the
tax consequences of the mergers to you.

WILL I HAVE DISSENTERS' RIGHTS?


     Yes, provided you do not vote in favor of the mergers and meet all other
requirements of the dissenter's rights statute. See "Rights of Dissenting
Shareholders" in this prospectus/proxy statement supplement and the Arizona
dissenters' rights statute that is attached as Appendix 1 to this
prospectus/proxy statement supplement.



HOW DO I VOTE AND HOW ARE THE VOTES COUNTED?


     Just indicate on your proxy card how you want to vote on the mergers, and
sign and mail it in the enclosed return envelope as soon as possible, so that
your shares will be represented at the stockholders meeting.


     If you sign and send in your proxy and do not indicate how you want to
vote, your proxy will be counted as a vote in favor of the mergers. If you do
not vote because you do not return your proxy, give instructions to your broker,
vote in person, or you abstain, it will have the same effect as a vote against
the mergers. Brokers who hold your shares of


                                        2
<PAGE>   403


Futech stock as nominees cannot vote those shares unless you give them
instructions, in the manner that they require, concerning how to vote the
shares.



     The stockholders' meeting will take place on           , at      local
time, at           . You may attend the stockholders meeting and vote your
shares in person, rather than signing and mailing your proxy card. In addition,
you may withdraw or revoke your proxy at any time up to and including the day of
the meeting by giving written notice to the Secretary of Futech; by returning a
later dated proxy, or by attending the meeting and voting in person.



     The votes will be tabulated by the Secretary of Futech or by such other
person as the President of Futech may designate.



     If properly exercised, dissenters' rights give a stockholder who objects to
the mergers the right to demand the fair value of his or her Futech shares in
cash. Fair value is the value of the dissenter's shares immediately before the
mergers, excluding any appreciation or depreciation in anticipation of the
mergers unless the exclusion is inequitable. The process of determining fair
value is described below.


SHOULD I SEND IN MY STOCK CERTIFICATES NOW?

     No. After the mergers are completed we will send you written instructions
for exchanging your stock certificates for the New Futech stock to which you are
entitled.

                      OTHER INFORMATION ABOUT THE MERGERS

THE COMPANIES


     Each of Futech, Janex, Trudy, DaMert, Fundex, New Futech and New Sub are
described in the "Summary" and "New Futech's Business" sections of the
prospectus/ proxy statement.


THE SPECIAL MEETING

DATE, TIME AND PLACE

     The Futech special meeting will be held on           , at      at
          .

PURPOSE OF THE SPECIAL MEETING


     We have called the special meeting so the Futech stockholders can vote on
whether to approve the mergers pursuant to the merger agreement and to vote on
whether to approve the 1999 stock option plan. The directors of Futech, Janex,
Trudy, Fundex and DaMert have called for special meetings of the stockholders of
their companies so that they also can vote whether to approve the mergers.


REQUIRED VOTE


     The mergers will have been approved by Futech only if the merger proposal
receives the affirmative vote of a majority of the outstanding shares of common
stock and a majority of the outstanding shares of preferred stock, voting as a
single class. Similarly, the 1999 stock option plan will have been approved only
if it receives the affirmative vote of a majority of the outstanding common
stock and preferred stock, voting as a single class. On October 1, 1999, Futech
had outstanding 90,973,598 shares of common stock and 3,750,000 shares of
preferred stock. Executive officers, directors and their affiliates owning


                                        3
<PAGE>   404


51,348,132 shares of common stock and all of the preferred stock have indicated
that they intend to vote in favor of the mergers and the 1999 stock option plan.


RECOMMENDATION OF THE FUTECH BOARD OF DIRECTORS


     We have approved the merger agreement and recommend that the stockholders
of Futech vote "For" approval of the merger agreement and "For" approval of the
1999 stock option plan.


THE MERGER AGREEMENT


     Under the merger agreement, first Futech and then Janex, Trudy, and DaMert
will merge with and into New Futech, which will survive the mergers, and Fundex
will merge into New Sub, which will survive as a wholly-owned subsidiary of New
Futech. Under the merger agreement, Futech stockholders who do not exercise
dissenters' rights will receive common stock of New Futech as described in the
prospectus/proxy statement under the heading "Description of the Mergers and the
Merger Agreement -- Basic Terms of the merger agreement." Stockholders of Fundex
and Trudy will also have certain conditional rights to receive additional stock
or to exchange their New Futech stock for promissory notes or certain other
assets under specified circumstances. See "Description of the Mergers and the
Merger Agreement -- Basic Terms of the Merger Agreement."


THE 1999 STOCK OPTION PLAN


     The 1999 stock option plan provides for the issuance of stock options for
up to 1,000,000 shares of New Futech common stock to employees and others from
time to time under the terms of the plan.


                                        4
<PAGE>   405

                      THE MERGERS AND RELATED TRANSACTIONS

GENERAL


     The merger agreement provides for the merger of Futech into New Futech,
promptly followed by the substantially simultaneous merger of Janex, Trudy and
DaMert with and into New Futech and the substantially simultaneous merger of
Fundex with and into New Sub. The discussion in this prospectus/proxy statement
supplement and the related prospectus/proxy statement of the mergers and the
description of the principal terms of the merger agreement contained in the
prospectus/proxy statement are subject to and qualified in their entirety by
reference to the merger agreement, a copy of which is attached to the
prospectus/proxy statement as Appendix A.


EFFECTS OF THE MERGERS

GENERAL


     We intend for the mergers to occur promptly following approval of the
mergers by the required vote of the stockholders of each of Janex, Futech,
Trudy, DaMert and Fundex and the satisfaction or waiver of all other conditions
to consummation of the mergers. The mergers will become effective at or about
the time of filing of articles of merger or other appropriate documents with the
applicable government offices or agencies. At that time first Futech will
reincorporate in Delaware by merging with New Futech and then Janex, Trudy and
DaMert will merge with and into New Futech with the result that New Futech will
be the surviving corporation. Then, Fundex will merge with and into New Sub with
the result that New Sub will be the surviving wholly owned subsidiary of New
Futech. As part of the mergers, New Futech will change its name to "Futech
Interactive Products, Inc." The stockholders of Futech will become stockholders
of New Futech, and their rights will be governed by the New Futech certificate
of incorporation and bylaws. See "Comparison of Rights of Stockholders of Futech
and New Futech." See also "Description of the Mergers and the Merger Agreement"
in the prospectus/proxy statement.



     For information regarding the operation of New Futech and New Sub following
the mergers, see " New Futech Business" in the prospectus/proxy statement. For
information regarding the officers and directors of New Futech following the
mergers, see "New Futech's Management" in the prospectus/proxy statement.


EXCHANGE RATIOS


     Options and warrants to purchase Futech common stock that are outstanding
at the time of the mergers will be converted into options to acquire New Futech
stock in the ratio of one New Futech share for every 30 Futech shares. Assuming
none of the outstanding options or warrants are exercised prior to the mergers,
each share of Futech common and preferred stock outstanding immediately prior to
the mergers other than dissenting shares, will be converted into the right to
receive approximately .0391 shares of New Futech common stock.



     Outstanding shares of Janex, DaMert, Fundex and Trudy will also be
converted into a combination of cash, common stock of New Futech and promissory
notes of New Futech or New Sub. Under some circumstances, the former
stockholders of Fundex will have the right to exchange their New Futech stock
for the license rights in the "Phase 10" family of games now owned by Fundex.
Under other circumstances, the former stockholders of Trudy will have the right
to receive additional New Futech stock or to exchange their New Futech stock for
unsecured five year debentures. In addition, outstanding options for shares


                                        5
<PAGE>   406


of Trudy, Futech, Janex and Fundex will be converted into options for shares of
common stock of New Futech. See "Description of the Mergers and the Merger
Agreement -- Basic Terms of the Merger Agreement" in the prospectus/proxy
statement.


FRACTIONAL SHARES


     Fractional shares of New Futech common stock will be issued in the mergers.


FUTECH'S BOARD RECOMMENDATION


     THE BOARD OF DIRECTORS OF FUTECH HAS DETERMINED THAT THE MERGERS ARE
ADVISABLE AND IN THE BEST INTERESTS OF FUTECH AND ITS STOCKHOLDERS AND HAS
RECOMMENDED A VOTE FOR APPROVAL OF THE MERGER PROPOSAL.


RELATED AGREEMENTS; INTERESTS OF CERTAIN FUTECH AFFILIATES IN THE MERGERS


     On June 1, 1998, Futech entered into a patent licensing and purchase
agreement with Grand Slam Investments, L.L.C., which is controlled by Mr. Goett.
Under the Agreement, Futech would make twelve monthly royalty payments of
$10,000 beginning June 1, 1998 in exchange for exclusive, world-wide rights to
use two patents owned by Grand Slam. On June 30, 1999, Futech would purchase the
patents for $1,500,000. Alternatively, Futech had the right to purchase the
patents at an earlier date of December 30, 1998 for a reduced cost of
$1,000,000. This agreement was amended on December 9, 1998 and Futech agreed to
pay $650,000 on December 9, 1998 and $850,000 on or before June 1, 1999.
Additionally, the monthly royalty payments of $10,000 were suspended as of
December 31, 1998. Futech has not yet paid $831,385 of the payment that was due
to Mr. Goett on June 30, 1999. The cost of these patents to Grand Slam was
approximately $550,000. The selling price was determined by Mr. Goett based on
his belief of future, potential sales of products using the technology in the
patents.



     Vincent W. Goett, Paul C. Oursler, Stephen S. Stuhmer, Joseph K. Petter,
and Frederick B. Gretsch will enter into employment agreements with New Futech
in connection with the merger. See "Description of the mergers and the Merger
Agreement -- Employment Agreement with Affiliates' and "New Futech's
Management -- Employment Agreements" in the prospectus/proxy statement.



     SEE "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" IN THIS
PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE CORRESPONDING HEADING IN THE
PROSPECTUS/PROXY STATEMENT.


REGULATORY MATTERS

     Except as disclosed in this prospectus/proxy statement supplement and the
prospectus/proxy statement, Futech and New Futech are not aware of any
governmental or regulatory approvals required for consummation of the mergers,
other than compliance with the federal securities laws and applicable securities
and "blue sky" laws of the various states.


FEDERAL INCOME TAX CONSEQUENCES



     In the opinion of Quarles & Brady LLP, special tax counsel to Futech and
New Futech:



          (1) the merger of Futech into New Futech, which will precede the
     mergers involving Janex, Trudy, DaMert and Fundex, will be treated for
     federal income tax purposes as a reorganization within the meaning of sec.
     368(a) of the Code, and Futech


                                        6
<PAGE>   407


     and New Futech will each be a party to that reorganization within the
     meaning of sec. 368(b) of the Code; and



          (2) the federal income tax consequences described here, to the extent
     that they constitute matters of law or legal conclusions, are correct in
     all material respects.



     In rendering its opinion, our tax counsel has relied upon and assumed as
accurate and correct, both now and as of the effective time of mergers, the
information contained in this prospectus/proxy statement supplement and the
related prospectus/proxy statement and on representations as to factual matters
made by Futech and New Futech. The representations relied upon include: (1)
Futech will be merged into New Futech whether or not the mergers involving
Janex, Trudy, DaMert and Fundex occur; and (2) immediately after the merger of
Futech into New Futech and before the Janex, Trudy, DaMert and Fundex mergers,
the Futech stockholders will own all of the outstanding New Futech common stock
and will own such stock solely by reason of their ownership of Futech stock
immediately prior to the merger of Futech into New Futech. Any inaccuracy or
change with respect to this information or these representations, or any actions
of Futech or New Futech contrary to such representations, could adversely affect
the conclusions reached in the opinion and the tax summary set forth below.



     The opinion represents our tax counsel's best legal judgement as to the tax
treatment of the merger, but the opinion is not binding on the Internal Revenue
Service. The parties have not and will not request a ruling from the Internal
Revenue Service in connection with the federal income tax consequences of the
merger. The following summary of material United States federal income tax
consequences of the merger is based upon the conclusions reached in our tax
counsel's opinion.



     Based on the provisions of the Internal Revenue Code, the applicable
regulations thereunder, judicial authority and current administrative rulings
and practices as of the date hereof, all of which are subject to change,
possibly with retroactive effect:



          (1) no gain or loss will be recognized by Futech or New Futech as a
     result of the merger;



          (2) no gain or loss will be recognized by the holders of Futech common
     stock upon conversion of their shares of Futech common stock into shares of
     New Futech common stock pursuant to the merger;



          (3) the tax basis of the shares of New Futech common stock into which
     shares of Futech common stock are converted will be the same as the basis
     of the shares of Futech common stock; and



          (4) the holding period for shares of New Futech common stock into
     which shares of Futech common stock are converted will include the period
     that the shares of Futech common stock were held by the holder, provided
     the shares were held as capital assets of the holder at the effective time
     of the merger.



     A holder of Futech common stock who receives New Futech common stock
pursuant to the merger will be required to retain records and file with the
holder's federal income tax return for the taxable year in which the merger
takes place a statement setting forth all relevant facts in respect of the
nonrecognition of gain or loss upon such exchange. The statement is required to
include: (1) the holder's basis in the shares of Futech common stock surrendered
in the merger; and (2) the value of New Futech common stock received, using fair
market value as of the effective time of the merger, and the amount of any cash
received in the merger.


                                        7
<PAGE>   408


     THIS DISCUSSION IS INTENDED ONLY AS A DESCRIPTION OF THE MATERIAL FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER. IT IS NOT A COMPLETE ANALYSIS OR
DESCRIPTION OF ALL POTENTIAL TAX EFFECTS OF THE MERGER. The discussion does not
address all of the tax consequences that may be relevant to particular taxpayers
in light of their personal circumstances or to taxpayers subject to special
treatment under the internal revenue code, such as insurance companies,
financial institutions, dealers in securities, tax exempt organizations, foreign
corporations, foreign partnerships, or other foreign entities and individuals
who are not citizens or residents of the United States and persons who acquired
their New Futech common stock pursuant to the exercise or termination of
employee stock options, warrants or otherwise as compensation.



     No information is provided in this tax consequences discussion with respect
to the tax consequences, if any, of the merger under applicable foreign, state,
local and other tax laws.



     THE SUMMARY SET FORTH ABOVE IS NOT INTENDED TO BE, NOR SHOULD IT BE
CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER OF FUTECH COMMON
STOCK. EACH HOLDER OF FUTECH COMMON STOCK IS URGED TO CONSULT THEIR OWN TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO THE HOLDER OF THE MERGER,
INCLUDING THE APPLICATION OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.


ACCOUNTING TREATMENT


     The mergers are intended to qualify as a purchase for accounting purposes.
Under this accounting method, the merged companies will record the combined net
assets at their fair value as of the date of the merger. The value of net assets
will be allocated between the identifiable assets acquired, including
intangibles, and liabilities assumed. Any excess of total purchase price over
the sum of the amounts assigned to identifiable assets and liabilities is
recorded as goodwill and will be amortized over its estimated economic life, but
not more that 40 years.


                       RIGHTS OF DISSENTING SHAREHOLDERS


     Pursuant to sections 10-1301 through 10-1303 and 10-1320 through 10-1331 of
the Arizona Business Corporation Act, copies of which are attached to this
prospectus/proxy statement supplement as Appendix 1, stockholders of Futech may
dissent from, and obtain payment of the fair value of their Futech shares in the
event of the consummation of the mergers. A Futech stockholder who wishes to
assert dissenters' rights in connection with the mergers must (1) deliver to
Futech, before a vote of the stockholders of Futech is taken with respect to the
mergers, written notice of the stockholder's intent to demand payment for the
stockholder's Futech shares if the mergers are effectuated; and (2) not vote in
favor of the merger proposal.


     If the merger proposal is approved at the Futech special meeting and if the
other conditions of the mergers are satisfied or waived, Futech will deliver a
written dissenters' notice to all Futech stockholders who have satisfied the
requirements described above to assert those rights. Futech will send the
dissenters' notice no later than ten days after the mergers are effectuated.

     The dissenters' notice delivered by Futech will:


     (1) state that the mergers were authorized and the effective date or
proposed effective date of the mergers;


                                        8
<PAGE>   409


     (2) state an address at which Futech will receive payment demands and an
address at which certificates for Futech shares must be deposited;



     (3) include a form for demanding payment; and



     (4) set a date by which Futech must receive the payment demand and by which
certificates for Futech shares must be deposited at the address for such
deposits in the dissenters' notice, which date may not be less than 30 days
after the date the dissenters' notice is given.



     Additionally, Futech may require that when a record holder of Futech shares
dissents with respect to the shares held by any one or more beneficial owners of
Futech shares, each such beneficial owner of Futech shares must certify to
Futech that both such beneficial owner and the record holder of Futech shares
beneficially owned by such beneficial owner have asserted dissenters' rights as
to all such Futech shares. If Futech so requires, the dissenters' notice will
state this requirement. The dissenters' notice will include a copy of the
Arizona Business Corporation Act sections 10-1301 through 10-1303 and 10-1320
through 10-1331.



     A Futech stockholder to whom a dissenters' notice is sent and who wishes to
exercise dissenters' rights must: (1) demand payment on the form provided and
within the time period set forth in the dissenters' notice; and (2) deposit
certificates for Futech shares in accordance with the terms of the dissenters'
notice. A stockholder of Futech who demands payment as described above retains
all rights of a stockholder of Futech, except the right to transfer the shares,
until the effective time of the mergers and thereafter has only the right to
receive payment for the fair value of his or her Futech shares.



     Upon receipt of a demand payment from a stockholder who exercises
dissenters' rights, New Futech will pay the dissenter an amount that New Futech
estimates to be the fair value of the dissenter's share plus accrued interest.
Such payment must be accompanied by Futech's financial statements as of, and for
the period ending on, its most recent fiscal year-end, the most recent interim
financial statements, a statement of New Futech's estimate of the fair value of
the shares, an explanation of how the interest was calculated, a statement of
the dissenter's right to demand payment under Arizona Business Corporation Act
Section 10-1328, and a copy of the Arizona Dissenters' Rights Statute. The
dissenter may then notify New Futech of the dissenter's own estimate of the fair
value of his or her shares and the amount of interest due, and demand payment of
the dissenter's estimate, less New Futech's payment of its estimate of the fair
value, if either the dissenter believes that the amount paid by New Futech is
less than the fair value of the dissenter's shares or that the interest due was
incorrectly calculated or if New Futech fails to make the payment within 60 days
after the date set for demanding payment.



     If the fair value determination remains unsettled, New Futech must commence
a court proceeding within 60 days after receiving the payment demand, and
petition the court to determine the fair value of the dissenter's shares plus
accrued interest. If New Futech does not commence the proceeding within this
60-day period, New Futech must pay each dissenter whose demand remains unsettled
the amount demanded. New Futech may commence the court proceeding in the county
where its principal office is located, and must make all dissenters whose
demands remain unsettled parties to the proceeding. There is no right to trial
by jury in this proceeding. The court may appoint a master to appraise the
shares and submit a report. The dissenters are entitled to discovery rights.
Each dissenter is entitled to judgment for the amount, if any, by which the
court finds the fair value of the dissenter's shares plus interest exceeds the
amount paid by New Futech. The


                                        9
<PAGE>   410


court determines all costs of the proceeding, including the reasonable
compensation and expenses of any master it appoints. The court will assess the
costs against New Futech, except that it may assess costs against any or all of
the dissenters to the extent it finds that the fair value does not materially
exceed the amount offered by New Futech or that the dissenters acted
arbitrarily, vexatiously or not in good faith in demanding payment. The court
may consider all factors it deems relevant, including the factors considered and
conclusions reached by the master it appoints, in determining the fair value of
the dissenters' shares. The court may determine the fair value to be more than,
less than or equal to the consideration that the dissenter would otherwise be
entitled to receive in the mergers.



     A stockholder of Futech who does not demand payment and deposit
certificates as required is not entitled to payment under Arizona Business
Corporation Act sections 10-1301 through 10-1303 and 10-1320 through 10-1331.


                          NEW FUTECH AND FUTECH SHARES

NEW FUTECH COMMON STOCK


     For a description of New Futech common stock and its Series A preferred
stock, see "Description of New Futech Capital Stock" in the prospectus/proxy
statement.


FUTECH CAPITAL STOCK


     The following description of Futech's capital stock is a summary only and
is subject to, and qualified in its entirety by, reference to Futech's articles
of incorporation and bylaws, copies of which are included as exhibits to the
prospectus/proxy statement which accompanies this prospectus/proxy statement
supplement, and by reference to Arizona law under which Futech is incorporated.


COMMON STOCK


     As of October 1, 1999 there were 90,973,598 shares of Futech common stock
outstanding which were held of record by approximately 138 stockholders. Futech
has not paid any dividends on its common stock. The merger agreement provides
that Futech will not declare or pay any dividend without the prior written
approval of New Futech.


PREFERRED STOCK


     As of October 1, 1999 there were 3,750,000 shares of Futech preferred stock
outstanding which were held of record by three stockholders. Futech has not paid
any dividends on its preferred stock. The merger agreement provides that Futech
will not declare or pay any dividend without the prior written approval of New
Futech. These shares will be converted into New Futech common stock at the time
of the mergers.


                                       10
<PAGE>   411

         COMPARISON OF THE RIGHTS OF HOLDERS OF FUTECH COMMON STOCK AND
                            NEW FUTECH COMMON STOCK


     Futech is an Arizona corporation and the rights of its stockholders are
governed by the Arizona Business Corporation Act and the articles of
incorporation and bylaws of Futech. New Futech is a Delaware corporation and the
rights of its stockholders are governed by the Delaware General Corporation Law
and the certificate of incorporation and bylaws of New Futech. By the merger
agreement, the Futech stockholders will become New Futech stockholders and as
such, their rights will be governed by the Delaware General Corporation Law and
the New Futech certificate of incorporation and bylaws.


SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF ARIZONA AND DELAWARE

     The corporation laws of Arizona and Delaware differ in many respects.
Although all the differences are not set forth in this prospectus/proxy
statement supplement, provisions which could materially affect the rights of
shareholders are discussed below.

REMOVAL OF DIRECTORS


<TABLE>
<CAPTION>
                    Arizona                                                Delaware
<S>                                                    <C>
     A director of a corporation that does not         A director of a corporation that does not have a
have a staggered board of directors or                 classified board or cumulative voting may be
cumulative voting may be removed with or without       removed without or without cause with approval
cause with the approval of a majority of the           of the majority of the outstanding shares
voting shares held by the voting group of              entitled to vote at an election of directors. In
stockholders that elected the director. In the         the case of a Delaware corporation having
case of an Arizona corporation having cumulative       cumulative voting, if less than the entire board
voting, if less than the entire board is to be         is to be removed, a director may not be removed
removed, a director may not be removed if the          without cause if the number of shares voted
number of shares voted against such removal            against such removal would be sufficient to
would be sufficient to elect the director under        elect the director under cumulative voting. A
cumulative voting. Pursuant to the articles of         director of a corporation with a classified
incorporation, Futech has a staggered board and        board of directors may be removed only for
allows the removal of a director only for cause        cause, unless the certificate of incorporation
and only by an affirmative vote of the holders         otherwise provides. The certificate of
of a majority of the outstanding shares of the         incorporation and bylaws of New Futech provide
Corporation then entitled to vote generally in         for a classified board of directors, but not for
the election of directors to remove a director.        cumulative voting.
Futech does not have cumulative voting.
</TABLE>


CLASSIFIED BOARD OF DIRECTORS


     A "classified," the term in Delaware, or staggered board of directors is
one on which a certain number, but not all, of the directors are elected on a
rotating basis each year. This method of electing directors makes changes in the
composition of the board of directors more difficult, and thus, a change in
control of a corporation potentially a lengthier and more difficult process.


                                       11
<PAGE>   412


<TABLE>
<CAPTION>
                    Arizona                                                Delaware
<S>                                                    <C>
     Arizona law permits, but does not require,        Delaware law permits, but does not require, a
a staggered board of directors, by which the           classified board of directors, by which the
directors can be divided into as many as three         directors can be divided into as many as three
classes with staggered terms of office, with           classes with staggered terms of office, with
only one class of directors standing for               only one class of directors standing for
election each year. The Futech articles of             election each year. The New Futech certificate
incorporation provide for a staggered board.           of incorporation and bylaws provide for a
                                                       classified board, consisting of three classes
                                                       with three directors in each class.
</TABLE>


INDEMNIFICATION AND LIMITATION OF LIABILITY


     Arizona and Delaware have similar laws respecting indemnification by a
corporation of its officers, directors, employees and other agents. The laws of
both states also permit, with certain exceptions, a corporation to adopt a
provision in its articles of incorporation or certificate of incorporation, as
the case may be, eliminating the liability of a director to the corporation or
its stockholders for monetary damages for breach of the director's fiduciary
duty. However, there are differences between the laws of the two states
respecting indemnification and limitation of liability.



<TABLE>
<CAPTION>
                    Arizona                                                Delaware
<S>                                                    <C>
     The articles of incorporation of Futech           The certificate of incorporation of New Futech
eliminate the liability of officers, directors,        also eliminates the liability of directors to
employees and other agents to the corporation to       the corporation or its stockholders for monetary
the fullest extent permissible under Arizona           damages for breach of fiduciary duty as a
law. Arizona law prohibits the elimination of          director to the fullest extent permissible under
monetary liability where such liability is based       Delaware law. Under Delaware law, such provision
on:                                                    may not eliminate or limit director monetary
                                                       liability for:
- financial benefit received by a director to
  which the director is not entitled,                  - breaches of the director's duty of loyalty to
                                                         the corporation or its stockholders,
- intentional infliction of harm on the
  corporation or the stockholders,                     - acts or omissions not in good faith or
                                                         involving intentional misconduct or knowing
- conduct not in good faith and the individual           violations of law,
  did not reasonably believe, in the case of
  conduct in an official capacity with the             - the payment of unlawful dividends or unlawful
  corporation, acts or omissions not in the best         stock repurchases or redemptions, or
  interest of the corporation, and in all other
  cases acts or omissions contrary to the best         - transactions in which the director received an
  interests of the corporation,                          improper personal benefit.
- intentional violation of criminal law, or
- liability for improper distributions, loans or
  guarantees.
</TABLE>


                                       12
<PAGE>   413

<TABLE>
<CAPTION>
                    Arizona                                                Delaware
<S>                                                    <C>
     Arizona law generally permits                     Such limitation of liability provisions also may
  indemnification of director expenses,                not limit a director's liability for violation
  including attorney's fees, reasonably related        of or otherwise relieve directors from the
  to the defense or settlement of a derivative         necessity of complying with federal or state
  or third-party action, provided there is a           securities laws, or affect the availability of
  determination by a majority vote of a                non-monetary remedies such as injunctive relief
  disinterested quorum of the directors, by            or rescission.
  independent legal counsel or by a majority
  vote of the stockholders that the person             Delaware law generally permits indemnification
  seeking indemnification acted in good faith          of expenses, including attorney's fees, actually
  and in a manner reasonably believed to be in         and reasonably incurred in the defense or
  the best interests of the corporation. Arizona       settlement of a derivative or third-party
  law requires indemnification of director             action, provided there is a determination by a
  expenses when the individual being indemnified       majority vote of disinterested directors, by
  has successfully defended any action, claim,         independent legal counsel or by a majority vote
  issue or on the merits or otherwise.                 of the stockholders that the person seeking
                                                       indemnification acted in good faith and in a
                                                       manner reasonably believed to be in or not
                                                       opposed to the best interest of the corporation.
                                                       Delaware law requires indemnification, of
                                                       expenses when the individual being indemnified
                                                       has successfully, defended any action, claim,
                                                       issue, or matter therein, on the merits or
                                                       otherwise.
                                                       Delaware law also permits a Delaware corporation
                                                       to provide indemnification in excess of that
                                                       provided by statute.
                                                       A provision of Delaware law states that the
                                                       indemnification provided by statute shall not be
                                                       deemed exclusive of any other rights under any
                                                       bylaw, agreement, vote of stockholders or
                                                       disinterested directors or otherwise.
</TABLE>


     Both Arizona and Delaware law require indemnification when the individual
has defended successfully the action on the merits or otherwise.


     Expenses incurred by an officer or director in defending an action may be
paid in advance, under Arizona law and Delaware law, if such director or officer
undertakes to repay such amounts and if it is ultimately determined that he or
she is not entitled to indemnification. In addition, the laws of both states
authorize a corporation's purchase of indemnity insurance for the benefit of its
officers, directors, employees and agents whether or not the corporation would
have the power to indemnify against the liability covered by the policy.

                                       13
<PAGE>   414

INSPECTION OF SHAREHOLDER LIST


     Arizona law allows any stockholder (1) who has been a holder of record of
shares or of a voting trust beneficial interest for at least six months, or (2)
will be the holder of record of shares or the holder of record of voting trust
beneficial interest for at least 5% of all of the outstanding shares of a
corporation, to inspect the stockholder list, if the stockholder makes a demand
in good faith and for a proper purpose and the records requested are directly
connected with the stockholder's purpose. Delaware law allows any stockholder to
inspect the stockholder list for a purpose reasonably related to such person's
interests as a stockholder. Both Arizona and Delaware law require the
stockholder to give the corporation written notice of its demand prior to
inspection of the stockholder list.


DIVIDENDS AND REPURCHASES OF SHARES


<TABLE>
<CAPTION>
                    Arizona                                                Delaware
<S>                                                    <C>
     Arizona law provides that dividends may be        Delaware law permits a corporation to declare
declared and paid in cash or property only out         and pay dividends out of surplus or if there is
of the unreserved and unrestricted earned              no surplus, out of net profits for the fiscal
surplus of the corporation or out of the               year as long as the amount of capital of the
unreserved and unrestricted net earnings of the        corporation following the declaration and
current fiscal year and the next preceding             payment of the dividend is not less than the
fiscal year taken as a single period. Arizona          aggregate amount of the capital represented by
law permits a corporation to declare and pay           the issued and outstanding stock of all classes
dividends unless it would be contrary to the           having preference upon the distribution of
articles of incorporation or after giving it           assets. In addition, Delaware law generally
effect:                                                provides that a corporation may redeem or
                                                       repurchase its shares only if the capital of the
- the corporation would not be able to pay its         corporation is not impaired and such redemption
  debts as they become due in the usual course         or repurchase would not impair the capital of
  of business, or                                      the corporation.
- the corporation's total assets would be less
  than the sum of its total liabilities plus,
  unless the articles of incorporation permit
  otherwise, the amount that would be needed, if
  the corporation were to be dissolved at the
  time of the distribution, to satisfy the
  preferential rights upon dissolution of
  stockholders whose preferential rights are
  superior to those receiving the distribution.
</TABLE>


                                       14
<PAGE>   415

STOCKHOLDER VOTING


<TABLE>
<CAPTION>
                    Arizona                                                Delaware
<S>                                                    <C>
     Arizona law generally requires that a             Delaware law generally requires that a majority
majority of the stockholders of both acquiring         of the stockholders of both acquiring and target
and target corporations approve statutory              corporations approve statutory mergers.
mergers.
                                                       Does not require a stockholder vote of the
     Does not require a stockholder vote of the        surviving corporation in a merger (unless the
surviving corporation in a merger if:                  corporation provides otherwise in its
                                                       certificate of incorporation) if:
- the merger agreement does not amend the
  existing articles of incorporation,                  - the merger agreement does not amend the
                                                         existing certificate of incorporation,
- each stockholder of the surviving corpo-
  ration whose shares were outstanding                 - each share of the stock of the surviving
  immediately before the merger will hold the            corporation outstanding immediately before the
  same number of shares, with identical                  effective date of the merger is to be
  designations, preferences, limitations and             identical outstanding or treasury share of the
  relative rights immediately after the merger,          surviving corporation after the merger, and
- the number of voting shares outstanding              - either no shares of common stock of the
  immediately after the merger, plus the number          surviving corporation and no shares,
  of voting shares issuable as a result of the           securities or obligations convertible into
  merger or by the exercise of rights and                such stock are to be issued or delivered under
  warrants issued pursuant to the merger, will           the plan of merger, or the authorized unissued
  not exceed by more than 20% the total number           shares or the treasury shares of common stock
  of shares of the surviving corporation                 of the surviving corporation to be issued or
  outstanding immediately before the merger, and         delivered under the plan of merger plus those
                                                         initially issuable upon conversion of any
- the number of participating shares, shares             other shares, securities or obligations to be
  that entitle their holders to participate              issued or delivered under such plan do not
  without limitation on distributions,                   exceed 20% of the shares of common stock of
  outstanding immediately after the merger, plus         the surviving corporation outstanding
  the number of participating shares issuable as         immediately prior to the effective date of the
  a result of the merger either by the                   merger.
  conversion of securities issued pursuant to
  the merger or by the exercise of rights and
  warrants issued pursuant to the merger, will
  not exceed by more than 20% the total number
  of participating shares outstanding
  immediately before the merger.
</TABLE>


     Both Arizona and Delaware law require that a sale of all or substantially
all of the assets of a corporation be approved by a majority of the outstanding
voting shares of the corporation transferring such assets.


     Both Arizona and Delaware law generally do not require class voting, except
in transactions involving an amendment to the certificate of incorporation that
adversely affects a specific class of stock or where the class of stock
designates such a right.


                                       15
<PAGE>   416

STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS UNDER DELAWARE LAW

     In recent years, a number of states have adopted special laws designed to
make certain kinds of "unfriendly" corporate takeovers, or other transactions
involving a corporation, and one or more of its significant stockholders, more
difficult. Under sec. 203 of the Delaware General Corporation Law, certain
"business combinations" with "interested stockholders" of Delaware corporations
are subject to a three-year moratorium unless specified conditions are met.


     Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the date
that such person or entity becomes an interested stockholder. With some
exceptions, an interested stockholder is:



     - a person or entity who or which owns, individually or with or through
       other persons or entities, 15% or more of the corporation's outstanding
       voting stock, including any rights to acquire stock pursuant to an
       option, warrant, agreement, arrangement or understanding, or upon the
       exercise of conversion or exchange rights, and stock with respect to
       which the person has voting rights only), or



     - is an affiliate or associate of the corporation and was the owner,
       individually or with or through other persons or entities, of 15% or more
       of such voting stock at any time within the previous three years; or



     - is an affiliate or associate of any of the foregoing.



     For purposes of sec. 203, the term "business combination" is defined
broadly to include:



     - mergers with or caused by the interested stockholder;



     - sales or other dispositions to the interested stockholder, except
       proportionately with the corporation's other stockholders, of assets of
       the corporation or a direct or indirect majority-owned subsidiary equal
       in aggregate market value of 10% or more of the aggregate market value of
       either the corporation's consolidated assets or all of its outstanding
       stock;



     - the issuance of transfer by the corporation or a direct or indirect
       majority-owned subsidiary of stock of the corporation or such subsidiary
       to the interested stockholder, except for transfers in a conversion or
       exchange or a pro rata distribution or certain other transactions, none
       of which increase the interested stockholder's proportionate ownership of
       any class or series of the corporation's or such subsidiary's stock or of
       the corporation's voting stock; or



     - receipt by the interested stockholder, except proportionately as a
       stockholder, directly or indirectly, of any loans, advances, guarantees,
       pledges or other financial benefits provided by or through the
       corporation or a subsidiary.


     The three-year moratorium imposed on business combinations by sec. 203 does
not apply if:


     - prior to the date on which such stockholder becomes an interested
       stockholder the board of directors approves either the business
       combination or the transaction that resulted in the person or entity
       becoming an interested stockholder;



     - upon consummation of the transaction that made him or her an interested
       stockholder, the interested stockholder owns at least 85% of the
       corporation's voting stock outstanding at the time the transaction
       commenced, excluding from the 85%


                                       16
<PAGE>   417


       calculation shares owned by directors who are also officers of the target
       corporation and shares held by employee stock plans that do not give
       employee participants the right to decide confidentiality whether to
       accept a tender or exchange offer; or



     - on or after the date such person or entity becomes an interested
       stockholder, the board approves the business combination and it is also
       approved at a stockholder meeting by 66 2/3% of the outstanding voting
       stock not owned by the interested stockholder.


     Section 203 only
applies to certain publicly held corporations that have a class of voting stock
that is:


     - listed on a national securities exchange;



     - quoted on an interdealer quotation system of a registered national
       securities association; or


     - held of record by more than 2,000 stockholders.


     Under certain circumstances, sec. 203 of the Delaware General Corporation
Law may made it more difficult for a person who would be an "interested
stockholder" to effect various business combinations with a corporation for a
three-year period.



     There is no provision in the Arizona Business Corporation Act equivalent to
sec. 203 of the Delaware General Corporation Law.


INTERESTED DIRECTOR TRANSACTIONS


     Under both Arizona and Delaware law, contracts or transactions in which one
or more of a corporation's directors has an interest are not void or voidable
because of such interest provided that conditions, such as obtaining the
required approval and fulfilling the requirements of good faith and full
disclosure, are met. With some exceptions, the conditions are similar under
Arizona and Delaware law. Under Arizona and Delaware law:



     - either the stockholders or the board of directors must approve any such
       contract or transaction after full disclosure of the material facts, and,
       in the case of board approval, the contract or transaction must also be
       "fair" to the corporation; or



     - the contract or transaction must have been fair as to the corporation at
       the time it was approved.


     If board approval is sought, the contract or transaction must be approved
by a majority vote of a quorum of the directors, without counting the vote of
any interested directors. Delaware law allows interested directors to be counted
for purposes of establishing a quorum, but Arizona law does not.

APPRAISAL/DISSENTERS' RIGHTS

     Under both Arizona and Delaware law, a stockholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal/dissenters' rights by which such
stockholder may receive cash in the amount of the fair market value of his or
her shares in lieu of the consideration he or she would otherwise receive in the
transactions. Under both Arizona and Delaware law, such fair market value is
determined exclusive of any element of value arising from the accomplishment or
expectation of the merger or consolidation.

                                       17
<PAGE>   418


<TABLE>
<CAPTION>
                    Arizona                                                Delaware
<S>                                                    <C>
     Dissenters' rights are not available (a)          Appraisal rights are not available (a) with
with respect to the sale of all or substantially       respect to the sale of all or substantially all
all of the assets of the corporation or a merger       of the assets of a corporation, (b) with respect
if no vote of the stockholders is required to          to a merger or consolidation by a corporation
approve the transaction under Arizona law, (b)         the shares of which are either listed on a
to stockholders of shares of any class or series       national securities exchange, designated as a
if the shares of the class or series are               national market system security on an
redeemable securities issued by a registered           interdealer quotation system by the National
investment company as defined pursuant to the          Association of Securities Dealers, Inc. or are
Investment Company Act of 1940, or (c) to              held of record by more than 2,000 holders if
stockholders of shares which either were listed        such stockholders receive only shares of the
on a national securities exchange or on the            surviving corporation or shares of any other
national market system of the National                 corporation that are either listed on a national
Association of Securities Dealers Automated            securities exchange, designated as a national
System or were held of record by more than 2,000       market system security on an interdealer
holders on the date fixed to determine the             quotation system by the National Association of
stockholders entitled to vote on the proposed          Securities Dealers, Inc. or held of record by
corporate action.                                      more than 2,000 holders, plus cash in lieu of
                                                       fractional shares of such corporations, or (c)
                                                       to stockholders of a corporation surviving a
                                                       merger if no vote of the stockholders of the
                                                       surviving corporation is required to approve the
                                                       merger under Delaware law.
</TABLE>


                                       18
<PAGE>   419

           MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


     The following discussion should be read in conjunction with Futech's
audited consolidated financial statements for the two years ended December 31,
1998 and December 31, 1997, and the unaudited financial statements for the six
months ended June 30, 1999 and June 30, 1998 and notes to these financials
appearing elsewhere in the prospectus/proxy statement supplement.


OVERVIEW


     Incorporated in 1990, Futech Interactive Products, Inc. designs, publishes,
hires subcontractors to manufacture and markets interactive, educational,
promotional and entertainment products, such as books, game boards, and
specialty post cards, targeted primarily towards children. Additionally, Futech
licenses its technology to other companies, manufactures through third parties
foam-based post cards, and distributes third party books from major book
publishers. These products are sold through all channels of retail sales,
including warehouse clubs, national book chains, specialty and independent
retailers, major toy chains, direct marketing catalogs, and the internet.



     Futech owns patented technology which uses specialized conductive ink to
print interactive touch points in books, games, and other print media. These
touch point trigger speech, music and sound effects. Futech uses subcontractors
to produce its own propriety products using this technology Additionally, Futech
distributes other proprietary products, as well as books of third party
publishers.



     In March 1998, Futech purchased substantially all of the assets of Gick
Publishing, Inc., a manufacturer of foam-based post cards, stationery, specialty
crafts and hobby items. Shortly after the purchase, Futech disposed of the
specialty crafts and hobby portions of the business.



     In May 1998, Futech purchased substantially all of the assets of XYZ Group,
Inc., a distributor of children's books and related products.



     In December 1998, Futech purchased a majority interest in the stock of
Janex, a designer, developer and manufacturer, through subcontractors, of
practical toy products.


                                       19
<PAGE>   420

RESULTS OF OPERATIONS OF THE COMPANY


     The following two tables set forth, for the periods indicated, the actual
dollars and relative percentage that certain income and expense items bear to
net sales.



<TABLE>
<CAPTION>
                                                              SIX MONTHS    SIX MONTHS
                                 YEAR ENDED     YEAR ENDED       ENDED         ENDED
                                DECEMBER 31,   DECEMBER 31,    JUNE 30,      JUNE 30,
                                    1997           1998          1998          1999
                                ------------   ------------   -----------   -----------
<S>                             <C>            <C>            <C>           <C>
Total revenue.................  $         --   $ 6,032,910    $ 1,084,424   $ 5,291,517
Cost of sales.................            --     4,295,578        823,070     4,350,955
                                ------------   -----------    -----------   -----------
Gross profit..................            --     1,737,332        261,354       940,562
Selling, general and
  administrative expenses.....     3,563,905     5,869,146      2,296,658     5,047,824
Research and development......     6,732,875       229,480        150,000
Depreciation and
  amortization................        55,491     1,343,197        430,996     1,075,576
(Income) Loss on Joint
  Venture.....................     1,393,778    (2,000,000)    (2,000,000)
                                ------------   -----------    -----------   -----------
Operating loss................   (11,746,049)   (3,704,491)      (616,300)   (5,182,838)
Other expense (net)...........    (2,681,134)   (2,089,768)      (519,517)   (2,969,305)
                                ------------   -----------    -----------   -----------
Net loss......................  $(14,427,183)  $(5,794,259)   $(1,135,817)  $(8,152,143)
</TABLE>



<TABLE>
<CAPTION>
                                                               SIX MONTHS     SIX MONTHS
                                 YEAR ENDED     YEAR ENDED       ENDED          ENDED
                                DECEMBER 31,   DECEMBER 31,     JUNE 30,       JUNE 30,
                                   1997*           1998           1998           1999
                                ------------   ------------   ------------   ------------
<S>                             <C>            <C>            <C>            <C>
Total revenue.................      N/A           100.0%          100.0%         100.0%
Cost of sales.................      N/A            71.2            75.9          (82.2)
                                    ---           -----          ------         ------
Gross profit..................      N/A            28.8            24.1           17.8
Selling, general and
  administrative expenses.....      N/A            97.3           211.8           95.5
Research and development......      N/A             3.8            13.8            0.0
Depreciation and
  amortization................      N/A            22.3            39.7           20.3
Loss on Joint Venture.........      N/A           (33.2)         (184.4)           0.0
                                    ---           -----          ------         ------
Operating loss................      N/A           (61.4)          (56.8)         (98.0)
Other expense (net)...........      N/A           (34.6)          (47.9)         (56.1)
                                    ---           -----          ------         ------
Net loss......................      N/A           (96.0)         (104.7)        (154.1)
</TABLE>


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


* Percentages are not applicable because there were zero sales in 1997.



SIX-MONTH PERIOD ENDED JUNE 30, 1999 COMPARED TO THE SIX-MONTH PERIOD ENDED JUNE
30, 1998



     Total sales for the six months ended June 30, 1999, increased significantly
by $4,207,093, or 388.0% to $5,291,517, compared to net sales of $1,084,424 for
the six months ended June 30, 1998 as a result of an increase in sales volume.
The reason for this dramatic increase is two-fold. First, Futech acquired three
companies that provide synergy in it's plan to manufacture and distribute
children's books and toys. Historically, Futech


                                       20
<PAGE>   421


has been a research and development company, working to refine and improve
patented technology. This emphasis changed during the first quarter of 1998 when
Futech acquired the assets of Gick, a foam greeting cards manufacturer on March
31, 1998. The company also acquired the assets of XYZ, a book distributor, on
April 30, 1998 and a majority of the outstanding stock of Janex, a toy
manufacturer on December 11, 1998. The acquisition of Gick generated $534,720 of
foam card sales in 1999 as compared to $256,339 during 1998. In 1998 Futech had
sales of $381,997 in the glitter and bead craft business lines of Gick that have
since been sold in 1998. The acquisition of XYZ generated $4,246,741 of sales in
1999 as compared to $446,108 during 1998. The acquisition of Janex generated
$244,934 of sales in 1999 as compared to $0 in 1998. The second reason for the
increase is the sale of proprietary product in 1999. Futech began selling it's
own Talking Pages books in March of 1999 and has sales for the six month period
ended June 30, 1999 of $265,122.



     Gross profit for the six months ended June 30, 1999, was $940,562 or 17.8%
of revenue, as compared to $261,354 or 24.1% of revenue for the six months ended
June 30, 1998. The increase in cost of good sold for the six months ended June
30, 1999 is due to the start-up costs on new proprietary products relating to
the first production run.



     Selling, general and administrative expenses for the six months ended June
30, 1999, were $5,047,824 or 95.5% of revenue, as compared to $2,296,658 or
211.8% for the six months ended June 30, 1998. The increase in SG&A is due
primarily to the acquisitions made and $730,000 of charges for compensatory
option grants and repricings. Salaries and wages increased by $679,991, or
65.1%, as the result of an increase in the number of employees. Shipping and
freight increased by $276,752, or 225.6%, due to the increased costs of the
distribution center and sales from an initial production run from Hong Kong.
Rent and related overhead expense increased $214,601, or 144.2%, due to the
facilities acquired in the acquisitions. Accounting and auditing costs increased
by $78,193, or 100.2%, and legal costs increased by $136,525, or 53.7%, as a
result of the acquisitions, the first time audit work of Ernst & Young of Janex
International, Inc. and it subsidiaries, and the increased public reporting
requirements of Futech's financial statements.



     Depreciation and amortization of intangibles for the six months ended June
30, 1999, were $1,075,576 or 20.3% of revenue, as compared to $430,996 or 39.7%
for the six months ended June 30, 1998. The increase in depreciation and
amortization of intangibles is due primarily to the acquisitions made. All of
the acquisitions were accounted for using the purchase method. As a result,
there was a significant increase of property and equipment as well as intangible
assets, such as goodwill that resulted in a corresponding increase in
depreciation and amortization.



     Loan origination fees and related amortization expenses for the six months
ended June 30, 1999, were $314,099 or 5.9% of revenue, as compared to $5,000 for
the six months ended June 30, 1998. The increase in loan fees is primarily due
to the amortization of loans fees from notes originating in the fourth quarter
of 1998.



     Interest expense for the six months ended June 30, 1999, was $1,751,724 or
33.1% of revenue, as compared to $568,377 or 52.4% for the six months ended June
30, 1998. The increase in interest expense is due to the increase in debt
incurred by Futech to fund the acquisitions made and to finance operations.


                                       21
<PAGE>   422


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



     Total revenue for the year ended December 31, 1998 was $6,032,910, as
compared to $0 for the year ended December 31, 1997. Historically, Futech has
been a research and development company, working to refine and improve patented
technology. For 1997 and 1998 there were no sales of products utilizing this
technology. The increase in total revenue is due primarily to Futech's
acquisitions during 1998. The acquisition of XYZ resulted in sales of
third-party books of $5,095,386. The acquisition of Gick resulted in sales of
foam-based post cards of $875,874. The acquisition of Janex, which occurred in
December, resulted in sales of toy products of $61,650.



     Gross profit for the year ended December 31, 1998, was $1,737,332 or 28.2%
of revenue, as compared to $0 for the year ended December 31, 1997. The increase
is entirely due to the gross profit generated from the product lines that have
been acquired due to the acquisitions.



     Selling, general and administrative expenses for the year ended December
31, 1998, were $5,869,146, or 71.2% of revenue, as compared to $3,563,905 for
the year ended December 31, 1997. The increase in SG&A is due primarily to an
increase of salaries and wages of $953,250, resulting from an increase in the
number of employees due to the acquisitions made. Rent and related overhead
expenses increased $329,975 due to the facilities acquired in these
acquisitions. Sales commissions increased $171,241 due to the additions of
product lines as a result of the acquisitions being made. Professional fees
increased $272,023 because of the increased need for legal and accounting
services as a result of the acquisitions made.



     Research and development costs for the year ended December 31, 1998, were
$229,480 or 3.8% of revenue, as compared to $6,732,875 for the year ended
December 31, 1997. The reduction of R&D costs was a result of having the major
portion of the R&D work completed in the year ended December 31, 1997 and prior.



     Depreciation and amortization of intangibles expenses for the year ended
December 31, 1998, was $1,343,197 or 22.3% of revenue, as compared to $55,491
for the year ended December 31, 1997. The increase in depreciation and
amortization of intangibles is due primarily to the acquisitions made. All of
the acquisitions were accounted for using the purchase method of accounting. As
a result, there was a significant increase of property and equipment as well as
intangible assets, such as goodwill, which resulted in a corresponding increase
in depreciation and amortization.



     Income on joint venture was $2,000,000 for the year ended December 31,
1998, as compared to a loss of $1,393,778 for the year ended December 31, 1997.
During 1997, the Company expended $1,393,778 in support of a joint venture with
Golden Books Family Entertainment, Inc. A technology fee at $2,000,000 was
earned in 1998 as the result of the termination of this joint venture.



     Loan origination fees and related amortization expense for the year ended
December 31, 1998 was $241,250 or 4.0% of revenue, as compared to $2,460,000 for
the year ended December 31, 1997. In 1998, Futech renegotiated its agreements
with individuals who provided financing. From these loan agreements, Futech pays
loan origination fees with stock options in lieu of cash.



     Interest expense for the year ended December 31, 1998, was $1,704,444 or
28.3% of revenue, as compared to $221,134 for the year ended December 31, 1997.
The increase in


                                       22
<PAGE>   423


interest expense is due to the increase in debt incurred by Futech to fund the
acquisitions and to finance operations.


SEASONALITY AND QUARTERLY FLUCTUATIONS


     Futech's business historically tends to generate greater revenues during
August through November when large retailers and wholesale clubs place orders
and make purchases for the Christmas selling season. Management anticipates the
average sales revenue for each of the months of August through November will be
twice as much as average sales revenue for other months of the year. Futech
plans for this occurrence each year by ordering greater volumes of inventory and
by hiring additional temporary staff during the 3rd and 4th quarters.


LIQUIDITY AND CAPITAL RESOURCES


     Futech believes that its existing lines of credit and projected cash flows
from operations will not be sufficient to fund projected order flow, overhead,
debt repayment and pending acquisitions for the fiscal year ended December 31,
1999. Futech has experienced recurring losses from operations, negative cash
flows and decreases in working capital.



     Futech's ultimate ability to continue as a going concern depends on: (1)
the market acceptance of its products, (2) Futech generating operating profits,
(3) its creation of sustainable positive cash flow, and (4) obtaining additional
financial resources to provide near-term operating cash. Management believes
that there are several items that will allow Futech to provide cash for
continuing operations.



     Cost Cutting:  After the acquisitions that were completed in 1998, Futech
closed the Gick facility and the Janex facility and laid off several employees.
These type of cost-cutting activities reduced expenses as well as reduced future
cash needs. Futech anticipates it will take other cost-cutting actions in the
future.



     Expanded Markets:  Management believes the combination of the companies in
this merger will allow Futech to sell its products into additional markets of
the acquired companies. Management expects this will have a positive affect on
sales and cash flow of Futech.



     Different Distribution Channels:  The varied companies in this combination
utilize different distribution and selling methods. Management believes this
will increase the sales and subsequent cash flow from its proprietary products.



     New Products:  Futech has begun to create new prototype products with
management of the acquired companies. The new products, game boards and other
interactive products, utilize interactive technology. Management believes these
new products will produce a high level of excitement in the consumer market that
will increase Futech's sales and subsequent cash flow.



     Secondary Public Offering:  Management is considering a follow-on public
offering after the merger. Funds provided from this offering would be used to
pay down debt, and if excess funds are available, they would be used to expand
Futech's product lines or to acquire other companies that would help to improve
Futech's sales and cash flow.



     Additional Loans:  On May 21, 1999 we borrowed $2,000,000 from F. Keith
Withycombe, a director who previously guaranteed a separate line-of-credit with
a bank. On August 4, 1999, Futech obtained a $5,000,000 loan from John W.
Dawson, an individual. Under the terms of this note, Futech issued warrants to
purchase up to


                                       23
<PAGE>   424


22,000,000 shares of Futech common stock with warrants for an additional
5,000,000 shares, subject to Board approval. Funds from this loan have been used
to pay for continuing operations. As of October 1, 1999 a total of $4,350,000
has been borrowed on this loan. Currently Futech is in discussions with other
individuals to borrow up to $10,000,000 under substantially the same terms as
the Dawson loan. Funds from this proposed loan will be used for continuing
operations as well as to pay for the costs and expenses of the mergers. Futech
is also working with its other existing lenders and selected stockholders to
provide funds, as needed, to supplement current cash-flow needs. On May 24, 1999
Futech retained Schroder & Co., Inc. to act as its financial advisor to perform
general investment banking services. The agreement expires May 24, 2000, but may
be terminated sooner, with some provisions of the agreement surviving early
termination.



     Management believes these activities, if successful, will be sufficient to
support Futech's liquidity and capital needs for the next 12 months.



     Futech's cash balance decreased by $154,779 to $31,964 at June 30, 1999, as
compared to $186,743 at December 31, 1998. Futech's net working capital
decreased by $307,742 from working capital deficit of $30,645,533 at December
31, 1998 to a working capital deficit of $30,953,275 at June 30, 1999 and
Futech's current ratio decreased to 0.24:1 at June 30, 1999 as compared to
0.19:1 at December 31, 1998.



     Futech had negative cash flow from operating activities of $6,026,989 for
the six months ended June 30, 1999, as compared to a negative operating cash
flow in 1998 of $595,711. The negative cash flows are the results of increased
production and operations that have been acquired since last year.



     During the six months ended June 30, 1999, Futech purchased property and
equipment totaling $462,423. Futech also incurred additions to product
development costs of $30,615. This compares to sales of property and equipment
of $158,175 and an advance of $100,000 for an acquisition for the six months
ended June 30, 1998. Futech purchased substantially all of the net assets of
Gick on March 31, 1998 for $2,076,910. Futech also purchased substantially all
of the net assets of the XYZ on April 29, 1998, expending cash in the amount of
$1,042,118. Of this amount, $125,000 was expended in 1997.



     Futech generated $6,365,248 from financing activities during the six months
ended June 30, 1999 compared to $3,735,264 during the same period in 1998. The
cash generated from financing activities came primarily from an increase in
borrowing of $6,744,408 for the six month period ended June 30, 1999 as compared
to $4,742,264 for the same period in 1998. There were also increased borrowings
from Futech's CEO of $379,160 during the six months ended June 30, 1999 as
compared to $1,007,000 during the same period in 1998.



     For the year ended December 31, 1998, Futech had negative cash flow from
operating activities of $4,484,878, as compared to negative cash flow of
$4,672,682 for the year ended December 31, 1997. The decrease in negative cash
flow from operating activities is due primarily to a decrease in net operating
loss in 1998 and an increase in sales in 1998, resulting in collection of
accounts receivable. The increase in cash used in financing activities is
primarily due to cash used for acquisitions of companies.



     Futech used $3,077,694 in investing activities for the year ended December
31, 1998, compared to $377,921 in 1997. The cash generated from financing
activities came primarily from an increase in borrowings of $9,388,601, offset
by net disbursements of $1,644,987 to the CEO of Futech. During 1997, the cash
generated from financing


                                       24
<PAGE>   425


activities came from an increase in borrowings of $5,826,502, proceeds of
$215,800 from the issuance of stock, offset by net disbursements of $1,056,590
to the CEO of Futech.



     Futech capital commitments for 1999 include debt repayments, lease
commitments, development of new and existing product lines, upgrade or
replacement of Futech's computer system, the purchase of an internet web server
and continuing development of Futech's internet web site.



     The following table is a schedule of notes payable as of December 31, 1998
and June 30, 1999.


                                       25
<PAGE>   426

     Notes payable consist of the following:


<TABLE>
<CAPTION>
                                                      DECEMBER 31,     JUNE 30,
                                                          1998           1999
                                                      ------------    -----------
<S>                                                   <C>             <C>
Notes payable to shareholders, due within the next
  12 months, interest from prime + 0.5 percent (8.25
  percent at June 30, 1999) to 10 percent payable at
  maturity..........................................  $10,650,000     $ 8,000,000
Notes payable to shareholders, due May 30, 2000,
  interest at prime + .05 percent (8.25 percent at
  June 30, 1999)....................................           --       2,000,000
$4.0 million line of credit with a bank due December
  31, 1999, interest at prime rate + 2.5 percent
  (10.25 percent at June 30, 1999) due monthly. $3.6
  million is personally guaranteed by the
  Company's CEO.....................................    4,000,000       4,000,000
$7.0 million line of credit with a bank due December
  31, 1999, interest at prime + 2.5 percent (10.25
  percent at June 30, 1999) due monthly, secured by
  inventory and accounts receivable of XYZ, and
  guaranteed by the former owner of XYZ.............    3,456,446       3,579,777
$7.0 million line of credit with a bank, due
  December 1, 2000, interest at prime + 1.0 percent
  (8.75 percent at June 30, 1999) due monthly,
  personally guaranteed by the Company's CEO and a
  director/warrant holder...........................    2,450,000       7,000,000
Note payable to Newtech, past due(1)................    1,000,000         200,000
Note payable to Golden Books, due June 1, 1999,
  interest at prime plus 1 percent (8.75 percent at
  June 30, 1999) payable at maturity(2).............    1,000,000       1,000,000
Note payable for purchase of patent due June 1,
  1999(3)...........................................      850,000         831,385
Note payable to former owner of XYZ, payable in cash
  or stock..........................................    6,867,334       7,867,334
Notes payable, due September 1999 to December 1999,
  interest at 10 percent payable at maturity,
  convertible into common stock at $0.50 per
  share.............................................      363,148          41,855
Notes payable to shareholders in connection with the
  acquisition of Janex..............................      750,000         750,000
$400,000 line of credit with a bank, due December
  31, 1999, interest at prime rate plus .25 percent
  (8.00 percent at June 30, 1999) payable monthly,
  collateralized by all assets of Janex and
  personally guaranteed by two shareholders.........      257,000         257,000
Notes payable to shareholders, due December 1, 1999
  interest at prime + 1.0 percent (8.75 percent at
  June 30, 1999) due monthly........................           --       2,000,000
Other...............................................      112,592          18,630
                                                      -----------     -----------
                                                       31,756,520      37,545,981
Less current portion................................   29,306,520      30,545,981
                                                      -----------     -----------
Notes payable, noncurrent...........................  $ 2,450,000     $ 7,000,000
                                                      ===========     ===========
</TABLE>


                                       26
<PAGE>   427


     Future maturities of notes payable are as follows at June 30, 1999:



<TABLE>
<S>                                                     <C>
1999..................................................  $28,545,981
2000..................................................    9,000,000
                                                        -----------
                                                        $37,545,981
                                                        ===========
</TABLE>


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

(1) On May 31, 1999 this note including accrued interest was converted into
    $50,000 cash, $200,000 note and 3,634,520.56 shares of Futech common stock.
    See "Certain Relationships and Related Transactions."


(2) This note was not paid on its due date. Futech is presently negotiating with
    the note holder regarding payment under this note.


(3) This note was not paid on its due date. See "Certain Relationships and
    Related Transactions."



     Futech leases operating facilities and certain equipment under
noncancelable leases. Future minimum lease payments under these leases are
$612,078 for 1999, $485,106 for 2000, $247,418 for 2001 and $126,431 for 2002.


INFLATION

     Management believes that inflation has not had a significant impact on
Futech's costs and profits during the past two years.

YEAR 2000


     The Year 2000 presents special concerns for business and consumer
computing. The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the year. Computer programs that
have date-sensitive functions may recognize a date using "00" as the year 1900
rather than the year 2000. This issue has grown in importance as the use of
computers has become more pervasive and the dependence on computers has
increased. Futech could be materially and adversely affected by the Year 2000
issue, either directly or indirectly. This could occur as a result of a system
failure or miscalculation causing disruption to operations, including a
temporary inability to process transactions, send invoices, ship goods, or
engage in similar, normal business activities.



     The failure of Futech to complete testing and renovation of its critical
systems on a timely basis could have a material, adverse effect on Futech's
financial condition and operating results, as could Year 2000 compliance
problems experienced by others with whom Futech does business. Because of the
broad range of possible issues and the large number of variables involved, it is
impossible to quantify the potential cost of problems should Futech's
remediation efforts, or the efforts of those companies with which Futech does
business, not be successful.



     Futech's internal information systems, both in Phoenix and in Wisconsin,
are a client/ server environment. The system in Phoenix has been tested by a
third party computer consulting firm and we believe this system is Year 2000
compliant. We hired another third party computer consultant to test the system
in Wisconsin. This work was begun in June 1999 and is expected to be completed
before October 15, 1999. We have replaced several pieces of hardware and we have
upgraded all of our operating and administration software. We believe this
system will be Year 2000 compliant on or before October 15. In addition to the
computer systems. we have done testing of, and have subsequently upgraded our


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<PAGE>   428


telephone systems and voice mail systems at both the Phoenix and Wisconsin
locations. We have also installed new hardware and software for internal e-mail
communications. All of the vendors for these upgrades have represented to us
that the systems are now or will be by October 15, Year 2000 compliant. Our
total cost of all these upgrades and testing was approximately $60,000.



     Futech has not begun formal communications with suppliers or customers to
determine the extent to which their failure to remedy their own Year 2000
compliance problems would materially affect Futech. At this time we do not know
whether the suppliers will be able to deliver goods or services, or whether
customers will be able to place orders, beyond December 31, 1999. If our
suppliers are not able to provide necessary products or services to Futech as a
result of Year 2000 compliance problems, we may be forced to seek other
suppliers, or cease doing business with such vendors. Additionally, if our major
customers are not able to function as a result of Year 2000 compliance problems,
we may be forced to substantially reduce operations, or worst case, discontinue
operations until such problems are resolved.



     At this time Futech cannot guarantee that there would not be a system
failure. Management's contingency plan is to use all Futech employees to
manually perform the duties that would normally be performed electronically in
order to meet the demands of customers. We believe that our company is trading
partner with vendors and customers who are much larger than us. We believe,
because of their size, they will have instituted Year 2000 compliance programs
to a much larger degree than Futech. If these companies do not establish
adequate Year 2000 resolutions, Futech may be, worst case, forced to
substantially reduce or discontinue operations.



     Any failure to address any unforeseen Year 2000 issue could adversely
affect our business, financial condition, and results of operations.



FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS



     This prospectus/proxy statement supplement and the prospectus/proxy
statement contains or incorporates by reference forward-looking statements. The
factors identified under "Special Risk Factors Affecting Futech" in this
prospectus/proxy statement supplement and "Risk Factors" in the prospectus/proxy
statement are important factors, but not necessarily all important factors, that
could cause actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, Futech.



     Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, Futech cautions
that, while such assumptions or bases are believed to be reasonable and are made
in good faith, assumed facts or bases almost always vary from actual results,
and the differences between assumed facts or bases and actual results can be
material, depending upon the circumstances. Where, in any forward-looking
statement, Futech, or its respective management, express an expectation or
belief as to future results, such expectation or belief is expressed in good
faith and believed to have a reasonable basis, but there can be no assurance
that the statement of expectation or belief will result or be achieved or
accomplished. The words "believe," "expect," and "anticipate" and similar
expressions identify forward-looking statements. The portions of this
prospectus/proxy statement supplement which contain forward-looking statements
often include cross-references to the "Risk Factors" section in the
prospectus/proxy statement. See also the information contained under the
sections entitled "Futech's Management's Discussion and Analysis or Plan of
Operation" included elsewhere in this prospectus/proxy statement supplement.


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<PAGE>   429

                        DESCRIPTION OF FUTECH'S BUSINESS

GENERAL: RECENT DEVELOPMENTS


     Futech Interactive Products, Inc., formerly known as Futech Educational
Products, Inc., was incorporated in Arizona in 1990. Futech's principal place of
business is located at 2999 N. 44th Street, Suite 225, Phoenix, Arizona
85018-7247. Futech's telephone number is (602) 808-8765.


     Futech, founded in 1988 by Stephen McTaggart, develops electronic "talking"
books that utilize specialized conductive ink on printed pages to convey sounds,
voices, and music. In late November 1992, Futech opened a manufacturing facility
and began manufacturing its own published books under the "Touch Me Sound Pages"
name. Futech closed this facility in 1996 and currently subcontracts with third
parties to manufacture its products.


     Futech co-publishes and distributes traditional paperback books under a co-
publishing/distribution agreement with Magi Publications. See "Licensing".
Futech licenses various book clubs, including Scholastic and Troll, to
distribute some of these paperback books.


     Futech distributes both Magi books and its own electronic books on an
exclusive basis. On a non-exclusive basis, Futech also distributes paperback
books published and manufactured by various third parties.


     In 1998, Futech entered into agreements to purchase the following three
companies or their assets to broaden product mix and improve distribution: Gick
Publishing, Inc., XYZ Group, Inc., and Janex International, Inc. Gick, a
California corporation, manufactures and distributes foam-based post cards, gift
tags, picture frames, specialty crafts and hobby items. XYZ, a Wisconsin
corporation, distributes children's books, adult books, audio books, activity
games and related educational products. Janex, a Colorado corporation, designs,
develops, and manufactures functional toy products for children, including tooth
brushes, coin banks, and Wet Pets.


     Futech acquired the XYZ distribution facility in Wisconsin along with
Gick's distribution center on the West Coast. Futech closed the West Coast
distribution facility and consolidated the shipping, receiving and billing of
Gick's foam-based products into its Wisconsin distribution facility.


     On February 1, 1999, Futech entered into a joint venture with author Joy
Berry and her company, Responsible Kids, LLC, by purchasing 49% of Gold Star
Publishing, LLC, to develop and publish children's self-improvement products.
The purchase required Futech to contribute $500,000 in working capital to Gold
Star and guarantee payment of a $200,000 line of credit from Responsible Kids,
LLC. The parties recently agreed not to proceed with the joint venture and
terminate the L.L.C. The parties have signed an exclusive distribution agreement
for Gold Star books.


     Futech currently operates three facilities: corporate offices in Phoenix,
Arizona; sales office in Chicago, Illinois; and general sales, distribution and
operations facilities in Waukesha, Wisconsin (near Milwaukee). Little Tiger
Press and Gold Star Publishing titles are sold and distributed through the
Wisconsin facility.

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<PAGE>   430


PRODUCTS





     Toys, games and interactive games encompass many product categories
including: conventional board games, electronic game boards, book and toy
packages. Futech has chosen to concentrate on certain formats such as
interactive game boards, interactive puzzles, interactive books, interactive
learning devices, practical toys and combination toy/game/book packages. This
area of products has grown in recent years due to parents' interest in combining
entertainment with educating their children. Futech expects to compete by
designing products which provide high quality play processes, interactive
capabilities, educational experiences and superior value to the consumer at
competitive prices. As an example of retail prices, the interactive game board
products will be sold at retail for $15 to $30. Management believes this price
point compares favorably with similar electronic game and toy products which
typically retail between $30 and $100. All of the products will be sold to major
mass market retailers, toy stores and independent retailers in the United States
and internationally.



PUBLISHING



Trade Publishing


     The trade publishing industry features hundreds of publishers releasing a
wide variety of consumer books into the market, including hard cover best
sellers, paperback best sellers, trade paperbacks, audio books, children's
books, computer books, religious books, gardening books, travel books, gift
books, novelty books, electronic books and others.

Interactive Publishing

     The interactive product industry consists of books containing sound,
promotional publishing and specialty products. Books containing sound first
appeared on the market in the early 1980's in the form of a piano keyboard
attached to a hard cover book featuring easy-to-play, familiar children's songs.
These books were generally low-tech products featuring a one-sound chip and a
low-quality speaker. With the production of low cost microchips and
microprocessors from companies such as Winbond, Electronic Speech Systems and
Texas Instruments Inc., the cost for incorporating speech technology, sound
effects and music into products dropped dramatically in the mid-1980's. Sight &
Sound helped define the interactive product industry by introducing licensed and
unlicensed products, reducing the costs of production and developing new
technologies allowing more sounds per product. Sight & Sound was acquired by
Western Publishing Company in 1990 and Western rapidly expanded Sight & Sound's
existing interactive product lines from $20 million to $125 million in three
years. These new products utilize either an ESS chip or a Texas Instrument chip
and improved technology allows the story to be enhanced by an electronic sound
pad. In 1996, Western Publishing was acquired by Golden Books.

     The Smart Pages and Extra Smart Pages formats produced by Golden Books use
the same technology as Futech's Talking Pages and Talking Pages Plus. Each of
Futech's books contains up to 42 touch points or switches that are embedded in
the covers or pages of the books. When a touch point is pushed it triggers a
switch and the microchip delivers an audible message. This allows children to
touch a picture, object or word and have the book respond to or instruct them.
Depending on the format, the audible messages consist of speech, music or sound
effects. Golden's books will contain anywhere from 100 to 150 musical sounds,
voices, or sound effects, as well as hundreds of interactive play options.

                                       30
<PAGE>   431

LICENSING

     Futech has a co-publishing/distribution agreement with Magi Publications, a
United Kingdom publisher, and will license Magi to produce co-editions for the
European market. The Little Tiger Press co-publishing/distribution agreement
grants Futech the exclusive publishing and distribution rights in the United
States, Mexico and Canadian markets for Magi's titles. Magi currently has over
50 back list titles and 14 new front list titles for 1999. Magi will create new
titles using United States-based authors and illustrators and Futech will
continue to import co-editions from Magi's European operations.

     Futech licenses certain United States paperback rights to various book
clubs such as Scholastic, Troll and Book-of-the-Month Club for United States
specialty distribution. When these companies purchase the paperback rights,
Futech provides them with films which allow them to produce their own low cost
paperback editions. These companies distribute the editions to schools
throughout the United States. They distribute flyers/order blanks directly to
children so the product can be ordered via mail order. They also participate in
school book fairs in which they set up book displays at schools for a one-week
period and sell directly to the students. A substantial advance in guarantee is
paid by these companies to Futech for the rights to produce these paperback
editions. These advances and guarantees are earned by Futech through a per-book
royalty agreement with these companies. Sales of these editions often average
100,000 copies or more.

     On August 14, 1996, Futech entered into a joint venture with Golden Books,
the world's largest publisher of children's books. In January 1998, Futech
transformed its agreement with Golden into a five year, non-exclusive licensing
agreement and received a $2 million up front, non-refundable guarantee for the
non-exclusive use of the technology. Golden Books recently filed bankruptcy for
reorganization purposes.


     In late 1997, due to the disappointing results from the Golden Books
relationship, Futech management re-evaluated their long-term licensing strategy
and decided to begin developing, manufacturing and distributing Futech's own
proprietary products in addition to licensing its technology to third parties.
To pursue this new complimentary strategy, Futech entered into several
acquisition and joint venture agreements beginning in 1998. See "Description of
New Futech's Business -- Recent Acquisitions" in the prospectus/ proxy
statement.



TOYS AND GAMES


     Toys, games and interactive games encompass many product categories
including: conventional board games, electronic game boards, book and toy
packages. Futech currently produces electronic books and has chosen to
concentrate on certain product development formats such as game boards,
interactive learning devices, and functional toys. A majority of the products
are sold at retail for $5 to $15, thereby creating impulse sales to consumers.
Companies producing educational toy products at similar price points include
Random House, Children's Books, Golden Books, Tiger Electronics and V-Tech.


     In December of 1998, Futech acquired approximately 73% of the outstanding
common stock and 100 percent of the outstanding preferred stock of Janex
International, Inc. Futech paid $1,500,000, consisting of a $750,000 note
payable and 3,750,000 shares of Futech's preferred stock valued at $0.20 per
share. The note bears interest at 10 percent and is payable 30 days after the
merger.



     Futech develops and manufactures through subcontractors a series of toy and
functional products for children through Janex, Futech's partially owned
subsidiary, which


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<PAGE>   432


are distributed both in the United States and internationally. These products
are designed to be practical while offering high quality and superior value to
the consumer. Current Hercules and Looney Tunes licensed products include tooth
brushes and banks. Janex proprietary products include Wet Pets, which is a line
of pool and bathtub related play products. Sales of the Janex product line in
the first six months of 1999 were less than 5% of Futech's total revenues.


SPECIALTY PRODUCTS


     Futech markets a three-dimensional, mailable foam card which can be
designed in any shape, including hearts and flowers, and can feature promotional
messages with up to one minute of speech music and sound effects. These foam
cards are sold in the form of stationery, greeting cards, gift tags, and picture
frames. These products range in price from $1 to $7. These products constituted
approximately 10% of Futech's total revenues in the 1st six months of 1999.


MARKETING, DISTRIBUTION AND CUSTOMERS


     The distribution of the paperback books published by third parties on a
non-exclusive basis is a highly competitive business. The largest demand for
distribution services is from the warehouse club segment. This includes Sam's
Club, Costco and BJ's. The warehouse clubs have become a very popular channel
from which consumers purchase books. Of the $1 billion in books sales by
warehouse clubs, $600 million are purchased directly from publishers. The
distribution market to warehouse clubs is currently controlled by two
distributors and is highly competitive. See "Competition."


     Futech sells its interactive products by marketing them through different
distribution channels including mass market retailers, warehouse clubs, regional
discounters, major book chains, drug chains, supermarkets and other retail
outlets throughout the United States. Futech distributes its proprietary product
lines to warehouse clubs, major retail outlets, regional discounters, national
book chains, drug store chains and supermarket chains.


     Futech distributes over 150 foam-based post cards to approximately 3,900
stores, including 2,500 independent, specialty retailers and to chains. Some of
the stores in which this product is being sold include Linen N' Things, Bed Bath
and Beyond, Meijer's, Long's Drug Stores, Fabricenters/Joan Fabrics, Vons, and
Giant Foods. The post cards are marketed under the Better Than A Letter and
Kinda Like A Card brand names.



     Currently, Futech has an assortment of wholesale catalogs to describe and
market existing products. Two options are available to consumers to facilitate
direct retail purchases. The first, a retail mail-order sales catalog, is
distributed by direct mail. Futech also has an internet-based website,
www.futechinteractive.com, which was activated in April of 1999 and updated to
www.okid.com on September 1, 1999. Consumers can order from a selection of
hundreds of products, order replacement batteries, play interactive online games
and learn general information about Futech. The website also provides email
links to key personnel, current press releases, a map of Futech locations,
catalog order forms, listings of current Futech job opportunities, and an
interactive environment that makes visiting fun. Previous online customers can
conveniently return and track their orders directly from the web site. Customer
contact forms are also available to provide easy communication with Futech
representatives. Futech received its first order on the web site on May 20,
1999.


                                       32
<PAGE>   433

     With the acquisition of XYZ on May 1, 1998, Futech now has a fully
operational distribution center centrally located in the Midwest to service its
U.S. and Canadian accounts. Futech currently distributes third-party publishers'
books on a non-exclusive basis domestically and proprietary and exclusive
product lines, including the electronic books, foam-core specialty products, and
the Little Tiger Press and Gold Star Publishing paperback books, domestically
and internationally.


     Futech's distribution facility is well equipped and utilizes electronic
data interface, or EDI, to receive orders from its major customers. EDI allows
for instantaneous downloading and tracking of orders and paperless invoicing.
This means that orders are received the same day they are placed and can be
processed rapidly. In addition, Futech has designed and implemented a custom bar
code-based inventory management and shipping system in its warehouse. High speed
packaging machines, labeling machines, conveyors and a computerized rate shopper
to allow for quick processing of customer orders. Most customers require
customized services such as pre-ticketing of merchandise, collating and shrink
wrapping custom packages, direct store shipment, prepaid freight and the ability
to receive returns from thousands of individual locations.


     The same distribution facility utilizes a computerized rate shopper to
determine the most economical and fastest way to ship products to its customers.
This allows Futech to control its freight expense while providing exceptional
service.

     For independent and specialty accounts, a special pick and pack system has
been developed that allows for one day processing of smaller orders. This system
utilizes thousands of individual bar-coded locations to track, pull and process
individual orders. This pick and pack area is conducive to packing small orders
for individual customers and can be expanded to service customers on a direct
basis from Futech's Internet based website catalog.

MANUFACTURING

     Futech subcontracts with third parties to manufacture its electronic books,
including Talking Pages and Talking Pages Plus, by sub-contracting with
manufacturing companies throughout Asia. Futech's specialty products, including
promotions and specialty post cards, are currently manufactured domestically.
The sound modules for the electronic specialty products are manufactured in
China.

PRODUCT DESIGN AND SELECTION


     Futech continually refines and enhances existing technology as required to
utilize the technology in new products. Futech corporate facility houses a
Macintosh supported product development department, which is utilized in the
design and development of its interactive products. The product development
department makes samples of Futech's books for marketing. A team of design
coordinating professionals takes products from inception to manufacturing by
troubleshooting with prototypes of the products and coordinating required
materials such as illustration, script writing, story writing, plastic mold
design, extensive technology development and sound development. The team also
acts as a support service to both overseas and U.S. manufacturers in the process
of manufacturing Futech products.



     The department also features an in-house web development team. This team is
responsible for bringing Futech presence into the next millennium with a fully
interactive E-Commerce website. The site offers customers the capability of
sampling and purchasing products online as well as playing interactive games,
ordering accessories, and

                                       33
<PAGE>   434


troubleshooting issues. This can all be done by touring a virtual town at
www.oKID.com which features creative animation, music and sound effects.


     Futech also maintains a liaison with individual inventors and companies
involved in the development of related technologies that are sometimes utilized
to enhance and expand Futech's products.

COMPETITION

     Futech operates in highly competitive markets. Some of Futech's competitors
are significantly larger than Futech and have substantially greater resources
available for developing and marketing their products. Futech believes that its
unique patented technology, which it licenses, distribution service capability
and manufacturing its own products will allow Futech to successfully compete
against many of these larger competitors.

TRADE PUBLISHING

     Futech's competition in the trade publishing industry includes Bantam
Doubleday Dell, Simon & Schuster, McGraw-Hill Companies, Inc., Harcourt Brace &
Company, Harlequin Enterprises Ltd., Golden Books, Dove Entertainment, Inc.,
Random House, The Putnam Publishing Group, Penguin USA, Scholastic, Andrews &
McMeel, HarperCollins, Avon, Houghton Mifflin Company, William Morrow,
North-South Books and others.

     Futech's co-publishing/distribution agreement with Little Tiger Press
allows Futech to compete in the Trade Publishing market with the importation of
quality books from the United Kingdom through Magi. Futech also intends to
distribute Little Tiger Press products in Canada and Little Tiger Press has
chosen a distinctive market segment by offering high quality children's books at
a value price.


     Futech has also entered a distribution agreement with author Joy Berry to
develop, produce and distribute children's self-improvement products, such as
Earning an Allowance, Self Esteem, Discipline and Handling Emergencies. During
1999, Gold Star is publishing more than 75 new books, kits, videos and board
books which will be available during the 4th quarter 1999 or 1st quarter 2000.
Previously, Joy Berry has sold more than 80 million books through various direct
mail and book club catalogs. Through the distribution agreement, Futech has
exclusive distribution rights to all new Gold Star products plus approximately
250 of Joy Berry's previously published titles.


SPECIALTY PRODUCTS


     The specialty products market is very competitive, in particular, in the
greeting cards segment. However, Futech believes its foam-core post cards are
unique due to its patented technology that combines printed circuitry, speakers
and batteries within one compact package. Futech has begun to leverage its
proprietary technology within the greeting card segment via its "Musical Mail"
line introduced in late 1998. Futech plans to launch additional products in 2000
that continue to exploit its patent and address key consumer needs. There are no
significant competitors for this specialty product since Futech holds the patent
on the manufacturing process for these cards.



     Futech is also actively participating in the re-emergence of scrap booking,
an industry devoted to producing arts and crafts for home assembled projects.
Futech's line of Little Bits and Make a Memory are positioned to take advantage
of this segment, defining pre-assembled kits for mass retail as a strategic
opportunity. The Specialty Products division


                                       34
<PAGE>   435

uses a series of independent representative sales companies to penetrate the
large number of small card and crafts shops, as well as individual retail chain
stores.

DISTRIBUTION


     Futech distributes paperback books on a non-exclusive basis to warehouse
clubs. The distribution market to warehouse clubs on a non-exclusive basis is
currently controlled by two distributors, Advanced Marketing Services and
Futech. Advanced Marketing Services is the market leader in warehouse club
distribution with 97.5% of total sales, compared with 2.5% for Futech. In 1990,
there were 10 warehouse club chains in the country and eight distributors
servicing those chains. Due to a consolidation in the club marketplace through
acquisitions and bankruptcies, there are currently only three major discount
warehouse chains, including Costco, Sam's Club, and B.J.'s, and two major
distributors of children's books to those chains. Warehouse club chains require
shipment to individual stores, the pre-ticketing of merchandise and the ability
of the distributor to manage their inventories and promotions. Since purchasing
XYZ, Futech has been competing by diversifying into areas other than
distributing third-party children's books. Futech competes with Advanced
Marketing Services in a number of different product categories including hard
cover best sellers, soft cover best sellers, paperbacks, trade paperbacks,
computer books, cookbooks, gardening books, self-help books, inspirational
books, religious books and audio books.


PATENTS AND TRADEMARKS


     Futech's proprietary technology relates to printed audible signals, visual
circuitry and associated electrical components such as switches, batteries,
speakers and liquid crystal displays. This technology is applied to produce
books and play boards that emit speech, music and sound effects or other visual
signals activated by pressing switches embedded in the surface of the product.
Upon pressing a designated point on the page or surface of the produce a
microchip is activated and a speech, music, or sound effect response is emitted.
In certain products light emitting diodes provide visual enhancement.



     Futech relies heavily on patent and trademark protection to maintain its
competitive position. Futech recognizes that patents are not totally effective
in prohibiting competitors from producing similar products that could compete
with those of Futech. For those products that it makes sense to patent, Futech
takes the steps necessary to do so. Prior to its incorporation, Futech applied
for its first patent in 1989. Since that time, Futech has obtained 10 U.S.
patents, 3 foreign patents (Australia and New Zealand), and a number of pending
U.S. and foreign patent applications covering various embodiments of an
interactive electronic book. These include a U.S. patent for an interactive
electronic game board, and several corresponding pending foreign patent
applications. Additionally, Futech owns a U.S. patent covering a model race car
track system, and several corresponding pending foreign patent applications.


     The electronic book, game board, and race car track patents and patent
applications cover a variety of notable features, such as a technique for
printing conductive ink to create electronic circuits for use in the products.
Such printing techniques may also be used to make electronic components such as
switches, batteries, speakers, and light emitting devices for use in the
circuits. Such components are used to produce interactive sounds and/or visual
images in response to user activation of switches embodied in the products.

     Futech also owns a U.S. patent and several pending U.S. and foreign patent
applications covering foam-core based novelty articles that may include sound
producing

                                       35
<PAGE>   436

and/or light emitting devices. The corresponding product line includes foam-core
based stationery, postcards, gift tags, and picture frames. Additionally, Futech
owns a U.S. patent covering a novelty flashlight having a decorative deformable
body that, when squeezed, activates the light.


     In order to prevent the use of Futech's products and their names, Futech
has registered the following trademarks/trade names for its electronic books and
foam-core based stationery, postcards, gift tags, and picture frames: ABC
Talking Book; ABC Talking Book Adventures; Adventures Through ABC Land; Bookee;
Bookie; Bookie Mark; Look, Listen & Learn Series; The ABC Talking Book, The
Talking Book Adventures; Better Than a Letter; and Talking Pages. Futech also
has 15 trademark/trade name applications pending for its foam-core based
stationery, postcards, gift tags, picture frames, electronic books, and
interactive electronic games.


GOVERNMENT REGULATIONS


     Futech is subject to the provision of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Products Safety Act. Those
laws empower the Consumer Products Safety Commission to protect children from
hazardous products. The CPSC has the authority to exclude from the market,
articles which are found to be hazardous, and can require a manufacturer to
repurchase such products under certain circumstances. Any such determination by
the CPSC is subject to court review. Similar laws exist in some states and
cities in the United States and in many jurisdictions throughout the world.
Futech endeavors to comply with all applicable regulations through a program for
quality inspections and product testing. Futech maintains product liability
insurance in the amount of $2,000,000.


EMPLOYEES


     As of August 1, 1999, Futech had 88 employees. None of the employees of
Futech is a member of a union. Futech closed its West Coast distribution center
on June 30, 1998 and consolidated its shipping, receiving and billing functions
to its Midwest distribution center and 30 Gick employees were terminated. The
remaining seven West Coast employees were terminated effective December 31,
1998, with their duties transferred to the Phoenix and Wisconsin operations.


PROPERTIES

     Futech leases one facility in Phoenix, Arizona with 9,628 square feet of
office space. The lease expires February 1, 2003. Through its XYZ acquisition,
Futech has assumed the lease on a facility in Pewaukee, Wisconsin with
approximately 50,000 square feet of warehouse space and 8,000 square feet of
office space. The lease expires June 30, 2002. Through its Gick acquisition,
Futech leases a facility in Laguna Hills, California with 4,643 square feet of
office space. This space has been subleased to a third party. This lease expires
June 30, 2000. Futech believes the existing facilities are adequate for its
current requirements and that suitable additional or substitute space is readily
available if needed.


LEGAL PROCEEDINGS



     Futech was the defendant in Gary Roy, a/k/a Joe, Billings v. Futech
Interactive Products, Inc., which was initiated on November 20, 1998 in Waukesha
County Circuit court of Wisconsin. Mr. Billings, a Director of Futech, alleged
Futech wrongfully terminated his employment and failed to perform according to
the terms of the Agreement for Purchase and Sale of Assets of XYZ. Mr. Billings
claims damages resulting from the wrongful termination equal approximately
$1,150,000 plus costs and attorneys' fees. This


                                       36
<PAGE>   437


suit was dismissed pending arbitration. Futech admitted it owes Mr. Billings
certain other amounts in connection with the acquisition. On September 16, 1999,
Futech & Billings signed a settlement agreement to resolve this lawsuit. See
"Legal Proceedings" in the prospectus/proxy statement. See also "Certain
Relationships and Related Transactions" in this prospectus/proxy statement
supplement.


     Futech is also pursuing a proceeding against Creative Beginnings relating
to nonpayment of obligations.

                                       37
<PAGE>   438

                               FUTECH MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS


     The directors and executive officers of Futech and their positions at
October 1, 1999 are as follows:



<TABLE>
<CAPTION>
NAME                                   AGE    TITLE
----                                   ---    -----
<S>                                    <C>    <C>
Vincent W. Goett.....................  35     Chairman of the Board, Chief Executive
                                              Officer and Director
Paul C. Oursler......................  42     President
Joseph K. Petter.....................  56     Chief Operating Officer
Frederick B. Gretsch, Sr.............  53     Chief Financial Officer, Treasurer and
                                              Secretary
Roderick L. Turner...................  66     Director
Gary A. Oman.........................  50     Director
Robert J. Rosepink...................  48     Director
F. Keith Withycombe..................  54     Director
</TABLE>


     VINCENT W. GOETT  Mr. Goett has served as Chairman and Chief Executive
Officer and Director of Futech since March 1995. He has served as Chairman of
the Board, Chief Executive Officer, President and Director of Janex since
December 11, 1998. Mr. Goett joined Futech as its Chief Operating Officer on
January 5, 1995. From August 1991 to January 1995, he owned and operated
Paradise International, an investment business engaged in acquisition and joint
venture activities. From September 1985 to August 1991, Mr. Goett was President
of Westplex, Inc. which effected major investments in commercial real estate. He
attended Arizona State University. Mr. Goett is the son-in-law of Roderick L.
Turner, a director of Futech, and brother-in-law of R. Bradford Turner, Vice
President, stationary/novelties of Futech.


     PAUL C. OURSLER  Mr. Oursler was hired as president of Futech on September
1, 1999. Prior to joining Futech, from September 1997 to September 1999, Mr.
Oursler was Director of Fan Fueler, a retail merchandising division of publicly
traded Action Performance Co., Inc., a leader in motorsports merchandising. From
August 1992 to September 1997, he served as CEO of Music Concepts, Inc. a
company he founded in 1992, that licensed and marketed products as well as
developed sponsorships and endorsement opportunities with properties within the
country music and NASCAR industries. From July 1985 thru August 1992, Mr.
Oursler served as President of Corporate Image, Inc., a company he founded and
that licensed and marketed merchandise and corporate sponsorships within the
NASCAR industry. From August 1980 to July 1985, Mr. Oursler served as
Vice-President of Sales for Concessions Management, Inc., a distributor of
printed sportswear and novelties to theme parks, corporations, and the country
music industry. Mr. Oursler attended Volunteer State Community College.


     JOSEPH K. PETTER  Mr. Petter has served as Chief Operating Officer of the
Company since February 1997. He has served as Chief Operating Officer of Janex
since December 11, 1998. Mr. Petter joined Futech as Vice President of
Operations in March 1996. Prior to joining Futech, from July 1989 to December
1995, he was a Division Vice President of ADVO, Inc., a direct mail marketing
company. From 1970 to 1989, he was a Group or Senior Manager with several
different operating companies of the Dun & Bradstreet Corporation. Mr. Petter
completed the Executive Management Program from

                                       38
<PAGE>   439

the University of Chicago and received his B.S. in Industrial Engineering from
the Illinois Institute of Technology.

     FREDERICK B. GRETSCH, SR.  Mr. Gretsch has served as Chief Financial
Officer, Secretary and Treasurer of Futech since September 1997. He has been
Chief Financial Officer, Treasurer, Secretary and Director of Janex since
December 11, 1998. He has served in various financial and marketing positions
throughout his career. Prior to joining Futech, from May 1996 to December 1996,
he was Treasurer of Vail Resorts, Inc., a ski resort company, and from November
1995 to May 1996, Mr. Gretsch was Treasurer of Cable Systems International, a
copper wire and cable manufacturing company. From February 1992 to February
1995, he was Director of Treasury Operations at General Dynamics Corporation, a
defense contractor. From June 1975 to December 1991, he was Vice President at
Citicorp/Citibank, a major bank holding company. From October 1968 to June 1975,
Mr. Gretsch was Manager of Sales Accounting and Administrator of Financial
Analysis at RCA, a diversified corporation. Mr. Gretsch received his Masters
degree in Business Administration from Columbia University and his B.A. in
Economics from Georgetown University.

     RODERICK L. TURNER  Mr. Turner has served as Director of Futech since July
1995. He retired as Senior Executive Vice President of Colgate Palmolive, Inc.
in 1992 with 30 years of service in various executive management positions
within Colgate. Since 1992, Mr. Turner has been engaged in entrepreneurial
interests along with the management of his personal investments. He is the
father-in-law of Mr. Goett, an officer and director of Futech, and father of R.
Bradford Turner. Mr. Turner received his BA in Business from Cornell University.

     GARY A. OMAN  Mr. Oman has served as a Director of Futech since January
1996. He has been a Vice President of Coldwell Banker Success Realty since 1991.
From 1973 to 1991, Mr. Oman was a real estate investment consultant and
entrepreneur. Prior to his business interests in real estate investments, Mr.
Oman was in the education profession. He attended Mankato State College where he
studied Educational Administration.


     ROBERT J. ROSEPINK  Mr. Rosepink has served as a Director of Futech since
January 1998. He has been a partner of Rosepink & Estes, a law firm specializing
in estate planning, probate and trust law since 1988. He was a partner at the
law firm of Snell & Wilmer in Phoenix, Arizona from 1985 to 1988 and an
associate and shareholder at the law firm of Fennemore, Craig, von Ammon, Udall
& Powers in Phoenix, Arizona from 1975 to 1985. Mr. Rosepink received his J.D.
degree, with honors, from George Washington University.


     F. KEITH WITHYCOMBE  Mr. Withycombe has served as a Director of Futech
since November, 1998. He was President and Chief Operating Officer of Evans
Withycombe Residential, Inc. from 1994 to 1996, and President of Evans
Withycombe, Inc. from 1981 to 1994. Mr. Withycombe received a B.S. in
Engineering from the United States Air Force Academy and a M.S. in Engineering
from Arizona State University.

EMPLOYMENT ARRANGEMENTS

     Vincent W. Goett, the Chairman of the Board, President and Chief Executive
Officer of Futech, entered into an employment agreement with Futech dated
December 31, 1997. Under the agreement, Mr. Goett is entitled to an annual base
salary of not less than $200,000 in the first year of the agreement and $350,000
in subsequent years of the agreement, plus a bonus at Futech's discretion. In
addition, Futech agreed to grant

                                       39
<PAGE>   440

Mr. Goett options to purchase 7 million shares of Futech's Common Stock at an
exercise price of $0.10 per share, which options are exercisable as follows: 2
million on December 31, 1998; 2 million on December 31, 1999; 1 million on
December 31, 2000; 1 million on December 31, 2001; and the remaining 1 million
on December 31, 2002. The agreement terminates on December 31, 2002, unless
earlier terminated, and is renewable for additional one-year periods. During
1999 Futech granted Mr. Goett 17 million options to purchase common stock at an
exercise price of $.05 per share, expiring in 2009.

     Joseph K. Petter, Chief Operating Officer of Futech, entered into an
employment agreement with Futech dated February 1, 1997. Under the agreement,
Mr. Petter will receive $125,000 per year for the first year and $175,000 for
the second through fifth years of employment. By verbal agreement Mr. Petter and
the company have changed Mr. Petters annual salary to $125,000 for 1999. The
agreement terminates in January 2002. Mr. Petter also entered into a
confidentiality agreement with Futech dated March 4, 1996.

     Frederick B. Gretsch, Sr., Chief Financial Officer, Secretary and Treasurer
of Futech, entered into an employment agreement with Futech dated September 2,
1997. Under the agreement, he is entitled to an annual base salary of not less
than $125,000. The agreement terminates on December 31, 2000. Mr. Gretsch also
entered into a confidentiality agreement with Futech in connection with his
employment.

     William E. Hermes, Executive Vice President -- Sales, entered into an
employment agreement with Futech dated April 1, 1999. Under the agreement, Mr.
Hermes is entitled to an annual salary of not less than $125,000. Additionally,
he received 2,500,000 preferred stock options exercisable at $.05 per share from
April 1, 1999 to March 1, 2009. Mr. Hermes also received 1,999,999 options for
common stock exercisable at $0.25 per share with one-third of the shares vesting
over three years on March 1, beginning in the year 2000. The agreement
terminates on April 1, 2002. Mr. Hermes also entered into a confidentiality
agreement with Futech in connection with his employment.


     Paul C. Oursler, President of Futech, entered into an employment agreement
with Futech on September 1, 1999. Under the agreement, Mr. Oursler is entitled
to a base annual salary of $150,000 in the first year and $200,000 in each of
the 2nd and 3rd years. The agreement calls for a semi-annual bonus to be paid in
the amount of 1% of gross revenues if Futech is profitable, and if Futech's
revenue exceeds $12,500,000 for the semi-annual period. The agreement grants
immediately vested stock options which allow Mr. Oursler to purchase up to
100,000 shares of New Futech common stock at $1.50 per share from the date the
agreement is signed until September 1, 2009. The agreement also allows Mr.
Oursler to purchase additional shares of New Futech at $3.75 per share according
to the following schedule:



     35,000 shares from 9-1-2000 until 9-1-2010


     30,000 shares from 9-1-2001 until 9-1-2011


     30,000 shares from 9-1-2002 until 9-1-2012



The employment agreement expires 9-1-2002.



     Stephen S. Stuhmer, President E-Commerce, entered into an employment
agreement with Futech on July 15, 1999. Under the agreement, Mr. Stuhmer is
entitled to a base annual salary of $125,000. The agreement grants immediately
vested stock options which allow Mr. Stuhmer to purchase up to 83,333.33 shares
of New Futech common stock at $1.50 per share from the date the agreement is
signed until July 15, 2009. The agreement


                                       40
<PAGE>   441


also allows Mr. Stuhmer to purchase additional shares of New Futech at $7.50 per
share according to the following schedule:



     22,222.20 shares from 7-15-2000 until 7-15-2010


     22,222.23 shares from 7-15-2001 until 7-15-2011


     22,222.23 shares from 7-15-2002 until 7-15-2012



The employment agreement expires 7-15-2002.


STOCK OPTION PLAN AND EXECUTIVE COMPENSATION MATTERS

1999 STOCK OPTION PLAN


     The 1999 stock option plan will be adopted by the board of directors of
Futech conditioned upon and subject to approval by Futech's stockholders. A
total of 1,000,000 shares of common stock will be reserved for issuance under
the 1999 plan. The 1999 plan will survive the merger.


Purposes


     The purpose of the 1999 plan is to attract and retain the best available
directors and employees of Futech or any parent or subsidiary or affiliate of
Futech which now exists or hereafter is organized or acquired by or acquires
Futech, as well as appropriate third parties who can provide valuable services
to Futech, to provide additional incentive to such persons and to promote the
success of the business of Futech.


Administration


     The 1999 plan is administered by the board of directors or a committee of
the board of directors appointed by the board and constituted so as to permit
the 1999 plan to comply with Rule 16b-3. The administering body is referred to
as the committee. The committee determines the persons to whom stock options
will be granted, the terms of such grants and the number of shares subject to
options. The 1999 Plan provides for the grant of options which qualify as
incentive stock options, sometimes referred to herein as ISOs under Section 422
of the code and non-statutory stock options which do not specifically qualify
for favorable income tax treatment under the Code (sometimes referred to herein
as NSOs.


Eligibility and Participation


     Any employee of Futech or any of its subsidiaries is eligible to receive
options under the 1999 plan. Non-employee directors are eligible to receive only
NSOs under the 1999 plan while employee directors are eligible for both ISOs and
NSOs. In addition, any other individual whose participation the committee
determines is in the best interests of Futech is eligible to receive only NSOs
under the 1999 plan. The committee has complete discretion to determine which
eligible individuals are to receive option grants. In general, the only
consideration received by Futech for the grant of an award will be past services
or the expectation of future services, or both. The 1999 plan does not confer on
any participant in the 1999 plan any right with respect to continued employment
or other services to Futech and will not interfere in any manner with the right
of Futech to terminate a participant's employment or other services.


                                       41
<PAGE>   442

Stock Subject to the 1999 Plan


     The aggregate number of shares which may be issued pursuant to the exercise
of options granted under the 1999 plan is 1,000,000 shares of Futech's common
stock, subject to adjustments in certain circumstances, including
reorganizations, recapitalizations, stock splits, reverse stock splits, stock
dividends and the like. If any outstanding option grant under the 1999 plan for
any reason expires or is terminated, the shares of common stock allocable to the
unexercised portion of the option grant shall again be available for options
under the 1999 plan as if no options had been granted with respect to those
shares.


Limitations on Awards


     No grants are required to be made during any calendar year. No incentive
stock option may be exercised more than ten years from the date of grant (five
years in the case of a grant to a participant owning more than 10% or more of
the total combined voting power of all classes of stock of Futech or any
incentive stock option group member), immediately after the date the participant
ceases to perform services for Futech or any incentive stock option group member
(for reasons other than death or disability), one year after the date the
participant ceases to perform services for Futech or any incentive stock option
group member if cessation is due to death or disability, or the date the
participant ceases to perform services for Futech or any incentive stock option
group member if cessation is for cause. No non-qualified stock option may be
exercised more than ten years from the date of grant, one year after the date
the participant ceases to perform services for Futech or any affiliated group
member (for reasons other than death, disability, retirement or cause), two
years after the date the participant cease to perform services for Futech or any
affiliated group member if cessation is due to death, disability or retirement,
or the date the participant ceases to perform services for Futech or any
affiliated group member if cessation is for cause.


Pricing and Payment of Options


     The per share exercise price of each stock option granted under the 1999
plan will be established by the committee at the time of grant. Subject to the
provisions of the Internal Revenue Code of 1986, as amended, grants to
participants may be either incentive stock options or non-qualified stock
options. In the case of an incentive stock option, the per share exercise price
may be no less than 100% of the fair market value of a share of common stock on
the date of grant, 110% in the case of a participant who owns, directly or
indirectly, 10% or more of the outstanding voting power of all classes of stock
of Futech. The per share exercise price of a non-qualified stock option may be
any amount determined in good faith by the committee. With respect to incentive
stock option, the aggregate fair market value of the common stock for which one
or more options granted to a participant may become exercisable during any one
calendar year may not exceed $1,000,000. The fair market value of the common
stock equals the closing price on the date in question on the principal exchange
or other market on which the stock is then traded.



     Under the 1999 plan, the purchase price of an option is payable upon
exercise: (1) in cash; (2) by check; (3) to the extent permitted by the
particular option grant, by transferring to Futech shares of common stock of
Futech at their fair market value as of the option exercise date (provided that
the participant held the shares of stock for at least six months); or (4)
through a sale and remittance procedure by which a participant delivers
concurrent written instructions to a company-designated brokerage firm to sell


                                       42
<PAGE>   443


immediately the purchased common stock and remit to Futech sufficient funds to
pay for the options exercised and by which the certificates for the purchased
common stock are delivered directly to the brokerage firm. Futech may also
extend and maintain, or arrange for the extension and maintenance of, credit to
a participant to finance the purchase of shares pursuant to the exercise of
options, on such terms as may be approved by the board of directors or the
committee, subject to applicable regulations of the Federal Reserve Board and
any other applicable laws or regulations in effect at the time such credit is
extended.



     The committee may require, as a condition to exercise of an option, that
the participant pay to Futech, in cash or in shares of the common stock of the
company, the entire amount of taxes which Futech is required to withhold by
reason of such exercise, in such amount as the committee or the board of
directors may determine. Alternatively, the participant may elect, subject to
rules adopted by the committee or the board of directors, or Futech may require
that Futech withhold from the shares to be issued that number of shares having a
fair market value equal to the amount which Futech is required to withhold.


Exercise


     As described above, the committee has the authority to determine the
vesting and exercise provisions of all grants under the 1999 plan. In general
under the 1999 plan, no option shall be exercisable during the lifetime of a
Participant by any person other than the participant, his or her guardian or
legal representative.


Accelerating Events


     The options granted under the 1999 plan become fully exercisable if Futech
is dissolved or liquidated, subject to certain reorganizations, mergers, or
consolidations, is acquired or subject to a hostile takeover attempt, undergoes
a change in control or if there is an announcement or proxy solicitation
relating to such events.


Termination or Amendment of the 1999 Plan


     The board of directors may amend or modify the 1999 plan at any time;
provided, that shareholder approval shall be obtained for any action for which
shareholders approval is required in order to comply with Rule 16b-3, the
internal revenue code, or other applicable laws or regulatory requirements
within such time periods prescribed. The 1999 plan will terminate on January 29,
2008, unless sooner terminated by the board of directors.


Option Grants


     No options have been granted under the 1999 plan.


LIMITATION OF LIABILITY AND INDEMNIFICATION


     Arizona Revised Statutes sec. 10-851 contains an extensive indemnification
provision which permits an Arizona corporation to indemnify any person who was,
or is threatened to be named defendant or respondent in any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than (1) a proceeding by or in the right of the
corporation in which the director was held liable to the corporation or (2) in
connection with a proceeding charging improper personal benefit in which the
director was held liable on the basis that personal benefit was improperly


                                       43
<PAGE>   444


received by the director) by reason of the fact that such person is or was a
director, or while serving as a director, is or was serving at the corporation's
request as a director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against the obligation to pay a judgment, settlement, penalty or
fine, or reasonable expenses with respect to a proceeding, including obligations
and expenses that have not yet been paid by such person but that have been or
may be incurred, if such person's conduct was in good faith and such person
reasonably believed that such conduct in an official capacity with the
corporation was in the corporation's best interest or, in all other cases, that
such conduct was at least not opposed to the corporation's best interest, and,
in the case of criminal proceedings, such person had no reasonable cause to
believe that the conduct was unlawful.



     Arizona Revised Statutes sec. 10-852 requires an Arizona corporation,
unless limited by its articles of incorporation, to (1) indemnify a director who
was the prevailing party in the defense of a proceeding to which the director
was a party because the director is or was a director of the corporation against
reasonable expenses incurred by the director in connection with the proceeding
and (2) indemnify a director who is not an officer, employee or holder of more
than 5% of the outstanding shares of any class of the corporation's stock
against liability and to pay an outside director's expenses in advance of a
final disposition of a proceeding. This requirement is triggered if the director
furnishes the corporation with a written affirmation of the director's good
faith belief that the director met the standard of conduct described in sec.
10-851 and an undertaking executed personally, or on the director's behalf, to
repay the advance if it is determined that the director did not meet the
standard of conduct. Arizona Revised Statutes sec. 10-853 permits an Arizona
corporation to pay expenses incurred by any other director who is a party to a
proceeding in advance of final disposition of a proceeding if the director
furnishes the corporation the written affirmation and undertaking described
above and a determination is made by Futech's board who are not parties to the
proceeding, special legal counsel or shareholders that the facts then known
would not preclude indemnification.


     Arizona Revised Statutes sec. 10-854 permits a court to order
indemnification of a director who is a party to a proceeding upon the director's
application for indemnification to the court even if the director has not met
the statutory requirements if the director is fairly and reasonably entitled to
indemnification in view of all of the relevant circumstances.

     Arizona Revised Statutes sec. 10-856 entitles an officer who is not a
director to the mandatory and court-ordered indemnification provided by Arizona
law to directors. In addition, an officer who is not a director and employees
and agents of an Arizona corporation may be indemnified to the same extent as
directors and may be further indemnified to the extent consistent with public
policy.


     Arizona Revised Statutes sec. 10-202 provides that a corporation in its
articles of incorporation may eliminate or limit personal liability of members
of its board of directors to the corporation or its shareholders for money
damages for any action taken or any failure to take any action as a director.
However, no such provision may eliminate or limit the liability of a director
for the amount of a financial benefit received by a director to which the
director is not entitled, an intentional infliction of harm on the corporation
or its shareholders, authorizing the unlawful distribution to shareholders, or
an intentional violation of criminal law. A provision of this type has no effect
on the availability of equitable remedies, such as injunction or rescission, for
an action or failure to take any action as a director. Futech's articles of
incorporation contain such a provision.


                                       44
<PAGE>   445


     As indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers and controlling persons of Futech pursuant to
the foregoing provisions, or otherwise, Futech has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities, other than the payment by Futech of expenses incurred or paid by a
director, officer or controlling person of Futech in the successful defense of
any action, suit or proceeding, is asserted by such director, officer or
controlling person in connection with the securities being registered, Futech
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.


                                       45
<PAGE>   446

                              FUTECH STOCKHOLDERS


     The following table sets forth information regarding the beneficial
ownership of Futech's Common Stock as of the date of this prospectus/proxy
statement supplement with respect to (1) each person known by Futech to
beneficially own more than five percent of the outstanding shares of Futech's
common stock or preferred stock, (2) each director of Futech, (3) each of the
executive officers listed in the Summary Compensation Table in the
prospectus/proxy statement, and (4) all directors and executive officers of
Futech as a group.



<TABLE>
<CAPTION>
                                                               SHARES BENEFICIALLY
                                                                  OWNED PRIOR TO
                                                                   MERGER(1)(2)
                                                              ----------------------
IDENTITY OF STOCKHOLDER OR GROUP                                NUMBER       PERCENT
--------------------------------                              -----------    -------
<S>                                                           <C>            <C>
Vincent W. and Melissa Turner Goett(3)......................   83,862,263      54.6
Debra McTaggart(4)..........................................   16,256,896      17.2
R. Bradford Turner(5).......................................    6,282,695       6.6
Garry and Darilyne Goett(6).................................    7,406,765       7.8
Roderick L. Turner(7).......................................   20,117,409      20.0
Gary A. Oman(8).............................................    2,379,000       2.5
Robert J. Rosepink(9).......................................    8,500,000       8.3
Joseph K. Petter(10)........................................    1,333,334       1.4
Frederick B. Gretsch, Sr.(11)...............................    1,166,668       1.2
F. Keith Withycombe(12).....................................   30,000,000      24.1
John W. Dawson(13)..........................................   20,000,000      17.4
Paul C. Oursler(14).........................................    3,000,000       3.1
Stephen S. Stuhmer(15)......................................    2,500,000       2.6
William E. Hermes(16).......................................    2,500,000       2.6
All Directors and Executive Officers as a Group (10
  persons)..................................................  161,458,674      73.9
</TABLE>


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


  (1) Beneficial ownership is determined in accordance with the rules of the
      Securities and Exchange Commission and generally includes voting or
      investment power with respect to securities. In accordance with SEC rules,
      shares which may be acquired upon exercise of stock options which are
      currently exercisable or which become exercisable within 60 days of the
      date of the table are deemed beneficially owned by the optionee. Except as
      indicated by footnote, and subject to community property laws where
      applicable, the persons or entities named in the table above have sole
      voting and investment power with respect to all shares of common stock
      shown as beneficially owned by them.



  (2) Includes shares issuable upon the exercise of options which are currently
      exercisable or become exercisable within 60 days of October 1, 1999 as
      applicable for each of the following individuals:


      Vincent W. & Melissa Turner Goett
      Roderick L. Turner
      Robert J. Rosepink
      Joseph K. Petter
      Frederick B. Gretsch, Sr.
      F. Keith Withycombe & Patricia A. Withycombe (H&W)

      John W. Dawson


      Paul C. Oursler


      Stephen S. Stuhmer


      William E. Hermes

                                       46
<PAGE>   447


  (3) 27,100,000 share options are currently exercisable by Vincent W. Goett,
      9,950,000 options are currently exercisable jointly by Vincent and Melissa
      Goett and 7,000,000 options as well as 26 million warrants are currently
      exercisable by Palmilla Management Trust (Goett Family Trust). 2,148,011
      shares are owned of record by Vincent Goett; 1,850,000 shares are owned of
      record by Mr. Goett's spouse, Melissa Goett; 15,614,252 shares are owned
      of record jointly by Vincent and Melissa Goett; and 300,000 are owned of
      record by three minor children of the Goetts.



  (4) 4,000,000 shares are owned of record by Newtech Consulting, Inc. and
      3,634,520 shares are owned of record by Newtech Consulting, Inc./Kingdom
      Funding, which are controlled by Stephen McTaggart; 5,502,375 shares are
      owned of record by Mr. McTaggart's spouse, Debra McTaggart; 3,000,000
      shares owned of record by Pacific Ranch, LP, which is controlled by Debra
      McTaggart; and 120,000 shares are owned of record by the six minor
      children of the McTaggarts.


  (5) R. Bradford Turner is the brother-in-law of Vincent W. Goett. He owns of
      record 6,282,695 Futech shares.

  (6) 5,788,227 shares are owned of record jointly by Garry Goett and his
      spouse, Darilyne Goett, the parents of Vincent Goett; 36,000 shares are
      owned by Garry Goett. 922,731.705 shares are owned of record by Metroplex
      Properties, Inc. and 180,000 are owned by Metroplex Property, Inc.
      Restated Money Purchase Pension Plan, which is controlled by Mr. Garry
      Goett; 81,410.625 shares are owned of record by Olympic Management, Inc.,
      which is controlled by Mr. Garry Goett; 398,395.295 shares are owned of
      record by Olympic Properties, Inc., which is controlled by Mr. Garry
      Goett.


  (7) Roderick L. Turner is the father-in-law of Vincent W. Goett. 5,750,000
      options are currently exercisable by Mr. Turner. Mr. Turner has also
      converted two separate loans with Futech to shares yet-to-be received for
      a total of 4,877,898 additional shares. 900,000 shares are in a family
      trust controlled by Mr. Turner, 7,225,721 shares are owned individually,
      and 1,363,790 shares are owned by Terry C. Turner, Mr. Turner's wife.


  (8) Indicated shares are owned of record by The Oman Family Trust, of which
      Gary Oman and his wife, Sherri Oman, are trustees.


  (9) 500,000 shares are owned of record by Robert J. Rosepink. Mr. Rosepink
      currently has 8,000,000 warrants that are exercisable.


 (10) 300,000 shares are held in Joseph K. Petter's Individual Retirement
      Account, and 200,000 shares are held by Mr. Petter individually. Mr.
      Petter currently has 833,334 options that are exercisable.


 (11) Mr. Frederick B. Gretsch, Sr. currently has 1,166,668 options that are
      exercisable.



 (12) Mr. F. Keith Withycombe & Patricia A. Withycombe (H&W) currently have
      30,000,000 warrants that are exercisable.



 (13) John W. Dawson currently has 20,000,000 warrants that are exercisable.



 (14) Paul C. Oursler currently has 3,000,000 options that are exercisable.



 (15) Stephen S. Stuhman currently has 2,500,000 options that are exercisable.



 (16) William E. Hermes currently has 2,500,000 options that are exercisable.


                                       47
<PAGE>   448

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


     On October 17, 1997, Futech entered into an Agreement for Purchase and Sale
of Assets with XYZ, pursuant to which Futech has purchased substantially all of
the assets of XYZ at the closing on May 1, 1998. Mr. Billings, a Director of
Futech, was the sole shareholder of XYZ. The agreement requires Futech to pay
the following consideration: (1) $1 million in cash; (2) $4 million in a
12-month, no interest note; (3) $2,867,334 in cash or in shares of common stock
at $.20 a share; and (4) an additional $1,000,000 to be added to the total
amount, if the $4,000,000 is not paid by April 30, 1999. This additional
$1,000,000 is now due and both the $4,000,000 and the additional $1,000,000 bear
interest at 10%. Futech has paid the $1 million in cash. There is a dispute
about whether Futech had cause to terminate Mr. Billings under the related
employment agreement. As the sole shareholder of XYZ, a subchapter S
corporation, Mr. Billings received the cash and shares of common stock
constituting the purchase price for XYZ. The total amount due under this
agreement was renegotiated on September 16, 1999. See "Certain Relationships and
Related Transactions" in the main prospectus/proxy statement.


     Pursuant to the Agreement for Purchase and Sale of Assets with XYZ, Futech
assumed a $7 million line of credit from Republic Acceptance Corporation made by
XYZ. The line of credit generally bears interest at prime plus 2.5%. Mr.
Billings personally guaranteed the loan. Additionally, the loan is secured with
the inventory and accounts receivable of XYZ.


     On January 1, 1997, Futech entered an agreement which allows Vincent W.
Goett, its chief executive officer, to borrow funds from time to time. The
outstanding balance bears interest at prime plus 1% on the amounts outstanding
and is due on December 31, 2001. There is an option to renew the agreement for
an additional 3 years. As of December 31, 1998 the balance due to the Company
was $1,440,270.


     In April 1997, Roderick L. Turner, a director and shareholder loaned Futech
$350,000, with interest at 10%, due July 2, 1999. In lieu of payment, Mr. Turner
could receive 840,000 common shares at $0.50 per share. On March 1, 1999, the
lender and Futech agreed to amend the loan agreement, whereby the loan plus
interest (totaling $417,083.33) was converted to 2,780,555.533 shares of common
stock at $0.15 per share. In connection with the original loan, Futech paid Mr.
Goett $35,000 and issued 1,000,000 shares of common stock as a loan origination
fee.

     On October 29, 1997, Roderick L. Turner and Vincent W. Goett loaned Futech
$245,000, with interest at 10%, due December 31, 1997. This loan was repaid
January 14, 1998. In connection with this loan, Futech issued Mr. Goett 500,000
shares common stock as a loan origination fee.


     On April 24 and September 2, 1997, Roderick L. Turner and Vincent W. Goett
loaned Futech $3,000,000, with interest at 10%, due in 1998 and 1999. On
December 15, 1998, the lender extended this loan's due date to December 15,
1999. In connection with the loans, Futech paid Mr. Goett $300,000 and issued
7,000,000 shares of common stock as a loan origination fee.



     On January 2, 1998, Roderick L. Turner and Vincent W. Goett loaned Futech
$2,500,000, with interest at 10% due April 30, 1998. On December 15, 1998, the
lender extended this loan's due date to December 15, 1999. In connection with
this loan, Futech paid Mr. Goett $250,000 and issued 2,500,000 shares of common
stock as a loan origination fee. Later in the year the loan fee and stock were
re-characterized as a loan and stock options.


                                       48
<PAGE>   449

     On March 31, 1998, Vincent W. Goett personally guaranteed $3.6 million of a
$4 million line of credit newly established with Republic Bank. This loan
generally bears interest at a rate of prime plus 2.5% and is due and payable on
demand. In connection with this guarantee, Futech paid Mr. Goett $360,000 and
issued 7,200,000 shares of common stock as a loan origination fee. Later in the
year, the loan fee and stock were re-characterized as a loan and stock options.

     On May 5, 1998, Roderick L. Turner and Vincent W. Goett loaned Futech
$1,500,000 with interest at 10% due May 5, 2000. At the same time, Mr. Turner
and Mr. Goett signed a subordination agreement with Republic Bank to subordinate
all of their debt to Republic. In connection with the loan and the subordination
fee, Futech paid Mr. Goett $500,000 and issued 3,000,000 shares of common stock
as a loan origination fee. Later in the year, the loan fee and stock were
re-characterized as a loan and stock options.


     On June 1, 1998, Futech entered a Patent Licensing and Purchase Agreement
with Grand Slam Investments, L.L.C., which is controlled by Mr. Goett. Under the
agreement, Grand Slam grants Futech exclusive, world-wide rights to use two
patents owned by Grand Slam. Under the agreement, Futech will make 12 monthly
royalty payments of $10,000 beginning June 1, 1998. On June 30, 1999, Futech
will purchase the patents for $1,500,000. Alternatively, Futech had the right to
purchase the patents at an earlier date of December 30, 1998 for a reduced cost
of $1,000,000. This agreement was amended on December 9, 1998 and Futech agreed
to pay $650,000 on December 9, 1998 and $850,000 on or before June 1, 1999.
Additionally, the monthly royalty payments of $10,000 were suspended as of
December 31, 1998. Futech has not yet paid $831,385 of the payment that was due
to Mr. Goett on June 30, 1999. The cost of these patents to Grand Slam was
approximately $550,000. The selling price was determined by Mr. Goett based on
his belief of future, potential sales of products using the technology in the
patents.



     On June 24, 1998, Roderick L. Turner and Vincent W. Goett loaned Futech
$1,000,000, with interest at 10%, due December 24, 1998. On December 15, 1998,
the lender extended this loan's due date to December 15, 1999. In connection
with the loan, Futech paid Mr. Goett $100,000 and issued 2,000,000 shares of
common stock as a loan origination fee. Later in the year, the loan fee and
stock were re-characterized as a loan and stock options.


     On August 3, 1998, Roderick L. Turner loaned Futech $300,000, with no
interest, due upon receipt of the $2,000,000 listed below. No repayment was made
and on March 1, 1999, the lender and Futech agreed to amend the loan agreement,
whereby interest was added to the loan at 10% per annum. Additionally, on March
1, 1999, the loan plus interest (totaling $314,604.37) was converted to
2,097,342.47 shares of common stock as $0.15 per share.


     On August 10, 1998, Vincent W. and Melissa T. Goett loaned Futech
$2,000,000, with interest at 10%, due on September 1, 1999. Mr. and Mrs. Goett
agreed to extend this loans due date to May 30, 2000. In connection with the
loan, Futech paid Mr. Goett $200,000 and issued 8,000,000 shares of common stock
as a loan origination fee. Later in the year, the loan fee and stock were
re-characterized as a loan and stock options.


     On December 3, 1998, F. Keith Withycombe, a director, Patricia A.
Withycombe, Vincent W. Goett and Melissa T. Goett personally guaranteed a $7
million line of credit newly established with Bank of America. This loan
generally bears interest at prime plus 1% and is due on December 1, 2000. In
return for their personal guarantees, Mr. Withycombe and Mr. Goett each received
warrants for 21,000,000 common stock

                                       49
<PAGE>   450

shares exercisable at $0.05 per share. In addition, Mr. Withycombe became a
Director. As a finder's fee, Robert J. Rosepink, a director, received warrants
for 4,000,000 shares of common stock exercisable at $0.05 per share.
Additionally, as part of this agreement, Mr. Goett may take a loan advance of
$300,000.

     On December 15, 1998, Roderick L. Turner and Vincent W. Goett agreed to
extend the due date of their combined $8,000,000 loans, and Vince and Melissa
Goett agreed to extend the due date of the $2,000,000 loan to December 15, 1999.
In connection with this extension, Mr. Turner and the Goetts received options
for a combined 8,000,000 shares of common stock exercisable at $0.05 per share.


     On May 21, 1999, F. Keith Withycombe, a director, agreed to provide a
secured $2,000,000 line of credit to Futech. The line of credit is due on
December 1, 1999 and interest accrues at prime plus 1% per annum. Mr. Withycombe
agreed to subordinate this secured loan to the $7,000,000 loan to Futech from
Bank of America National Trust and Savings Association. As consideration for
this loan Futech agreed to issue warrants for 9,000,000 shares of Futech common
stock -- 300,000 in New Futech shares -- exercisable at $0.05 per share $1.50
per share in New Futech shares. As consideration for facilitating this loan
Futech agreed to issue Robert J. Rosepink, a director, warrants for 2,000,000
shares of Futech common stock, 66,667 shares of New Futech common stock,
exercisable at $0.05 per share -- $1.50 per share in New Futech Shares.
Additionally, Vincent W. Goett received warrants for 5,000,000 shares of Futech
common stock -- 166,667 shares of New Futech common stock -- exercisable at
$0.05 per share in New Futech shares).



     On May 31, 1999 Futech Interactive Products and Newtech Consulting,
controlled by a 4.4% shareholder, agreed to convert outstanding debt, including
interest, totaling $1,158,630.14 into $50,000 cash, a $200,000 note bearing
interest at 8% due by June 30, 1999, and 3,634,520.56 shares of Futech common
stock. Futech paid to Newtech $50,000 on May 31 and $100,000 during August 1999.
No other payments or stock issuances have been made under this agreement.



     On June 7, 1999, Fundex and Futech entered into a loan and licensing
agreement under which (a) Futech agreed to loan Fundex $250,000 upon signing the
merger Agreement, $500,000 prior to the closing of the merger, and an additional
$750,000 loan or other financial assistance as required pending the mergers, and
(b) a nonexclusive license to use Futech's game board technology pending the
mergers in exchange for a royalty equal to 50% of net operating profits from the
associated products. The debt must be repaid with interest at the rate of 10%
per annum two years after the date of this agreement. If New Futech defaults on
the promissory notes issued to the Fundex stockholders under the merger
agreement, and as a result they foreclose on the stock of New Sub, $750,000 of
the balance due under these loans will be forfeited by New Futech as a penalty.
As of August 31, Futech has loaned to Fundex $231,829 under this agreement.



     Futech signed an agreement on March 31, 1999 with Trudy that, in the event
that merger did not occur by June 1, 1999, Futech will assist in providing the
working capital needs of Trudy, if needed, to maintain sales momentum until the
closing. Its agreement also states that Futech will assure that Trudy is not in
default under any of the loan agreements, including its borrowings from First
Union Bank. Through August 31, 1999 Futech has loaned $346,730 under this
agreement.



     On August 4, 1999, John W. Dawson agreed to loan Futech a total of
$5,000,000 for working capital needs. The loan bears interest at prime plus 1%
due monthly, and the loan


                                       50
<PAGE>   451


is due December 1, 1999. In connection with the loan, Futech issued warrants for
20,000,000 shares of Futech common stock exercisable at $0.05 per share. As a
fee for facilitating this loan, Robert Rosepink, a director, received warrants
to purchase 20,000,000 shares of Futech common stock, exercisable at $0.05 per
share. As of October 1, 1999 a total of $4,350,000 has been borrowed on this
loan.


                      WHERE CAN YOU FIND MORE INFORMATION

     You may request a copy of these documents at no cost by writing to us at
the following address:
                          Futech Interactive Products, Inc.
                          2999 North 44th Street, Suite 225
                          Phoenix, Arizona 85018-7247
                          Attn: Frederick B. Gretsch, Sr.
                          Telephone: (602) 808-8765


     You should rely only on the information provided in or incorporated by
reference, and not later changed, in the prospectus/proxy statement or any
prospectus/proxy statement supplement. We have not, and New Futech and New Sub
have not, authorized anyone else to provide you with additional or different
information. New Futech and New Sub are not making an offer of any securities in
any state where the offer is not permitted. You should not assume that the
information in the prospectus/proxy statement or any prospectus/proxy statement
supplement is accurate as of any date other than the date on the front of these
documents.


                                       51
<PAGE>   452


                                                                      APPENDIX 1



                        ARIZONA BUSINESS CORPORATION ACT



                               DISSENTERS' RIGHTS



                                   ARTICLE 1.



                         DISSENT AND PAYMENT FOR SHARES



10-1301  DEFINITIONS.



     In this article, unless the context otherwise requires:



          1. "Beneficial shareholder" means the person who is a beneficial owner
     of shares held in a voting trust or by a nominee as the record shareholder.



          2. "Corporation" means the issuer of the shares held by a dissenter
     before the corporate action or the surviving or acquiring corporation by
     merger or share exchange of that issuer.



          3. "Dissenter" means a shareholder who is entitled to dissent from
     corporate action under sec.10-1302 and who exercises that right when and in
     the manner required by article 2 of this chapter.



          4. "Fair value" with respect to a dissenter's shares means the value
     of the shares immediately before the effectuation of the corporate action
     to which the dissenter objects, excluding any appreciation or depreciation
     in anticipation of the corporate action unless exclusion is inequitable.



          5. "Interest" means interest from the effective date of the corporate
     action until the date of payment at the average rate currently paid by the
     corporation on its principal bank loans or, if none, at a rate that is fair
     and equitable under the circumstances.



          6. "Record shareholder" means the person in whose names shares are
     registered in the records of a corporation or the beneficial owner of
     shares to the extent of the rights granted by a nominee certificate on file
     with a corporation.



          7. "Shareholder" means the record shareholder or the beneficial
     shareholder.



10-1302  RIGHT TO DISSENT.



     A. A shareholder is entitled to dissent from and obtain payment of the fair
value of the shareholder's shares in the event of any of the following corporate
actions:



          1. Consummation of a plan of merger to which the corporation is a
     party if either:



             (a) Shareholder approval is required for the merger by sec.10-1103
        or the articles of incorporation and if the shareholder is entitled to
        vote on the merger.



             (b) The corporation is a subsidiary that is merged with its parent
        under sec.10-1104.


                                       A-1
<PAGE>   453


          2. Consummation of a plan of share exchange to which the corporation
     is a party as the corporation whose shares will be acquired, if the
     shareholder is entitled to vote on the plan.



          3. Consummation of a sale or exchange of all or substantially all of
     the property of the corporation other than in the usual and regular course
     of business, if the shareholder is entitled to vote on the sale or
     exchange, including a sale in dissolution, but not including a sale
     pursuant to a court order or a sale for cash pursuant to a plan by which
     all or substantially all of the net proceeds of the sale will be
     distributed to the shareholders within one year after the date of sale.



          4. An amendment of the articles of incorporation that materially and
     adversely affects rights in respect to a dissenter's shares because it
     either:



             (a) Alters or abolishes a preferential right of the shares.



             (b) Creates, alters or abolishes a right in respect of redemption,
        including a provision respecting a sinking fund for the redemption or
        repurchase, of the shares.



             (c) Alters or abolishes a preemptive right of the holder of the
        shares to acquire shares or other securities.



             (d) Excludes or limits the right of the shares to vote on any
        matter or to cumulate votes other than a limitation by dilution through
        issuance of shares or other securities with similar voting rights.



             (d) Reduces the number of shares owned by the shareholder to a
        fraction of a share if the fractional share so created is to be acquired
        for cash under sec.10-604.



          5. Any corporate action taken pursuant to a shareholder vote to the
     extent the articles of incorporation, the bylaws or a resolution of the
     board of directors provides that voting or nonvoting shareholders are
     entitled to dissent and obtain payment for their shares.



     B. A shareholder entitled to dissent and obtain payment for his shares
under this chapter may not challenge the corporate action creating the
shareholder's entitlement unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.



     C. This section does not apply to the holders of shares of any class or
series if the shares of the class or series are redeemable securities issued by
a registered investment company as defined pursuant to the investment company
act of 1940 (15 United States Code sec.80a-1 through 80a-64).



     D. Unless the articles of incorporation of the corporation provide
otherwise, this section does not apply to the holders of shares of a class or
series if the shares of a class or series were registered on a national
securities exchange, were listed on the national market systems of the national
association of securities dealers automated quotation system or were held of
record by at least two thousand shareholders on the date fixed to determine the
shareholders entitled to vote on the proposed corporate action.


                                       A-2
<PAGE>   454


10-1303  DISSENT BY NOMINEES AND BENEFICIAL OWNERS.



     A. A record shareholder may asset dissenters' right as to fewer than all of
the shares registered in the record shareholder's name only if the record
shareholder dissents with respect to all shares beneficially owned by any one
person and notifies the corporation in writing of the name and address of each
person on whose behalf the record shareholder assets dissenters' rights. The
rights of a partial dissenter under this subsection are determined as if the
shares as to which the record shareholder dissents and the record shareholder's
other shares were registered in the names of different shareholders.



     B. A beneficial shareholder may assert dissenter's rights as to shares held
on the beneficial shareholder's behalf only if both:



          1. The beneficial shareholder submits to the corporation the record
     shareholder's written consent to the dissent not later than the time the
     beneficial shareholder assets dissenters' rights.



          2. The beneficial shareholder does so with respect to all shares of
     which the beneficial shareholder is the beneficial shareholder or over
     which the beneficial shareholder has the power to direct the vote.



                                   ARTICLE 2.



                 PROCEDURES FOR EXERCISE OF DISSENTERS' RIGHTS



10-1320  NOTICE OF DISSENTERS' RIGHTS.



     A. If proposed corporate action creating dissenters' right under sec.
10-1302 is submitted to a vote at a shareholders' meeting, the meeting notice
shall state that shareholders are or may be entitled to assert dissenters'
rights under this article and shall be accompanied by a copy of this article.



     B. If corporate action creating dissenters' rights under sec. 10-1302 is
taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and shall send them the dissenters' notice described in sec. 10-1322.



10-1321  NOTICE OF INTENT TO DEMAND PAYMENT.



     A. If proposed corporate action creating dissenters' rights under
sec.10-1032 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights shall both:



          1. Deliver to the corporation before the vote is taken written notice
     of the shareholder's intent to demand payment for the shareholder's shares
     if the proposed action is effectuated.



          2. Not vote the shares in favor of the proposed action.



     B. A shareholder who does not satisfy the requirements of subsection A of
this section is not entitled to payment for the shares under this article.


                                       A-3
<PAGE>   455


10-1322  DISSENTERS' NOTICE.



     A. If proposed corporate action creating dissenters' rights under
sec.10-1302 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of sec.10-1321.



     B. The dissenters' notice shall be sent no later than ten days after the
corporate action is taken and shall:



          1. State where the payment demand must be sent and where and when
     certificates for certificated shares shall be deposited.



          2. Inform holders of uncertificated shares to what extent transfer of
     the shares will be restricted after the payment demand is received.



          3. Supply a form for demanding payment that includes the date of the
     first announcement to news media or to shareholders of the terms of the
     proposed corporate action and that requires that the person asserting
     dissenters' rights certify whether or not the person acquired beneficial
     ownership of the shares before that date.



          4. Set a date by which the corporation must receive the payment
     demand, which date shall be at least thirty but not more than sixty days
     after the date the notice provided by subsection A of this section is
     delivered.



          5. Be accompanied by a copy of this article.



10-1323  DUTY TO DEMAND PAYMENT.



     A. A shareholder sent a dissenters' notice described in sec.10-1322 shall
demand payment, certify whether the shareholder acquired beneficial ownership of
the shares before the date required to be set forth in the dissenters' notice
pursuant to sec.10-1322, subsection B, paragraph 3 and deposit the shareholder's
certificates in accordance with the terms of the notice.



     B. A shareholder who demands payment and deposits the shareholder's
certificates under subsection A of this section retains all other rights of a
shareholder until these rights are canceled or modified by the taking of the
proposed corporate action.



     C. A shareholder who does not demand payment or does not deposit the
shareholder's certificates if required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
article.



10-1324  SHARE RESTRICTIONS.



     A. The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions are released under sec.10-1326.



     B. The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are canceled
or modified by the taking of the proposed corporate action.


                                       A-4
<PAGE>   456


10-1325  PAYMENT.



     A. Except as provided in sec.10-1327, as soon as the proposed corporate
action is taken, or if such action is taken without a shareholder vote, on
receipt of a payment demand, the corporation shall pay each dissenter who
complied with sec.10-1323 the amount the corporation estimates to be the fair
value of the dissenter's shares plus accrued interest.



     B. The payment shall be accompanied by all of the following:



          1. The corporation's balance sheet as of the end of a fiscal year
     ending not more than sixteen months before the date of payment, an income
     statement for that year, a statement of changes in shareholders' equity for
     that year and the latest available interim financial statements, if any.



          2. A statement of the corporation's estimate of the fair value of the
     shares.



          3. An explanation of how the interest was calculated.



          4. A statement of the dissenter's right to demand payment under
     sec.10-1328.



          5. A copy of this article.



10-1326  FAILURE TO TAKE ACTION.



     A. If the corporation does not take the proposed action within sixty days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on certain shares.



     B. If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it shall send a new
dissenters' notice under sec. 10-1322 and shall repeat the payment demand
procedure.



10-1327  AFTER-ACQUIRED SHARES.



     A. A corporation may elect to withhold payment required by sec. 10-1325
from a dissenter unless the dissenter was the beneficial owner of the shares
before the date set forth in the dissenters' notice as the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action.



     B. To the extent the corporation elects to withhold payment under
subsection A of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares plus accrued interest and shall pay
this amount to each dissenter who agrees to accept it in full satisfaction of
his demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest was
calculated and a statement of the dissenters' right to demand payment under sec.
10-1328.



10-1328  PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.



     A. A dissenter may notify the corporation in writing of the dissenter's own
estimate of the fair value of the dissenter's shares and amount of interest due
and either demand payment of the dissenter's estimate, less any payment under
sec. 10-1325, or reject the


                                       A-5
<PAGE>   457


corporation's offer under sec. 10-1327 and demand payment of the fair value of
the dissenter's shares and interest due, if either:



          1. The dissenter believes that the amount paid under sec. 10-1325 or
     offered under sec. 10-1327 is less than the fair value of the dissenter's
     shares or that the interest due is incorrectly calculated.



          2. The corporation fails to make payment under sec. 10-1325 within
     sixty days after the date set for demanding payment.



          3. The corporation, having failed to take the proposed action, does
     not return the deposited certificates or does not release the transfer
     restrictions imposed on uncertificated shares within sixty days after the
     date set for demanding payment.



     B. A dissenter waives the right to demand payment under this section unless
the dissenter notifies the corporation of the dissenter's demand in writing
under subsection A of this section within thirty days after the corporation made
or offered payment for the dissenter's shares.



                                   ARTICLE 3.



                          JUDICIAL APPRAISAL OF SHARES



10-1330  COURT ACTION.



     A. If a demand for payment under sec. 10-1328 remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and shall petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the proceeding
within the sixty day period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.



     B. The corporation shall commence the proceeding in the court in the county
where a corporation's principal officer or, if none in this state, its known
place of business is located. If the corporation is a foreign corporation
without a known place of business in this state, it shall commence the
proceeding in the county in this state where the known place of business of the
domestic corporation was located.



     C. The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to proceeding as in an action
against their shares, and all parties shall be served with a copy of the
petition. Nonresidents may be served by certified mail or by publication as
provided by the law or by the Arizona rules of civil procedure.



     D. This jurisdiction of the court in which the proceeding is commenced
under subsection B of this section is plenary and exclusive. There is no right
to trial by jury in any proceeding brought under this section. The court may
appoint a master to have the powers and authorities as are conferred on masters
by law, by the Arizona rules of civil procedure or by the order of appointment.
The master's report is subject to exceptions to be heard before the court, both
on the law and the facts. The dissenters are entitled to the same discovery
rights as parties in other civil proceedings.


                                       A-6
<PAGE>   458


     E. Each dissenter made a party to the proceeding is entitled to judgement
either:



          1. For the amount, if any, by which the court finds the fair value of
     his shares plus interest exceeds the amount paid by the corporation.



          2. For the fair value plus accrued interest of the dissenter's
     after-acquired shares for which the corporation elected to withhold payment
     under sec. 10-1327.



101331  COURT COSTS AND ATTORNEY FEES.



     A. The court in an appraisal proceeding commenced under sec. 10-1330 shall
determine all costs of the proceeding, including the reasonable compensation and
expenses of any master appointed by the court. The court shall assess the cost
against the corporation, except that the court shall assess cost against all or
some of the dissenters to the extent the court finds that the fair value does
not materially exceed the amount offered by the corporation pursuant to sec.sec.
101325 and 101327 or that the dissenters acted arbitrarily, vexatiously or not
in good faith in demanding payment under sec. 10-1328.



     B. The court may also assess the fees and expenses of attorneys and experts
for the respective parties in amounts the court finds equitable either:



          1. Against the corporation and in favor of any or all dissenters if
     the court finds that the corporation did not substantially comply with the
     requirements of article 2 of this chapter.



          2. Against the dissenter and in favor of the corporation if the court
     finds that the fair value does not materially exceed the amount offered by
     the corporation pursuant to sec.sec. 10-1325 and 10-1327.



          3. Against either the corporation or a dissenter in favor of any other
     party if the court finds that the party against whom the fees and expenses
     are assessed acted arbitrarily, vexatiously or not in good faith with
     respect to the rights provided by this chapter.



     C. If the court finds that the services of an attorney for any dissenter
were of substantial benefit to other dissenters similarly situated and that the
fees for those services should not be assessed against the corporation, the
court may award to these attorneys reasonable fees to be paid out of the amounts
awarded the dissenters who were benefitted.


                                       A-7
<PAGE>   459

                           JANEX INTERNATIONAL, INC.
                     C/O FUTECH INTERACTIVE PRODUCTS, INC.
                             2999 NORTH 44TH STREET
                                   SUITE 225
                          PHOENIX, ARIZONA 85018-7247
                           -------------------------

                   NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
                         TO BE HELD             , 1999
                           -------------------------

     You are invited to attend a Special Meeting of Stockholders of Janex
International, Inc. that will be held at           a.m. local time on
1999 at           . The Janex board of directors has called this special meeting
for the following purposes:

     - To consider and vote upon a proposal to approve and adopt the Merger
       Agreement dated as of June 7, 1999, by and among Janex, Futech
       Interactive Products, Inc., Trudy Corporation, Fundex Games, Ltd., DaMert
       Company, and two newly formed companies that we are referring to as "New
       Futech" and "New Sub." Under the Merger Agreement, first Futech and then
       Janex, Trudy, and DaMert will merge with and into New Futech, which will
       survive the merger, and Fundex will merge into New Sub, which will
       survive as a wholly-owned subsidiary of New Futech. Each share of Janex
       common stock outstanding immediately prior to the mergers (other than
       dissenting shares) will be converted into the right to receive
       approximately 0.0333 shares of New Futech common stock. The outstanding
       preferred stock of Janex, all of which is owned by Futech, will be
       cancelled in the mergers but has been valued on the same basis as the
       Janex common stock.

     - To transact such other business as may properly come before the special
       meeting or any adjournment or postponement of the special meeting.

     These matters are more fully described in the prospectus/proxy statement
supplement and related prospectus/proxy statement that are attached to this
Notice.

     We, the board of directors of Janex, unanimously recommend that you vote
FOR the mergers.

     You will be entitled to vote at the special meeting or any adjournment or
postponement of the special meeting only if you are a holder of record of Janex
common stock at the close of business on           , 1999.

                                  BY ORDER OF THE BOARD OF DIRECTORS

                                  Vincent W. Goett
                                  Chairman
Phoenix, Arizona
          , 1999

                                   IMPORTANT

     We cordially invite all stockholders to attend the special meeting in
person.

     Whether or not you plan to attend the special meeting in person, in order
to assure your representation at the meeting, we urge you to complete, sign and
date the enclosed proxy card, which is being solicited by the board of
directors, and promptly return it in the self-addressed return envelope enclosed
for that purpose. You may revoke your proxy at any time prior to the vote at the
meeting by telling us that you want to do so.
<PAGE>   460


                  Subject to Completion, Dated October 8, 1999



                  FUTECH INTERACTIVE PRODUCTS (DELAWARE) INC.


                           FUTECH TOYS & GAMES, INC.


                           JANEX INTERNATIONAL, INC.



                     Prospectus/Proxy Statement Supplement



     The board of directors of Janex International, Inc. has called a special
meeting of stockholders to consider and vote upon a proposal to (a) merge Futech
Interactive Products, Inc. with Futech Interactive Products (Delaware) Inc., a
newly-formed company, so that New Futech is a Delaware corporation, (b) merge
Janex and two other companies into New Futech, and (c) merge a fourth company
into a subsidiary so that it becomes a subsidiary of New Futech. This
prospectus/proxy statement supplement and the accompanying prospectus/proxy
statement are intended to give you important information about the special
meeting and about the proposed mergers and the combined company that would
result from the mergers. PLEASE READ THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS/PROXY STATEMENT TOGETHER WITH EACH OTHER AS IF
THEY WERE A SINGLE DOCUMENT. THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT ALONE
DOES NOT INCLUDE ALL OF THE INFORMATION THAT WE BELIEVE MAY BE IMPORTANT TO YOU.



     Under the merger agreement, first Futech and then Janex, Trudy Corporation,
and DaMert Company will merge with and into New Futech, and Fundex Games, Ltd.
will merge into the newly formed subsidiary, Futech Toys & Games, Inc. ("New
Sub"), which will survive as a wholly-owned subsidiary of New Futech. Each share
of outstanding stock of any of the merging companies immediately prior to the
mergers, other than dissenting shares, is expected to be converted into the
right to receive cash, shares of New Futech stock, promissory notes of New
Futech or New Sub, or a combination of these things, in the amounts specified on
the cover page of the prospectus/proxy statement, but subject to changes in
accordance with the elections and conditional rights described under
"Description of the Mergers and the Merger Agreement" in the prospectus/proxy
statement beginning at page 12. The table does not include outstanding options
and warrants of Futech, Janex and Fundex which would be converted into New
Futech options and warrants in the mergers.



     We expect the New Futech common stock to trade on the OTC Bulletin Board or
on other markets after the mergers, but we cannot be sure it will do so and we
cannot predict what the price might be. We do not expect a trading market to
develop for any of the other securities of New Futech or New Sub. On
             , 1999, the closing price of a share of Janex common stock, as
reported on the OTC Bulletin Board, was $          .



     THESE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROSPECTUS/PROXY STATEMENT
SUPPLEMENT AND THE RELATED PROSPECTUS/PROXY STATEMENT. THE PROPOSED MERGERS ARE
COMPLEX TRANSACTIONS. WE STRONGLY URGE YOU TO READ AND CONSIDER CAREFULLY THIS
PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE PROSPECTUS/PROXY STATEMENT IN
THEIR ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO UNDER "RISK FACTORS"
BEGINNING ON PAGE 6 OF THE PROSPECTUS/PROXY STATEMENT.



     Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus/proxy statement supplement or the accompanying prospectus/proxy
statement is truthful or complete. Any representation to the contrary is a
criminal offense.



     This prospectus/proxy statement supplement and the related prospectus/proxy
statement are first being mailed to stockholders of Futech, Janex, Trudy, Fundex
and DaMert on or about              , 1999.



 The date of this prospectus/proxy statement supplement is             , 1999.

<PAGE>   461

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS/PROXY STATEMENT. WE HAVE NOT, AND NEW FUTECH AND NEW SUB HAVE NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. NEW FUTECH AND NEW SUB ARE NOT MAKING AN OFFER TO SELL THESE SECURITIES IN
ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME
THAT THE INFORMATION APPEARING IN THIS PROSPECTUS PROXY/ STATEMENT SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS/PROXY STATEMENT IS ACCURATE AS OF THE DATE ON
THE FRONT OF THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT ONLY. OUR BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE
THAT DATE.

                      WHERE YOU CAN FIND MORE INFORMATION


     We will send to you, without charge, any material information that we have
or can obtain without unreasonable effort or expense concerning Janex or any
other merging company, concerning the merger agreement and related contracts or
concerning the proposed management and operations of New Futech. You may direct
requests for such additional information to Janex in the manner described below.


     We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http.//www.sec.gov. You may also read and copy
any document we file at the SEC's public reference rooms in Washington, D.C.,
New York, and Chicago. You can call the SEC at 1-800-732-0330 for further
information about the public reference rooms. Similar information is available
concerning Trudy.

     The SEC allows us to "incorporate by reference" some of the information we
file with them, which means we are assumed to have disclosed important
information to you when we refer you to documents that are on file with the SEC.
The information we have incorporated by reference is an important part of this
prospectus/proxy statement supplement and the related prospectus/proxy
statement, and information that we file later with the SEC will automatically
update and supersede this information. We incorporate by reference the documents
listed below and any future documents we file with the SEC under Sections 13(a),
13(c), l4 or 15(d) of the Securities Exchange Act of 1934 until the mergers
occur.

     - Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998.

     - Quarterly Report on Form 10-QSB for the quarter ended March 31, 1999.

     - Current Reports on Form 8-K dated February 25, 1999.

     You may request a copy of these documents at no cost by writing to us at
the following address:
                           Janex International, Inc.
                     c/o Futech Interactive Products, Inc.
                       2999 North 44th Street, Suite 225
                          Phoenix, Arizona 85018-7247
                               Attn: Brian Young
                            Telephone: 602-808-8765

     TO OBTAIN TIMELY DELIVERY OF THESE DOCUMENTS, YOU MUST MAKE YOUR REQUEST NO
LATER THAN              , 1999, FIVE BUSINESS DAYS BEFORE THE DATE OF THE JANEX
STOCKHOLDERS MEETING.

                                        i
<PAGE>   462

                               TABLE OF CONTENTS


<TABLE>
<S>                                                             <C>
Summary Information -- Q&A..................................       1
Other Information About the Mergers.........................       4
  The Companies.............................................       4
  The Special Meeting.......................................       4
  The Merger Agreement......................................       4
Stockholder Matters.........................................       5
The Mergers and Related Transactions........................       6
  General...................................................       6
  Effects of the Mergers....................................       6
  Background of the Merger..................................       7
  Reasons for the Merger....................................       7
  Janex's Board Recommendation..............................       8
  Related Agreements; Interests of Certain Janex Affiliates
     in the Merger..........................................       8
  Regulatory Matters........................................       8
  Federal Income Tax Consequences...........................       9
  Accounting Treatment......................................      10
Rights of Dissenting Stockholders...........................      10
New Futech and Janex Shares.................................      12
  New Futech Common Stock...................................      12
  Janex Capital Stock.......................................      12
Comparison of the Rights of Holders of Janex Common Stock
  and New Futech Common Stock...............................      13
Management's Discussion and Analysis or Plan of Operation...      20
  Overview..................................................      20
  Results of Operations of the Company......................      20
  Seasonality and Quarterly Fluctuations....................      23
  Liquidity and Capital Resources...........................      24
  Inflation.................................................      26
  Year 2000.................................................      26
  Safe Harbor Disclosure: Forward-Looking Statements and
     Associated Risks.......................................      26
Description of Janex's Business.............................      27
  Business..................................................      27
  Marketing, Distribution and Customers.....................      28
  Manufacturing.............................................      30
  Product Design and Selection..............................      30
  Competition...............................................      31
  Patents, Trademarks and Licenses..........................      32
  Backlog...................................................      33
</TABLE>


                                       ii
<PAGE>   463

<TABLE>
<S>                                                             <C>
  Governmental Regulations..................................      33
  Properties................................................      33
  Legal Proceedings.........................................      34
  Employees.................................................      34
Janex Management............................................      35
  Directors and Executive Officers..........................      35
  Employment Arrangements...................................      36
Janex Stockholders..........................................      36
  Security Ownership of Certain Beneficial Owners and
     Management.............................................      36
Certain Relationships and Related Transactions..............      37
Changes in and Disagreements with Accountants on Accounting
  and Financial Disclosure..................................      38
Appendices
Appendix 1 - Section 7-113-102 Dissenters' Rights of
  Colorado Business Corporation Act.........................     A-1
</TABLE>


                                       iii
<PAGE>   464

                           SUMMARY INFORMATION -- Q&A


     This summary highlights selected information from this document and may not
contain all the information that is important to you. For a more complete
understanding of the mergers, you should carefully read the prospectus/proxy
statement and this prospectus/proxy statement supplement and the additional
documents we mention. You should pay special attention to the "Risk Factors"
section beginning on page 6 of the prospectus/proxy statement.


WHY ARE THE FIVE COMPANIES PROPOSING TO MERGE?


     The five companies are proposing to merge because the directors of each
company believe the combination will provide significant benefits to
stockholders. We believe the mergers will enable us to take advantage of the
complementary strategic fit of our respective businesses by marketing through
additional channels of distribution. We also hope and believe the mergers will
improve the likelihood that stockholders will have a more liquid market should
they wish to sell their stock and that the combined companies will be able to
more efficiently access the markets for debt and equity when appropriate. To
review the background and reasons for the mergers in greater detail, see
"Background of the Mergers" in the prospectus/proxy statement.


WHAT WILL I RECEIVE IN THE MERGERS?


     You and all Janex stockholders will receive common stock of New Futech in
exchange for your Janex stock. Stockholders of the other merging companies will
receive cash, promissory notes and common stock of New Futech. Certain
employment contracts and other agreements with affiliates of the merging
companies are also part of the deal. See "Description of the Mergers and the
Merger Agreement" in the prospectus/proxy statement.


WHAT RISKS SHOULD I CONSIDER?


     You should review "Risk Factors" beginning on page 6 of the
prospectus/proxy statement.


WHAT STOCKHOLDER VOTE IS REQUIRED TO APPROVE THE MERGERS?

     The following table shows the proportions of the outstanding shares that
must vote in favor of the mergers, together with the proportion of the
outstanding shares that are held by directors, executive officers and their
affiliates, the majority of whom have indicated that they intend to vote in
favor of the mergers.


<TABLE>
<CAPTION>
                          SHARES OWNED BY DIRECTORS,
COMPANY   VOTE REQUIRED   EX. OFFICERS & AFFILIATES
-------   -------------   --------------------------
<S>       <C>             <C>
DaMert     Majority                 100.0%
Fundex     Majority                  70.8%
Futech     Majority                  56.4%
Janex      Majority                  79.2%
Trudy      Majority                  60.9%
</TABLE>



     The presence in person or by proxy of a majority of the outstanding shares
of each company constitutes a quorum for business to be conducted at the
meeting. Abstentions and broker non-votes will be treated as present for
purposes of determining a quorum for


                                        1
<PAGE>   465


each company's stockholders' meeting, but since they will not be counted as
votes in favor of the merger, they will have the same effect as votes against
the merger.


WHAT CIRCUMSTANCES MIGHT PREVENT THE MERGERS?


     New Futech has the right to terminate the merger agreement if stockholders
from all of the merging companies combined exercise dissenters' rights with
respect to more than 5% of the aggregate merger consideration to be issued in
the mergers. See "Description of the Mergers and the Merger
Agreement -- Conditions to Closing" in the prospectus/proxy statement for a
description of the other conditions to the mergers.


HOW WILL THE MERGERS BE TREATED FOR ACCOUNTING PURPOSES?

     We expect the mergers to be treated as purchases by Futech, which means
that the amount by which the total merger consideration received by stockholders
of the other merging companies plus the amount of their liabilities exceeds the
fair market value of their identifiable assets will initially be treated as
goodwill by New Futech for accounting purposes.

WHEN DO YOU EXPECT THE MERGERS TO BE COMPLETED?


     We are working to complete the mergers during the third quarter of 1999.
However, the merger agreement does not include any express deadline for the
mergers to proceed.


WHAT ARE THE TAX CONSEQUENCES OF THE MERGERS TO ME?


     We and the other merging companies have structured the merger agreement
with the intent and expectation that a gain or loss will be recognized by Janex
shareholders upon the exchange of shares. Gain or loss will also be recognized
by the other stockholders with respect to the portion of the merger
consideration to them that consists of cash (including cash in lieu of
fractional shares), or promissory notes, or certain other property of New Futech
or New Sub. You should review the more detailed description of federal tax
consequences that appear on pages 11 through 12 of this prospectus/proxy
statement supplement. State and local taxes may also become due as a result of
the mergers.


     The precise tax consequences of the mergers will depend on your own
situation. You should consult your tax advisor for a full understanding of the
tax consequences of the mergers to you.

WILL I HAVE DISSENTERS' RIGHTS?


     Yes, provided you do not vote in favor of the mergers and meet all other
requirements of the dissenter's rights statute. See "Rights of Dissenting
Stockholders" on pages 12 through 13 of this prospectus/proxy statement and the
Colorado dissenters' rights statute which is attached as Appendix 1 to this
supplement.



HOW DO I VOTE AND HOW ARE THE VOTES COUNTED?


     Just indicate on your proxy card how you want to vote on the mergers, and
sign and mail it in the enclosed return envelope as soon as possible, so that
your shares will be represented at the stockholders meeting.


     If you sign and send in your proxy and do not indicate how you want to
vote, your proxy will be counted as a vote in favor of the mergers. If you do
not vote, because you do


                                        2
<PAGE>   466


not return the proxy, give instructions to your broker, or vote in person, or
you abstain, it will have the same effect as a vote against the mergers.



     The stockholders meeting will take place on                , at      local
time, at                . You may attend the stockholders meeting and vote your
shares in person, rather than signing and mailing your proxy card. In addition,
you may withdraw or revoke your proxy at any time up to and including the day of
the meeting by giving written notice to the Secretary of Janex, by returning a
later dated proxy, or by attending the meeting and voting in person.



     The votes will be tabulated by the Secretary of Janex or by such other
person as the President of Janex may designate.


IF MY SHARES OF JANEX STOCK ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY
BROKER VOTE MY SHARES FOR ME?

     Your broker will vote your shares of Janex stock only if you provide
instructions on how to vote. Without instructions, your shares will not be
voted. Shares that are not voted will have the same effect as votes against the
mergers.

SHOULD I SEND IN MY STOCK CERTIFICATES NOW?

     No. After the mergers are completed we will send you written instructions
for exchanging your stock certificates for the New Futech stock to which you are
entitled.

                                        3
<PAGE>   467

                      OTHER INFORMATION ABOUT THE MERGERS

THE COMPANIES


     Each of Futech, Janex, Trudy, Damert, Fundex, New Futech and New Sub are
described in the "Summary" and "New Futech's Business" sections of the
prospectus/proxy statement.



THE SPECIAL MEETING


DATE, TIME AND PLACE

     The Janex special meeting will be held on      , at      at
               .

PURPOSE OF THE SPECIAL MEETING


     We have called the special meeting so the Janex stockholders can vote on
whether to approve the mergers pursuant to the merger agreement. The directors
of Futech, Trudy, Fundex and DaMert have called for special meetings of the
stockholders of their companies so that they also can vote whether to approve
the mergers.


RECOMMENDATION OF THE JANEX BOARD OF DIRECTORS


     We have unanimously approved the merger agreement and unanimously recommend
that the stockholders of Janex vote "For" approval of the merger agreement.


THE MERGER AGREEMENT


     Under the merger agreement, first Futech and then Janex, Trudy, and DaMert
will merge with and into New Futech, which will survive the mergers, and Fundex
will merge into New Sub, which will survive as a wholly-owned subsidiary of New
Futech. Under the merger agreement, Janex stockholders who do not exercise
dissenters' rights will receive common stock of New Futech as described in the
prospectus/proxy statement under the heading "Description of the Mergers and the
Merger Agreement -- Basic Terms of the Merger Agreement." Stockholders of Fundex
and Trudy will also have certain conditional rights to receive additional stock
or to exchange their New Futech stock for promissory notes or certain other
assets under specified circumstances. See "Description of the Mergers and the
Merger Agreement -- Basic Terms of the Merger Agreement."


                                        4
<PAGE>   468

                              STOCKHOLDER MATTERS


     Janex common stock began trading on the National Association of Securities
Dealers Automated Quotation System, or NASDAQ, on October 16, 1989, and was
quoted on NASDAQ until July 17, 1997, when it was deleted from NASDAQ, as a
consequence of Janex's failure to meet the minimum capital and surplus
requirements for continued listing. Janex common stock is now traded on the OTC
Bulletin Board under the symbol "JANX." Janex preferred stock is not traded. The
following table sets forth the high and low bid prices per share for the Janex
common stock for each fiscal quarter from January 1, 1997, through June 30,
1999, as reported by the National Association of Securities Dealers and the OTC
Bulletin Board and as adjusted to reflect the conversion of the shares of Janex
stock not held by Futech into shares of common stock of New Futech in the
mergers. The historical quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and do not necessarily represent actual
transactions. On June 4, 1999, the day before the Merger Agreement was signed,
the closing price of the Janex common stock was $0.23 per share.



<TABLE>
<CAPTION>
                                                               HISTORICAL
                                                                 PRICES
                                                              -------------
JANEX COMMON STOCK                                            HIGH     LOW
------------------                                            -----    ----
<S>                                                           <C>      <C>
Year Ended December 31, 1997
  1st Quarter...............................................  $1.44    $.56
  2nd Quarter...............................................    .75     .31
  3rd Quarter...............................................    .69     .05
  4th Quarter...............................................    .55     .13
Year Ended December 31, 1998
  1st Quarter...............................................  $ .63    $.14
  2nd Quarter...............................................    .53     .17
  3rd Quarter...............................................    .23     .06
  4th Quarter...............................................    .38     .12
Year Ending December 31, 1999
  1st Quarter...............................................  $ .35    $.17
  2nd Quarter...............................................    .27     .16
  3rd Quarter...............................................    .19     .08
</TABLE>



     As of July 31, 1999, there were approximately 780 Janex common stockholders
and one Janex preferred stockholder of record, as shown on the records of its
transfer agent.


     Janex has not paid dividends on its common stock and does not anticipate
paying dividends in the foreseeable future. If the mergers do not occur for any
reason, we anticipate that all earnings, in the foreseeable future, will be
retained for development of Janex's business.

                                        5
<PAGE>   469

                      THE MERGERS AND RELATED TRANSACTIONS

GENERAL


     The merger agreement provides for the merger of Futech into New Futech,
promptly followed by the substantially simultaneous merger of Janex, Trudy and
DaMert with and into New Futech and the substantially simultaneous merger of
Fundex with and into New Sub. The discussion in this prospectus/proxy statement
supplement and the related prospectus/proxy statement of the mergers and the
description of the principal terms of the merger agreement contained in the
prospectus/proxy statement are subject to and qualified in their entirety by
reference to the merger agreement, a copy of which is attached to the
prospectus/proxy statement as Appendix A.


EFFECTS OF THE MERGER

GENERAL


     We intend for the mergers to occur promptly following approval of the
mergers by the requisite vote of the stockholders of each of Janex, Futech,
Trudy, DaMert and Fundex and the satisfaction or waiver of all other conditions
to consummation of the mergers. The mergers will become effective at or about
the time of filing of articles of merger or other appropriate documents with the
applicable government offices or agencies. At that time Futech will
reincorporate in Delaware by merging with New Futech and then Janex, Trudy and
DaMert will merge with and into New Futech with the result that New Futech will
be the surviving corporation. Then, Fundex will merge with and into New Sub with
the result that New Sub will be the surviving wholly owned subsidiary of New
Futech. As part of the mergers, New Futech will change its name to "Futech
Interactive Products, Inc." The stockholders of Janex will become stockholders
of New Futech, and their rights will be governed by the New Futech certificate
of incorporation and bylaws. See "Comparison of Rights of Stockholders of Janex
and New Futech." See "Description of the Mergers and the Merger Agreement" in
the prospectus/proxy statement.



     For information regarding the operation of New Futech and New Sub following
the mergers, see "Description of New Futech's Business" in the prospectus/proxy
statement. For information regarding the officers and directors of New Futech
following the mergers, see "New Futech's Management" in the prospectus/proxy
statement.



EXCHANGE RATIOS



     Each share of Janex common stock outstanding immediately prior to the
mergers, other than dissenting shares, will be converted into the right to
receive approximately 0.0333 shares of New Futech common stock.



     Outstanding shares of Futech, DaMert, Fundex and Trudy will also be
converted into a combination of cash, common stock of New Futech and promissory
notes of New Futech or New Sub. Under certain circumstances the former
stockholders of Fundex will have the right to exchange their New Futech stock
for the license rights in the "Phase 10" family of games now owned by Fundex.
Under other circumstances the former stockholders of Trudy will have the right
to receive additional New Futech stock or to exchange their New Futech stock for
unsecured five year debentures. In addition, outstanding options for shares of
Trudy, Futech, Janex and Fundex will be converted into options for shares of
common stock of New Futech. See "Description of the Mergers and the Merger
Agreement -- Basic Terms of the Merger Agreement" in the prospectus/proxy
statement.


                                        6
<PAGE>   470


FRACTIONAL SHARES



     Fractional shares of New Futech common stock will be issued in the mergers.


BACKGROUND OF THE MERGER

     In April of 1998, Mr. Vince Goett, Chairman of Futech, telephoned Les
Friedland, President of Janex, to express an interest in a possible merger of
the two companies, and business synergies.


     In early August 1998, Mr. Goett arranged for Les Friedland, Daniel Lesnick,
Michael Handelman and Janex counsel to visit the Futech offices in Phoenix.
During the meeting the possibilities of a merger between the two companies were
discussed, as well as a review of the financial condition of Janex. By the end
of the meeting, the parties entered into a tentative agreement and counsel for
Futech drafted a term sheet.



     From the visit to the Futech office in Phoenix, negotiations continued
regarding the acquisition of shares and debt. The negotiations culminated in a
Letter of Intent dated August 24, 1998.



     From August 30 to September 2, 1998 members of Futech, including Fred
Gretsch, Mel Sauder, Joe Petter and outside counsel, visited the office of Janex
to perform due diligence procedures.



     The actual stock purchase and sale agreement with Futech was signed on
September 30, 1998.



     On May 27, 1999, the Futech board of directors approved the merger
agreement.


REASONS FOR THE MERGER


     For the year ended December 31, 1998, net sales declined to $3,117,599, as
compared to $5,596,979 for the year ended December 31, 1997, a decrease of
$2,479,380 or 44.3% as a result of a decrease in sales volume. For the six
months ended June 30, 1999, net sales declined to $244,935, as compared to
$2,200,625 for the six months ended June 30, 1998, a decrease of $1,955,690 or
88.9%. The decline in revenues for both six-month periods was the result of a
decrease in sales volume. The decline in revenues has resulted in Janex
experiencing recurring losses from operations, negative cash flows and decreases
in working capital. Without additional cash availability, Janex will be unable
to develop new products, acquire new licenses or fund overhead and debt
repayment. As a small, de-listed company, Janex has found it difficult to raise
capital. Janex has been unable to provide its stockholders liquidity for its
stock.



     Recognizing the need for additional operating capital, Janex raised
$600,000 from the sale of common stock in two private placements during 1996 and
1997. As 1997 progressed, however, management concluded this would not be enough
to fund continuing operations, so three shareholders of Janex gave personal
guarantees to establish a $400,000 line of credit with a bank. This action was
intended to provide working capital for a short period of time while management
looked for an eligible buyer of the company. During the summer of 1998, they
found a potential buyer in Florida, however that company was unable to raise
enough cash to acquire or merge with Janex. Subsequently, management decided the
best offer for acquisition or merger was with Futech.


                                        7
<PAGE>   471


     Management believes that the merger will provide many advantages that Janex
would not otherwise experience in the normal course of business. Additionally,
we believe the combined company will posses the ability to raise public capital
for the following reasons:



     - The new entity will have a broader product line;



     - A large, existing distribution facility is already in place with one of
       the companies in the merger;



     - The combined company is larger and will have much larger revenues;



     - We will have a more diverse product presentation to mass retailers;


     - Current Futech patented technology to be incorporated into existing and
       future product lines;


     - New technology provided through on-going research and development has not
       been available to Janex, and will be available after the merger;



     - We will have greater access to popular key licensed characters to be
       incorporated into existing and future product lines;



     - We will have greater access to more experienced and deeper management;
       and



     - The combined company will have Broader company strength to withstand
       potential competitor aggression that is designed to eliminate smaller
       competition, such as Janex.



     Management also hopes that the merger will enable Janex shareholders to be
provided liquidity for their New Futech stock resulting from New Futech becoming
a public corporation with actively traded securities. It is expected that the
New Futech common stock will trade on the OTC Bulletin Board following the
merger. Management further hopes that within a period of time, New Futech will
be listed on the NASDAQ market upon achieving the minimum requirements of
NASDAQ, and that upon listing, will further improve shareholder liquidity.



     For additional information regarding the background of and reasons for the
merger, see "Specific Reasons for Previous Acquisitions and Proposed Merger
Partners" in the prospectus/proxy statement.


JANEX'S BOARD RECOMMENDATION


     The board of directors of Janex has determined that the mergers are
advisable and in the best interests of Janex and its stockholders and has
recommended a vote for approval of the merger proposal.


RELATED AGREEMENTS; INTERESTS OF CERTAIN JANEX AFFILIATES IN THE MERGER


     In connection with the mergers, New Futech will repay certain promissory
notes of Futech to the former stockholders of Janex in the principal amount of
$750,000, and will also repay certain bank debt. See "Certain Relationships and
Related Transactions" in this prospectus/proxy statement supplement and the
corresponding section in the prospectus/proxy statement.


REGULATORY MATTERS

     Except as disclosed in this prospectus/proxy statement supplement and the
prospectus/proxy statement, Janex and New Futech are not aware of any
governmental or

                                        8
<PAGE>   472

regulatory approvals required for consummation of the mergers, other than
compliance with the federal securities laws and applicable securities and "blue
sky" laws of the various states.


FEDERAL INCOME TAX CONSEQUENCES


     In the opinion of Quarles & Brady LLP, special tax counsel to New Futech,


     (1) the merger of Janex into New Futech will be treated for federal income
tax purposes as reorganization as to New Futech within the meaning of Section
368(a) of the Internal Revenue Code and New Futech and Janex will each be a
party to that reorganization within the meaning of Section 368(b) of the
Internal Revenue Code; and



     (2) the federal income tax consequences described herein to the extent that
they constitute matters of law or legal conclusions are correct in all material
respects.



     In rendering its opinion, our tax counsel has relied upon and assumed as
accurate and correct, both now and as of the effective time of the merger, the
information contained in this prospectus/proxy statement supplement and the
related prospectus/proxy statement and our representations as to factual matters
made by Futech, New Futech and Janex. The representations relied upon include
that Futech, prior to the effective time of the mergers and within a 12 month
period, has acquired by purchase within the meaning of Section 338(h)(3) of the
Internal Revenue Code, stock of Janex representing at least 80% of the voting
power of the stock of Janex and having a value equal to at least 80% of the
total value of the stock of Janex. Any inaccuracy or change with respect to this
information or these representations or any actions by Futech, New Futech or
Janex contrary to these representations, could adversely affect the conclusions
reached in the opinion and the tax summary set forth below.



     The opinion represents our tax counsel's best legal judgement as to the tax
treatment of the merger, but the opinion is not binding on the Internal Revenue
Service. The parties have not and will not request a ruling from the Service in
connection with the federal income tax consequences of the merger. The following
summary of material United States federal income tax consequences of the merger
is based upon the conclusions reached in our tax counsel's opinion.



     Based on the provisions of the Internal Revenue Code, the applicable
regulations thereunder, judicial authority and current administrative rulings
and practices as of the date hereof, all of which are subject to change,
possibly with retroactive effect:



     (1) no gain or loss will be recognized by Futech, New Futech or Janex as a
result of the merger; and



     (2) with respect to holders of Janex common stock other than Futech or New
Futech:


     (A) gain or loss will be recognized by such holders of Janex common stock
upon conversion of their shares of Janex common stock into shares of New Futech
common stock pursuant to the merger measured by the difference between the fair
market value of the New Futech common stock received and the adjusted tax basis
of the Janex common stock exchanged for it;


     (B) the tax basis of the shares of New Futech common stock into which
shares of Janex common stock are converted will be equal to the fair market
value of such New Futech common stock at the effective time of the merger;


                                        9
<PAGE>   473


     (C) the holding period for shares of New Futech common stock into which
shares of Janex common stock are converted will begin at the effective time of
the merger; and



     (D) the gain or loss recognized will be long term capital gain or loss
provided the Janex common stock was held as a capital asset for more than 12
months.



     If a trading market develops for New Futech common stock within a
reasonable period after the merger, the fair market value of the New Futech
common stock should be based on the selling price of New Futech common stock in
the market. If no selling prices for New Futech common stock are available, then
the fair market value of New Futech common should be determined taking into
account all of the facts and circumstances, including the selling price of Janex
common stock on a market before the merger, if such selling prices are
available, and New Futech's net worth, prospective earning power, dividend
paying capacity and other relevant factors.



     THIS TAX CONSEQUENCE DISCUSSION IS INTENDED ONLY AS A DESCRIPTION OF THE
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. IT IS NOT A COMPLETE
ANALYSIS OR DESCRIPTION OF ALL POTENTIAL TAX EFFECTS OF THE MERGER. The
discussion does not address all of the tax consequences that may be relevant to
particular taxpayers in light of their personal circumstances or to taxpayers
subject to special treatment under the Code, such as, insurance companies,
financial institutions, dealers in securities, tax exempt organizations, foreign
corporations, foreign partnerships, or other foreign entities and individuals
who are not citizens or residents of the United States and persons who acquired
their New Futech common stock pursuant to the exercise or termination of
employee stock options, warrants or otherwise as compensation.



     No information is provided in this tax consequences discussion with respect
to the tax consequences, if any, of the merger under applicable foreign, state,
local and other tax laws.



     THIS TAX CONSEQUENCE SUMMARY IS NOT INTENDED TO BE, NOR SHOULD IT BE
CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER OF JANEX COMMON
STOCK. EACH HOLDER OF JANEX COMMON STOCK IS URGED TO CONSULT THEIR OWN TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO THE HOLDER OF THE MERGER,
INCLUDING THE APPLICATION OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.


ACCOUNTING TREATMENT

     The mergers are intended to qualify as a purchase for accounting purposes.
Under this accounting treatment, the amount by which the total merger
consideration received by stockholders of the other merging companies plus the
amount of their liabilities exceeds the fair market value of their identifiable
assets will initially be treated as goodwill by New Futech for accounting
purposes.

                       RIGHTS OF DISSENTING STOCKHOLDERS


     Pursuant to Sections 7-113-101 through 7-113-302 of the Colorado Business
Corporation Act ("CBCA"), copies of which are attached to this prospectus/proxy
statement supplement as Appendix 1, stockholders of Janex may dissent from, and
obtain payment of the fair value of their Janex shares in the event of the
consummation of the mergers. If properly exercised, dissenters' rights give a
stockholder who objects to the mergers the right to demand the fair value of his
or her Janex shares in cash. The fair value of a dissenting stockholder's stock
is the value of such shares immediately before the


                                       10
<PAGE>   474


effective date of the mergers, excluding any appreciation or depreciation in
anticipation of the mergers except to the extent that exclusion would be
inequitable. The process of determining fair value is described below. A Janex
stockholder who wishes to assert dissenters' rights in connection with the
mergers must:



     (1) deliver to Janex, before a vote of the stockholders of Janex is taken
with respect to the mergers, written notice of the stockholder's intent to
demand payment for the stockholder's Janex shares if the mergers are
effectuated; and



     (2) not vote in favor of the merger proposal.


     If the merger proposal is approved at the Janex special meeting and if the
other conditions of the mergers are satisfied or waived, Janex will deliver a
written dissenters' notice to all Janex stockholders who have satisfied the
requirements described above to assert those rights. Janex will send the
dissenters' notice no later than ten days after the mergers are effectuated.

     The dissenters' notice delivered by Janex will:


     (1) state that the mergers were authorized and the effective date or
proposed effective date of the mergers;



     (2) state an address at which Janex will receive payment demands and an
address at which certificates for Janex shares must be deposited;



     (3) include a form for demanding payment; and



     (4) set a date by which Janex must receive the payment demand and by which
certificates for Janex shares must be deposited at the address for such deposits
in the dissenters' notice, which date may not be less than 30 days after the
date the dissenters' notice is given. Additionally, Janex may require that when
a record holder of Janex shares dissents with respect to the shares held by any
one or more beneficial owners of Janex shares, each beneficial owner of Janex
shares must certify to Janex that both such beneficial owner and the record
holder of Janex shares beneficially owned by such beneficial owner have asserted
dissenters' rights as to all such Janex shares. If Janex so requires, the
dissenters' notice will state this requirement. The dissenters' notice will
include a copy of the CBCA Sections 7-113-101 through 7-113-302.


     A Janex stockholder to whom a dissenters' notice is sent and who wishes to
exercise dissenters' rights must:


          (1) demand payment on the form provided and within the time period set
     forth in the dissenters' notice; and



          (2) deposit certificates for Janex shares in accordance with the terms
     of the dissenters' notice. A stockholder of Janex who demands payment as
     described above retains all rights of a stockholder of Janex, except the
     right to transfer the shares, until the effective time of the mergers and
     thereafter has only the right to receive the fair value of his or her Janex
     shares.



     Upon receipt of a payment demand or on the effective date of the mergers,
whichever is later, New Futech shall pay each dissenting Janex stockholder who
has made a proper demand for payment the amount New Futech estimates to be the
fair value of such stockholder's shares, plus accrued interest. A dissenting
Janex stockholder who does not agree with New Futech's estimation of the fair
value of the dissenting stockholder's Janex shares or the amount of interest
due, must notify New Futech of his or her estimate within 30 days after New
Futech made payment for such shares, in accordance with


                                       11
<PAGE>   475


Section 7-113-209 of the CBCA. If a dissenting Janex stockholder and New Futech
cannot agree upon the fair value of the shares or the amount of interest due,
New Futech may, within 60 days after receiving the notice of disagreement from
the dissenting stockholder, commence a proceeding and petition the appropriate
court to determine the fair value of the dissenting stockholder's shares and the
amount of interest due. If New Futech does not commence such a proceeding within
the 60-day period, New Futech must pay each dissenting stockholder whose demand
remains unsolved the amount demanded. The court may appoint one or more persons
as appraisers to receive evidence and recommend a decision on the question of
fair value. The court may consider all factors it deems relevant, including the
factors considered and conclusions reached by the appraisers it appoints, in
determining the fair value of the dissenter's shares. The court may determine
the fair value to be more than, less than or equal to the consideration that the
dissenting stockholder would otherwise be entitled to receive pursuant to the
merger agreement.



     A stockholder of Janex who does not demand payment and deposit certificates
as required is not entitled to payment under CBCA Sections 7-113-101 through
7-113-302.


                          NEW FUTECH AND JANEX SHARES

NEW FUTECH COMMON STOCK


     For a description of New Futech common stock and its authorized but
unissued preferred stock, see "Description of New Futech Capital Stock" in the
prospectus/proxy statement.


JANEX CAPITAL STOCK


     The following description of Janex's capital stock is a summary only and is
subject to, and qualified in its entirety by, reference to Janex's articles of
incorporation and bylaws, copies of which are included as exhibits to the
registration statement of which this prospectus/proxy statement supplement is a
part, and by reference to Colorado law under which Janex is incorporated.


COMMON STOCK


     As of October 1, 1999, there were 18,098,750 shares of Janex common stock
outstanding which were held of record by approximately 781 stockholders. Janex's
common stock is traded on the OTC Bulletin Board (under the symbol "JANX"). To
Janex's knowledge, no dealer makes a market in Janex's shares. Quotes for Janex
shares on the OTC Bulletin Board are relatively infrequent. Janex has not paid
any dividends on its common stock. The merger agreement provides that Janex will
not declare or pay any dividend without the prior written approval of New
Futech.


PREFERRED STOCK


     As of October 1, 1999, there were 5,000,000 shares of Janex preferred stock
outstanding which were held of record by one stockholder.


                                       12
<PAGE>   476

         COMPARISON OF THE RIGHTS OF HOLDERS OF JANEX COMMON STOCK AND
                            NEW FUTECH COMMON STOCK


     Janex is a Colorado corporation and the rights of its stockholders are
governed by CBCA and the articles of incorporation and bylaws of Janex. New
Futech is a Delaware corporation and the rights of it stockholders are governed
by the Delaware General Corporation Law ("DGCL") and the certificate of
incorporation and bylaws of New Futech. By the merger agreement, the Janex
stockholders will become New Futech stockholders and as such their rights will
be governed by the DGCL and the New Futech certificate of incorporation and
bylaws.


SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF COLORADO AND DELAWARE

     The corporation laws of Colorado and Delaware differ in many respects.
Although all the differences are not set forth in this prospectus/proxy
statement supplement, provisions which could materially affect the rights of
stockholders are discussed below.

REMOVAL OF DIRECTORS


<TABLE>
<S>                                                    <C>
Colorado                                               Delaware
A director of a corporation that does not have a       A director of a corporation that does not have a
staggered board of directors or cumulative             classified board or cumulative voting may be
voting may be removed with or without cause with       removed with or without cause with approval of
the approval of a majority of the outstanding          the majority of the outstanding shares entitled
shares entitled to vote at an election of              to vote at an election of directors. In the case
directors. In the case of a Colorado corporation       of a Delaware corporation having cumulative
having cumulative voting, if less than the             voting, if less than the entire board is to be
entire board is to be removed, a director may          removed, a director may not be removed without
not be removed if the number of shares voted           cause if the number of shares voted against such
against such removal would be sufficient to            removal would be sufficient to elect the
elect the director under cumulative voting.            director under cumulative voting. A director of
Janex does not have a staggered board or               a corporation with a classified board of
cumulative voting.                                     directors may be removed only for cause, unless
                                                       the certificate of incorporation otherwise
                                                       provides. The certificate of incorporation and
                                                       bylaws of New Futech provide for a classified
                                                       board of directors, but not for cumulative
                                                       voting.
</TABLE>


CLASSIFIED BOARD OF DIRECTORS


     A classified, the term in Delaware, or staggered board is one on which a
specified number, but not all, of the directors are elected on a rotating basis
each year. This method of electing directors makes changes in the composition of
the board of directors more difficult, and thus a change in control of a
corporation is potentially a lengthier and more difficult process.


                                       13
<PAGE>   477


<TABLE>
<S>                                                    <C>
Colorado                                               Delaware
Colorado law permits, but does not require, a          Delaware law permits, but does not require, a
staggered board of directors, by which the             classified board of directors, by which the
directors can be divided into as many as three         directors can be divided into as many as three
classes with staggered terms of office, with           classes with staggered terms of office, with
only one class of directors standing for               only one class of directors standing for
election each year. The Janex articles of              election each year. The New Futech certificate
incorporation and bylaws do not provide for a          of incorporation and bylaws provide for a
staggered board.                                       classified board, consisting of three classes
                                                       with three directors in each class.
</TABLE>


INDEMNIFICATION AND LIMITATION OF LIABILITY


     Delaware and Colorado have similar laws respecting indemnification by a
corporation of its officers, directors, employees and other agents. The laws of
both states also permit, with certain exceptions, a corporation to adopt a
provision in its articles of incorporation or certificate of incorporation, as
the case may be, eliminating the liability of a director to the corporation or
its stockholders for monetary damages for breach of the director's fiduciary
duty. There are, nonetheless, differences between the laws of the two states
respecting indemnification and limitation of liability.



<TABLE>
<S>                                                    <C>
Colorado                                               Delaware
The articles of incorporation of Janex eliminate       The certificate of incorporation of New Futech
the liability of directors of the corporation to       also eliminates the liability of directors to
the fullest extent permissible under Colorado          the corporation or its stockholders for monetary
law. Colorado law prohibits the elimination of         damages for breach of fiduciary duty as a
monetary liability where such liability is based       director to the fullest extent permissible under
on:                                                    Delaware law. Under Delaware law, such provision
                                                       may not eliminate or limit director monetary
- breaches of the director's duty of loyalty to        liability for:
  the corporation or its stockholders,
                                                       - breaches of the director's duty of loyalty to
- acts or omissions not in good faith or                 the corporation or its stockholders,
  involving intentional misconduct or knowing
  violations of law,                                   - acts or omissions not in good faith or
                                                         involving intentional misconduct or knowing
- in the case of conduct in an official capacity         violations of law,
  with the corporation, acts or omissions not in
  the best interest of the corporation, and in         - the payment of unlawful dividends or unlawful
  all other cases acts or omissions contrary to          stock repurchases or redemptions, or
  the best interests of the corporation,
                                                       - transactions in which the director received an
- receipt of an improper personal benefit,               improper personal benefit.
- liability for improper distributions, loans or       Such limitation of liability provisions also may
  guarantees.                                          not limit a director's liability for violation
                                                       of or otherwise relieve directors from the
Colorado law generally permits indemnifi-              necessity of complying with federal or state
                                                       securities laws, or affect
</TABLE>


                                       14
<PAGE>   478

<TABLE>
<S>                                                    <C>
cation of director expenses, including                 the availability of non-monetary remedies such
attorneys' fees, actually and reasonably               as injunctive relief or rescission.
incurred in the defense or settlement of a
derivative or third-party action, provided there       Delaware law generally permits indemnification
is a determination by a majority vote of a             of expenses, including attorneys' fees, actually
disinterested quorum of the directors, by              and reasonably incurred in the defense or
independent legal counsel or by a majority vote        settlement of a derivative or third-party
of the stockholders that the person seeking            action, provided there is a determination by a
indemnification acted in good faith and in a           majority vote of disinterested directors, by
manner reasonably believed to be in the best           independent legal counsel or by a majority vote
interests of the corporation. Colorado law             of the stockholders that the person seeking
requires indemnification of director expenses          indemnification acted in good faith and in a
when the individual being indemnified has              manner reasonably believed to be in or not
successfully defended any action, claim, or            opposed to the best interest of the corporation.
issue on the merits or otherwise.                      Delaware law requires indemnification of
                                                       expenses when the individual being indemnified
                                                       has successfully, defended any action, claim,
                                                       issue, or matter therein, on the merits or
                                                       otherwise.
                                                       Delaware law also permits a Delaware corporation
                                                       to provide indemnification in excess of that
                                                       provided by statute.
                                                       A provision of Delaware law states that the
                                                       indemnification provided by statute shall not be
                                                       deemed exclusive of any other rights under any
                                                       bylaw, agreement, vote of stockholders or
                                                       disinterested directors or otherwise.
</TABLE>



     Both Colorado and Delaware law require indemnification when the individual
has defended successfully the action on the merits or otherwise.


     Expenses incurred by an officer or director in defending an action may be
paid in advance, under Colorado law and Delaware law, if such director or
officer undertakes to repay such amounts if it is ultimately determined that he
or she is not entitled to indemnification. In addition, the laws of both states
authorize a corporation's purchase of indemnity insurance for the benefit of its
officers, directors, employees and agents whether or not the corporation would
have the power to indemnify against the liability covered by the policy.

INSPECTION OF STOCKHOLDER LIST

     Both Delaware and Colorado law allow any stockholder to inspect the
stockholder list for a purpose reasonably related to such person's interests as
a stockholder.

DIVIDENDS AND REPURCHASES OF SHARES


<TABLE>
<S>                                                    <C>
Colorado                                               Delaware
Colorado law dispenses with the concepts of par        Delaware law permits a corporation to declare
value of shares as well as statutory definitions       and pay dividends out of surplus or if there is
of capital, surplus and the like.                      no surplus, out of net profits for
</TABLE>


                                       15
<PAGE>   479

<TABLE>
<S>                                                    <C>
The concepts of par value, capital and surplus         the fiscal year as long as the amount of capital
are retained under Delaware law. Colorado law          of the corporation following the declaration and
permits a corporation to declare and pay               payment of the dividend is not less than the
dividends unless, after giving it effect:              aggregate amount of the capital represented by
                                                       the issued and outstanding stock of all classes
- the corporation would not be able to pay its         having preference upon the distribution of
  debts as they become due in the usual course         assets. In addition, Delaware law generally
  of business, or                                      provides that a corporation may redeem or
                                                       repurchase its shares only if the capital of the
- the corporation's total assets would be less         corporation is not impaired and such redemption
  than the sum of its total liabilities plus,          or repurchase would not impair the capital of
  unless the articles of incorporation permit          the corporation.
  otherwise, the amount that would be needed, if
  the corporation were to be dissolved at the
  time of the distribution, to satisfy the
  preferential rights upon dissolution of
  stockholders whose preferential rights are
  superior to those receiving the distribution.
</TABLE>


STOCKHOLDER VOTING


<TABLE>
<S>                                                    <C>
Colorado                                               Delaware
Generally requires that a majority of the              Generally requires that a majority of the
shareholders of both acquiring and target              shareholders of both acquiring and target
corporations approve statutory mergers.                corporations approve statutory mergers.
Does not require a stockholder vote of the             Does not require a stockholder vote of the
surviving corporation in a merger if:                  surviving corporation in a merger, unless the
                                                       corporation provides otherwise in its
- the merger agreement does not amend the              certificate of incorporation, if:
  existing articles of incorporation,
                                                       - the merger agreement does not amend the
- each stockholder of the surviving corpo-               existing certificate of incorporation,
  ration whose shares were outstanding
  immediately before the merger will hold the          - each share of the stock of the surviving
  same number of shares, with identical                  corporation outstanding immediately before the
  designations, preferences, limitations and             effective date of the merger is to be an
  relative rights immediately after the merger,          identical outstanding or treasury share of the
                                                         surviving corporation after the merger, and
- the number of voting shares outstanding
  immediately after the merger, plus the number        - either no shares of common stock of the
  of voting shares issuable as a result of the           surviving corporation and no shares,
  merger or by the exercise of rights and                securities or obligations convertible into
  warrants issued pursuant to the merger, will           such stock are to be issued or delivered under
  not exceed by more than twenty percent the             the plan of merger, or the authorized unissued
  total number of shares of the surviving                shares or the treasury shares of common stock
  corporation outstanding immediately before the         of the surviving corporation to be issued or
  merger, and                                            delivered under the plan of merger plus those
                                                         initially issuable upon conversion of any
</TABLE>


                                       16
<PAGE>   480

<TABLE>
<S>                                                    <C>
- the number of participating shares, shares             other shares, securities or obligations to be
  that entitle their holders to participate              issued or delivered under such plan do not
  without limitation on distributions,                   exceed twenty percent of the shares of common
  outstanding immediately after the merger, plus         stock of the surviving corporation outstanding
  the number of participating shares issuable as         immediately prior to the effective date of the
  a result of the merger either by the                   merger.
  conversion of securities issued pursuant to
  the merger or by the exercise of rights and
  warrants issued pursuant to the merger, will
  not exceed by more than twenty percent the
  total number of participating shares
  outstanding immediately before the merger.
</TABLE>


     Both Delaware and Colorado law also require that a sale of all or
substantially all of the assets of a corporation be approved by a majority of
the outstanding voting shares of the corporation transferring such assets.


     Both Colorado and Delaware law generally do not require class voting,
except in transactions involving an amendment to the certificate of
incorporation that adversely affect a specific class of shares or where the
class of securities designates such a right.


STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS UNDER DELAWARE LAW


     In recent years, a number of states have adopted special laws designed to
make certain kinds of "unfriendly" corporate takeovers, or other transactions
involving a corporation and one or more of its significant stockholders, more
difficult. Under Section 203 of the DBCL, certain "business combinations" with
"interested stockholders" of Delaware corporations are subject to a three-year
moratorium unless specified conditions are met.



     Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the date
that such person or entity becomes an interested stockholder. With some
exceptions, an interested stockholder is a person or entity who or which owns,
individually or with or through certain other persons or entities, fifteen
percent or more of the corporation's outstanding voting stock, including any
rights to acquire stock pursuant to an option, warrant, agreement, arrangement
or understanding, or upon the exercise of conversion or exchange rights, and
stock with respect to which the person has voting rights only, or is an
affiliate or associate of the corporation and was the owner, individually or
with or through certain other persons or entities, of fifteen percent or more of
such voting stock at any time within the previous three years, or is an
affiliate or associate of any of the foregoing.



     For purposes of Section 203, the term "business combination" is defined
broadly to include:



     - mergers with or caused by the interested stockholder;



     - sales or other dispositions to the interested stockholder, except
       proportionately with the corporation's other stockholders, of assets of
       the corporation or a direct or indirect majority-owned subsidiary equal
       in aggregate market value of ten percent or more of the aggregate market
       value of either the corporation's consolidated assets or all of its
       outstanding stock;


                                       17
<PAGE>   481


     - the issuance or transfer by the corporation or a direct or indirect
       majority-owned subsidiary of stock of the corporation or such subsidiary
       to the interested stockholder, except for some transfers in a conversion
       or exchange or a pro rata distribution or certain other transactions,
       none of which increase the interested stockholder's proportionate
       ownership of any class or series of the corporation's or such
       subsidiary's stock or of the corporation's voting stock; or



     - receipt by the interested stockholder, except proportionately as a
       stockholder, directly or indirectly, of any loans, advances, guarantees,
       pledges or other financial benefits provided by or through the
       corporation or a subsidiary.


     The three-year moratorium imposed on business combinations by Section 203
does not apply if:

     - prior to the date on which such stockholder becomes an interested
       stockholder the board of directors approves either the business
       combination or the transaction that resulted in the person or entity
       becoming an interested stockholder,


     - upon consummation of the transaction that made him or her an interested
       stockholder, the interested stockholder owns at least eighty-five percent
       of the corporation's voting stock outstanding at the time the transaction
       commenced, excluding from the eighty-five percent calculation shares
       owned by directors who are also officers of the target corporation and
       shares held by employee stock plans that do not give employee
       participants the right to decide confidentially whether to accept a
       tender or exchange offer, or


     - on or after the date such person or entity becomes an interested
       stockholder, the board approves the business combination and it is also
       approved at a stockholder meeting by sixty-six and two-thirds percent of
       the outstanding voting stock not owned by the interested stockholder.

     Section 203 only applies to certain publicly held corporations that have a
class of voting stock that is:

     - listed on a national securities exchange,

     - quoted on an interdealer quotation system of a registered national
       securities association, or

     - held of record by more than 2,000 stockholders.


     Under some circumstances, Section 203 of the Delaware General Corporate Law
may make it more difficult for a person who would be an "interested stockholder"
to effect various business combinations with a corporation for a three year
period.



     There is no provision in the CBCA equivalent to Section 203 of the DGCL.


INTERESTED DIRECTOR TRANSACTIONS


     Under both Delaware and Colorado law, contracts or transactions in which
one or more of a corporation's directors has an interest, are not void or
voidable because of such interest provided that conditions, such as obtaining
the required approval and fulfilling the requirements of good faith and full
disclosure, are met. Subject to particular exceptions, the conditions are
similar under Delaware and Colorado law. Under Delaware and Colorado law, (a)
either the stockholders or the board of directors must approve any such contract
or transaction after full disclosure of the material facts, and, in the case of
board approval, the contract or transaction must also be "fair" to the
corporation, or (b) the


                                       18
<PAGE>   482


contract or transaction must have been fair as to the corporation at the time it
was approved. If board approval is sought, the contract or transaction must be
approved by a majority vote of a quorum of the directors, without counting the
vote of any interested directors, except that interested directors may be
counted for purposes of establishing a quorum.


APPRAISAL/DISSENTERS' RIGHTS


     Under both Delaware and Colorado law, stockholders of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal/dissenters' rights by which such
shareholder may receive cash in the amount of the fair market value of his or
her shares in lieu of the consideration he or she would otherwise receive in the
transactions. Under both Delaware and Colorado law, such fair market value is
determined exclusive of any element of value arising from the accomplishment or
expectation of the merger or consolidation.



<TABLE>
<S>                                                    <C>
Colorado                                               Delaware
Dissenters' rights are not available (a) with          Appraisal rights are not available (a) with
respect to the sale of all or substantially all        respect to the sale of all or substantially all
of the assets of the corporation or a merger if        of the assets of a corporation, (b) with respect
no vote of the stockholders is required to             to a merger or consolidation by a corporation
approve the transaction under Colorado law, or         the shares of which are either listed on a
(b) to stockholders of shares which either were        national securities exchange, designated as a
listed on a national securities exchange               national market system security on an
registered under the federal Securities and            interdealer quotation system by the National
Exchange Act of 1934 or on the national market         Association of Securities Dealers, Inc. or are
system of the National Association of Securities       held of record by more than 2,000 holders, if
Dealers Automated System or were held of record        such stockholders receive only shares of the
by more than 2,000 holders, if such stockholders       surviving corporation or shares of any other
receive only shares of the surviving corporation       corporation that are either listed on a national
or shares of any other corporation that are            securities exchange, designated as a national
either listed on a national securities exchange        market system security on an interdealer
registered under the federal Securities Act of         quotation system by the National Association of
1934 or on the national market system of the           Securities Dealers, Inc. or held of record by
National Association of Securities Dealers             more than 2,000 holders, plus cash in lieu of
Automated Quotation System or held of record by        fractional shares of such corporations, or (c)
more than 2,000 holders, plus cash in lieu of          to stockholders of a corporation surviving a
record by more than 2,000 holders, plus cash in        merger if no vote of the stockholders of the
lieu of fractional shares.                             surviving corporation is required to approve the
                                                       merger under Delaware law.
</TABLE>


                                       19
<PAGE>   483

           MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


     The following discussion should be read in conjunction with Janex's audited
consolidated financial statements and notes thereto appearing elsewhere in the
prospectus.


OVERVIEW


     Incorporated in 1986, Janex currently develops, manufactures and markets a
combination of functional children's products, toys and novelty gift items,
through its Janex and Malibu lines.


RESULTS OF OPERATIONS OF THE COMPANY

     The following table sets forth, for the periods indicated, the relative
percentage that certain income and expense items bear to net sales.

                                       20
<PAGE>   484


<TABLE>
<CAPTION>
                                                        YEARS ENDED                                 SIX MONTHS ENDED
                                       ---------------------------------------------   ------------------------------------------
                                         DECEMBER 31, 1997       DECEMBER 31, 1998        JUNE 30, 1998          JUNE 30, 1999
                                       ---------------------   ---------------------   --------------------   -------------------
                                         AMOUNT      PERCENT     AMOUNT      PERCENT     AMOUNT     PERCENT    AMOUNT     PERCENT
                                       -----------   -------   -----------   -------   ----------   -------   ---------   -------
<S>                                    <C>           <C>       <C>           <C>       <C>          <C>       <C>         <C>
Net Sales............................  $ 5,596,979    100.0%   $ 3,117,599    100.0%   $2,200,625    100.0%   $ 244,935    100.0
Cost of Sales........................    3,354,114     59.9      1,663,627     52.4     1,124,523     51.1      201,909     82.4
Royalties............................      651,422     11.6        380,969     12.2       221,925     10.1        6,152      2.5
                                       -----------    -----    -----------    -----    ----------    -----    ---------   ------
Gross Profit.........................    1,591,443     28.5      1,103,003     35.4       854,177     38.8       36,874     15.1
Selling, general and administrative
  expenses...........................    2,208,106     39.5      1,755,882     56.3       762,900     34.7      354,108    144.6
Depreciation and amortization........      551,951      9.9        376,283     12.1       162,263      7.4      148,956     60.8
Write-off of goodwill and intangible
  assets.............................    1,643,386     29.3             --       --            --       --           --       --
                                       -----------    -----    -----------    -----    ----------    -----    ---------   ------
Operating income (loss)..............   (2,812,000)   (50.2)    (1,029,162)   (33.0)      (70,986)    (3.3)    (466,190)  (190.3)
Other expense........................      359,303     (6.4)       248,432     (8.0)     (107,771)    (4.9)     (14,011)    (5.7)
                                       -----------    -----    -----------    -----    ----------    -----    ---------   ------
Loss before taxes....................   (3,171,303)   (56.6)    (1,277,594)   (41.0)     (178,757)    (8.2)    (480,201)  (196.0)
Income tax expense...................        3,548     (0.1)         5,746     (0.1)        5,900       .2        4,725      1.9
                                       -----------    -----    -----------    -----    ----------    -----    ---------   ------
Net income (loss)....................  $(3,174,851)   (56.7)   $(1,283,340)   (41.1)   $ (184,657)    (8.4)   $(484,926)  (197.9)
                                       ===========    =====    ===========    =====    ==========    =====    =========   ======
</TABLE>


                                       21
<PAGE>   485


SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998



     For six months ended June 30, 1999, net sales decreased significantly by
$1,955,690 or 88.9%, to $244,935, as compared to net sales of $2,200,625 for the
six months ended June 30, 1998, as a result of a decrease in sales volume. The
significant decrease in net sales is a direct result of the changeover in new
management. The resulting relocation of Janex's headquarters and a major change
in sales representative groups had a direct negative impact on net sales for the
six months ended June 30, 1999.



     As of June 30, 1999, Janex had a backlog of unfilled orders of
approximately $200,000 comparable with its order backlog of approximately
$1,200,000 as of June 30, 1998. Although Janex has noted a general decrease in
order flow in 1999, as compared to prior years, the present backlog is not
necessarily indicative of net sales to be expected for the full fiscal year
ending December 31, 1999.



     For the six months ended June 30, 1999, gross profit was $36,874 or 15.1%
of net sales, as compared to $854,177 or 38.8% of net sales for the six months
ended June 30, 1998. Janex typically establishes prices to obtain a target gross
margin ranging from 45% to 50%, but overall gross margin can vary depending on
the sales mix in each period. The decrease in gross margin in 1999, as compared
to 1998, was the result of Janex deciding to close out certain slow-moving
inventory at little or no profit and price adjustments due to competition.



     For the six months ended June 30, 1999, royalty expense was $6,152 or 2.5%
of net sales, as compared to $221,925 or 10.1% of net sales for the six months
ended June 30, 1998. The decrease in royalty expense in 1999, as compared to
1998, was a result of a shift in the sales mix to a higher proportion of
non-royalty sales, which include the Wet Pet line.



     For the six months ended June 30, 1999, selling, general and administrative
("SG&A") expenses decreased by $408,792 or 53.6%, to $354,108 or 144.6% of net
sales, as compared to $762,900 or 34.7% of net sales for the six months ended
June 30, 1998. SG&A expenses are comprised of fixed overhead costs and variable
selling expenses. The decrease in SG&A expenses is a direct result of
management's continuing effort to reduce fixed overhead costs.


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


     Sales for the year ended December 31, 1998, were $3,117,599, as compared to
$5,596,979 for the year ended December 31, 1997, a decrease of $2,479,380 or
44.3% as a result of a decrease in sales volume. Management believes the sales
decrease resulted from a number of factors. Many of Janex's customers had
inventory carry-overs from 1997 and were reluctant to place large orders for
shipment for 1998. In addition, approvals on product designs from certain
licensors were provided on an untimely basis, delaying manufacturing. And
finally, there was a significantly reduced demand for products incorporating a
licensed character.



     The net loss for the year ended December 31, 1998, was $1,283,340 or $0.13
per share, compared to a net loss of $3,174,851 or $0.55 per share for the year
ended December 31, 1997. However, the significant net loss for 1997 was due in
part to Janex's write-off of certain intangible assets, consisting of
trademarks, licensing arrangements and goodwill, amounting to $1,643,386.
Without these write-offs, the company's net losses for 1997 would have been
$1,531,465, or $0.27 per share.


                                       22
<PAGE>   486


     Sales during the year ended December 31, 1998, were primarily from shipment
of products from the Malibu product line. The Wet Pets product line generated
sales of $1,798,866 or 57.7% of total sales in 1998. This compares to sales for
the year ended December 31, 1997, of $2,817,410 or 50.3% of total sales.
Shipment of products incorporating characters licensed from the Walt Disney
Company generated sales of $62,243 or 2.0% of total sales, and the shipment of
products incorporating characters licensed from Warner Bros. generated sales of
$95,366 or 3.1% of total sales. This compares to sales during the year ended
December 31, 1997, when licenses from the Walt Disney Company generated sales of
$628,184 or 11.2% of total sales, and licenses from Warner Bros. generated
$1,361,780 or 24.3% of total sales.



     Royalty expense was $380,969 for the year ended December 31, 1998, or 12.2%
of sales, as compared to royalties of $651,422, or 11.6% of sales, for the year
ended December 31, 1997. The increase in royalties as a percentage of sales is a
result of a significant shift in the sales mix to a higher proportion of
non-royalty sales, including the Wet Pet products, which resulted in a reduction
of royalty expense that was offset by a charge to operations of $197,880 to meet
royalty guarantees made on contracts under which insufficient product sales were
generated to meet the minimum guarantees through December 31, 1998.


     Gross profit of $1,103,003 was 35.4% of total sales for the year ended
December 31, 1998, as compared to $1,591,443 or 28.5% of sales for the year
ended December 31, 1997. Gross profits fell in 1998 because of significantly
lower sales but margins improved because sales of lower margin products were
more substantially affected. The gross profit for both 1998 and 1997 was
negatively affected by the write down of inventories of approximately $299,000
and $50,000 during those years, respectively.


     SG&A expenses were $1,755,882 or 56.3% of sales for the year ended December
31, 1998, as compared to $2,208,106 or 39.5% of sales for the year ended
December 31, 1997. SG&A expenses are comprised of fixed overhead costs and
variable selling costs. SG&A expenses increased as a percentage of sales due to
the significant decrease in sales volume in 1998 over that of 1997.



     Interest expense for the year ended December 31, 1998, was $260,533 or 8.4%
of sales as compared to $389,401 or 7.0% of the sales for the year ended
December 31, 1997. The decrease was primarily attributable to the decrease of
imputed interest charges on notes payable to related parties. For 1998, the
charge was $116,863, as compared to $214,292 for 1997. The decrease was slightly
offset by an increase in the use of Janex's credit facilities to finance
operations during peak business periods as a result of the overall decrease in
sales during the year.



     Depreciation expense for the year ended December 31, 1998, was $376,283 or
12.1% of sales, as compared to $551,951 or 9.9% of sales for the year ended
December 31, 1997. Due to historical operating losses and limited working
capital, Janex's ability to acquire new fixed assets has decreased. As a result,
depreciation expense has declined.


SEASONALITY AND QUARTERLY FLUCTUATIONS


     Janex's business historically tended to generate the greater part of both
sales and profits during the Christmas selling season. However, with the
significant shift of sales relating to the Wet Pet line, approximately 50% of
shipping has taken place between January and March.


                                       23
<PAGE>   487

LIQUIDITY AND CAPITAL RESOURCES


     Janex believes that its existing cash balance together with its existing
lines of credit and projected cash flow from operations will not be sufficient
to fund projected order flow, overhead and debt repayment for the fiscal year
ending December 31, 1999. Janex has experienced recurring losses from
operations, negative cash flows and decreases in working capital.



     Janex's ultimate ability to continue as a going concern depends on: (1) the
market acceptance of its products; (2) its generation of operating profits; (3)
its creation of a sustainable positive cash flow; and (4) obtaining additional
financial resources to provide near term operating cash. Management believes
that the financial resources from its majority shareholder, Futech, in addition
to sales generated from new product lines that it is developing, will allow
Janex to continue in operation for fiscal year 1999.



     Janex had negative cash flow from operating activities of $967,064 for the
six months ended June 30, 1999, as compared to a negative operating cash flow
for the six months ended June 30, 1998 of $69,985, as declining sales have led
to lower accounts receivable collections in 1999.



     During the six months ended June 30, 1999, the Company incurred additions
to product development costs of $30,615. This compares to additions to tooling
and molds related to new licenses of $54,702 and additions to product
development costs of $80,042 for the six months ended June 30.



     Janex generated $950,169 from financing activities during the six months
ended June 30, 1999 compared to $77,893 during the same period in 1998. The cash
generated in financing activities came from proceeds of advances from parent of
$950,169.



     Janex had negative cash flow from operating activities of $666,007 for the
year ended December 31, 1998, compared to a positive cash flow in 1997 of
$323,180, as declining sales have led to lower accounts receivable collections
in 1998.



     Janex used $96,031 in investing activities for the year ended December 31,
1998, compared to providing $103,018 in 1997. The increase in cash used in
investing activities relates primarily to a slight decrease in expenditures to
build tools and molds and to develop new products. During 1998, Janex invested
$81,567 in additions to property, plant and equipment, all of which was for
tooling for new products, and Janex invested $114,464 in product development
costs. Additionally, in 1998, Janex redeemed $100,000 of its certificate of
deposit. During 1997, Janex made comparable investments of $190,898 in property,
plant and equipment, of which approximately $174,499 was for tooling for new
products, and Janex invested $106,084 in product development costs.
Additionally, Janex redeemed $400,000 of its certificate of deposit.



     Janex generated $659,778 from financing activities during the year ended
December 31, 1998, compared to using $448,142 during 1997. The cash generated in
financing activities came primarily from an increase in bank debt of $257,000, a
decrease in note payable of $219,189, a decrease in loan payable-agent of
$249,113 and offset by proceeds of advances from parent of $621,080 and proceeds
of issuance of common stock of $250,000.



     Janex's capital commitments for 1999 include commitments for minimum
guaranteed royalties under licensing agreements. The commitments for 1999 and
2000 amount to $268,959 and $35,000, respectively. Janex also maintains a
non-cancelable operating lease on its former facility, although it subleases
that space for an amount approximating Janex's


                                       24
<PAGE>   488

rent to the landlord. Future minimum payments under this lease are $102,000 per
year for each of 1999 and 2000.


     On December 11, 1998, Futech purchased 5,219,046 shares of common stock and
$1,480,783 of stockholder loans, including interest of $250,784, to Janex from
certain of Janex's majority stockholders. Subsequently, the shareholder loans
were converted into 8,011,645 shares of common stock and 5,000,000 shares of
preferred stock. After such conversion, Futech owns approximately 79% of Janex's
outstanding stock.



     Until December, 1998, Janex had the ability to borrow up to $900,000 under
a revolving credit agreement with a significant stockholder of Janex that
expires on October 19, 1999. The revolving credit agreement bears interest at
9.5% payable quarterly. The revolving credit agreement is secured by all of the
assets of Janex, and the guarantee of Janex. As additional consideration, on
April 19, 1996, Janex granted the lender warrants to purchase up to 900,000
shares of Janex's common stock, exercisable at a price of $1.45 per share
through April 19, 2000. Janex has used $150,000 under the revolving credit
agreement as security to issue a stand-by letter of credit in connection with
the loan payable to Janex's Hong Kong agent. This agreement ended and all
warrants were canceled on December 11, 1998, in connection with Futech's
acquisition of a significant portion of Janex's common stock.



     In connection with Janex International Inc.'s acquisition of Janex
Corporation in 1993, Janex issued promissory notes to two stockholders totaling
$1,000,000, payable in semi-annual installments over a three-year period. On
June 28, 1996, the note holders agreed to extend the payment date for all
remaining payments to February 1, 1998, subject to payment of interest at the
rate of 9.5% per annum, retroactive to January 1, 1996. On August 4, 1997, the
note holders agreed to further extend the payment date to February 1, 1999.
Quarterly interest payments commenced on September 1, 1996. In connection with
the extension of the notes, Janex entered into a warrant agreement with each of
the note holders, providing for the issuance of up to 282,994 warrants to one of
them and up to 167,994 warrants to the other, to acquire a total of 450,998
shares of Janex's common stock, exercisable at a price of $1.45 per share
through June 28, 2000. The warrants vest in six-month increments over the term
of the loan, and if the loan is paid off early, certain of the warrants will be
void. The agreement ended and all warrants were canceled on December 11, 1998,
in connection with Futech's acquisition of these two stockholder's common stock.



     Janex charged to operations $116,863 and $214,292 of imputed interest
expense from the issuance of stock purchase warrants noted above for the years
ended December 31, 1998 and 1997, respectively.



     Janex may borrow up to $400,000 under a line of credit agreement with a
bank. Borrowings under the line bear interest at the bank's prime rate plus 0.25
percent, eight percent at December 31, 1998. The line is secured by all of
Janex's assets and is personally guaranteed by two shareholders. Borrowings
under the line are due December 31, 1999. Borrowing capacity of $143,000 was
available at December 31, 1998.



     Through 1998, Janex had the ability to borrow up to $450,000 from its Hong
Kong agent for the payment of product development and tooling costs. Any loans
are to be repaid from collections of certain customer invoices at the rate of
five percent of the invoice amount, with interest at two percent above the Hong
Kong prime rate. All borrowings under this arrangement were repaid in 1998. Any
borrowings are secured by certain tooling, as well as an irrevocable stand-by
letter of credit for $150,000.


                                       25
<PAGE>   489


     Pursuant to a supplementary agency agreement, Janex had the ability to
borrow an additional $200,000 from its Agent provided that Janex issues to the
Agent an irrevocable stand-by letter of credit for $100,000. Any advance was to
be repaid within 60 days from the date of advance with interest at two percent
above the Hong Kong prime rate. As of December 31, 1997 and 1998, Janex had no
borrowings under this credit facility.



     Janex previously borrowed $340,000 under a private unsecured loan. At
December 31, 1997, the balance outstanding against this facility was $219,189,
which bore interest at prime plus two percent. This loan was repaid in 1998.


INFLATION


     Management believes that inflation has not had a significant impact on
Janex costs and profits during the past two years.


YEAR 2000


     The Year 2000 presents special concerns for business and consumer
computing. The Year 2000 issue is a result of computer programs being written
using two digits rather than four to define the year. Computer programs that
have date-sensitive functions may recognize a date using "00" as the year 1900
rather than the year 2000. This issue has grown in importance as the use of
computers has become more pervasive and the dependence on computers has
increased. Janex could be materially and adversely affected by the Year 2000
issue, either directly or indirectly. This could occur as a result of a system
failure or miscalculation causing disruption to operations, including a
temporary inability to process transactions, send invoices, ship goods, or
engage in similar, normal business activities.



     Failure of Janex to complete testing and renovation of its critical systems
on a timely basis could have a material, adverse effect on Janex's financial
condition and operating results, as could Year 2000 compliance problems
experienced by other with whom Janex does business. Because of the range of
possible issues and the large number of variables involved, it is impossible to
quantify the potential cost of problems should our efforts, or the efforts of
those companies with which we do business, not be successful.



     All of Janex systems have been transferred to the systems of its parent
company, Futech Interactive Products. Please see the discussion of Year 2000 in
the main prospectus/proxy statement.


SAFE HARBOR DISCLOSURE: FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS


     This prospectus/proxy statement and each related prospectus/proxy statement
supplement contains or incorporates by reference forward-looking statements. The
factors identified above in this section are important factors, but not
necessarily all important factors, that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, New Futech or any of the merging companies.



     Where any such forward-looking statement includes a statement of the
assumptions or basis underlying such forward-looking statement, New Futech
cautions that, while such assumptions or basis are believed to be reasonable and
are made in good faith, assumed facts or basis almost always vary from actual
results, and the differences between assumed facts or basis and actual results
can be material, depending upon the circumstances. We cannot promise that
statements of expectation or belief will be achieved or accomplished. The words
"believe," "expect," and "anticipate" and similar expressions identify forward-
looking statements throughout these materials.


                                       26
<PAGE>   490

                        DESCRIPTION OF JANEX'S BUSINESS


     Janex International, Inc., formerly known as With Design in Mind
International, Inc., was incorporated in Colorado in 1986. Its direct or
indirect wholly-owned subsidiaries include: With Design in Mind, a California
corporation ("WDIM"); Janex Corporation, a New Jersey corporation ("Janex");
Malibu Fun Stuffed, Inc., a California corporation ("Malibu"); Pro Gains Company
Limited, a Hong Kong corporation ("Pro Gains"); and Malibu Fun Stuffed
International Limited, a Hong Kong corporation ("MFSI"). As used herein, the
term "Janex" refers to Janex International, Inc. and its wholly owned
subsidiaries, unless the context indicates otherwise. Janex's principal place of
business is located at 2999 N. 44th Street, Suite 225, Phoenix, Arizona
85018-7247. Janex's telephone number is (602) 808-8765.



     The business of Janex and ProGains, collectively referred to as the "Janex
Division", focuses on the manufacturing and marketing of children's toys, coin,
flashlights and battery operated toothbrushes marketed under the brand name
Janex. Janex incorporates licensed characters into most of its products, and
sells its products to United States mass merchant retailers, toy specialty
stores and department stores. Sales and manufacturing were historically
facilitated through Pro Gains.



     Malibu and MFSI, collectively referred to as the "Malibu Division", operate
in tandem similar to Janex and Pro Gains. Together they develop, manufacture and
market toys and novelty gift items, selling to mass merchant retailers, chains
stores, and specialty stores primarily in the United States.



     The product line of the Malibu Division differs from that of the Janex
Division in that most of the Malibu Division products ("Malibu Products") do not
incorporate licensed characters. While the Malibu Products fall more clearly
into the toy category, the Company considers the Janex Division products ("Janex
Products") to be of a functional nature and not necessarily toys. Therefore,
Janex operates Malibu and MFSI, and Janex and Pro Gains, as two distinct
divisions. Nevertheless, their methods of operation and procedures are almost
identical, and therefore will not be separately discussed herein, unless there
are significant differences.


BUSINESS

PRODUCTS


     Janex's products are either created by Janex or licensed from independent
inventors. Royalties are payable by Janex with respect to products manufactured
from designs or technologies licensed by Janex from inventors or other third
parties.



     Janex Products.  Most of the Janex Products incorporate licensed fantasy
characters. Presently, Janex has licenses to utilize one or more trademarks
and/or copyrights owned or controlled by The Walt Disney Company, Saban
Merchandising, New Line Productions, Inc., MCA/Universal Merchandising, Inc.,
Children's Television Workshop, World Championship Wrestling, The Lyons Group,
Lionel LLC, Warner Bros. Corporation and Turner Home Entertainment, Inc.
Although the basic underlying product may stay the same, generally the product
is tailored to match the licensed character which is incorporated into it.



     Janex Products are targeted for sale by mass merchant retailers at prices
ranging from $3 to $30. Generally, the commercial life expectancy of any given
Janex product is


                                       27
<PAGE>   491


virtually unlimited in its generic state, i.e., without a licensed character.
However, the commercial life span of any particular version of one of the Janex
Products is directly tied to the length of the license agreement for the fantasy
character incorporated into that product, and the popularity of that fantasy
character with consumers. Since most of the Janex license agreements are written
for a term of two years, and given that the popularity of most fantasy
characters is short lived, Janex estimates that the useful life of any given
version of a Janex product will be no more than two years. Janex intends to
continue to market some version of all of the Janex Products it now sells for at
least the next two years.



     The Janex product line currently includes the following: battery operated
Power Toothbrush and Stand, battery operated Power Toothbrush without stand,
battery operated Power Flashlight, Action/Talking Alarm Clock, Role Play Gear,
Deluxe Doll Carrier, Deluxe Doll Diaper Bag, Budget Doll Bedding Assortment,
Doll Comforter and Pillow Set and Lil' Miss Executive Play Set.



     Malibu Products.  The Malibu Products do not normally incorporate licensed
fantasy characters. As a result, this product line is not limited by licensor
approval of the products it develops and sells. Malibu Products are targeted for
sale by mass merchant retailers, specialty retailers and gift stores at prices
ranging from $3 to $40. The commercial life span of the Malibu Products could be
long-lived, as is the case with many toys that are not tied into a fashion or
fad, but Janex expects the life span of a Malibu Product to be five years or
less. Consequently, Janex is constantly seeking new product concepts for the
Malibu product line, and further, is continually redesigning and repackaging
existing products to improve consumer appeal.



     Malibu Products include the following pool and bathtub toys: Wee Wet Pets,
Wet Pet Babies, Water Wings, Water Rings, Bath Tub Basketball, Tub-A-Ducks, Wee
Boats, Train Adventure Video Set and Mr. Baby Proofer.



     Janex intends to add several new products in 2000, subject to the
availability of working capital. The concentration of new product introductions
will be on products of similar characteristics to those already in Janex's
product lines, i.e., similar retail price levels, similar capability of
incorporating a fanciful licensed character, for Janex products, similar target
age groups, suitable for manufacture through existing or similar factories, and
suitable for distribution through existing distribution channels.


MARKETING, DISTRIBUTION AND CUSTOMERS


     Janex sells its products nationwide to retailers primarily through a
network of independent sales representative firms. One of those independent
sales representative firms is owned by Janex's former President and current
director. That firm represents Janex's products to one of its largest customers.
See "Certain Relationships and Related Transactions." Janex's products are
displayed at two major consumer product shows in January and February of each
year, and at a number of smaller specialty market shows throughout the year.
Marketing activities for Janex's product lines primarily target mass merchant
retailers in the United States and Canada, as well as smaller regional
merchants, drug chains, department stores and gift stores. In 1998, two mass
merchant retailers, Toys "R" Us and Advantage Merchandise, represented 63% of
Janex's revenues.



     Janex Products.  The product marketing strategy for the Janex Products line
is to market the line as a selection of products for children that are primarily
functional in


                                       28
<PAGE>   492


nature and will provide a benefit to both the parent and child, and may in
certain circumstances be used as toys. Janex Products incorporate licensed
characters where possible, are marketed under one brand name, Janex, and are
sold at retail prices ranging from $3 and $30. The brand name provides an
umbrella for all products which helps both the sell-in of the product line to
retailers, and the sell-through to customers.



     The primary target audience for the product line is mothers of boys and
girls between the ages of three and ten. Janex Products are designed to be
functional fun products which would help a parent "manage" their children and at
the same time make routine activities and chores fun and/or easier for the child
to do.



     Malibu Products.  The product marketing strategy for the Malibu Products
line is to market a line of reasonably priced toys and novelty gift items for
which a demand exists, and that are different from other products on the market,
either through unique product design or innovative packaging. Because Janex does
not have the financial strength to support Malibu Products with television
advertising, the product design and unique packaging need to capture the
attention of consumers at the shelf level. Further, Malibu Products will be
customized, either in design or in packaging, to meet the needs of specific
customers.



     Janex historically offered to customers two primary methods of purchasing
products: on customary industry credit terms, FOB Janex's primary warehouse
facility in Baltimore, Maryland; or on a letter of credit basis, through the
Hong Kong subsidiaries Pro Gains and MFSI, FOB Hong Kong. Under these terms,
title to the goods passes to the buyer at the point of origin, and in most cases
the buyer is responsible for the costs of transportation.



     Prior to 1998, domestic inventories were kept in a third party contract
warehouse facility located in Baltimore, Maryland owned by the father of Janex's
former President and current director. Orders from domestic customers were
processed by Janex. Shipping documents were forwarded to the Baltimore
warehouse, which filled the orders and ensured shipment of product to customers
in accordance with customer specified shipping instructions. The warehouse
confirmed shipment to the customer, and Janex then invoiced the customer.



     Letter of credit orders are processed through Janex's Hong Kong
subsidiaries. Janex has no employees in Hong Kong, but instead has entered into
a service agreement with a Hong Kong based services company, also referred to in
the industry as an agent, that provides the personnel and facilities to
accomplish accepting orders primarily from United States and Canadian based
retailers, arranging for the manufacture of products to fill those orders,
delivering the products to the customers or the customers' representatives in
Hong Kong, and then processing the necessary documentation to negotiate payment
for the goods by way of letters of credit or, in some instances, by direct wire
transfer from the customer.


     Although Janex maintained a domestic warehouse in Baltimore, Maryland, and
shipped to customers FOB Baltimore, this business activity ceased in 1997
because it required continued investment in inventory and accounts receivable.
Management believes that shipping to customers on normal credit terms from
domestic inventories provides access to a base of customers that do not purchase
on a letter of credit basis. This group of customers may include smaller
retailers that do not purchase enough product to make letter of credit
purchasing advantageous, and certain larger multi-location retailers that rely
on their suppliers to provide inventory and logistics services along with
product.

                                       29
<PAGE>   493


     In order to facilitate shipping to these customers, Janex entered into an
agreement with Advantage Merchandise, a warehouse in San Diego, California.
Advantage Merchandise purchased directly from Janex, on a letter of credit
basis, enough inventory to fulfill orders sold by Janex, through its network of
sales representative firms. Advantage Merchandise then processed these orders,
delivering the product to the customer and then processing the collection of the
accounts receivable.



     As of December 31, 1998, the agreement with Advantage Merchandise expired
and Janex entered into a non-exclusive verbal distribution agreement with Fundex
Games, Ltd. on terms and service similar to the Advantage Merchandise agreement,
without commission mark up.


MANUFACTURING


     All of Janex's products are manufactured to Janex's specifications by
manufacturers based in Hong Kong. Janex believes that teaming contract
manufacturers with Janex representatives yields cost savings, maximizes the
design resources of Janex and shortens the new product introduction cycle.
During the design stage, Janex representatives work closely with employees of
the manufacturers and travel to the manufacturers' facilities, in order to
accomplish Janex's design goals. Janex employees also travel to the
manufacturing facilities for the purpose of inspecting the manufacturing process
and verifying the effectiveness of quality control and assurance programs.



     Pro Gains or MFSI, through its agent, initiates all orders for product with
the manufacturer and pays the manufacturer, subsequent to the delivery of the
product in accordance with payment terms agreed to between Janex and the
manufacturer. All products manufactured in Asia are manufactured specifically
for a customer order.


PRODUCT DESIGN AND SELECTION


     New products are initially selected based upon what management believes
will be successful. However, in order to reduce the expense of producing a
product that may not sell, Janex may utilize the services of professional market
research companies to perform product testings and to determine product
viability. In the product selection and design process input is also solicited
from buyers at certain retailers and from sales representatives. Feedback from
these market research resources is also used in the development of product
packaging and in the establishment of product price levels. In addition, for the
Janex products, since most incorporate licensed characters, the licensor's input
into product and packaging design is always solicited, and in some cases may
even be required by the terms and conditions of the license agreement.



     While Janex has been the sole originator of several of its products, it
actively seeks innovative and unusual product concepts from third parties. If
and when Janex determines that it is willing to license a product, it seeks to
obtain the exclusive marketing and manufacturing rights.



     Historically, Janex has not incurred any significant costs in connection
with research and development and does not expect to do so in the foreseeable
future. Janex keeps the direct investment in research and development on new
products to a minimum by entering into agreements with product
researchers/inventors providing for ongoing royalty participation should a given
product be brought to market.


                                       30
<PAGE>   494


     For the Janex Products line, Janex continually searches for new characters
to license. A new fantasy character can be used on new products as well as
extend the life of an existing product. When new licenses are acquired, the
licensors generally specify exactly what products the licensed characters can be
incorporated into, the territory in which products incorporating those licenses
can be sold, the royalty rate payable on sales of products, the royalty advance,
if any, and the royalty guarantee, if any. The amount of the royalty rate,
advance and guarantee required under any given license agreement is generally a
function of the credibility of the owner of the licensed property, and the
popularity of the licensed character with the target market.



     For the Janex Products, Janex seeks licenses which may open up additional
target market groups. As an example, the Little Mermaid character on a battery
operated toothbrush is a suitable product for a four-year old girl. That same
battery operated toothbrush with a Batman character on it would be a suitable
product for a seven-year old boy. As a result, Janex endeavors as part of its
product development program to ensure that it has spread its available license
acquisition funds across a range of licenses, rather than investing heavily in
only one or two licenses.


COMPETITION


     The market for both toys and functional children's products is served by
manufacturers, both foreign and domestic, many of whom have greater financial
resources and greater name and product recognition than Janex. Because each of
Janex's products are available over a broad price range, the market is
competitive, including numerous small manufacturers and two industry giants that
dominate the industry. Janex classifies the competition for its product lines as
follows: (1) toy and novelty gift manufacturers, (2) functional product
manufacturers, and (3) direct functional children's product competitors.



     Toy and novelty gift manufacturers are companies which are primarily in the
business of manufacturing and marketing toys. Functional product manufacturers
are companies which are primarily in the business of manufacturing and marketing
a specific type, or group, of functional products, such as furniture, lighting,
or clocks, but which may include in their product line certain functional
children's products. Direct functional children's product competitors are
companies which manufacture and market functional children's products as their
company's primary business. All companies that fall into these three categories
compete with Janex's product lines.



     There is considerable competition for the consumer's dollar in Janex's
target markets. However, Janex believes that Janex products are differentiated
from those of the competition by relying heavily on the use of licensed
characters. Malibu Products are differentiated from those of the competition by
relying on unique product designs and unique packaging. Although Janex attempts
to protect its products with patents and/or trademarks when available,
successful products in any product classification are always susceptible to
imitation or "knock-off." Janex seeks to maintain a competitive advantage by
continuing to introduce new products and/or product enhancements over time, by
producing high quality products, and by pursuing licenses for a broad range of
children's characters.



     For the Janex Products, competition between companies for licenses is
intense. Most license agreements are non-exclusive and limited in duration.
Within the industry, two years is the standard term for most license agreements.
When licenses become available, or


                                       31
<PAGE>   495


when they are up for renewal, the licensor may give the license to the company
which is willing to offer the highest royalty rate, advance royalty amount, or
royalty guarantee. Janex ranks as a very small player in the industry, and is
extremely vulnerable in the competition for licenses should financial strength
become a primary decision making criterion of the licensor.



     Janex believes its relationship with its major licensors to be good, and
believes that it will continue to be able to obtain from its existing licensors,
and new licensors, the necessary licenses to maintain a competitive advantage in
the marketplace. However, there is no guarantee that Janex will be able to
obtain the licenses necessary to maintain a competitive advantage, and failure
to obtain those licenses would adversely effect the sales of Janex Products.



     Since the Janex Division relies upon licensed characters as the primary
method of differentiating its products from those of other companies, revenues
tend to be a function of the general popularity of the characters licensed by
Janex. Thus, the strength or weakness of the licenses held by Janex can be
expected to a have a major influence on revenues and profitability, and over
time Janex expects to experience both significant upward and downward
fluctuations in sales. These upward and downward swings in revenue associated
with "fad" or "hit" licenses that generate tremendous sales volumes for short
periods make the business of selling products that incorporate licensed fantasy
characters extremely volatile, in comparison to businesses that do not sell
products that incorporate licensed fantasy characters, and that do not sell
products that are considered fads.



     The volatility of revenues and profits created as a result of the
significant reliance on licensed characters by Janex products has, over time,
been reduced as Malibu Products increasingly contribute to the operations of
Janex.


PATENTS, TRADEMARKS AND LICENSES


     For those products that can be patented, Janex normally takes the steps
necessary to do so. However, Janex recognizes that patents are not totally
effective in prohibiting competitors from producing similar products that could
compete with those of Janex. Therefore, Janex does not rely heavily upon patent
protection to maintain its competitive position. Janex believes that its growth,
competitive position and success are dependent upon its right to use specific
licensed characters and trademarks, its ability to develop and design unique
products and packaging, its relationships with customers, and its relationship
with contract manufacturers.



     Janex has entered into a number of license agreements for the use of
licensed fantasy characters on its products. These licenses typically run for
two years and all have guaranteed royalties. The following is a partial list of
the current licensors to Janex and the characters licensed:



     - Warner Bros. Corporation for Looney Tunes


     - Children's Television Workshop for Sesame Street

     - Lionel LLC for Lionel Trains


     - New Line Cinema Productions, Inc. for Lost in Space


     - Leisure Concepts for World Championship Wrestling, Inc. for WCW
       characters

                                       32
<PAGE>   496

     - The Lyons Group for Barney

     - Saban Merchandising, Inc. for Power Rangers in Space


     - JG Motorsports for Jeff Gordon



     In addition, Janex has entered into a number of license agreements for the
use of product designs and for the rights to use certain trademarks. These
license agreements typically run two to five years. The respective licensors in
each instance have registered, own and/or control the trademark, registered
trademarks and/or copyright rights to the characters licensed and the
characters, likenesses thereof, names, pictures, drawings and any other
associations with those characters that are used by Janex strictly under license
from the respective licensor.


BACKLOG


     Shipment of Janex's products is anticipated to peak during the summer
months and, consequently, it is expected that the Janex's backlog will be at a
maximum during June, July and August. If items are not in stock, delivery
typically takes between one and three months. When items are in stock, items are
normally shipped on the date upon which the customer has requested shipment.



     As of December 31, 1998, the backlog of orders was approximately $250,000
and at December 31, 1997, the backlog of orders was approximately $1,000,000.


GOVERNMENT REGULATIONS


     Janex is subject to the provision of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Products Safety Act. Those
laws empower the Consumer Products Safety Commission ("CPSC") to protect
children from hazardous products. The CPSC has the authority to exclude from the
market articles which are found to be hazardous and can require a manufacturer
to repurchase such products under certain circumstances. Any such determination
by the CPSC is subject to court review. Similar laws exist in some states and
cities in the United States and in many jurisdictions throughout the world.
Janex endeavors to comply with all applicable regulations through a program of
quality inspections and product testing. Janex maintains product liability
insurance in the amount of $1,000,000.


PROPERTIES


     As of December 11, 1998, Janex moved its headquarters to Phoenix, Arizona,
and is presently operating in the offices of Futech Interactive Products, Inc.,
its parent corporation.



     Janex entered into a lease, effective April 1, 1994, for 2,202 square feet
of office space in a multi-tenant high rise building located at 21700 Oxnard
Street, Woodland Hills, California (the "Office"). Janex and the landlord
amended the lease, effective January 1, 1996, providing Janex with an additional
2,460 square feet of space adjacent to its current offices, and extended the
expiration date of the lease to December 31, 2000. The lease allows for its
early termination at any time after March 1997, provided that Janex enters into
another lease with the landlord in the same complex. Effective April 1, 1997,
Janex entered into an agreement to sublease a portion of the facility to a third
party for the


                                       33
<PAGE>   497


balance of the lease. Effective May 1, 1998, Janex entered into an agreement to
sublease the remaining portion of the facility to a third party for the
remaining term of the lease.


LEGAL PROCEEDINGS


     There are no pending legal proceedings involving Janex.


EMPLOYEES


     As of September 30, 1999, Janex had one full-time employee. This employee
was engaged in marketing and product development. Janex has never experienced a
work stoppage and Janex believes that relations with its employee is good. None
of Janex's employees are covered by collective bargaining agreements.


                                       34
<PAGE>   498

                                JANEX MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS


     The following table sets forth information regarding Janex's executive
officers and directors as of December 31, 1998:



<TABLE>
<CAPTION>
NAME                                   AGE                      TITLE
----                                   ---                      -----
<S>                                    <C>    <C>
Vincent W. Goett.....................  35     Chairman of the Board, Chief Executive
                                              Office, President and Director
Joseph K. Petter.....................  56     Chief Operating Officer
Frederick B. Gretsch, Sr.............  53     Chief Financial Officer, Treasurer,
                                              Secretary and Director
Charles M. Foley.....................  41     Director
Leslie Friedland*....................  45     Director
Daniel Lesnick.......................  46     Director
</TABLE>


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

* Mr. Friedland submitted a letter of resignation to Janex effective September
  26, 1999. Biographical information regarding Vincent W. Goett, Joseph K.
  Petter and Frederick B. Gretsch, Sr. is set forth in the "New Futech's
  Management" section of the prospectus/ proxy statement.



     CHARLES M. FOLEY  Mr. Foley has been a Director of Janex since December 11,
1998. Mr. Foley currently serves a the President of Home, Office & Personal
Organizers, Inc., a consulting business that specializes in accounting,
financial, administrative and Y2K issues. He started his company in 1996 after
having served as Futech's Chief Operating and Financial Officer from January
1995 through February 1997, and on Futech's Board of Directors from 1997 through
the Spring of 1998. Prior to his tenure at Futech, Mr. Foley was Corporate
Controller for Paradise International Distribution Corporation, an international
and specialty markets distributor for Futech's Talking Pages from January 1995.
From 1993 to 1994, he was Corporate Controller for Hypercom, Inc., an
international manufacturer of networks and EFT terminals and systems. From 1990
to 1993, Mr. Foley served as the Financial Revenue Manager for Syntellect Inc.,
a global manufacturer of interactive voice response systems. From 1987 to 1990,
he was an Audit Supervisor for Greyhound Corporation, and from 1983 to 1987, he
was an Internal Auditor with Monsanto Company in St. Louis, Missouri. Mr. Foley
received his Masters in International Management from the American Graduate
School of International Management in 1982 and his B.S. in Management Science
from Moorhead State University in 1979. Mr. Foley served in the Peace Corps in
Honduras, Central America, from 1980 to 1982.


     DANIEL LESNICK  Mr. Lesnick has been a Director of Janex since August 29,
1997. Mr. Lesnick was Executive Vice President and Chief Operating officer of
Janex from August 4, 1997 to December 11, 1998. Prior to that time, Mr. Lesnick
had been Executive Vice President of Janex Corporation, a wholly owned
subsidiary of Janex International, Inc., from October 6, 1993 to January 31,
1997, at which time he left Janex. From August 1988 to October 5, 1993, Mr.
Lesnick was Vice President and co-owner of MJL Marketing, Inc. (now Janex). He
was Director of Sales and Marketing for Sunk Yong Company, a Korean corporation
operating in a number of different industries, from February 1986 to July 1988.
Previously, Mr. Lesnick held positions as Merchandising

                                       35
<PAGE>   499

Manager with Spencer Gifts and as a Senior Buyer with Lionel Leisure, both
specialty retailers. Mr. Lesnick holds an associate degree in marketing.

EMPLOYMENT ARRANGEMENTS


     Janex has not entered into employment agreements with any of its executive
officers.



     In August 1995, Janex established a 401K Profit Sharing Plan for the
benefit of the employees of Janex. Under the provisions of the 401K, employees
may make contributions on a tax deferred basis to their 401K account, up to the
legal limits provided for by United States income tax regulations. Janex, at its
discretion, may contribute a portion of Janex's profits to the 401K. Such
contributions are allocated between members of the 401K based on a pre-stated
formula. Employer contributions vest with 401K participants at the rate of 20%
per year, beginning in year two and ending in year six of employment. For the
year ended December 31, 1998, Janex did not make a contribution to the 401K.



     Janex has a health insurance plan, which covers all employees in a
non-discriminatory manner. With the exception of the health insurance plan and
the 401K, Janex has no insurance or medical reimbursement plans covering its
officers or directors, nor do they contemplate implementing any such plans at
this time.


                               JANEX STOCKHOLDERS

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


     The following table sets forth information, as of October 1, 1999, with
respect to the beneficial ownership of Janex's common stock by each person known
by Janex to be the beneficial owner of more than five percent of the outstanding
common stock, by each of Janex's directors, and by the officers and directors of
Janex as a group:



<TABLE>
<CAPTION>
                                                       SHARES OWNED      PERCENT
BENEFICIAL OWNERS                                      BENEFICIALLY    OF CLASS(1)
-----------------                                      ------------    -----------
<S>                                                    <C>             <C>
Security ownership of certain beneficial owners:
  Futech Interactive Products, Inc...................   13,296,691(2)     73.5%
  2999 N. 44th Street, Suite 225
  Phoenix, AZ 85018-7247
Security ownership of management:
  Vincent W. Goett...................................       10,000         0.1%
All executive officers and directors as a group (6
  persons)...........................................       10,000         0.1%
</TABLE>


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


(1) Based upon 18,098,750 shares of common stock issued and outstanding on
    October 1, 1998.



(2) Does not include ownership of 5,000,000 shares of Janex's preferred stock
    which is convertible at any time into 5,000,000 shares of common stock,
    provided that a sufficient number of shares of common stock are authorized
    and unissued which is not currently the case. If such ownership is included,
    Futech would own approximately 79% of Janex's common stock on a
    fully-diluted basis.



     Janex is not aware of any contract or other arrangement, including a pledge
of Janex's securities, that could result in a change in the control of Janex.
Janex is not aware of any voting trusts.


                                       36
<PAGE>   500

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


     Janex has engaged the services of a manufacturers' representative firm, Les
Friedland Associates, or LFA, to represent Janex to customers located in the
states of New York, New Jersey, Connecticut and Pennsylvania. LFA represents
Janex to its largest customer, Toys "R" Us. The principal owner and operator of
LFA, Mr. Leslie Friedland, is one of the former shareholders and former Chief
Executive Officer of Janex, and formerly a director of Janex. Under the terms of
the representative agreement, LFA was to be paid a commission of four and
one-quarter percent on all sales that it generates within its territory.
Effective April 1, 1995, LFA and Janex agreed to reduce the commission rate to
four percent. The terms and conditions of the agreement with LFA are standard in
the industry, and the agreement is cancelable at any time with 30 days notice.
Pursuant to the agreement with LFA, LFA was paid, or will be paid, $65,154 for
the year ended December 31, 1998 and was paid, or will be paid, $98,166 for the
year ended December 31, 1997. Further, Janex rented showroom space from LFA
during a major industry trade show in 1997, for which Janex paid $26,000. The
rate charged by LFA for the showroom rental is competitive with other showroom
space rental rates during the show period. No such expense was incurred in 1998.



     On June 28, 1996, Janex and Leslie Friedland entered into an agreement
whereby the due date on Janex's note held by Mr. Friedland was extended to
February 1, 1998. Additionally Janex owed Mr. Friedland $115,000 for commissions
as of December 31, 1995, which Mr. Friedland also extended to December 31, 1997.
In connection with such extension agreement, Janex granted warrants to Mr.
Friedland to acquire up to 282,994 shares of Janex's common stock, restricted,
with certain "piggy-back" registration rights. These warrants have an exercise
price of $1.45 and expire on June 28, 2000. The warrants vest in six-month
increments over the term of the loan, commencing on June 28, 1996. The warrants
were canceled on December 11, 1998.



     On June 28, 1996, Janex and Daniel Lesnick, Executive Vice President of
Janex, entered into an agreement whereby the due date on Janex's note held by
Mr. Lesnick was extended to February 1, 1998. In connection with such extension
agreement, Janex granted warrants to Mr. Lesnick to acquire up to 167,994 shares
of Janex's common stock, restricted, with certain "piggy-back" registration
rights. These warrants have an exercise price of $1.45 and expire on June 28,
2000. The warrants vest in six-month increments over the term of the loan,
commencing on June 28, 1996. The warrants were canceled on December 11, 1998.



     Janex utilized the services of a public warehouse facility, Hollins
Distributors, in Baltimore, Maryland. The warehouse facility charges Janex a fee
based on the amount of goods received, and the amount of goods shipped. The
rates charged by Hollins Distributors are competitive with those of other public
warehouses, and the relationship can be terminated annually upon 60 days written
notification. Hollins Distributors is owned by Mr. Howard Friedland, the father
of Mr. Leslie Friedland. Hollins Distributors was paid $20,911 during 1997. No
payments were owed during 1998.



     In December 1998, Futech Interactive Products, Inc. acquired 5,219,046
shares of Janex's common stock and shareholder loans of $1,480,783, including
interest of $250,784 from certain of Janex's majority shareholders, including
Leslie Friedland and Daniel Lesnick. Subsequently, Janex converted those
shareholder loans into 8,011,645 shares of common stock and 5,000,000 shares of
preferred stock. As a result, Futech owns 73% of Janex's outstanding common
stock and 100% of its outstanding preferred stock.


                                       37
<PAGE>   501


     On December 11, 1998, three of Janex's major stockholders, including Leslie
Friedland and Daniel Lesnick, completed the sale of their stock under a stock
purchase and sale agreement with Futech Interactive Products, Inc., a Phoenix,
Arizona-based company. Pursuant to the agreement, the shareholders sold all
5,219,046 shares of the common stock of Janex stock owned by them, constituting
approximately 52% of the issued and outstanding common stock of Janex, to Futech
for a combination of 3,750,000 shares of Futech's Series A preferred stock and
$750,000 in promissory notes, and the assumption by Futech of certain
liabilities. As part of the transaction, Futech also purchased certain
receivables owed by Janex to these shareholders. In connection with the closing
of the transaction, Futech exchanged these receivables for 8,011,645 shares of
common stock and 5,000,000 shares of preferred stock of Janex. As a result,
Futech is the owner of an aggregate of approximately 73% of the issued and
outstanding common stock and all of the preferred stock of Janex, together
aggregating 79% of the issued and outstanding capital stock of Janex.



     Also in connection with the closing of the transaction, Alex Hughes, Jr.
resigned from the board of directors of the Company, and Futech nominees Vincent
W. Goett, Frederick B. Gretsch, Sr. and Charles M. Foley were appointed to the
board of directors. In addition, Vincent W. Goett became the President, Chief
Executive Officer and Chairman of the Board, Joseph K. Petter became the Chief
Operating Officer, Frederick B. Gretsch became the Chief Financial Officer,
Treasurer and Secretary.



     Since its acquisition of the Janex's stock, Futech has provided
administrative services to Janex, and has made certain loan advances to Janex
for its operations and is likely to make further advances as needed.


                CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                      ACCOUNTING AND FINANCIAL DISCLOSURE


     As previously reported in Janex's Current Report on Form 8-K dated February
25, 1999, Janex engaged Ernst & Young, LLP as its independent auditor for the
fiscal year ending December 31, 1998, to replace the firm of BDO Seidman, LLP.
Ernst & Young, LLP is the independent auditor used by Janex's majority
shareholder. The decision to change auditors was made in the ordinary course of
business.



     The reports of BDO Seidman, LLP on Janex's financial statements for 1996
and 1997 did not contain an adverse opinion or a disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope, or accounting
principles, except as discussed in the following paragraph.



     As indicated in the reports of BDO Seidman, LLP on Janex's financial
statements for the past two fiscal years, there are factors that raise
substantial doubt about Janex's ability to continue as a going concern. The
independent auditor's report indicates there is no assurance Janex will be able
to realize its recorded assets and liquidate its liabilities in the normal
course of business. Although management discusses, in a footnote, its plans in
regard to these matters, the financial statements do not include any adjustments
that might result from the outcome of this uncertainty.



     In connection with the audits of Janex's financial statements for each of
the two fiscal years ended December 31, 1996 and 1997, and in the subsequent
interim period, there were no disagreements with BDO Seidman, LLP on any matters
of accounting principles


                                       38
<PAGE>   502

or practices, financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of BDO Seidman, LLP would have caused
BDO Seidman, LLP to make reference to the matter in their report.


     Janex has agreed to indemnify and hold harmless BDO Seidman, LLP for any
and all liabilities, costs or expenses of any nature whatsoever incurred by BDO
Seidman, LLP in defending itself in a lawsuit brought because of the re-issuance
of BDO Seidman, LLP's report on its audit of the Janex's 1997 financial
statements. In accordance with the agreement, the indemnification will be void
if a court, after adjudication, finds BDO Seidman, LLP to be liable for
malpractice.


                                       39
<PAGE>   503

                                                                      APPENDIX 1

                       COLORADO BUSINESS CORPORATION ACT

                               DISSENTERS' RIGHTS

7-113-101 -- DEFINITIONS.

     For purposes of this article:

          (1) "Beneficial shareholder" means the beneficial owner of shares held
     in a voting trust or by a nominee as the record shareholder.

          (2) "Corporation" means the issuer of the shares held by a dissenter
     before the corporate action, or the surviving or acquiring domestic or
     foreign corporation, by merger or share exchange of that issuer.

          (3) "Dissenter" means a shareholder who is entitled to dissent from
     corporate action under section 7-113-102 and who exercises that right at
     the time and in the manner required by part 2 of this article.

          (4) "Fair value", with respect to a dissenter's shares, means the
     value of the shares immediately before the effective date of the corporate
     action to which the dissenter objects, excluding any appreciation or
     depreciation in anticipation of the corporate action except to the extent
     that exclusion would be inequitable.

          (5) "Interest" means interest from the effective date of the corporate
     action until the date of payment, at the average rate currently paid by the
     corporation on its principal bank loans or, if none, at the legal rate as
     specified in section 5-12-101, C.R.S.

          (6) "Record shareholder" means the person in whose name shares are
     registered in the records of a corporation or the beneficial owner of
     shares that are registered in the name of a nominee to the extent such
     owner is recognized by the corporation as the shareholder as provided in
     section 7-107-204.

          (7) "Shareholder" means either a record shareholder or a beneficial
     shareholder.

7-113-102 -- RIGHT TO DISSENT.

     (1) A shareholder, whether or not entitled to vote, is entitled to dissent
and obtain payment of the fair value of the shareholder's shares in the event of
any of the following corporate actions:

          (a) Consummation of a plan of merger to which the corporation is a
     party if:

             (I) Approval by the shareholders of that corporation is required
        for the merger by section 7-111-103 or 7-111-104 or by the articles of
        incorporation; or

             (II) The corporation is a subsidiary that is merged with its parent
        corporation under section 7-111-104;

          (b) Consummation of a plan of share exchange to which the corporation
     is a party as the corporation whose shares will be acquired;

          (c) Consummation of a sale, lease, exchange, or other disposition of
     all, or substantially all, of the property of the corporation for which a
     shareholder vote is required under section 7-112-102 (1); and
                                       A-1
<PAGE>   504

          (d) Consummation of a sale, lease, exchange, or other disposition of
     all, or substantially all, of the property of an entity controlled by the
     corporation if the shareholders of the corporation were entitled to vote
     upon the consent of the corporation to the disposition pursuant to section
     7-112-102 (2).

     (1.3) A shareholder is not entitled to dissent and obtain payment, under
subsection (1) of this section, of the fair value of the shares of any class or
series of shares which either were listed on a national securities exchange
registered under the federal "Securities Exchange Act of 1934", as amended, or
on the national market system of the national association of securities dealers
automated quotation system, or were held of record by more than two thousand
shareholders, at the time of:

          (a) The record date fixed under section 7-107-107 to determine the
     shareholders entitled to receive notice of the shareholders' meeting at
     which the corporate action is submitted to a vote;

          (b) The record date fixed under section 7-107-104 to determine
     shareholders entitled to sign writings consenting to the corporate action;
     or

          (c) The effective date of the corporate action if the corporate action
     is authorized other than by a vote of shareholders.

     (1.8) The limitation set forth in subsection (1.3) of this section shall
not apply if the shareholder will receive for the shareholder's shares, pursuant
to the corporate action, anything except:

          (a) Shares of the corporation surviving the consummation of the plan
     of merger or share exchange;

          (b) Shares of any other corporation which at the effective date of the
     plan of merger or share exchange either will be listed on a national
     securities exchange registered under the federal "Securities Exchange Act
     of 1934", as amended, or on the national market system of the national
     association of securities dealers automated quotation system, or will be
     held of record by more than two thousand shareholders;

          (c) Cash in lieu of fractional shares; or

          (d) Any combination of the foregoing described shares or cash in lieu
     of fractional shares.

     (2) (Deleted by amendment, L. 96, p. 1321, sec. 30, effective June 1,
1996.)

     (2.5) A shareholder, whether or not entitled to vote, is entitled to
dissent and obtain payment of the fair value of the shareholder's shares in the
event of a reverse split that reduces the number of shares owned by the
shareholder to a fraction of a share or to scrip if the fractional share or
scrip so created is to be acquired for cash or the scrip is to be voided under
section 7-106-104.

     (3) A shareholder is entitled to dissent and obtain payment of the fair
value of the shareholder's shares in the event of any corporate action to the
extent provided by the bylaws or a resolution of the board of directors.

     (4) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this article may not challenge the corporate action
creating such entitlement unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.

                                       A-2
<PAGE>   505

7-113-103 -- DISSENT BY NOMINEES AND BENEFICIAL OWNERS.

     (1) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in the record shareholder's name only if the record
shareholder dissents with respect to all shares beneficially owned by any one
person and causes the corporation to receive written notice which states such
dissent and the name, address, and federal taxpayer identification number, if
any, of each person on whose behalf the record shareholder asserts dissenters'
rights. The rights of a record shareholder under this subsection (1) are
determined as if the shares as to which the record shareholder dissents and the
other shares of the record shareholder were registered in the names of different
shareholders.

     (2) A beneficial shareholder may assert dissenters' rights as to the shares
held on the beneficial shareholder's behalf only if:

          (a) The beneficial shareholder causes the corporation to receive the
     record shareholder's written consent to the dissent not later than the time
     the beneficial shareholder asserts dissenters' rights; and

          (b) The beneficial shareholder dissents with respect to all shares
     beneficially owned by the beneficial shareholder.

     (3) The corporation may require that, when a record shareholder dissents
with respect to the shares held by any one or more beneficial shareholders, each
such beneficial shareholder must certify to the corporation that the beneficial
shareholder and the record shareholder or record shareholders of all shares
owned beneficially by the beneficial shareholder have asserted, or will timely
assert, dissenters' rights as to all such shares as to which there is no
limitation on the ability to exercise dissenters' rights. Any such requirement
shall be stated in the dissenters' notice given pursuant to section 7-113-203.

7-113-201 -- NOTICE OF DISSENTERS' RIGHTS.

     (1) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is submitted to a vote at a shareholders' meeting, the notice
of the meeting shall be given to all shareholders, whether or not entitled to
vote. The notice shall state that shareholders are or may be entitled to assert
dissenters' rights under this article and shall be accompanied by a copy of this
article and the materials, if any, that, under articles 101 to 117 of this
title, are required to be given to shareholders entitled to vote on the proposed
action at the meeting. Failure to give notice as provided by this subsection (1)
shall not affect any action taken at the shareholders' meeting for which the
notice was to have been given, but any shareholder who was entitled to dissent
but who was not given such notice shall not be precluded from demanding payment
for the shareholder's shares under this article by reason of the shareholder's
failure to comply with the provisions of section 7-113-202 (1).

     (2) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized without a meeting of shareholders pursuant to
section 7-107-104, any written or oral solicitation of a shareholder to execute
a writing consenting to such action contemplated in section 7-107-104 shall be
accompanied or preceded by a written notice stating that shareholders are or may
be entitled to assert dissenters' rights under this article, by a copy of this
article, and by the materials, if any, that, under articles 101 to 117 of this
title, would have been required to be given to shareholders entitled to vote on
the proposed action if the proposed action were submitted to a vote at a
shareholders' meeting. Failure to give notice as provided by this subsection (2)
shall not affect any

                                       A-3
<PAGE>   506

action taken pursuant to section 7-107-104 for which the notice was to have been
given, but any shareholder who was entitled to dissent but who was not given
such notice shall not be precluded from demanding payment for the shareholder's
shares under this article by reason of the shareholder's failure to comply with
the provisions of section 7-113-202 (2).

7-113-202 -- NOTICE OF INTENT TO DEMAND PAYMENT.

     (1) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is submitted to a vote at a shareholders' meeting and if
notice of dissenters' rights has been given to such shareholder in connection
with the action pursuant to section 7-113-201 (1), a shareholder who wishes to
assert dissenters' rights shall:

          (a) Cause the corporation to receive, before the vote is taken,
     written notice of the shareholder's intention to demand payment for the
     shareholder's shares if the proposed corporate action is effectuated; and

          (b) Not vote the shares in favor of the proposed corporate action.

     (2) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized without a meeting of shareholders pursuant to
section 7-107-104 and if notice of dissenters' rights has been given to such
shareholder in connection with the action pursuant to section 7-113-201 (2), a
shareholder who wishes to assert dissenters' rights shall not execute a writing
consenting to the proposed corporate action.

     (3) A shareholder who does not satisfy the requirements of subsection (1)
or (2) of this section is not entitled to demand payment for the shareholder's
shares under this article.

7-113-203 -- DISSENTERS' NOTICE.

     (1) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized, the corporation shall give a written
dissenters' notice to all shareholders who are entitled to demand payment for
their shares under this article.

     (2) The dissenters' notice required by subsection (1) of this section shall
be given no later than ten days after the effective date of the corporate action
creating dissenters' rights under section 7-113-102 and shall:

          (a) State that the corporate action was authorized and state the
     effective date or proposed effective date of the corporate action;

          (b) State an address at which the corporation will receive payment
     demands and the address of a place where certificates for certificated
     shares must be deposited;

          (c) Inform holders of uncertificated shares to what extent transfer of
     the shares will be restricted after the payment demand is received;

          (d) Supply a form for demanding payment, which form shall request a
     dissenter to state an address to which payment is to be made;

          (e) Set the date by which the corporation must receive the payment
     demand and certificates for certificated shares, which date shall not be
     less than thirty days after the date the notice required by subsection (1)
     of this section is given;

          (f) State the requirement contemplated in section 7-113-103 (3), if
     such requirement is imposed; and

                                       A-4
<PAGE>   507

          (g) Be accompanied by a copy of this article.

7-113-204 -- PROCEDURE TO DEMAND PAYMENT.

     (1) A shareholder who is given a dissenters' notice pursuant to section
7-113-203 and who wishes to assert dissenters' rights shall, in accordance with
the terms of the dissenters' notice:

          (a) Cause the corporation to receive a payment demand, which may be
     the payment demand form contemplated in section 7-113-203 (2) (d), duly
     completed, or may be stated in another writing; and

          (b) Deposit the shareholder's certificates for certificated shares.

     (2) A shareholder who demands payment in accordance with subsection (1) of
this section retains all rights of a shareholder, except the right to transfer
the shares, until the effective date of the proposed corporate action giving
rise to the shareholder's exercise of dissenters' rights and has only the right
to receive payment for the shares after the effective date of such corporate
action.

     (3) Except as provided in section 7-113-207 or 7-113-209 (1) (b), the
demand for payment and deposit of certificates are irrevocable.

     (4) A shareholder who does not demand payment and deposit the shareholder's
share certificates as required by the date or dates set in the dissenters'
notice is not entitled to payment for the shares under this article.

7-113-205 -- UNCERTIFICATED SHARES.

     (1) Upon receipt of a demand for payment under section 7-113-204 from a
shareholder holding uncertificated shares, and in lieu of the deposit of
certificates representing the shares, the corporation may restrict the transfer
thereof.

     (2) In all other respects, the provisions of section 7-113-204 shall be
applicable to shareholders who own uncertificated shares.

7-113-206 -- PAYMENT.

     (1) Except as provided in section 7-113-208, upon the effective date of the
corporate action creating dissenters' rights under section 7-113-102 or upon
receipt of a payment demand pursuant to section 7-113-204, whichever is later,
the corporation shall pay each dissenter who complied with section 7-113-204, at
the address stated in the payment demand, or if no such address is stated in the
payment demand, at the address shown on the corporation's current record of
shareholders for the record shareholder holding the dissenter's shares, the
amount the corporation estimates to be the fair value of the dissenter's shares,
plus accrued interest.

     (2) The payment made pursuant to subsection (1) of this section shall be
accompanied by:

          (a) The corporation's balance sheet as of the end of its most recent
     fiscal year or, if that is not available, the corporation's balance sheet
     as of the end of a fiscal year ending not more than sixteen months before
     the date of payment, an income statement for that year, and, if the
     corporation customarily provides such statements to shareholders, a
     statement of changes in shareholders' equity for that year and a statement
     of cash flow for that year, which balance sheet and statements shall have

                                       A-5
<PAGE>   508

     been audited if the corporation customarily provides audited financial
     statements to shareholders, as well as the latest available financial
     statements, if any, for the interim or full-year period, which financial
     statements need not be audited;

          (b) A statement of the corporation's estimate of the fair value of the
     shares;

          (c) An explanation of how the interest was calculated;

          (d) A statement of the dissenter's right to demand payment under
     section 7-113-209; and

          (e) A copy of this article.

7-113-207 -- FAILURE TO TAKE ACTION.

     (1) If the effective date of the corporate action creating dissenters'
rights under section 7-113-102 does not occur within sixty days after the date
set by the corporation by which the corporation must receive the payment demand
as provided in section 7-113-203, the corporation shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.

     (2) If the effective date of the corporate action creating dissenters'
rights under section 7-113-102 occurs more than sixty days after the date set by
the corporation by which the corporation must receive the payment demand as
provided in section 7-113-203, then the corporation shall send a new dissenters'
notice, as provided in section 7-113-203, and the provisions of sections
7-113-204 to 7-113-209 shall again be applicable.

7-113-208 -- SPECIAL PROVISIONS RELATING TO SHARES ACQUIRED AFTER ANNOUNCEMENT
OF PROPOSED CORPORATE ACTION.

     (1) The corporation may, in or with the dissenters' notice given pursuant
to section 7-113-203, state the date of the first announcement to news media or
to shareholders of the terms of the proposed corporate action creating
dissenters' rights under section 7-113-102 and state that the dissenter shall
certify in writing, in or with the dissenter's payment demand under section
7-113-204, whether or not the dissenter (or the person on whose behalf
dissenters' rights are asserted) acquired beneficial ownership of the shares
before that date. With respect to any dissenter who does not so certify in
writing, in or with the payment demand, that the dissenter or the person on
whose behalf the dissenter asserts dissenters' rights acquired beneficial
ownership of the shares before such date, the corporation may, in lieu of making
the payment provided in section 7-113-206, offer to make such payment if the
dissenter agrees to accept it in full satisfaction of the demand.

     (2) An offer to make payment under subsection (1) of this section shall
include or be accompanied by the information required by section 7-113-206 (2).

7-113-209 -- PROCEDURE IF DISSENTER IS DISSATISFIED WITH PAYMENT OR OFFER.

     (1) A dissenter may give notice to the corporation in writing of the
dissenter's estimate of the fair value of the dissenter's shares and of the
amount of interest due and may demand payment of such estimate, less any payment
made under section 7-113-206,

                                       A-6
<PAGE>   509

or reject the corporation's offer under section 7-113-208 and demand payment of
the fair value of the shares and interest due, if:

          (a) The dissenter believes that the amount paid under section
     7-113-206 or offered under section 7-113-208 is less than the fair value of
     the shares or that the interest due was incorrectly calculated;

          (b) The corporation fails to make payment under section 7-113-206
     within sixty days after the date set by the corporation by which the
     corporation must receive the payment demand; or

          (c) The corporation does not return the deposited certificates or
     release the transfer restrictions imposed on uncertificated shares as
     required by section 7-113-207 (1).

     (2) A dissenter waives the right to demand payment under this section
unless the dissenter causes the corporation to receive the notice required by
subsection (1) of this section within thirty days after the corporation made or
offered payment for the dissenter's shares.

7-113-301 -- COURT ACTION.

     (1) If a demand for payment under section 7-113-209 remains unresolved, the
corporation may, within sixty days after receiving the payment demand, commence
a proceeding and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the sixty-day period, it shall pay to each dissenter whose demand remains
unresolved the amount demanded.

     (2) The corporation shall commence the proceeding described in subsection
(1) of this section in the district court of the county in this state where the
corporation's principal office is located or, if the corporation has no
principal office in this state, in the district court of the county in which its
registered office is located. If the corporation is a foreign corporation
without a registered office, it shall commence the proceeding in the county
where the registered office of the domestic corporation merged into, or whose
shares were acquired by, the foreign corporation was located.

     (3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unresolved parties to the proceeding commenced
under subsection (2) of this section as in an action against their shares, and
all parties shall be served with a copy of the petition. Service on each
dissenter shall be by registered or certified mail, to the address stated in
such dissenter's payment demand, or if no such address is stated in the payment
demand, at the address shown on the corporation's current record of shareholders
for the record shareholder holding the dissenter's shares, or as provided by
law.

     (4) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend a
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in any amendment to such order. The parties to
the proceeding are entitled to the same discovery rights as parties in other
civil proceedings.

     (5) Each dissenter made a party to the proceeding commenced under
subsection (2) of this section is entitled to judgment for the amount, if any,
by which the court finds the fair value of the dissenter's shares, plus
interest, exceeds the amount paid by the

                                       A-7
<PAGE>   510

corporation, or for the fair value, plus interest, of the dissenter's shares for
which the corporation elected to withhold payment under section 7-113-208.

7-113-302 -- COURT COSTS AND COUNSEL FEES.

     (1) The court in an appraisal proceeding commenced under section 7-113-301
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation; except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under section 7-113-209.

     (2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:

          (a) Against the corporation and in favor of any dissenters if the
     court finds the corporation did not substantially comply with the
     requirements of part 2 of this article; or

          (b) Against either the corporation or one or more dissenters, in favor
     of any other party, if the court finds that the party against whom the fees
     and expenses are assessed acted arbitrarily, vexatiously, or not in good
     faith with respect to the rights provided by this article.

     (3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to said counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who were benefitted.

                                       A-8
<PAGE>   511

                               TRUDY CORPORATION
                                353 MAIN AVENUE
                        NORWALK, CONNECTICUT 06851-1552
                           -------------------------

                   NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
                        TO BE HELD                , 1999
                           -------------------------

     You are invited to attend a Special Meeting of Stockholders of Trudy
Corporation that will be held at      a.m. local time on              , 1999, at
                          . The Trudy Board of Directors has called this special
meeting for the following purposes:

     - To consider and vote upon a proposal to approve and adopt the Merger
       Agreement dated as of June 7, 1999, by and among Trudy, Futech
       Interactive Products, Inc., Janex International, Inc., Fundex Games,
       Ltd., DaMert Company, and two newly formed companies that we are
       referring to as "New Futech" and "New Sub." Under the Merger Agreement,
       first Futech and then Trudy, Janex, and DaMert will merge with and into
       New Futech, which will survive the mergers, and Fundex will merge into
       New Sub, which will survive as a wholly-owned subsidiary of New Futech.
       Each share of Trudy common stock outstanding immediately prior to the
       mergers (other than dissenting shares) will be converted into the right
       to receive approximately .0011 shares of New Futech common stock and
       $.0012 in cash. In addition, if at the time the New Futech stock is first
       traded on a listed and recognized securities exchange, its average
       closing price over a specified 15 day period is less than $7.50 per
       share, the former Trudy stockholders will receive additional shares of
       New Futech common stock in an amount sufficient to cause the value of all
       such stock issued to them to equal $3,000,000. If by the fifth
       anniversary of the closing the New Futech common stock is still not
       publicly traded as described above, each former Trudy stockholder will
       have the right to exchange New Futech stock for unsecured five year
       debentures of New Futech bearing interest at prime and with a principal
       amount equal to $7.50 per share exchanged.

     - To transact such other business as may properly come before the special
       meeting or any adjournment or postponement of the special meeting.

     These matters are more fully described in the prospectus/proxy statement
supplement and related prospectus/proxy statement that are attached to this
Notice.

     We, the board of directors of Trudy, unanimously recommend that you vote
FOR the mergers.

     You will be entitled to vote at the special meeting or any adjournment or
postponement of the special meeting only if you are a holder of record of Trudy
common stock at the close of business on              , 1999.

                                  BY ORDER OF THE BOARD OF DIRECTORS

                                  William W. Burnham
                                  Chairman
Norwalk, Connecticut
             , 1999

                                   IMPORTANT

     We cordially invite all stockholders to attend the special meeting in
person.

     Whether or not you plan to attend the special meeting in person, in order
to assure your representation at the meeting, we urge you to complete, sign and
date the enclosed proxy card, which is being solicited by the board of
directors, and promptly return it in the self-addressed return envelope enclosed
for that purpose. You may revoke your proxy at any time prior to the vote at the
meeting by telling us that you want to do so.
<PAGE>   512


                  Subject To Completion, dated October 8, 1999



                  FUTECH INTERACTIVE PRODUCTS (DELAWARE) INC.


                           FUTECH TOYS & GAMES, INC.


                               TRUDY CORPORATION


                     PROSPECTUS/PROXY STATEMENT SUPPLEMENT



     The board of directors of Trudy Corporation has called a special meeting of
stockholders to consider and vote upon a proposal to (a) merge Futech
Interactive Products, Inc. with Futech Interactive Products (Delaware) Inc., a
newly-formed company, so that New Futech is a Delaware corporation, (b) merge
Trudy and two other companies into New Futech, and (c) merge a fourth company
into a subsidiary so that it becomes a subsidiary of New Futech. This
prospectus/proxy statement supplement and the accompanying prospectus/proxy
statement are intended to give you important information about the special
meeting and about the proposed mergers and the combined company that would
result from the mergers. PLEASE READ THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS/PROXY STATEMENT TOGETHER WITH EACH OTHER AS IF
THEY WERE A SINGLE DOCUMENT. THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT ALONE
DOES NOT INCLUDE ALL OF THE INFORMATION THAT WE BELIEVE MAY BE IMPORTANT TO YOU.



     Under the merger agreement, first Futech and then Trudy, Janex
International, Inc., and DaMert Company will merge with and into New Futech, and
Fundex Games, Ltd. will merge into the newly formed subsidiary, Futech Toys &
Games, Inc. ("New Sub"), which will survive as a wholly-owned subsidiary of New
Futech. Each share of outstanding stock of any of the merging companies
immediately prior to the mergers other than dissenting shares is expected to be
converted into the right to receive cash, shares of New Futech stock, promissory
notes of New Futech or New Sub, or a combination of these things, in the amounts
specified on the cover page of the prospectus/ proxy statement, but subject to
changes in accordance with the elections and conditional rights described under
"Description of the Mergers and the Merger Agreement" in the prospectus/proxy
statement beginning at page 12. The table does not include outstanding options
and warrants of Futech, Janex and Fundex, which would be converted into New
Futech options and warrants in the mergers. Trudy shareholders will receive
additional shares of New Futech common stock or will have the right to exchange
the shares of New Futech common stock received in the mergers for New Futech
promissory notes under some circumstances described in the prospectus/proxy
statement.



     There is no established public trading market for Trudy common stock,
although it is traded sporadically on the OTC Bulletin Board under the symbol
"TRDY." We expect the New Futech common stock to trade on the OTC Bulletin Board
or on other markets after the mergers, but we cannot be sure it will do so and
we cannot predict what the price might be. We do not expect a trading market to
develop for any of the other securities of New Futech or New Sub.



     THESE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROSPECTUS/PROXY STATEMENT
SUPPLEMENT AND THE RELATED PROSPECTUS/PROXY STATEMENT. THE PROPOSED MERGERS ARE
COMPLEX TRANSACTIONS. WE STRONGLY URGE YOU TO READ AND CONSIDER CAREFULLY THIS
PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE PROSPECTUS/PROXY STATEMENT IN
THEIR ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO UNDER "RISK FACTORS"
BEGINNING ON PAGE 6 OF THE PROSPECTUS/PROXY STATEMENT.



     Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus/proxy statement supplement or the accompanying prospectus/proxy
statement is truthful or complete. Any representation to the contrary is a
criminal offense.



     This prospectus/proxy statement supplement and the related prospectus/proxy
statement are first being mailed to stockholders of Futech, Janex, Trudy, Fundex
and DaMert on or about                , 1999.



The date of this prospectus/proxy statement supplement is                , 1999.

<PAGE>   513

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS/PROXY STATEMENT. WE HAVE NOT, AND NEW FUTECH AND NEW SUB HAVE NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. NEW FUTECH AND NEW SUB ARE NOT MAKING AN OFFER TO SELL THESE SECURITIES IN
ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME
THAT THE INFORMATION APPEARING IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS/PROXY STATEMENT IS ACCURATE AS OF THE DATE ON THE
FRONT OF THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT ONLY. OUR BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE
THAT DATE.

                      WHERE YOU CAN FIND MORE INFORMATION


     We will send to you, without charge, any material information that we have
or can obtain without unreasonable effort or expense concerning Trudy or any
other merging company, concerning the merger agreement and related contracts or
concerning the proposed management and operations of New Futech. You may direct
requests for such additional information to Trudy in the manner described below.


     We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http.//www.sec.gov. You may also read and copy
any document we file at the SEC's public reference rooms in Washington, D.C.,
New York, and Chicago. You can call the SEC at 1-800-732-0330 for further
information about the public reference rooms. Similar information is available
concerning Janex.

     The SEC allows us to "incorporate by reference" some of the information we
file with them, which means we are assumed to have disclosed important
information to you when we refer you to documents that are on file with the SEC.
The information we have incorporated by reference is an important part of this
prospectus/proxy statement supplement and the related prospectus/proxy
statement, and information that we file later with the SEC will automatically
update and supersede this information. We incorporate by reference the documents
listed below and any future documents we file with the SEC under Sections 13(a),
13(c), l4 or 15(d) of the Securities Exchange Act of 1934 until the mergers
occur.

     - Annual Report on Form 10-KSB for the fiscal year ended March 31, 1999.

     - Quarterly Reports on Form 10-QSB for the periods ended June 30, 1998,
       September 30, 1998 and December 31, 1998.


     - Current Report on Form 8-K dated April 12, 1999.


     You may request a copy of these documents at no cost by writing to us at
the following address:

                               Trudy Corporation
                                353 Main Avenue
                        Norwalk, Connecticut 06851-1552

                            Attn: William W. Burnham

                            Telephone: 203-846-2274

     TO OBTAIN TIMELY DELIVERY OF THESE DOCUMENTS, YOU MUST MAKE YOUR REQUEST NO
LATER THAN           , FIVE BUSINESS DAYS BEFORE THE DATE OF THE TRUDY
STOCKHOLDERS MEETING.

                                        i
<PAGE>   514

                               TABLE OF CONTENTS


<TABLE>
<S>                                                           <C>
Summary Information -- Q&A..................................    1
Other Information About the Mergers.........................    3
  The Companies.............................................    3
  The Special Meeting.......................................    3
  The Merger Agreement......................................    3
Stockholder Matters.........................................    5
The Mergers and Related Transactions........................    5
  General...................................................    5
  Effects of the Mergers....................................    5
  Background of the Mergers.................................    6
  Reasons for the Mergers...................................    8
  Trudy's Board Recommendation..............................    8
  Related Agreements; Interests of Trudy Affiliates in the
     Mergers................................................    8
  Regulatory Matters........................................    9
  Federal Income Tax Consequences...........................    9
  Accounting Treatment......................................   12
Appraisal Rights of Trudy Stockholders......................   12
New Futech and Trudy Shares.................................   14
  New Futech Common Stock...................................   14
  Trudy Capital Stock.......................................   14
Common Stock................................................   14
Comparison of the Rights of Holders of Trudy Common Stock
  and New Futech Common Stock...............................   15
Management's Discussion and Analysis or Plan of Operation...   18
  Overview..................................................   18
  Results of Operations.....................................   18
  Seasonality and Quarterly Fluctuations....................   20
  Liquidity and Capital Resources...........................   20
  Inflation.................................................   22
  Year 2000.................................................   22
  Forward-Looking Statements and Associated Risks...........   22
Description of Trudy's Business.............................   23
  General...................................................   23
  Products and Licensing....................................   23
  Marketing and Sales.......................................   23
  Customers.................................................   24
  Manufacturing and Product Design..........................   24
  Backlog...................................................   24
</TABLE>


                                       ii
<PAGE>   515

<TABLE>
<S>                                                           <C>
  Governmental Regulations..................................   24
  Competition...............................................   25
  Employees and Product Design..............................   25
  Property..................................................   25
  Legal Proceedings.........................................   25
Trudy Management............................................   26
  Directors and Executive Officers..........................   26
Trudy Stockholders..........................................   28
  Security Ownership of Certain Beneficial Owners and
     Management.............................................   28
Certain Relationships and Related Transactions..............   29
Changes in and Disagreements with Accountants on Accounting
  and Financial Disclosure..................................   30
Appendices
Appendix 1 -- Section 262 Appraisal Rights Delaware General
  Corporation Law...........................................  A-1
</TABLE>


                                       iii
<PAGE>   516

                           SUMMARY INFORMATION -- Q&A


     This summary highlights selected information from this document and may not
contain all the information that is important to you. For a more complete
understanding of the mergers, you should carefully read the prospectus/proxy
statement and this prospectus/ proxy statement supplement and the additional
documents we mention. You should pay special attention to the "Risk Factors"
section beginning on page 6 of the prospectus/proxy statement.


WHY ARE THE FIVE COMPANIES PROPOSING TO MERGE?


     The five companies are proposing to merge because the directors of each
company believe the combination will provide significant benefits to
stockholders. We believe the mergers will enable us to take advantage of the
complementary strategic fit of our respective businesses by marketing through
additional channels of distribution. We also hope and believe that the mergers
will improve the likelihood that stockholders will have a more liquid market
should they wish to sell their stock and that the combined companies will be
able to more efficiently access the markets for debt and equity when
appropriate. To review the background and reasons for the mergers in greater
detail, see "Background of the Mergers" in the prospectus/proxy statement.


WHAT WILL I RECEIVE IN THE MERGERS?


     You and all Trudy stockholders will receive a combination of cash and
common stock of New Futech in exchange for your Trudy stock. Stockholders of the
other merging companies will receive cash, common stock of New Futech and
promissory notes of New Futech or New Sub. Certain employment contracts and
other agreements with affiliates of the merging companies are also part of the
deal. See "Description of the Mergers and the Merger Agreement" in the
prospectus/proxy statement.


WHAT RISKS SHOULD I CONSIDER?


     You should review "Risk Factors" beginning on page 6 of the
prospectus/proxy statement.


WHAT STOCKHOLDER VOTE IS REQUIRED TO APPROVE THE MERGERS?

     The following table shows the proportions of the outstanding shares that
must vote in favor of the mergers, together with the proportion of the
outstanding shares that are held by directors, executive officers and their
affiliates, the majority of whom have indicated that they intend to vote in
favor of the mergers.


<TABLE>
<CAPTION>
                            SHARES OWNED BY DIRECTORS,
COMPANY  VOTE REQUIRED   EXECUTIVE OFFICERS AND AFFILIATES
-------  -------------   ---------------------------------
<S>      <C>             <C>
Trudy..    Majority                     60.9%
Fundex...   Majority                    70.8%
Futech...   Majority                    56.4%
Janex..    Majority                     79.2%
DaMert...   Majority                   100.0%
</TABLE>



     The presence in person or by proxy of a majority of the outstanding shares
of each company constitutes a quorum for business to be conducted at the
meeting. Abstentions and broker non-votes will be treated as present for
purposes of determining a quorum for


                                        1
<PAGE>   517


each company's stockholders' meeting, but since they will not be counted as
votes in favor of the merger, they will have the same effect as votes against
the merger.


WHAT CIRCUMSTANCES MIGHT PREVENT THE MERGERS?


     New Futech has the right to terminate the merger agreement if stockholders
from all of the merging companies combined exercise dissenters' rights with
respect to more than 5% of the aggregate merger consideration to be issued in
the mergers. See "Description of the Mergers and the Merger
Agreement -- Conditions to Closing" in the prospectus/proxy statement for a
description of the other conditions to the mergers.


HOW WILL THE MERGERS BE TREATED FOR ACCOUNTING PURPOSES?

     We expect the mergers to be treated as purchases by Futech, which means
that the amount by which the total merger consideration received by stockholders
of the other merging companies plus the amount of their liabilities exceeds the
fair market value of their identifiable assets will initially be treated as
goodwill by New Futech for accounting purposes.

WHEN DO YOU EXPECT THE MERGERS TO BE COMPLETED?


     We are working to complete the mergers during the fourth quarter of 1999.
However, the merger agreement does not contain any express deadline for the
mergers to proceed.


WHAT ARE THE TAX CONSEQUENCES OF THE MERGERS TO ME?


     We and the other merging companies have structured the merger agreement
with the intent and expectation that the exchange of shares by Trudy
shareholders will be tax-free for federal income tax purposes. THERE WILL BE
FEDERAL INCOME TAXES DUE ON THE CASH AND OTHER RIGHTS THAT YOU RECEIVE. You
should review the more detailed description of federal tax consequences in
"Certain Federal Tax Matters" in this prospectus/proxy statement supplement.
State and local taxes may also become due as a result of the mergers.


     The precise tax consequences of the mergers will depend on your own
situation. You should consult your tax advisor for a full understanding of the
tax consequences of the mergers to you.

WILL I HAVE DISSENTERS' RIGHTS?


     Yes, provided you do not vote in favor of the mergers and meet all other
requirements of the dissenters' rights statute. See "Appraisal Rights of Trudy
Stockholders" on pages 1- and 1- of in this prospectus/proxy statement
supplement and the Delaware dissenters' rights statute that is attached as
Appendix 1 to this prospectus/proxy statement supplement.



HOW DO I VOTE AND HOW ARE THE VOTES COUNTED?


     Just indicate on your proxy card how you want to vote on the mergers, and
sign and mail it in the enclosed return envelope as soon as possible, so that
your shares will be represented at the stockholders meeting.


     If you sign and send in your proxy and do not indicate how you want to
vote, your proxy will be counted as a vote in favor of the mergers. If you do
not vote (because you do not return the proxy, give instructions to your broker,
or vote in person) or you abstain, it will have the same effect as a vote
against the mergers.



     The stockholders meeting will take place on                , at
local time, at                           . You may attend the stockholders
meeting and vote your shares in person, rather than signing and mailing your
proxy card. In addition, you may withdraw or


                                        2
<PAGE>   518


revoke your proxy at anytime up to and including the day of the meeting by
giving written notice to the Secretary of Trudy, or by returning a later dated
proxy vote or by attending the meeting and voting in person. The votes will be
tabulated by the Secretary of Trudy or by such other person as the President of
Trudy may designate.


IF MY SHARES OF TRUDY STOCK ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY
BROKER VOTE MY SHARES FOR ME?

     Your broker will vote your shares of Trudy stock only if you provide
instructions on how to vote. Without instructions, your shares will not be
voted. Shares that are not voted will have the same effect as votes against the
mergers.

SHOULD I SEND IN MY STOCK CERTIFICATES NOW?

     No. After the mergers are completed we will send you written instructions
for exchanging your stock certificates for the New Futech stock and cash to
which you are entitled.

                      OTHER INFORMATION ABOUT THE MERGERS

THE COMPANIES


     Each of Futech, Janex, Trudy, DaMert, Fundex, New Futech and New Sub are
described in the "Summary" and "New Futech's Business" sections of the
prospectus/proxy statement.



THE SPECIAL MEETING


DATE, TIME AND PLACE

     The Trudy special meeting will be held on                , at           at
                     .

PURPOSE OF THE SPECIAL MEETING


     We have called the special meeting so the Trudy stockholders can vote on
whether to approve the mergers pursuant to the merger agreement. The directors
of Futech, Janex, Fundex and DaMert have called for special meetings of the
stockholders of their companies so that they also can vote whether to approve
the mergers.


RECOMMENDATION OF THE TRUDY BOARD OF DIRECTORS


     We have unanimously approved the merger agreement and unanimously recommend
that the stockholders of Trudy vote "For" approval of the merger agreement.


THE MERGER AGREEMENT


     Under the merger agreement, first Futech and then Trudy, Janex and DaMert
will merge with and into New Futech, which will survive the mergers, and Fundex
will merge into New Sub, which will survive as a wholly-owned subsidiary of New
Futech. Under the merger agreement, each share of Trudy common stock outstanding
immediately prior to the mergers (other than dissenting shares) will be
converted into the right to receive approximately .0011 shares of New Futech
common stock and $.0012 in cash. In addition, if at the time the New Futech
stock is first traded on a listed and recognized securities exchange, its
average closing


                                        3
<PAGE>   519


price over a specified 15 day period is less than $7.50 per share, the former
Trudy stockholders will receive additional shares of New Futech common stock in
an amount sufficient to cause the value of all such stock issued to them to
equal $3,000,000. If by the fifth anniversary of the closing the New Futech
common stock is still not publicly traded as described above, each former Trudy
stockholder will have the right to exchange New Futech stock for unsecured five
year debentures of New Futech bearing interest at prime and with principal
amount equal to $7.50 per share exchanged. See "Description of the Mergers and
the Merger Agreement -- Basic Terms of the Merger Agreement" in the
prospectus/proxy statement.


                                        4
<PAGE>   520


                              STOCKHOLDER MATTERS



     There is no established public trading market for Trudy common stock,
because it is traded only rarely on the OTC Bulletin Board under the symbol
"TRDY." There is no public trading market for the New Futech common stock. We
expect the New Futech common stock to trade on the OTC Bulletin Board/Nasdaq
Stock Market soon after the mergers, but we cannot be sure it will do so and we
cannot predict what the price might be. We do not expect a trading market to
develop for any of the other securities of New Futech or New Sub.



     As of October 1, 1999, there were approximately 1,491 stockholders of
record of Trudy common stock, as shown on the records of our transfer agent.


     Since its organization, Trudy has not paid any dividends on its common
stock and does not anticipate paying dividends in the foreseeable future. If the
mergers do not occur for any reason, we anticipate that all earnings, in the
foreseeable future, will be retained for development of Trudy's business.

                      THE MERGERS AND RELATED TRANSACTIONS

GENERAL


     The merger agreement provides for the merger of Futech with and into New
Futech, promptly followed by the substantially simultaneous merger of Trudy,
Janex, and DaMert with and into New Futech and the substantially simultaneous
merger of Fundex with and into New Sub. The discussion in this prospectus/proxy
statement supplement and the related prospectus/proxy statement of the mergers
and the description of the principal terms of the merger agreement contained in
the prospectus/proxy statement are subject to and qualified in their entirety by
reference to the merger agreement, a copy of which is attached to the
prospectus/proxy statement as Appendix A.


EFFECTS OF THE MERGERS

GENERAL


     We intend for the mergers to occur promptly following approval of the
mergers by the requisite vote of the stockholders of each of Trudy, Futech,
Janex, DaMert and Fundex and the satisfaction or waiver of all other conditions
to consummation of the mergers. The mergers will become effective at or about
the time of filing of articles of merger or other appropriate documents with the
applicable government offices or agencies. At that time Futech will
reincorporate in Delaware by merging with New Futech and then Trudy, Janex, and
DaMert will merge with and into New Futech with the result that New Futech will
be the surviving corporation. Then, Fundex will merge with and into New Sub with
the result that New Sub will be the surviving wholly owned subsidiary of New
Futech. As part of the mergers, New Futech will change its name to "Futech
Interactive Products, Inc." The stockholders of Trudy will become stockholders
of New Futech, and their rights will be governed by the New Futech certificate
of incorporation and bylaws. See "Comparison of Rights of Stockholders of Trudy
and New Futech." See "Description of the Mergers and the Merger Agreement" in
the prospectus/proxy statement.



     For information regarding the operation of New Futech and New Sub following
the mergers, see "New Futech Business" in the prospectus/proxy statement. For
information regarding the officers and directors of New Futech following the
mergers, see "New Futech's Management" in the prospectus/proxy statement.


                                        5
<PAGE>   521

EXCHANGE RATIOS


     Each share of Trudy common stock outstanding immediately prior to the
mergers (other than dissenting shares) will be converted into the right to
receive approximately .0011 shares of new Futech common stock and $.0012 in
cash. In addition, if the average closing price of the New Futech stock for the
15 consecutive trading days starting on the day on which the New Futech stock is
first traded on a listed and recognized securities exchange, is less than $7.50
per share, the former Trudy stockholders will receive additional shares of New
Futech common stock in an amount sufficient to cause the value of all such stock
issued to them to equal $3,000,000. If by the fifth anniversary of the closing
the New Futech common stock is still not publicly traded as described above,
each former Trudy stockholder will have the right to exchange New Futech stock
for unsecured five year debentures of New Futech bearing interest at prime and
with principal amount equal to $7.50 per share exchanged.



     Outstanding shares of Futech, Fundex, Janex and DaMert will also be
converted into a combination of cash, common stock of New Futech and promissory
notes of New Futech or New Sub. Under certain circumstances the former
stockholders of Fundex will have the right to exchange their New Futech stock
for the license rights in the "Phase 10" family of games now owned by Fundex. In
addition, outstanding options for shares of Trudy, Futech, Janex and Fundex will
be converted into options for shares of common stock of New Futech. See
"Description Of The Mergers And The Merger Agreement -- Basic Terms of the
Merger Agreement" in the prospectus/proxy statement.


FRACTIONAL SHARES


     Fractional shares of New Futech common stock will be issued in the mergers.


BACKGROUND OF THE MERGERS


     During 1998, Trudy actively sought an acquisition that would provide ready
distribution for its Soundprints storybooks and audio tapes in the supplemental
education market either to libraries and/or the classroom. After several years
of growth in sales and profitability due to the successful penetration of the
Soundprints products in the book seller and specialty retail trade, warehouse
clubs, and direct mail segments, Trudy's management decided, after reviewing
market data, that the best opportunity for continuing sales momentum was to sell
directly to educators where the Soundprints products could be used in libraries
and classrooms. Trudy management also believed that it had sufficient direct
marketing, back-office and order fulfillment expertise and capacity to nearly
double its sales without adding substantially to overhead costs.



     During the summer of 1998, Trudy entered preliminary discussions with three
companies with a presence in the education market. During this time, sales in
Trudy's main market segments, particularly sales to the warehouse clubs, began
to decline. It was determined that, at this reduced level of sales, Trudy would
not have the financial resources to acquire another company. In the meantime
Trudy hired a mergers and acquisitions consulting firm, JPMC Associates, which
was actively seeking acquisition candidates for Trudy. This firm introduced
Trudy to a manufacturer and marketer of science educational products that was
seeking to acquire other companies. Discussions between Trudy's management,
JPMC, and the management of the other company took place during the fall of
1998. Historical financial results and projections were exchanged. Trudy's
management did not reach an acceptable acquisition agreement.


                                        6
<PAGE>   522


     In early November 1998, Vincent Goett, Futech's CEO, having become aware of
Trudy's interest in acquisition candidates, placed a telephone call to William
Burnham, Trudy's chief executive officer. William Carney, Trudy's former chief
financial officer, returned the call to Mr. Goett. Mr. Goett reviewed Futech's
recent history of acquiring several toy, game, greeting card and publishing
distribution companies and outlined his strategy to continue making acquisitions
of companies that could utilize Futech's proprietary conductive ink sound
technology. A confidentiality agreement between Futech and Trudy was signed by
Mr. Goett and Mr. Carney on November 11.



     On November 16 and 17, 1998 at an annual strategic planning retreat of
management and board members in Vermont, Trudy's financial condition was
reviewed and discussed in detail as to a strategy to address the recent sales
softness. Various alternatives were considered including remaining independent,
merging with Futech, continuing to seek other merger partners including the
science educational products company or rekindling the earlier strategy of
acquiring a literature based educational publisher. For the latter option, one
such publisher had been identified and preliminary acquisition negotiations
initiated. Those at the retreat concluded Trudy did not have a source of cash to
fund an acquisition. Alternatively, a purchase with Trudy stock would not be
sufficient incentive to the acquiring party since Trudy's stock had been
de-listed and there were no market makers. In addition, the sales level of Trudy
was such that sufficient cash could not be generated in the next six months to
allow Trudy to stay within its bank lending covenants. Accordingly, it was
decided that management should continue preliminary merger negotiations with
Futech. On November 23 and 24, a meeting was held at Futech's offices in
Phoenix, AZ between Mr. Goett and Mr. Burnham, Elisabeth Prial, Trudy's former
publisher and currently a Vice President and Publisher of Futech, and Mr. James
McGough, principal of JPMC Associates. Terms of an agreement for Futech to
acquire Trudy were agreed to at these meetings. On December 11th, at a special
board meeting, details of the acquisition terms were discussed and the agreement
was unanimously approved. On December 18, 1998 a letter of intent was signed by
both Futech and Trudy.



     Throughout January and February, both companies performed due diligence
while the definitive merger agreement was drafted. On March 1, 1999, Trudy's
board held a special meeting to review the proposed merger and, after discussion
and consideration, approved and authorized the execution of the merger
agreement. Following further negotiation, each of Trudy and Futech executed and
delivered the merger agreement on March 3. Since March, Trudy management has
been working closely with the management of the other merging companies to
integrate the various operations. Additional due diligence work has been
performed by all parties. Since the execution of the merger agreement on March
3, 1999 between Trudy and Futech, it was determined that it would be preferable
to have a global merger agreement which would be signed by all of the merging
companies and would supersede the prior merger agreement between Trudy and
Futech. The merger agreement contains substantially similar terms as the prior
merger agreement and was unanimously approved by Trudy's board of directors on
May 25, 1999.



     Trudy has agreed to pay James P. McGough of JPMC Associates, Trudy's
mergers and acquisitions consulting firm, total compensation of approximately
$167,000 for his services in connection with the Trudy merger. Mr. McGough has
been issued 13,500,000 shares of Trudy common stock and will be paid $43,670.
The 13,500,000 shares of Trudy common stock will be converted in the mergers
into cash in the amount of $16,287 and 14,276 shares of New Futech common stock.
Mr. McGough is not related in any other way to Trudy or any of the members of
management.


                                        7
<PAGE>   523

REASONS FOR THE MERGERS

     THE TRUDY BOARD OF DIRECTORS HAS DETERMINED THAT THE TERMS OF THE MERGERS
ARE IN THE BEST INTERESTS OF TRUDY AND ITS SHAREHOLDERS. ACCORDINGLY, THE TRUDY
BOARD HAS UNANIMOUSLY APPROVED AND ADOPTED THE MERGER AGREEMENT AND RECOMMENDS
THAT THE STOCKHOLDERS OF TRUDY VOTE FOR APPROVAL OF THE MERGER PROPOSAL.

     As a small, de-listed public company, Trudy has found it difficult to raise
capital for investment opportunities which it considered attractive. It has also
been unable to provide its shareholders liquidity for its stock. A decline in
sales and profitability in 1998 has made it increasingly difficult for Trudy to
fund needed investments.

     After pursuing several alternatives throughout 1998, including acquiring or
merging with other small publishing companies, Trudy agreed to be acquired by
Futech. Management and the board believe that the mergers will give Trudy access
to the capital needed to increase the number of titles published each year and
also expand into the supplemental education market. The mergers will also allow
Trudy to improve profitability by realizing economies of scale needed to improve
the effectiveness of its sales efforts in multiple distribution channels and
reduce overhead costs in administrative, logistical, and back-office functions.

     The mergers may provide liquidity to the former Trudy stockholders for
their New Futech common stock. Trudy's board of directors expects the New Futech
common stock to trade on the OTC Bulletin Board after the mergers, but there is
no assurance that it will do so or at what price or prices it would trade.


     For additional information regarding the background of and the reasons for
the merger, see "Specific Reasons for Previous Acquisitions and Proposed Merger
Partners" beginning in the prospectus/proxy statement.


TRUDY'S BOARD RECOMMENDATION


     The board of directors of Trudy has determined that the mergers are
advisable and in the best interests of Trudy and its stockholders and has
unanimously recommended a vote for approval of the merger proposal.



RELATED AGREEMENTS; INTERESTS OF TRUDY AFFILIATES IN THE MERGERS



     In connection with the mergers, William W. Burnham will be employed as the
Vice President -- Specialty and Education Products of New Futech. Mr. Burnham
will also be a director of New Futech and will receive a three year employment
agreement providing for a base salary of $100,000 per year and stock options for
a total of 20,000 shares of New Futech common stock, vesting in equal, annual
installments over the three year period and with an exercise price of $7.50 per
share. Some of the officers and directors of the other merging companies will
also receive employment agreements and stock options in connection with the
mergers. Mr. Burnham is currently Chairman of the Board, President, and
Treasurer of Trudy Corporation. He beneficially owns 115,090,000 common shares
of Trudy.



     New Futech has also agreed, as part of the merger agreement, to repay
certain loans owing by Trudy to William W. Burnham and two of his family members
in the aggregate amount, including accrued interest at 10% per year through
January 31, 1999 of $800,000. Interest will continue to accrue only on the debt
owing to the family members until the mergers occur. As of June 30, 1999, the
balance, including accrued interest owed to the family members was $173,941. No
interest will accrue on the debts owing to Mr. Burnham


                                        8
<PAGE>   524


from February 1, 1999 through the effective time of the mergers. Beginning on
the closing date of the mergers, interest will accrue on the outstanding balance
of all of these loans at 4% per year. At the closing, New Futech will repay 25%
of the outstanding balance, and thereafter will repay three equal amounts of
principal plus all accrued interest at six month intervals.



     Within thirty days after the effective date of the mergers, New Futech will
obtain releases from William W. Burnham, Alice Burnham and Peter Burnham of
their personal guaranty of Trudy debts with Wilmington Trust. New Futech may be
required to refinance these loans to obtain the releases. See "Certain
Relationships and Related Transactions."


REGULATORY MATTERS

     Except as disclosed in this prospectus/proxy statement supplement and the
prospectus/proxy statement, Trudy and New Futech are not aware of any
governmental or regulatory approvals required for consummation of the mergers,
other than compliance with the federal securities laws and applicable securities
and "blue sky" laws of the various states.


FEDERAL INCOME TAX CONSEQUENCES



     In the opinion of Quarles & Brady LLP, special tax counsel to New Futech:



     (1) the Merger will be treated for federal income tax purposes as a
         reorganization within the meaning of Section 368(a) of the Code, and
         New Futech and Trudy will each be a party to that reorganization within
         the meaning of Section 368(b) of the Code; and



     (2) the federal income tax consequences described in this prospectus/proxy
         statement supplement, to the extent that they constitute matters of law
         or legal conclusions, are correct in all material results.



     In rendering its opinion, tax counsel has relied upon and assumed as
accurate and correct, both now and as of the effective time of the merger, the
information contained in this prospectus/proxy statement supplement and the
related prospectus/proxy statement and representations as to factual matters
made to tax counsel by New Futech and Trudy. The representations relied upon
include:



     (1) the Trudy stockholders will receive in the merger New Futech common
         stock having a fair market value of at least 40% of the fair market
         value of all outstanding Trudy common stock immediately before the
         merger; and



     (2) there is no plan or intention on the part of New Futech or a
         corporation related to New Futech to purchase any of the new Futech
         common stock transferred to the Trudy shareholders in the merger. Any
         inaccuracy or change with respect to this information or these
         representations, or any actions of New Futech or Trudy contrary to
         these representations, could adversely affect the conclusions reached
         in the opinion and the tax summary set forth below.



     The opinion represents our tax counsel's best legal judgment as to the tax
treatment of the merger, but the opinion is not binding on the Internal Revenue
Service. The parties have not and will not request a ruling from the Internal
Revenue Service in connection with the federal income tax consequences of the
merger.



     The following discussion addresses the material federal income tax
consequences of the merger to a Trudy stockholder. It is based on the provisions
of the Internal Revenue


                                        9
<PAGE>   525


Code, applicable tax regulations, court decisions and current administrative
rulings and practices, all of which are subject to change, possibly with
retroactive effect. The discussion assumes that the shares of Trudy common stock
are held as capital assets.



     The receipt by the Trudy stockholders of the conditional rights to
additional New Futech common stock will not be taxable to the Trudy
stockholders. However, the receipt by the Trudy stockholders of the conditional
rights to exchange their New Futech common stock for New Futech debentures after
five years from the merger will be taxable to the Trudy stockholders. A portion
of the value of additional New Futech common stock or New Futech debentures
received by Trudy stockholders, after exercising the conditional rights, may be
treated as interest income to the Trudy stockholders at the time of exercise of
the conditional rights.



     Under section 356(a)(1) of the Internal Revenue Code, a Trudy stockholder
will not recognize loss but may recognize gain on the receipt of New Futech
common stock, cash, and the conditional right to exchange New Futech common
stock for a New Futech debenture, in exchange for Trudy common stock. The amount
of any gain recognized will not exceed the sum of the fair market value of the
portion of the conditional right and the amount of cash received in exchange for
the share of Trudy common stock. For this purpose, a Trudy stockholder's gain,
if any, with respect to each share of Trudy common stock exchanged is equal to
the excess of: (1) the sum of (a) the fair market value of the shares of New
Futech common stock, plus (b) the fair market value of portion of the
conditional right to exchange New Futech common stock for a New Futech
debenture, plus (c) the amount of cash received for the share of Trudy common
stock, over (2) the tax basis of the share of Trudy common stock.



     Any gain recognized will be taxed as either capital gain from the sale or
exchange of stock or as a dividend, to the extent of the stockholder's pro rata
share of earnings and profits of Trudy. This determination will be based upon
whether, in the hypothetical transaction described in the next sentence, the
stockholder's interest in Trudy was reduced sufficiently so as to meet one of
the tests set forth in Section 302(b) of the Internal Revenue Code, as described
in the next paragraph. For purposes of this determination, a Trudy stockholder
will be treated as if he or she had engaged in a hypothetical transaction in
which the stockholder and all other Trudy stockholders (1) received solely
shares of New Futech common stock in exchange for all of their shares of Trudy
common stock; and (2) thereafter had a portion of the shares of New Futech
common stock redeemed for the portion of the merger consideration paid in the
form of cash and the conditional right. A Trudy stockholder's hypothetical
interest in New Futech after step (1) is compared to the stockholder's interest
in New Futech subsequent to the deemed redemption in step (2). In each case,
subject to limited exceptions, shares of New Futech common stock actually or
constructively owned by the stockholder will be considered owned for purposes of
applying the test, even if the shares of New Futech common stock were not
received or deemed received in the merger.



     Under section 302(b) of the Code, a stockholder's interest in New Futech
will be deemed to have been reduced sufficiently if (1) the stockholder's
interest in New Futech is completely terminated as a result of the transaction;
(2) as a result of the hypothetical redemption described above and taking into
account all other hypothetical redemptions in the merger, the Fundex merger and
the DaMert merger, a stockholder's percentage interest in New Futech is less
than 80% of the stockholder's interest in New Futech before the redemption; or
(3) the stockholder's interest was "meaningfully reduced" by virtue of the
hypothetical redemption. The third test requires a determination based on a


                                       10
<PAGE>   526


stockholder's particular facts and circumstances. The Internal Revenue Service
has indicated in published rulings that a distribution that results in any
actual reduction in interest of an extremely small minority stockholder in a
publicly held corporation will meaningfully reduce the stockholder's interest in
the corporation of the stockholder exercises no control with respect to
corporate affairs.



     Section 318 of the Internal Revenue Code provides constructive ownership
rules for purposes of the tests under section 302. Under these constructive
ownership rules, a stockholder will generally be treated as owning shares owned
by certain family members and other related entities, or that are subject to
options owned by or deemed owned by the stockholder. The actual or constructive
ownership of shares of Trudy common stock may, in some circumstances, have the
effect of causing a Trudy stockholder who would otherwise qualify for capital
gain treatment under the test described in section 302 to fail to qualify and
subject the stockholder to dividend treatment, which may involve higher tax
rates.



     To the extent that cash and the conditional right to exchange New Futech
common stock for a New Futech debenture received in exchange for shares of Trudy
common stock is treated as a dividend to a corporate stockholder (other than an
S corporation), the stockholder will be (1) eligible for a deduction of the
amount of the dividend received (subject to applicable limitations); and (2)
subject to the "extraordinary dividend" provisions of the Code. Under recently
enacted legislation, in the case of a dividend to a corporate stockholder which
constitutes an extraordinary dividend as defined in Section 1059(c), (except as
otherwise provided in Treasury Regulations which have yet to be promulgated).
The nontaxed portion of any such dividend would reduce a corporate stockholder's
adjusted tax basis in the shares of New Futech common stock received in the
merger but not below zero and would thereafter be taxable as capital gain.
Generally, an extraordinary dividend is a dividend with respect to a share of
stock if the amount of the dividend exceeds one of several threshold percentages
of the tax basis in the share of stock. Dividends paid within certain periods
may be aggregated and treated as one dividend for this purpose. Various
exceptions and special rules apply in determining whether a dividend is an
extraordinary dividend.



     The tax basis of each share of New Futech common stock received in the
merger will be the same as the tax basis of the shares of Trudy common stock
exchanged for it, increased by the amount of gain recognized on the exchange
with respect to the shares of Trudy common stock (including any such gain that
is treated as a dividend), decreased by the amount of cash and conditional right
to exchange New Futech common stock for a New Futech debenture received with
respect to the shares of Trudy common stock (other than cash received in lieu of
a fractional share interest). The holding period of the shares of New Futech
common stock received will include the holding period of the shares of Trudy
common stock exchanged for them.



     A holder of Trudy common stock who receives New Futech common stock and
cash pursuant to the merger will be required to retain records and file with
such holder's federal income tax return for the taxable year in which the merger
takes place a statement setting forth all relevant facts in respect of the
nonrecognition of gain or loss upon such exchange. The statement is required to
include (1) the holder's basis in the shares of Trudy common stock surrendered
in the merger; and (2) the value of New Futech common stock received and the
conditional right to exchange New Futech common stock for a New Futech debenture
(using fair market value as of the effective time of the merger) and the amount
of any cash received in the merger.


                                       11
<PAGE>   527


     THIS TAX CONSEQUENCES DISCUSSION IS INTENDED ONLY AS A DESCRIPTION OF THE
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND IT IS NOT A COMPLETE
ANALYSIS OR DESCRIPTION OF ALL POTENTIAL TAX EFFECTS OF THE MERGER. The
discussion does not address all of the tax consequences that may be relevant to
particular taxpayers in light of their personal circumstances or to taxpayers
subject to special treatment under the internal revenue Code, such as insurance
companies, financial institutions, dealers in securities, tax exempt
organizations, foreign corporations, foreign partnerships, or other foreign
entities and individuals who are not citizens or residents of the United States
and persons who acquired their New Futech common stock pursuant to the exercise
or termination of employee stock options, warrants or otherwise as compensation.



     No information is provided this tax consequences discussion with respect to
the tax consequences, if any, of the merger under applicable foreign, state,
local and other tax laws.



     THIS TAX CONSEQUENCES SUMMARY IS NOT INTENDED TO BE, NOR SHOULD IT BE
CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER OF TRUDY COMMON
STOCK. EACH HOLDER OF TRUDY COMMON STOCK IS URGED TO CONSULT THEIR OWN TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO THE HOLDER OF THE MERGER,
INCLUDING THE APPLICATION OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.


ACCOUNTING TREATMENT


     The mergers are intended to qualify as a purchase for accounting purposes,
which means that the amount by which the total merger consideration received by
stockholders of the other merging companies plus the amount of their liabilities
exceeds the fair market value of their identifiable assets will initially be
treated as goodwill by New Futech for accounting purposes.


                     APPRAISAL RIGHTS OF TRUDY STOCKHOLDERS


     Delaware law entitles the holders of record of shares of Trudy common stock
who follow the procedures specified in Section 262 of the Delaware General
Corporation Law to have their shares appraised by the Delaware Court of Chancery
and to receive the "fair value" of such shares as of the effective date of the
mergers as determined by the court in place of the merger consideration. In
order to exercise appraisal rights, a stockholder must demand and perfect the
rights in accordance with Section 262 of the Delaware General Corporation Law.
The following is a summary of Section 262 of the Delaware General Corporation
Law and is qualified in its entirety by reference to Section 262 of the Delaware
General Corporation Law, a copy of which is attached to this prospectus/proxy
statement supplement as Appendix I. Stockholders should carefully review Section
262 of the Delaware General Corporation Law as well as information discussed
below to determine their rights to appraisal.



     If a stockholder of Trudy elects to exercise the right to an appraisal
under Section 262 of the Delaware General Corporation Law, the stockholder must
do ALL of the following:



          (1) File with Trudy at its main office in Norwalk, Connecticut, a
     written demand for appraisal of the shares of Trudy common stock held,
     which demand must identify the stockholder and expressly request an
     appraisal, before the vote is taken on the merger agreement at the special
     meeting. This written demand for appraisal must be in addition to and
     separate from any proxy or vote against the merger agreement. Neither
     voting against, abstaining from voting, nor failing to vote on, the merger


                                       12
<PAGE>   528


     agreement will constitute a demand for appraisal within the meaning of
     Section 262 of the Delaware General Corporation Law.



          (2) Not vote in favor of the merger agreement. A failure to vote or
     abstaining from voting will satisfy this requirement. A vote in favor of
     the merger agreement, by proxy or in person, or the return of a signed
     proxy which does not specify a vote against approval and adoption of the
     merger agreement, will constitute a waiver of such stockholder's right of
     appraisal and will nullify any previously filed written demand for
     appraisal.



          (3) Continuously hold such shares through the effective date of the
     mergers.



     All written demands for appraisal should be addressed to: William W.
Burnham, President, Trudy Corporation, 353 Main Avenue, Norwalk, Connecticut
06851-1552, before the vote is taken on the merger agreement at the special
meeting, and should be executed by, or on behalf of, the holder of record. Such
demand must reasonably inform Trudy of the identity of the stockholder and that
such stockholder is thereby demanding appraisal of such stockholder's shares.



     Within 10 days after the effective date of the mergers, New Futech will
give written notice of the effective date of the mergers to each dissenting
stockholder of Trudy. Dissenting stockholders are stockholders who have
satisfied the requirements of Section 262 of the Delaware General Corporation
Law and have not voted for the proposal to approve and adopt the merger
agreement and the transactions contemplated by the merger agreement. Within 120
days after the effective date of the mergers, New Futech or any dissenting
stockholder may file a petition in the court demanding a determination of the
fair value of the shares of Trudy common stock of all dissenting stockholders.
Any dissenting stockholder desiring the filing of such petition is advised to
file such petition on a timely basis, unless such dissenting stockholder
receives notice that such a petition has been filed by New Futech or another
dissenting stockholder.



     If a petition for appraisal is timely filed, the court will determine which
stockholders are entitled to appraisal rights and will determine the fair value
of the shares of Trudy common stock held by dissenting stockholders, exclusive
of any element of value arising from the accomplishment or expectation of the
merger, but together with a fair rate of interest, if any, to be paid on the
amount determined to be fair value. In determining such fair value, the court
will take into account all relevant factors. The court may determine such fair
value to be more than, less than or equal to the consideration that such
dissenting stockholder would otherwise be entitled to receive pursuant to the
merger agreement. If a petition for appraisal is not timely filed, then the
right to an appraisal will end. The costs of the appraisal proceeding shall be
determined by the court and taxed against the parties as the court determines to
be equitable under the circumstances. Upon the application of any stockholder,
the court may determine the amount of interest, if any, to be paid upon the
value of stock of stockholders entitled thereto. Upon application of a
stockholder, the court may order all or a portion of the expenses incurred by
any stockholder in connection with the appraisal proceeding, including, without
limitation, reasonable attorneys' fees and the fees and expenses of experts, to
be charged pro rata against the value of all shares entitled to appraisal.



     From and after the effective date of the mergers, no dissenting stockholder
will have any rights of a Trudy stockholder with respect to such holder's shares
for any purpose, except to receive payment of its fair value and to receive
payment of dividends or other distributions on such holder's shares, if any,
payable to Trudy stockholders of record as of


                                       13
<PAGE>   529


a date prior to the effective date of the mergers. If a dissenting stockholder
delivers to New Futech a written withdrawal of the demand for an appraisal
within 60 days after the effective date of the mergers or thereafter with the
written approval of New Futech, or if no petition for appraisal is filed within
120 days after the effective date of the mergers, then the right of such
dissenting stockholder to an appraisal will cease and such dissenting
stockholder will be entitled to receive only the merger consideration.


                          NEW FUTECH AND TRUDY SHARES

NEW FUTECH COMMON STOCK


     For a description of New Futech common stock and its authorized but
unissued preferred stock, see "Description of New Futech Capital Stock" in the
prospectus/proxy statement.


TRUDY CAPITAL STOCK

     The following description of Trudy's capital stock is a summary only and is
subject to, and qualified in its entirety by, reference to Trudy's certificate
of incorporation and bylaws, copies of which are included as exhibits to the
registration statement of which this prospectus/proxy statement supplement is a
part, and by reference to Delaware law under which Trudy is incorporated.

COMMON STOCK


     The current authorized capital of Trudy consists of 850,000,000 shares of
common stock, par value $.0001 per share. As of September 15, 1999, there were
378,252,249 shares of Trudy common stock issued and outstanding. There were also
22,500,000 shares of Trudy common stock reserved for issuance pursuant to
Trudy's 1987 Stock Option Plan, 6,765,000 shares of which of have been issued
pursuant to the exercise of options granted under the plan and 14,680,000 shares
of which are subject to outstanding options granted under the plan. To Trudy's
knowledge, no dealer makes a market in Trudy's shares. Quotes for Trudy shares
on the over-the-counter market (NASDAQ symbol: TRDY) are infrequent and do not
constitute an established market for Trudy shares. Trudy has not paid any
dividends on its common stock. The Merger Agreement provides that Trudy will not
declare or pay any dividend without the prior written approval of New Futech.



     Each share of Trudy common stock is entitled to one vote. The directors of
Trudy are elected to serve one-year terms. The Delaware General Corporation Law
provides that the affirmative vote of a majority of all shares entitled to vote
is required in order to constitute stockholder approval of a merger,
consolidation or liquidation of Trudy, sale or other disposition of
substantially all of its assets or amendment of its certificate of
incorporation. Pursuant to its certificate of incorporation, Trudy's board of
directors may amend the bylaws. Trudy's bylaws provide for removal of a
director, with or without cause by the affirmative vote of a majority of all
shares entitled to vote at an election of directors.


     Holders of capital stock of Trudy do not have preemptive or other
subscription rights to purchase or subscribe for unissued stock or other
securities of Trudy.

                                       14
<PAGE>   530

           COMPARISON OF THE RIGHTS OF HOLDERS OF TRUDY COMMON STOCK
                          AND NEW FUTECH COMMON STOCK


     Trudy and New Futech are both Delaware corporations and as such the rights
of their stockholders are governed by the Delaware General Corporation Law and
their respective certificates of incorporation and bylaws. By the Merger
Agreement, the Trudy stockholders will become New Futech stockholders and as
such their rights will be governed by, in addition to the Delaware General
Corporation Law, New Futech's certificate of incorporation and bylaws.



     The certificate of incorporation and bylaws of Trudy and New Futech differ
in certain respects. In addition, certain provisions of the Delaware General
Corporation Law may apply differently to Trudy and New Futech. Although all of
the provisions of the Delaware General Corporation Law that may apply
differently to Trudy and New Futech and all of the differences between Trudy's
and New Futech's certificates of incorporation and bylaws are not set forth in
this prospectus/proxy statement supplement, differences which could materially
affect the rights of stockholders are discussed below.


CAPITAL STOCK


     The Trudy certificate of incorporation authorizes the issuance of
850,000,000 shares of common stock, par value $.0001 per share. Trudy currently
has outstanding 378,252,249 shares of common stock. Accordingly, all
shareholders of Trudy common stock have equal rights and preferences with
respect to dividends and distributions upon liquidation.



     The New Futech certificate of incorporation authorizes the issuance of
45,000,000 shares of common stock, par value $.001 and 5,000,000 shares of
preferred stock, par value $.001 per share. Following the mergers a minimum
aggregate of 5,510,550 shares and a maximum aggregate of 5,598,219 shares of New
Futech common stock will be outstanding. In addition, certain outstanding
indebtedness in the amount of 10,000,000 is expected to be exchanged for
2,222,222 shares of New Futech preferred stock shortly after the mergers.



     Holders of New Futech preferred stock will have rights and preferences with
respect to dividends and upon liquidation that are superior to those of holders
of New Futech common stock. The relative rights and preferences of any New
Futech preferred stock issued in the future may be established by the New Futech
board of directors without shareholder action, and such shares, when and if
issued, could have dividend, liquidation, voting and other rights superior to
those of New Futech common stock.


STOCKHOLDER VOTING


     Delaware law generally does not require class voting, except in certain
transactions involving an amendment to the certificate of incorporation that
adversely affects a specific class of shares or where the designation of a class
of securities grants such a right. Accordingly, holders of New Futech preferred
stock will have class voting rights in transactions involving an amendment to
New Futech's certificate of incorporation if such amendment will adversely
affect the rights of such holders.


CLASSIFIED BOARD OF DIRECTORS

     A classified board is one on which a certain number, but not all, of the
directors are elected on a rotating basis each year. This method of electing
directors makes changes in the composition of the board of directors more
difficult, and thus a potential change in

                                       15
<PAGE>   531

control of a corporation a lengthier and more difficult process. Delaware law
permits, but does not require, a classified board of directors, by which the
directors can be divided into as many as three classes with staggered terms of
office, with only one class of directors standing for election each year.


     Trudy's certificate of incorporation and bylaws do not provide for a
classified board of directors. New Futech's certificate of incorporation and
bylaws provide for a classified board, consisting of three classes with three
directors in each class.


REMOVAL OF DIRECTORS


     A director of Trudy may be removed with or without cause with the approval
of a majority of the outstanding shares entitled to vote at an election of
directors. A director of a corporation with a classified board of directors may
be removed only for cause, unless the corporation's certificate of incorporation
provides otherwise. New Futech's certificate of incorporation provides for a
classified board.


STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS UNDER DELAWARE LAW

     In recent years, a number of states have adopted special laws designed to
make certain kinds of "unfriendly" corporate takeovers, or other transactions
involving a corporation and one or more of its significant shareholders, more
difficult. Under Section 203 of the Delaware General Corporation Law, certain
"business combinations" with "interested stockholders" of Delaware corporations
are subject to a three-year moratorium unless specified conditions are met.


     Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the date
that such person or entity becomes an interested stockholder. With certain
exceptions, an interested stockholder is a person or entity who or which owns,
individually or with or through certain other persons or entities, 15% or more
of the corporation's outstanding voting stock, including any rights to acquire
stock pursuant to an option, warrant, agreement, arrangement or understanding,
or upon the exercise of conversion or exchange rights, and stock with respect to
which the person has voting rights only, or is an affiliate or associate of the
corporation and was the owner, individually or with or through certain other
persons or entities, of 15% or more of such voting stock at any time within the
pervious three years, or is an affiliate or associate of any of these.



     For purposes of Section 203, the term "business combination" is defined
broadly to include:



     - mergers with or caused by the interested stockholder;



     - sales or other dispositions to the interested stockholder, except
       proportionately with the corporation's other stockholders, of assets of
       the corporation or a direct or indirect majority-owned subsidiary equal
       in aggregate market value of 10% or more of the aggregate market value of
       either the corporation's consolidated assets or all of its outstanding
       stock;



     - the issuance of transfer by the corporation or a direct or indirect
       majority-owned subsidiary of stock of the corporation or such subsidiary
       to the interested stockholder, except for certain transfers in a
       conversion or exchange or a pro rata distribution or certain other
       transactions, none of which increase the interested stockholder's
       proportionate ownership of any class or series of the corporation's or
       such subsidiary's stock or of the corporation's voting stock; or


                                       16
<PAGE>   532


     - receipt by the interested stockholder, except proportionately as a
       stockholder, directly or indirectly, of any loans, advances, guarantees,
       pledges or other financial benefits provided by or through the
       corporation or a subsidiary.


     The three-year moratorium imposed on business combinations by Section 203
does not apply if:

     - prior to the date on which such stockholder becomes an interested
       stockholder the board of directors approves either the business
       combination or the transaction that resulted in the person or entity
       becoming an interested stockholder,


     - upon consummation of the transaction that made him or her an interested
       stockholder, the interested stockholder owns at least 85% of the
       corporation's voting stock outstanding at the time the transaction
       commenced excluding from the 85% calculation shares owned by directors
       who are also officers of the target corporation and shares held by
       employee stock plans that do not give employee participants the right to
       decide confidentiality whether to accept a tender or exchange offer, or



     - on or after the date such person or entity becomes an interested
       stockholder, the board approves the business combination and it is also
       approved at a stockholder meeting by 66 2/3% of the outstanding voting
       stock not owned by the interested stockholder.


     Section 203 only applies to certain publicly held corporations that have a
class of voting stock that is:

     - listed on a national securities exchange,

     - quoted on an interdealer quotation system of a registered national
       securities association, or

     - held of record by more than 2,000 stockholders.


     In addition, Section 203 of the Delaware General Corporation Law does not
apply if a corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by Section 203. Neither Trudy's
nor New Futech's certificate of incorporation contains an election not to be
governed by Section 203.



     Section 203 of the Delaware General Corporation Law does not currently
apply to Trudy. Based upon the expectation that there will be more than 2,000
record holders of New Futech common stock following the mergers, Section 203
will apply to New Futech.



     Under certain circumstances, Section 203 of the Delaware General
Corporation Law may make it more difficult for a person who would be an
"interested stockholder" to effect various business combinations with a
corporation for a three year period.


                                       17
<PAGE>   533

           MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION


     The following discussion should be read in conjunction with Trudy's audited
financial statements and notes thereto for the two years ended March 31, 1998
and 1999 and its unaudited financial statements for the quarter ended June 30,
1999, appearing as an attachment to the prospectus/proxy statement.


OVERVIEW

     Trudy Corporation, a Delaware corporation, was initially organized as a
Connecticut corporation under the name Norwest Manufacturing Corporation in
1979. Trudy, which does business under the name Soundprints, currently publishes
juvenile storybooks and audio cassettes which are sold in conjunction with
contract-manufactured educational toys to the retail, education and mail order
markets.

     Soundprints holds an exclusive license from the Smithsonian Institution to
utilize the Smithsonian name in connection with the sale of realistic wildlife
plush toys and educational kits, storybooks and audio cassettes. Soundprints
also has a license from The Nature Conservancy to develop a series of habitat
books, toys and audio cassettes.

     Soundprints' products are sold to book, toy and specialty retailers;
warehouse clubs and book, gift and educational distributors by an in-house sales
staff and independent commissioned sales representatives and are offered at
retail prices ranging from $4.95 to $32.95.

RESULTS OF OPERATIONS

     The following table sets forth, for the periods indicated, the relative
percentage that certain income and expense items bear to net sales.


<TABLE>
<CAPTION>
                                                                          FOR THREE
                                                  YEAR ENDED            MONTHS ENDED
                                             ---------------------   -------------------
                                             MARCH 31,   MARCH 31,   JUNE 30,   JUNE 30,
                                               1999        1998        1999       1998
                                             ---------   ---------   --------   --------
<S>                                          <C>         <C>         <C>        <C>
Net sales..................................    100.0%      100.0%     100.0%     100.0%
Cost of sales..............................     64.0        54.9       70.1       64.0
                                               -----       -----      -----      -----
Gross profit...............................     36.0        45.1       29.9       36.0
Selling, general and administrative
  expenses.................................     70.1        43.9       90.0       51.6
                                               -----       -----      -----      -----
Income from operations.....................    (34.1)        1.2      (60.1)     (15.6)
Other income (expense).....................     (2.3)       (1.3)       6.9       (1.5)
                                               -----       -----      -----      -----
(Loss) income before benefit for income
  taxes....................................    (36.4)       (0.1)     (53.3)     (17.1)
Income tax benefit (provision).............    (12.3)        3.1         --         --
                                               -----       -----      -----      -----
Net income.................................    (48.7)        3.0      (53.3)     (17.1)
</TABLE>



THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED


JUNE 30, 1998



     Net Sales.  Total revenue for the three months ended June 30, 1999, was
$422,292, as compared to 710,733 for the three months ended June 30, 1998 as a
result of a decrease in sales volume. Sales to warehouse clubs were
approximately $285,000 last year, while there were no similar sales this year.
Sales to schools were approximately $51,732 for the


                                       18
<PAGE>   534


three months ended June 30, 1999, as compared with the approximate sales of
$42,000 for the same period last year, an increase of 23.2%, as the company
continues to target the educational market as a growth area. Since June 1999,
the company has begun to sell its products to Futech which is acting as a
distributor. Sales to Futech through June 30, 1999 were $75,329 as compared to
$0 over the same period last year. Sales in other segments for the first quarter
were roughly equal to sales in the first quarter of last year.



     Cost of Sales.  Cost of sales for the quarter ended June 30, 1999 were
$295,984, or 70.1% of revenue as compared to $454,640, or 64.0% of sales. Gross
profit for the three months ended June 30, 1999, was $126,308 or 29.9% of
revenue, as compared to $256,093 or 36.0% of revenue for the same period last
year. The change in gross profit margin is due mostly to the change in the
segment sales and the associated discounting. The higher percentage is the
result of the acceleration of product development costs, the change in segment
sales, and lower sales volume as compared to the fixed portion of product
costing.



     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses for the three months ended June 30, 1999 were 372,172 or
90.0% of revenue, as compared to $357,876 or 51.6% of revenue. While the dollar
amounts for the two periods has remained somewhat constant the percentage to
revenue has changed drastically. This 39.4% change is the result of the lower
sales volume. Accounting costs for the first quarter ended June 30, 1999 were
$45,479 as compared to $3,883 for the same period last year. This increase in
cost is due to the changing of auditors and work on the merger. Royalty expense
for the quarter ended June 30, 1999 were $12,946 compared to $44,066 for the
same quarter last year. The drop in expense is due to lower sales volume.



     Depreciation and Amortization.  Depreciation and amortization of
intangibles for the three months ended June 30, 1999 were $8,019 or 1.9% of
revenue, as compared to $9,000 or 1.3% of revenue. The percentage increase was
primarily the result of the lower sales volume.



     Interest Expense.  Interest expense for the three months ended June 30,
1999 were $29,413 or 6.9% of revenue, as compared to $15,243 or 2.1% of revenue
for the three months ended June 30, 1998. The increase in interest expense is
due to the increase in debt incurred by the company to cover shortfalls in
working capital.



     Net Loss.  A net loss of $224,928 for the three months ended June 30, 1999
compares to a loss of $121,823 for the same period last year. This decline in
profitability was primarily the result of the lower sales volume. Although the
Company has taken selective action to reduce overhead costs in the face of lower
sales level, it has continued to commit resources to new product development and
marketing and sales efforts in the expectation that sales levels will increase
in the fall after the merger with Futech is concluded.


FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED
MARCH 31, 1998


     Net Sales.  Net sales for the year ended March 31, 1999 were $3,390,884 as
compared with net sales of $4,977,599 for the year ended March 31, 1998. The
decrease is entirely as a result of a decline in sales volume. Sales to
warehouse clubs, the largest market segment, were down $775,443 or 44% to
$977,961 due to the clubs' decision to purchase more conservatively and minimize
inventory carryover. Direct response sales of $961,624 were $269,554 or 22%
lower than last year. Catalog marketers, in general, experienced reduced buying
early in the pre-holiday season (September) due to financial


                                       19
<PAGE>   535


market uncertainty. Sales of $671,946 to bookstores and specialty retailers were
$492,101, 42%, below last year as the number of independent bookstores continues
to decline and specialty stores have become more selective in their purchases.
Sales to schools and education wholesalers continue to increase as a result of
Trudy's decision to target its direct marketing toward this growing market
segment.



     Cost of Sales.  Cost of sales of $2,168,685 decreased from $2,730,401 in
the prior year primarily because of the lower level of sales volume. In
percentage terms, cost of sales increased 64.0% from 54.9%. The higher
percentage is the result of the acceleration of amortization of product
development costs of $140,121 and an increase in the reserves for inventory
obsolescence of $205,000 in 1999.



     Selling, General and Administrative Expense.  Selling, general, and
administrative expenses increased to $2,355,787 from $2,168,322. The increase is
the result of the accelerated write-off of royalty advances in the amount of
$44,119, the recording of sub-right royalty expenses in the amount of $84,367,
and the write-off in the amount of $53,080 of a computer operating system
purchased in December 1997 because it was determined that the new system did not
meet Trudy's requirements. Lower royalty, $22,814 in 1999 compared to $305,448
in 1998, and sales commission expenses, $77,634 in 1999 as compared to $101,735
in 1998, resulting from lower revenue were offset by the higher cost of a larger
consumer catalog mailing; $698,118 in the year ended March 31, 1999 compared to
$537,124 for the year ended March 31, 1998.


     Income/(Loss) from Operations.  Income from operations was a loss of
$1,155,763 compared with a profit of $61,427 in the prior year. The decline is
primarily the result of lower sales and the accelerated write-offs cited above.

     Interest Expense.  Interest expense increased to $111,604 from $102,099
last year as a result of higher borrowing needed to fund working capital
requirements and operating losses.

     Depreciation Expense.  Depreciation expense increased to $22,175 from
$17,449 in the prior year. The increase is due to purchases of equipment
amounting to $59,671.

     Other Income.  Other income of $34,134 decreased from $35,904 in the prior
year.


     Net Income/(Loss).  A net loss of $1,611,233 for the year ended March 31,
1999 compares to a profit of $147,232 in the prior year. In addition to the
changes discussed above, the decline is also the result of the write-off of
$378,000 of deferred tax assets in 1999 and two non-recurring gains recorded
last year: an income tax benefit of $152,000 and an after tax gain of $56,320
from the forgiveness of accrued interest on loans made to Trudy by its
President.


SEASONALITY AND QUARTERLY FLUCTUATIONS

     The demand for Trudy's retail products is seasonal, with a majority of
sales to retailers occurring during the late summer and early fall in
anticipation of the Christmas season. Direct mail sales are concentrated in the
October-December quarter.

LIQUIDITY AND CAPITAL RESOURCES

     The seasonality of sales has made credit availability an important issue
for Trudy. It is necessary for Trudy to build inventory during the summer in
anticipation of the large number of direct mail shipments, which are primarily
paid by credit card, in the fall.

                                       20
<PAGE>   536

Shipments to the warehouse clubs are also heavy in the late summer and early
fall, but payment terms for these customers are sixty days.


     Trudy had positive cash flow from operating activities of $47,433 for the
three months ended June 30, 1999, as compared to negative operating cash flow
for the three months ended June 30, 1998 of $460,154. This change was due to the
decrease in accounts receivable due to lesser sales in the fourth quarter of
1999 and the concerted effort to increase terms with various vendors.



     During the three months ended June 30, 1999 Trudy purchased $1,770 of
property and equipment and invested $62,211 in pre-publication and royalty
advances. This number compares to $14,056 spent on plant and equipment and an
adjustment to royalty advances of $16,398 for the three months ended June 30,
1998.



     The company generated $65,519 from financing activities during the three
months ended June 30, 1999 compared to $461,539 used in financing activities
during the same period in 1998. The cash generating from financing activities
came from the net borrowings from a short-term loan in the amount of $140,000
with repayments on the term loan in the amount of $84,481, and borrowings of
$10,000 to cover working capital needs in 1999. Trudy made payments of $2,375 on
short-term debt, borrowed $470,000 in long term debt and repaid 6,086 on the
term note in 1998.



     The company had negative cash flow from operating activities of $431,002
for the year ended March 31, 1999, as compared to negative operating cash flow
for the year ended March 31, 1998 of $295,766. This was primarily due to lower
sales volume in 1998.



     Trudy invested $59,671 in additions to property, plant and equipment and
invested $165,688 in pre-publication and royalty advances for the year ended
March 31, 1999, compared to $81,679 and invested $135,500 in pre-publication and
royalty advances for the year ended March 31, 1998.



     Trudy generated $656,985 from financing activities for the year ended March
31, 1999 compared to $509,706 during the year ended March 31, 1998. The cash
generated from financing activities came from net borrowings on the short-term
debt in the amount of $706,637 and repayments on the term loan in the amount of
$49,652 during the year ended March 31, 1999. The company made repayments on
short-term borrowings of $105,598, borrowed $648,822 on a long-term note, repaid
$40,813 on long-term notes and had proceeds of $7,295 from the exercise of
common stock options during the year ended March 31, 1998.



     In March 1998, Trudy renewed a bank revolving line of credit of $1,200,000
and obtained a four-year term loan of $250,000 to finance seasonal working
capital needs, catalog expenses, and system improvements. The line of credit
bears interest at the rate of prime plus .25% and the term loan bears interest
at the rate of 8.75%. In March 1999, Trudy negotiated an extension of the line
of credit through June 15, 1999. An integral part of the March 3, 1999 merger
agreement with Futech, which remains in effect as part of the New Futech merger
agreement, is an agreement, also dated March 3, 1999, by Futech to assist in
providing the working capital needs of Trudy, if needed, to maintain sales
momentum and assure that Trudy is not in default of its loan agreements,
including its borrowings from First Union National Bank. On May 13, 1999 First
Union notified Trudy that it was in default on its loans. These loans were
repaid with refinancing loans obtained through Wilmington Trust Co. See "Certain
Relationships and Related Transactions." Management has no assurances that
Futech currently has the financial resources to honor its agreement with Trudy.
The balances as of June 30, 1999 are $679,234 on the line of credit and $186,099
on the term loan.


                                       21
<PAGE>   537


     In July 1998, William W. Burnham loaned Trudy $28,900 to fund conversion
costs for a second computer system. The note bears an interest rate of 8% and is
payable in one year. In August 1998, Mr. Burnham loaned the company $310,000 to
finance short term working capital needs. This note bears an interest rate of 8%
and was due in sixty days. Lower than expected direct mail sales in the fall
prevented repayment of this loan. See "Certain Relationships and Related
Transactions."



     On May 28, 1999, Alice B. Burnham, a director of Trudy and wife of the
Trudy's president loaned the Company $140,000 to meet immediate cash needs. The
note bears interest at 8 percent and was due, but not paid, on July 2, 1999. See
"Certain Relationships and Related Transactions."



     Loans from the President of Trudy and his family totaled $950,264 on June
30, 1999 compared with $449,045 on June 30, 1998.



     Accounts receivable were $169,556 on June 30, 1999 compared with $536,633
on June 30, 1998. The decrease is due to lower sales volume in the first quarter
of the fiscal year compared with last year. Inventory levels were $1,469,838 on
June 30, 1999 compared with $1,760,353 on June 30, 1998. Actual unit inventory
increased because of slower turnover resulting from the downturn in sales along
with the need to stock new titles and toys. The reserve for inventory
obsolescence was increased by $205,000.


INFLATION

     Trudy does not believe that inflation has a significant impact on its
operations.

YEAR 2000


     During 1998, Trudy upgraded its computer system and MAS90 software used for
accounting, order processing, and inventory management. Trudy believes that this
equipment and software is Year 2000 compliant. Trudy is now in the process of
receiving certification from its major vendors that their systems are Year 2000
compliant. This survey includes vendors who provide systems-related services,
e.g., banking, credit card processing, shipping, security, HVAC, etc. along with
those providing Trudy with its book and toy products. Trudy does not believe
that the failure of any vendor to be Year 2000 compliant would have a material
impact on Trudy.



FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS



     This prospectus/proxy statement and each related prospectus/proxy statement
supplement contains or incorporates by reference forward-looking statements. The
factors identified above in this section are important factors, but not
necessarily all important factors, that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, New Futech or any of the merging companies.


     Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, New Futech
cautions that, while such assumptions or bases are believed to be reasonable and
are made in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. We cannot promise that
statements of expectation or belief will be achieved or accomplished. The words
"believe," "expect," and "anticipate" and similar expressions identify forward-
looking statements throughout these materials.

                                       22
<PAGE>   538

                        DESCRIPTION OF TRUDY'S BUSINESS

GENERAL


     Trudy, which does business under the name Soundprints, publishes juvenile
storybooks and audio cassettes which are sold in conjunction with
contract-manufactured educational toys to the retail, education and mail order
markets.



     Trudy Corporation was initially organized as a Connecticut corporation
under the name Norwest Manufacturing Corporation on September 14, 1979. It
changed its name to Trudy Toys Company, Inc. on December 5, 1979. It again
changed its name to Trudy Corporation on March 27, 1984, and was re-incorporated
as a Delaware corporation on February 25, 1987.


PRODUCTS AND LICENSING

     Soundprints holds an exclusive license from the Smithsonian Institution to
utilize the Smithsonian name through the period ending September 30, 2002, in
connection with the sale of realistic wildlife plush toys and educational kits,
storybooks, and audio cassettes. Since 1991, Soundprints has published a total
of 60 titles in four different series under the Smithsonian license. Royalties
are paid to the Smithsonian at the rate of 5.0% of net sales on all licensed
products.

     Soundprints also has a license from The Nature Conservancy to develop a
series of habitat books, toys and audio cassettes. The first four titles in the
habitat series were introduced in the spring of 1997. The orientation of the
habitat series has been toward both the education and trade markets. Through
1998, twelve Nature Conservancy titles have been published. The license from the
Nature Conservancy runs to January 2000.

     Market reception of the Smithsonian and Nature Conservancy series has been
extremely positive as a result of the highly perceived value of the book and
plush animal sets. Each season Soundprints introduces five to seven new titles.
In addition to new titles in the Smithsonian and Nature Conservancy series, an
international series, combining books and dolls, was launched this spring. In
the fall of 1999, a new series of photographic board books accompanied by soft
cotton velour toys for toddlers will be launched in cooperation with the
Smithsonian Institution National Zoological Park.

MARKETING AND SALES

     Soundprints' products are sold to book, toy, and specialty store retailers;
warehouse clubs; and book, gift and educational distributors by an in-house
sales staff and independent commissioned sale representatives. In addition,
Soundprints mails a catalog directly to consumers, schools, and libraries and an
in-house telemarketing staff receives and processes phone, Internet and mail
orders.


     A promising growth area is the educational market. Schools and libraries
have discovered how to use Soundprints' products as supplemental classroom
reading material. School book clubs and book fairs have experienced impressive
sales growth to both students and teachers. In addition to actual book sales,
subsidiary rights are sold to book club operators who also purchase significant
quantities of plush toys to accompany the books. "Subsidiary rights" in this
context can best be described as follows: Trudy holds copyrights on its
published books. It assigns certain copyrights to other publishers who print and
sell such books to their customers in consideration of a royalty paid to Trudy.
The assigned copyrights are referred to as "subsidiary rights" in the publishing
industry.


                                       23
<PAGE>   539

     During 1998, sales to retailers, principally book, toy, and specialty
stores, were flat or off somewhat from the prior year. Sales to aquarium,
museum, and zoo stores continued to increase because of the nature theme of the
products. Sales to independent booksellers have been the most volatile as these
retailers continue to be adversely affected by the market penetration of the
superstore chains and Internet booksellers.

CUSTOMERS


     One customer, Advanced Marketing Services, accounted for 28.8% of sales in
1999 and 35.2% of sales in 1998. Advanced Marketing Services discontinued
purchasing goods from Trudy during 1999 and this had a material effect on sales.
Trudy expects to replace these sales with direct sales to warehouse clubs. By
2000, Trudy anticipates an increase in warehouse sales that will be about the
same level as the sales were to Advanced Marketing Services.


MANUFACTURING AND PRODUCT DESIGN

     Plush and toy product design is done in "design rooms" managed by
Soundprints' overseas contractors. Storybooks are created by free-lance authors
and illustrators working under the direction of Soundprints' editorial and
graphic design staff. Audio is produced by an award-winning sound designer
overseen by Soundprints' editorial department.


     Soundprints produces the majority of its products by sub-contracting with
independent toy factories and printing plants located in Asia. Approximately 95%
of the toys are purchased from one vendor in China, but Trudy has other
qualified sources of supply from which it has purchased in the past. Trudy owns
the design of each of its existing toy products except for Smithsonian plush
toys which are co-trademarked with Smithsonian Institution, and actively manages
the design of new products. Trudy believes that production could quickly be
transferred to other companies in Bangladesh and Sri Lanka if production were
not available from the company in China, or if more favorable pricing became
available. Soundprints purchases books from a U.S. company that subcontracts
production to various printers in the Far East. These manufacturers can also
perform certain other functions such as the labeling and packaging of product
for volume shipments directly to specific customers. Audio cassettes are
duplicated locally. Delivery has been satisfactory from all suppliers.


     Originally a plush toy manufacturer, Soundprints discontinued its plush toy
sewing operations in 1990 and now concentrates its operational expertise on
package assembly of the toy, book and tape components for fulfillment to retail
and mail order customers.

BACKLOG


     As of June 30, 1999, Trudy's order backlog was approximately $196,734.
Orders are generally shipped promptly unless items are on back order or the
customer requests a later delivery date. As of March 31, 1998, Trudy's order
backlog was approximately $472,365. The increase in order backlog in March 1998
was primarily the result of several large orders placed by Trudy's largest
customers. Although orders are subject to cancellation, this happens only
rarely.


GOVERNMENTAL REGULATIONS

     Trudy is subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Products Safety Act. Those
laws empower the Consumer Products Safety Commission (the "CPSC") to protect
children from hazardous

                                       24
<PAGE>   540

products. The CPSC has the authority to exclude from the market articles which
are found to be hazardous and can require a manufacturer to repurchase such
products under certain circumstances. Any such determination by the CPSC is
subject to court review. Similar laws exist in some states and cities in the
United States and in many jurisdictions throughout the world. Trudy endeavors to
comply with all applicable regulations.

COMPETITION


     Management believes Soundprints is the leading supplier of licensed,
realistic plush toys packaged with an educational book and audio cassette. Trudy
is not aware of any direct competitors in this market, although there are a few
publishers who compete by combining plush toys with single titles of children's
classic books. Trudy believes that its competitive advantages are its unique
editorial genre, its superior design and the perceived high quality of its
products relative to the retail price, in addition to the licenses with the
Smithsonian Institution and The Nature Conservancy.


EMPLOYEES AND PRODUCT DESIGN


     As of June 30, 1999, Trudy had 18 full-time employees, all in its Norwalk
facility, consisting of 9 persons in sales and administration, five in shipping
and handling, and four in editing and graphic design. Trudy hires seasonal
personnel in the fall to assist with greater volumes in the assembly area and to
handle in-bound telemarketing for the direct response business.



     Trudy's ability to design, manufacture, market, and sell products depends
largely upon its ability to attract and retain highly skilled personnel,
particularly in the product design, publishing, and sales areas. Over the last
year, Trudy upgraded positions in editorial and sales management in terms of
professionalism and experience to further improve the quality and distribution
of its products and their value to the customer.


PROPERTY


     Trudy leases warehouse and administrative facilities in a 27,000 square
foot building at 353 Main Avenue in Norwalk, Connecticut. The building is
located approximately 50 miles east of New York City. This facility, first
occupied by Trudy in July 1996, is owned by a partnership comprised of Trudy's
President, a former Vice President, and a Board Member.



     The lease, which runs to 2004, provides for annual rent which is
representative of the local market today and holds Trudy responsible for payment
of taxes and utilities as well as rent.



     The Main Avenue property was purchased and financed independently of Trudy.
Renovations to the site however required the use of a $300,000 installment loan
payable over eight years. This bank loan is collateralized with the Trudy lease
contract, as well as a Trudy Corporation guarantee. See "Certain Relationships
and Related Transactions."


     Trudy believes that its facilities are adequate for all of its foreseeable
requirements.

LEGAL PROCEEDINGS


     There are no material pending legal proceedings to which Trudy is a party,
or of which, any of its property is subject.


                                       25
<PAGE>   541

                                TRUDY MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS


     The directors and executive officers of Trudy, at September 15, 1999, are
as follows:



<TABLE>
<CAPTION>
                NAME                   AGE                      TITLE
                ----                   ---                      -----
<S>                                    <C>    <C>
Alice B. Burnham.....................  51     Director
William W. Burnham...................  56     Chairman of the Board of Directors,
                                              President and Treasurer
Peter D. Nalle.......................  52     Director
Fred M. Filoon.......................  57     Director
Richard Saltz........................  46     Secretary and Interim Chief Financial
                                              Officer
</TABLE>


     Each director is elected to hold office until the next annual meeting of
shareholders and until his successor is elected and qualified. Executive
officers are elected by the Board of Directors and hold office until their
successors are chosen and qualified, subject to earlier removal by the Board of
Directors.

     The principal occupations for the past five years of each director and
officer of Trudy are as follows:

     Alice B. Burnham was elected a director of Trudy in October 1994. As a
major shareholder and wife of the President, she had long been familiar with the
workings of Trudy. Mrs. Burnham manages her own interior design business in New
Canaan, Connecticut and is active in civic and professional affairs. Mrs.
Burnham received her degree from Briarcliff College.


     William W. Burnham has been Chairman and President and a director of Trudy
since 1979. He was appointed as Treasurer of Trudy in 1989. Mr. Burnham served
as Group Director of Marketing at Pepsico, Inc. from 1976 to 1979. From 1972 to
1976, Mr. Burnham served as the Director of Advertising and Sales Promotion at
Vlasic Foods. Mr. Burnham received a B.S. from Trinity College and an M.B.A.
from Columbia University.



     Peter D. Nalle was named a director of Trudy in September 1996. From 1996
to 1999, Mr. Nalle has been an advisor to Nichols Publishing, 100 Book Challenge
Corp., DHR, Inc., CrownPoint Publishing and Trudy Corporation, all publishing
companies. From 1994 to 1996, Mr. Nalle was the Chief Operating Officer for
Grolier, Inc., a major children's book publisher. Peter Nalle was President of
the Business and Professional Group at Simon & Schuster from 1990 to 1993. From
1987 to 1990, Mr. Nalle served as President and CEO for J.B. Lippincott Company,
a diversified publisher of healthcare publications. From 1970 to 1986, Mr. Nalle
held these positions at McGraw-Hill: Director of Marketing & Sales, Editorial
Director, Editor-in-Chief, District Sales Manager, Sponsoring Editor, General
Manager -- Professional and Reference Division, and Group Vice
President -- Engineering and Science. He received his degree from Brown
University in 1969.



     Fred M. Filoon was named a director of Trudy in January 1993. Mr. Filoon is
currently a partner with Cramer Rosenthal McGlynn and is the Senior Portfolio
Manager, managing a combination of institutional and individual balanced and
equity accounts.


                                       26
<PAGE>   542


Mr. Filoon has made a career of managing investment portfolios for institutions
such as public retirement systems, corporate pension and profit sharing plans,
endowments, foundations. He also managed portfolios for estates, personal, and
family trusts. The firms and positions in which he has worked are:



<TABLE>
<S>              <C>
1991 to present  Cramer Rosenthal, McGlynn
                 Senior Portfolio Manager
1989 to 1991     Morgan Stanley Asset Management
                 Vice President -- Senior Portfolio Manager
1983 to 1989     Wood Struthers and Winthrop Management,
                 a subsidiary of Donaldson, Lufkin & Jenrette.
                 Senior Vice President and Director
1973 to 1983     Alliance Capital Management Corp.,
                 a subsidiary of Donaldson, Lufkin & Jenrette.
                 Vice President and Senior Portfolio Manager
1968 to 1973     Webster Management,
                 a subsidiary of Kidder Peabody (FKA Clark Dodge & Co.)
                 Vice President and Portfolio Manager
1965 to 1968     First National City Bank -- Trust Department
                 Portfolio Manager and Security Analyst
</TABLE>



     Mr. Filoon received his B.A. from Bowdoin College in 1964.



     Richard Saltz was hired as Interim Chief Financial Officer of Trudy
Corporation on September 15, 1999. On the same date, the Board of Directors
elected Mr. Saltz to the position of Corporate Secretary. Since March 1996, Mr.
Saltz has owned a consulting company specializing in corporate financial
management, providing services for start-up companies seeking venture capital,
implementation of accounting software programs, and business plan development.
From April 1991 to March 1996, Mr. Saltz was the assistant controller and
assistant treasurer for H. Muehlstein & Co., Inc., formerly a subsidiary of
Mobil Oil. H. Muehlstein is engaged in trading plastic and rubber resins with
annual sales of $750 million. Prior to this, he worked for Berol Nobel
Corporation, as the Senior Vice President -- Finance and Administration from
January 1988 to April 1991. This company is a manufacturer of specialized
chemical products. From July 1983 to January 1988, his position was
Comptroller -- Chemical Products Division for Rayonier, Inc., a forest products,
pulp and chemical manufacturing company. Mr. Saltz worked for the commercial
lending division of Manufacturers Hanover Trust Company from August 1974 until
July 1983 as a Senior Credit Analyst. He received a BS in 1973 and an MBA in
1974, both from Cornell University.



     On May 24, 1999, Elisabeth T. Prial, a former officer of Trudy, resigned in
anticipation of taking the position of Vice President and Publisher of Futech.
Prior to joining Futech, Ms. Prial served as the Vice President of Sales of
Trudy since October 1994 and Publisher of Trudy since 1996. Ms. Prial continued
to serve as a director of Trudy until September 15, 1999, when she resigned to
avoid any conflicts.


                                       27
<PAGE>   543

                               TRUDY STOCKHOLDERS

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


     The following table sets forth information regarding the beneficial
ownership of Trudy's common stock at October 1, 1999, with respect to (i) each
person known to Trudy to own beneficially more than 5% of the outstanding shares
of Trudy's common stock, (ii) each director of Trudy, (iii) each of the
executive officers of Trudy, and (iv) all directors and executive officers of
Trudy as a group.



<TABLE>
<CAPTION>
                                               TRUDY COMMON STOCK
NAME                                          BENEFICIALLY OWNED(1)    PERCENT OF CLASS
----                                          ---------------------    ----------------
<S>                                           <C>                      <C>
William W. Burnham(2)(3)(4).................       115,090,000               31.5%
Alice B. Burnham(2)(3)(5)...................        63,250,000               17.4%
Peter B. Burnham............................        35,410,000                9.7%
  216 Hardwick Road
  Petersham, MA
Peter D. Nalle(3)...........................         2,750,000                0.8%
Fred M. Filoon(3)(6)........................         5,250,000                1.4%
Richard Saltz(3)............................                 0                 --
All executive officers and directors as a
  group (5 persons)(4)(5)(6)................       186,340,000               50.4%
</TABLE>


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


(1) Beneficial ownership is determined in accordance with the rules of the
    Securities and Exchange Commission and generally includes voting or
    investment power with respect to securities. In accordance with SEC rules,
    shares which may be acquired upon exercise of stock options which are
    currently exercisable or which become exercisable within 60 days of the date
    of the table are deemed beneficially owned by the optionee. Except as
    indicated by footnote, and subject to community property laws where
    applicable, the persons or entities named in the table above have sole
    voting and investment power with respect to all shares of Trudy common stock
    shown as beneficially owned by them.


(2) Husband and wife.

(3) The address of each of these individuals is: c/o Trudy Corporation, 353 Main
    Avenue, Norwalk, Connecticut 06851-1552.

(4) Includes 2,000,000 shares of Trudy common stock issuable upon exercise of
    immediately exercisable options.

(5) Includes 1,000,000 shares of Trudy common stock issuable upon exercise of
    immediately exercisable options.


(6) Includes 3,000,000 shares of Trudy common stock issuable upon exercise of
    immediately exercisable options.


                                       28
<PAGE>   544

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


     In connection with the mergers, William W. Burnham will be employed as the
Vice President -- Specialty and Educational Products of New Futech. Mr. Burnham
will also be a director of New Futech and will receive a three year employment
agreement providing for a base salary of $100,000 per year and stock options for
a total of 20,000 shares of New Futech common stock, vesting in equal, annual
installments over the three year period and with an exercise price of $7.50 per
share. Some of the officers and directors of the other merging companies will
also receive employment agreements and stock options in connection with the
mergers.



     The Main Avenue property leased by Trudy is owned by a Connecticut limited
liability corporation, Noreast Management LLC, which is owned jointly by William
W. Burnham, the Chairman of the board of directors and President of Trudy, P.
Ogilvie, a former officer of Trudy, and Fred M. Filoon, a director of Trudy. To
effect refurbishment on this building, Noreast Management borrowed $300,000 as
an eight year loan from a local bank. This loan was secured by personal
guarantees from both Mr. Burnham and Mr. Ogilvie, an assignment of the lease,
and a guarantee by Trudy. Pursuant to the merger agreement, Mr. Burnham has
agreed to indemnify New Futech for any all claims relating to hazardous waste
associated with this property for all periods of time prior to the closing of
the mergers.


     In previous years, Trudy had borrowed an aggregate of $454,729 from William
W. Burnham, Peter B. Burnham and members of their families. The loans bear
interest at the rate of 10% per annum. On March 31, 1987, the note holders
contributed to the Company's capital an aggregate of $374,205 of these notes
payable. The balance of $80,525 in demand loans was converted to five-year term
loans with interest payments quarterly in arrears at the greater of 10% per
annum or the applicable Federal rate. Interest accruals aggregating $91,728 have
further increased the indebtedness to $173,941 as of June 30, 1999.


     As of March 31, 1998, Trudy has borrowed an aggregate of $383,742 in cash
advances, including accrued interest, from William W. Burnham to finance
inventory purchases and catalog printing. This total is comprised of promissory
notes which bear interest at the rate of 12% per annum. The notes are secured
with a pledge of all of Trudy's inventory, accounts receivable, and equipment.
On March 31, 1998, Mr. Burnham forgave the unpaid accrued interest, totaling
$96,320 on these notes. No further interest expense has been accrued on these
loans. The aggregate balance of these loans, as of June 30, 1999, was $287,422.


     In July and August 1998, William W. Burnham made additional loans to the
Company totaling $338,900 to fund an investment in a new computer system and
seasonal working capital requirements. The note for the computer system is for
$28,900 and bears an interest rate of 8%. It is due in July 1999. The note for
the working capital totals $310,000 and bears an interest rate of 8%. It was due
in October 1998, but remains unpaid.


     New Futech has also agreed, as part of the merger agreement, to assume
certain loans owing by Trudy to William W. Burnham and two of his family members
in the aggregate amount, including accrued interest through January 31, 1999, of
$810,032. Of this amount, $287,422 has not accrued interest since March 31,
1998, but interest (at the rate of 10% per annum) continues to accrue only on
the debt owing to the family members until the mergers occur. As of August 31,
1999, the balance, including accrued interest owed to the


                                       29
<PAGE>   545


family members was $832,352. No interest will accrue on the debts owing to Mr.
Burnham from February 1, 1999 through the effective time of the mergers.
Beginning on the closing date of the mergers, interest will accrue on the
outstanding balance of all of these loans at 4% per annum. At the closing, New
Futech will repay 25% of the outstanding balance, and thereafter will repay
three equal amounts of principal plus all accrued interest at six month
intervals.



     On May 28, 1999, Alice B. Burnham a director of Trudy and wife of the
Trudy's president loaned Trudy $140,000 to meet immediate cash needs. The note
bears interest at 8 percent and was due, but not paid, on July 2, 1999.



     On September 29, 1999, Trudy signed a promissory note with a maximum
availability of $674,031. The note bears interest at prime plus 1% and is due on
demand. The proceeds of this note were used to repay Trudy's loans from First
Union Bank in full. As of September 30, 1999 there was $638,483 outstanding on
this loan. The note is personally guaranteed by William Burnham, Alice Burnham
and Peter Burnham.



     Within thirty days after the effective date of the mergers, New Futech will
obtain releases of William W. Burnham, Alice Burnham and Peter Burnham of their
personal guaranty of Trudy debts with Wilmington Trust. New Futech may be
required to refinance these loans to obtain the releases.


                CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                      ACCOUNTING AND FINANCIAL DISCLOSURE


     As previously reported in Trudy's Current Report on Form 8-K dated April
12, 1999, Trudy's board of directors approved the engagement of Ernst & Young,
LLP and retained this firm as its independent auditor for the fiscal year ending
March 31, 1999 to replace the firm of Abrams and Company, P.C., who was
dismissed as auditor of Trudy effective April 9, 1999. Ernst & Young, LLP is the
independent auditor used by Futech Interactive Products, Inc., one of the other
merging companies.


     The reports of Abrams and Company, P.C. on Trudy's financial statements for
the past two fiscal years did not contain an adverse opinion or a disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope, or
accounting principles. In connection with the audits of Trudy's financial
statements for each of the two fiscal years ended March 31, 1997 and 1998, there
were no disagreements with Abrams and Company, P.C. on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope
procedures which, if not resolved to the satisfaction of Abrams and Company,
P.C. would have caused Abrams and Company, P.C. to make reference to these
matters in their report. Trudy has requested Abrams and Company, P.C. to furnish
Trudy with a letter addressed to the Securities Exchange Commission stating
whether it agrees with the above statements and such letter has been furnished.

                                       30
<PAGE>   546

                                                                      APPENDIX 1

                        DELAWARE GENERAL CORPORATION LAW

SECTION 262 APPRAISAL RIGHTS.

     (a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.

     (b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to sec.
251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or sec.
264 of this title:

          (1) Provided, however, that no appraisal rights under this section
     shall be available for the shares of any class or series of stock, which
     stock, or depository receipts in respect thereof, at the record date fixed
     to determine the stockholders entitled to receive notice of and to vote at
     the meeting of stockholders to act upon the agreement of merger or
     consolidation, were either (i) listed on a national securities exchange or
     designated as a national market system security on an interdealer quotation
     system by the National Association of Securities Dealers, Inc. or (ii) held
     of record by more than 2,000 holders; and further provided that no
     appraisal rights shall be available for any shares of stock of the
     constituent corporation surviving a merger if the merger did not require
     for its approval the vote of the stockholders of the surviving corporation
     as provided in subsection (f) of sec. 251 of this title.

          (2) Notwithstanding paragraph (1) of this subsection, appraisal rights
     under this section shall be available for the shares of any class or series
     of stock of a constituent corporation if the holders thereof are required
     by the terms of an agreement of merger or consolidation pursuant to
     sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
     such stock anything except:

             a. Shares of stock of the corporation surviving or resulting from
        such merger or consolidation, or depository receipts in respect thereof;

             b. Shares of stock of any other corporation, or depository receipts
        in respect thereof, which shares of stock (or depository receipts in
        respect thereof) or depository receipts at the effective date of the
        merger or consolidation will be either listed on a national securities
        exchange or designated as a national market

                                       A-1
<PAGE>   547

        system security on an interdealer quotation system by the National
        Association of Securities Dealers, Inc. or held of record by more than
        2,000 holders;

             c. Cash in lieu of fractional shares or fractional depository
        receipts described in the foregoing subparagraphs a. and b. of this
        paragraph; or

             d. Any combination of the shares of stock, depository receipts and
        cash in lieu of fractional shares or fractional depository receipts
        described in the foregoing subparagraphs a., b. and c. of this
        paragraph.

          (3) In the event all of the stock of a subsidiary Delaware corporation
     party to a merger effected under sec. 253 of this title is not owned by the
     parent corporation immediately prior to the merger, appraisal rights shall
     be available for the shares of the subsidiary Delaware corporation.

     (c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.

     (d) Appraisal rights shall be perfected as follows:

          (1) If a proposed merger or consolidation for which appraisal rights
     are provided under this section is to be submitted for approval at a
     meeting of stockholders, the corporation, not less than 20 days prior to
     the meeting, shall notify each of its stockholders who was such on the
     record date for such meeting with respect to shares for which appraisal
     rights are available pursuant to subsection (b) or (c) hereof that
     appraisal rights are available for any or all of the shares of the
     constituent corporations, and shall include in such notice a copy of this
     section. Each stockholder electing to demand the appraisal of such
     stockholder's shares shall deliver to the corporation, before the taking of
     the vote on the merger or consolidation, a written demand for appraisal of
     such stockholder's shares. Such demand will be sufficient if it reasonably
     informs the corporation of the identity of the stockholder and that the
     stockholder intends thereby to demand the appraisal of such stockholder's
     shares. A proxy or vote against the merger or consolidation shall not
     constitute such a demand. A stockholder electing to take such action must
     do so by a separate written demand as herein provided. Within 10 days after
     the effective date of such merger or consolidation, the surviving or
     resulting corporation shall notify each stockholder of each constituent
     corporation who has complied with this subsection and has not voted in
     favor of or consented to the merger or consolidation of the date that the
     merger or consolidation has become effective; or

          (2) If the merger or consolidation was approved pursuant to sec. 228
     or sec. 253 of this title, each constituent corporation, either before the
     effective date of the merger or consolidation or within ten days
     thereafter, shall notify each of the holders of any class or series of
     stock of such constituent corporation who are entitled to appraisal rights
     of the approval of the merger or consolidation and that appraisal rights
     are available for any or all shares of such class or series of stock of
     such constituent corporation, and shall include in such notice a copy of
     this section; provided that, if the notice is given on or after the
     effective date of the merger or consolidation, such notice shall be given
     by the surviving or resulting corporation to all such holders of

                                       A-2
<PAGE>   548

     any class or series of stock of a constituent corporation that are entitled
     to appraisal rights. Such notice may, and, if given on or after the
     effective date of the merger or consolidation, shall, also notify such
     stockholders of the effective date of the merger or consolidation. Any
     stockholder entitled to appraisal rights may, within 20 days after the date
     of mailing of such notice, demand in writing from the surviving or
     resulting corporation the appraisal of such holder's shares. Such demand
     will be sufficient if it reasonably informs the corporation of the identity
     of the stockholder and that the stockholder intends thereby to demand the
     appraisal of such holder's shares. If such notice did not notify
     stockholders of the effective date of the merger or consolidation, either
     (i) each such constituent corporation shall send a second notice before the
     effective date of the merger or consolidation notifying each of the holders
     of any class or series of stock of such constituent corporation that are
     entitled to appraisal rights of the effective date of the merger or
     consolidation or (ii) the surviving or resulting corporation shall send
     such a second notice to all such holders on or within 10 days after such
     effective date; provided, however, that if such second notice is sent more
     than 20 days following the sending of the first notice, such second notice
     need only be sent to each stockholder who is entitled to appraisal rights
     and who has demanded appraisal of such holder's shares in accordance with
     this subsection. An affidavit of the secretary or assistant secretary or of
     the transfer agent of the corporation that is required to give either
     notice that such notice has been given shall, in the absence of fraud, be
     prima facie evidence of the facts stated therein. For purposes of
     determining the stockholders entitled to receive either notice, each
     constituent corporation may fix, in advance, a record date that shall be
     not more than 10 days prior to the date the notice is given, provided, that
     if the notice is given on or after the effective date of the merger or
     consolidation, the record date shall be such effective date. If no record
     date is fixed and the notice is given prior to the effective date, the
     record date shall be the close of business on the day next preceding the
     day on which the notice is given.

     (e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.

     (f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their

                                       A-3
<PAGE>   549

shares have not been reached by the surviving or resulting corporation. If the
petition shall be filed by the surviving or resulting corporation, the petition
shall be accompanied by such a duly verified list. The Register in Chancery, if
so ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.

     (g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.

     (h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.

     (i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.

     (j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.

                                       A-4
<PAGE>   550

     (k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.

     (l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.

                                       A-5
<PAGE>   551

                               FUNDEX GAMES, LTD.
                               2237 DIRECTORS ROW
                          INDIANAPOLIS, INDIANA 46241
                            ------------------------

                   NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
                        TO BE HELD                , 1999
                            ------------------------

     You are invited to attend a Special Meeting of Stockholders of Fundex
Games, Ltd., that will be held at       a.m. local time on             , 1999,
at       .

     The Fundex board of directors has called this special meeting for the
following purposes:

     - To consider and vote upon a proposal to approve and adopt the Merger
       Agreement dated as of June 7, 1999, by and among Fundex, Futech
       Interactive Products, Inc., Trudy Corporation, Janex International, Inc.,
       DaMert Company, and two newly formed companies that we are referring to
       as "New Futech" and "New Sub." Under the Merger Agreement, first Futech
       and then Janex, Trudy, and DaMert will merge with and into New Futech,
       which will survive the mergers, and Fundex will merge into New Sub, which
       will survive as a wholly-owned subsidiary of New Futech. Under the Merger
       Agreement, Fundex stockholders who do not exercise dissenters' rights
       will generally receive a combination of cash, promissory notes of New Sub
       and common stock of New Futech as described in the prospectus/proxy
       statement under the heading "DESCRIPTION OF THE MERGERS AND THE Merger
       Agreement -- Basic Terms of the Merger Agreement." However, holders of up
       to approximately 29% of the outstanding stock of Fundex may elect to
       receive cash at the rate of $2.84 per Fundex share (the "All Cash
       Alternative"). Those Fundex stockholders not electing the All Cash
       Alternative will receive promissory notes in the aggregate amount of
       $4,500,000 minus the total consideration paid to stockholders electing
       the All Cash Alternative. Fundex stockholders not electing the All Cash
       Alternative will also receive approximately .3693 shares of New Futech
       common stock per Fundex share plus their pro rata proportion (shared
       among all Fundex stockholders who do not elect the All Cash Alternative)
       of .184635 shares of New Futech for each of the Fundex shares as to which
       the All Cash Alternative is selected. The promissory note of New Sub will
       be secured by a subordinated pledge of its assets and secured by a pledge
       of the New Sub stock.

     - To transact such other business as may properly come before the special
       meeting or any adjournment or postponement of the special meeting.

     These matters are more fully described in the prospectus/proxy statement
supplement and related prospectus/proxy statement that are attached to this
Notice.

     We, the board of directors of Fundex, unanimously recommend that you vote
FOR the mergers.

     You will be entitled to vote at the special meeting or any adjournment or
postponement of the special meeting only if you are a holder of record of Fundex
common stock at the close of business on              , 1999.

                                   BY ORDER OF THE BOARD OF DIRECTORS

                                   Chip Voigt
                                   President

Indianapolis, Indiana
             , 1999
                                   IMPORTANT

      We cordially invite all stockholders to attend the special meeting in
 person.

      Whether or not you plan to attend the special meeting in person, in order
 to assure your representation at the meeting, we urge you to complete, sign
 and date the enclosed proxy card, which is being solicited by the board of
 directors, and promptly return it in the self-addressed return envelope
 enclosed for that purpose. You may revoke your proxy at any time prior to the
 vote at the meeting by telling us that you want to do so.
<PAGE>   552


                  Subject to Completion, Dated October 8, 1999



                  FUTECH INTERACTIVE PRODUCTS (DELAWARE) INC.


                           FUTECH TOYS & GAMES, INC.


                               FUNDEX GAMES, LTD.


                     PROSPECTUS/PROXY STATEMENT SUPPLEMENT



     The board of directors of Fundex Games, Ltd., has called a special meeting
of stockholders to consider and vote upon a proposal to (a) merge Futech
Interactive Products, Inc. with Futech Interactive Products (Delaware) Inc., a
newly-formed company, so that New Futech is a Delaware corporation, (b) merge
three other companies into New Futech, and (c) merge Fundex into a subsidiary so
that it becomes a subsidiary of New Futech. This prospectus/proxy statement
supplement and the accompanying prospectus/proxy statement are intended to give
you important information about the special meeting and about the proposed
mergers and the combined company that would result from the mergers. PLEASE READ
THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS/PROXY
STATEMENT TOGETHER WITH EACH OTHER AS IF THEY WERE A SINGLE DOCUMENT. THIS
PROSPECTUS/PROXY STATEMENT SUPPLEMENT ALONE DOES NOT INCLUDE ALL OF THE
INFORMATION THAT WE BELIEVE MAY BE IMPORTANT TO YOU.



     Under the merger agreement, first Futech and then Trudy Corporation, Janex
International, Inc., and DaMert Company will merge with and into New Futech, and
Fundex will merge into the newly formed subsidiary, Futech Toys & Games, Inc.
("New Sub"), which will survive as a wholly-owned subsidiary of New Futech. Each
share of outstanding stock of any of the merging companies immediately prior to
the mergers, other than dissenting shares, is expected to be converted into the
right to receive cash, shares of New Futech stock, promissory notes of New
Futech or New Sub, or a combination of these things, in the amounts specified on
the cover page of the prospectus/proxy statement, but subject to changes in
accordance with the elections and conditional rights described under
"Description of the Mergers and the Merger Agreement" in the prospectus/proxy
statement beginning at page   . The table does not include outstanding options
and warrants of Futech, Janex and Fundex which would be converted into New
Futech options and warrants in the mergers. Fundex stockholders will receive
additional shares of New Futech common stock under some circumstances and will
have the right to exchange their New Futech common stock for the license rights
in the "Phase 10" family of games under some other circumstances described in
the prospectus/proxy statement.



     There is no trading market for any Fundex securities. We expect the New
Futech common stock to trade on the OTC Bulletin Board or on other markets after
the mergers, but we cannot be sure it will do so and we cannot predict what the
price might be. We do not expect a trading market to develop for any of the
other securities of New Futech or New Sub.



     THESE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROSPECTUS/PROXY STATEMENT
SUPPLEMENT AND THE RELATED PROSPECTUS/PROXY STATEMENT. THE PROPOSED MERGERS ARE
COMPLEX TRANSACTIONS. WE STRONGLY URGE YOU TO READ AND CONSIDER CAREFULLY THIS
PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE PROSPECTUS/PROXY STATEMENT IN
THEIR ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO UNDER "RISK FACTORS"
BEGINNING ON PAGE 6 OF THE PROSPECTUS/PROXY STATEMENT.



     Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus/proxy statement supplement or the accompanying prospectus/proxy
statement is truthful or complete. Any representation to the contrary is a
criminal offense.



     This prospectus/proxy statement supplement and the related prospectus/proxy
statement are first being mailed to stockholders of Futech, Janex, Trudy, Fundex
and DaMert on or about              , 1999.



 The date of this prospectus/proxy statement supplement is              , 1999.

<PAGE>   553

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS/PROXY STATEMENT. WE HAVE NOT, AND NEW FUTECH AND NEW SUB HAVE NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. NEW FUTECH AND NEW SUB ARE NOT MAKING AN OFFER TO SELL THESE SECURITIES IN
ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME
THAT THE INFORMATION APPEARING IN THIS PROSPECTUS PROXY/ STATEMENT SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS/PROXY STATEMENT IS ACCURATE AS OF THE DATE ON
THE FRONT OF THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT ONLY. OUR BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE
THAT DATE.

                      WHERE YOU CAN FIND MORE INFORMATION

     We will send to you, without charge, any material information that we have
or can obtain without unreasonable effort or expense concerning Fundex or any
other merging company, concerning the Merger Agreement and related contracts or
concerning the proposed management and operations of New Futech. You may direct
requests for additional information regarding DaMert, Futech, Trudy, Fundex, or
Janex to Frederick B. Gretsch, Sr. at 2999 North 44th Street, Suite 225,
Phoenix, Arizona 85018-7247, (602) 808-8765.


     TO OBTAIN TIMELY DELIVERY OF THESES DOCUMENTS, YOU MUST MAKE YOUR REQUEST
NO LATER THAN                , FIVE BUSINESS DAYS BEFORE THE DATE OF THE FUNDEX
STOCKHOLDERS MEETING.


                                        i
<PAGE>   554

                               TABLE OF CONTENTS


<TABLE>
<S>                                                           <C>
Summary Information -- Q&A..................................    1
  Why are the five companies proposing to merge?............    1
  What will I receive in the mergers?.......................    1
  What risks should I consider?.............................    1
  What stockholder vote is required to approve the
     mergers?...............................................    1
  What circumstances might prevent the mergers?.............    2
  How will the mergers be treated for accounting
     purposes?..............................................    2
  When do you expect the mergers to be completed?...........    2
  What are the tax consequences of the mergers to me?.......    2
  Will I have dissenters' rights?...........................    2
  How do I vote and how are the votes counted?..............    2
  Should I send in my stock certificates now?...............    3
Other Information About the Mergers.........................    3
  The Companies.............................................    3
  The Special Meeting.......................................    3
  The Merger Agreement......................................    3
Stockholder Matters.........................................    5
The Mergers and Related Transactions........................    6
  General...................................................    6
  Effects of the Mergers....................................    6
  Background of the Merger..................................    7
  Reasons for the Mergers...................................    8
  Fundex's Board Recommendation.............................    9
  Related Agreements; Interests of Certain Fundex Affiliates
     in the Merger..........................................    9
  Regulatory Matters........................................   10
  Federal Income Tax Consequences...........................   10
  Accounting Treatment......................................   14
Rights of Dissenting Stockholders...........................   14
New Futech and Fundex Shares................................   15
  New Futech Common Stock...................................   15
  General Description of Fundex Common Stock................   15
  Common Stock..............................................   15
Comparison of the Rights of Holders of Fundex Common Stock
  and New Futech Common Stock...............................   16
Fundex Management's Discussion and Analysis or Plan of
  Operation.................................................   23
  Overview..................................................   23
  Results of Operations of Fundex...........................   23
  Seasonality and Quarterly Fluctuations....................   25
</TABLE>


                                       ii
<PAGE>   555

<TABLE>
<S>                                                           <C>
  Liquidity and Capital Resources...........................   25
  Inflation.................................................   25
  Year 2000.................................................   26
  Safe Harbor Disclosure: Forward-Looking Statements and
     Associated Risks.......................................   26
Description Of Fundex's Business............................   27
  Business..................................................   27
  Marketing, Distribution and Customers.....................   29
  Manufacturing.............................................   30
  Product Design and Selection..............................   30
  Competition...............................................   30
  Patents, Trademarks and Licensing.........................   31
  Backlog...................................................   31
  Government Regulations....................................   31
  Employees.................................................   32
  Properties................................................   32
  Legal Proceedings.........................................   32
Fundex Management...........................................   33
  Directors and Executive Officers..........................   33
Fundex Stockholders.........................................   35
Certain Relationships and Related Transactions..............   35
Appendices
Appendix 1 -- Section 92A.380 of Nevada Revised Statutes....  A-1
</TABLE>


                                       iii
<PAGE>   556


                           SUMMARY INFORMATION -- Q&A



     This summary highlights selected information from this document and may not
contain all the information that is important to you. For a more complete
understanding of the proposed mergers, you should carefully read the
prospectus/proxy statement, this prospectus/proxy supplement and the additional
documents we mention. You should pay special attention to the "Risk Factors"
section beginning on page 6 of the prospectus/proxy statement.


WHY ARE THE FIVE COMPANIES PROPOSING TO MERGE?


     The five companies are proposing to merge because the directors of each
company believe the combination will provide significant benefits to
stockholders. We believe the mergers will enable us to take advantage of the
complementary strategic fit of our respective businesses by marketing through
additional channels of distribution. We also hope and believe that the mergers
will improve the likelihood that stockholders will have a more liquid market
should they wish to sell their stock and that the combined companies will be
able to more efficiently access the markets for debt and equity when
appropriate. To review the background and reasons for the mergers in greater
detail, see "Background of the Mergers" in the prospectus/proxy statement.


WHAT WILL I RECEIVE IN THE MERGERS?


     Unless you or other Fundex stockholders elect the All Cash Alternative
described below, you and all Fundex stockholders will receive a combination of
cash, promissory notes and common stock in exchange for your Fundex stock.
Stockholders of the other merging companies will receive cash, promissory notes
and common or preferred stock of New Futech. Certain employment contracts and
other agreements with affiliates of the merging companies are also part of the
deal. See "Description of the Mergers and the Merger Agreement" in the
prospectus/proxy statement.


WHAT RISKS SHOULD I CONSIDER?


     You should review "Risk Factors" beginning on page 6 of the
prospectus/proxy statement.


WHAT STOCKHOLDER VOTE IS REQUIRED TO APPROVE THE MERGERS?

     The following table shows the proportions of the outstanding shares that
must vote in favor of the mergers, together with the proportion of the
outstanding shares that are held by directors, executive officers and their
affiliates, the majority of whom have indicated that they intend to vote in
favor of the mergers.


<TABLE>
<CAPTION>
                                  SHARES OWNED BY DIRECTORS,
COMPANY         VOTE REQUIRED  EXECUTIVE OFFICERS AND AFFILIATES
-------         -------------  ---------------------------------
<S>             <C>            <C>
DaMert            Majority                   100.0%
Fundex            Majority                    70.8%
Futech            Majority                    56.4%
Janex             Majority                    79.2%
Trudy             Majority                    60.9%
</TABLE>



     The presence in person or by proxy of a majority of the outstanding shares
of each company constitutes a quorum for business to be conducted at the
meeting. Abstentions


                                        1
<PAGE>   557


and broker non-votes will be treated as present for purposes of determining a
quorum for each company's stockholders' meeting, but since they will not be
counted as votes in favor of the merger, they will have the same effect as votes
against the merger.


WHAT CIRCUMSTANCES MIGHT PREVENT THE MERGERS?


     New Futech has the right to terminate the merger agreement if stockholders
from all of the merging companies combined exercise dissenters' rights with
respect to more than 5% of the aggregate merger consideration to be issued in
the mergers. See "Description of the Mergers and the Merger
Agreement -- Conditions to Closing" in the prospectus/proxy statement for a
description of the other conditions to the mergers.


HOW WILL THE MERGERS BE TREATED FOR ACCOUNTING PURPOSES?

     We expect the mergers to be treated as purchases by Futech, which means
that the amount by which the total merger consideration received by stockholders
of the other merging companies plus the amount of their liabilities exceeds the
fair market value of their identifiable assets will initially be treated as
goodwill by New Futech for accounting purposes.

WHEN DO YOU EXPECT THE MERGERS TO BE COMPLETED?


     We are working to complete the mergers during the third quarter of 1999.
However, the merger agreement does not contain any express deadline for the
mergers to proceed.


WHAT ARE THE TAX CONSEQUENCES OF THE MERGERS TO ME?


     We and the other merging companies have structured the merger agreement
with the intent and expectation that the exchange of shares by Fundex
shareholders will be tax-free for federal income tax purposes. THERE WILL BE
FEDERAL INCOME TAXES DUE ON THE CASH, PROMISSORY NOTES AND CONDITIONAL RIGHTS
THAT YOU RECEIVE. You should review the more detailed description of federal tax
consequences that appear on pages 12 through 16 of this prospectus/proxy
statement supplement. State and local taxes may also become due as a result of
the mergers.


     The precise tax consequences of the mergers will depend on your own
situation. You should consult your tax advisor for a full understanding of the
tax consequences of the mergers to you.

WILL I HAVE DISSENTERS' RIGHTS?


     Yes, provided you do not vote in favor of the mergers and meet all other
requirements of the dissenter's rights statute. See "Rights of Dissenting
Stockholders" starting on page 16 of this prospectus/proxy statement supplement
and the Nevada dissenters' rights statute that is attached as Appendix 1 to this
prospectus/proxy statement supplement.



HOW DO I VOTE AND HOW ARE THE VOTES COUNTED?


     Just indicate on your proxy card how you want to vote on the mergers, and
sign and mail it in the enclosed return envelope as soon as possible, so that
your shares will be represented at the stockholders meeting.


     If you sign and send in your proxy and do not indicate how you want to
vote, your proxy will be counted as a vote in favor of the mergers. If you do
not vote because you either do not return your proxy, give instructions to your
broker, or vote in person, or you


                                        2
<PAGE>   558


abstain, it will have the same effect as a vote against the mergers. Brokers who
hold your shares of Fundex stock as nominees cannot vote those shares unless you
give them instructions, in the manner that they require, concerning how to vote
the shares.



     The stockholders meeting will take place on                , at
               local time, at                . You may attend the stockholders
meeting and vote your shares in person, rather than signing and mailing your
proxy card. In addition, you may withdraw or revoke your proxy up to and
including the day of the meeting by giving written notice to the Secretary of
Fundex, by returning a later dated proxy or by attending the meeting and voting
in person.



     The votes will be tabulated by the Secretary of Fundex or by such other
person as the President of Fundex may designate.


SHOULD I SEND IN MY STOCK CERTIFICATES NOW?

     No. After the mergers are completed we will send you written instructions
for exchanging your stock certificates for the New Futech stock, cash and
promissory notes to which you are entitled.


                      OTHER INFORMATION ABOUT THE MERGERS


THE COMPANIES


     Each of Futech, Janex, Trudy, DaMert, Fundex, New Futech and New Sub are
described in the "Summary" and "New Futech's Business" sections of the
prospectus/ proxy statement.



THE SPECIAL MEETING



DATE, TIME AND PLACE


     The Fundex special meeting will be held on                , at
               at                .


PURPOSE OF THE SPECIAL MEETING



     We have called the special meeting so the Fundex stockholders can vote on
whether to approve the mergers pursuant to the merger agreement. The directors
of Futech, Trudy, Janex and DaMert have called for special meetings of the
stockholders of their companies so that they also can vote whether to approve
the mergers.



RECOMMENDATION OF THE FUNDEX BOARD OF DIRECTORS



     We have unanimously approved the merger agreement and unanimously recommend
that the stockholders of Fundex vote "For" approval of the merger agreement.


THE MERGER AGREEMENT


     Under the merger agreement, first Futech and then Janex, Trudy, and DaMert
will merge with and into New Futech, which will survive the mergers, and Fundex
will merge into New Sub, which will survive as a wholly-owned subsidiary of New
Futech. Under the merger agreement, Fundex stockholders who do not exercise
dissenters' rights will generally receive a combination of cash, promissory
notes of New Sub and common stock of New Futech as described in the
prospectus/proxy statement under the heading


                                        3
<PAGE>   559


"Description of the Mergers and the Merger Agreement -- Basic Terms of the
Merger Agreement." However, holders of up to approximately 29% of the
outstanding stock of Fundex, or all Fundex stockholders except Carl E. Voigt, IV
and Carl E. Voigt, III, who have agreed not to receive this right, may elect to
receive cash at the rate of $2.84 per Fundex share (the All Cash Alternative).
Those Fundex stockholders not electing the All Cash Alternative will receive
promissory notes in the aggregate amount of $4,500,000 minus the total
consideration paid to stockholders electing the All Cash Alternative. Fundex
stockholders not electing the All Cash Alternative will also receive .3693
shares of New Futech common stock per Fundex share plus their pro rata
proportion of approximately .184635 shares of New Futech for each of the Fundex
shares as to which the All Cash Alternative is selected. The promissory note of
New Sub will be secured by a subordinated pledge of its assets and secured by a
pledge of the New Sub stock and will also be fully and unconditionally
guaranteed. See "Description of the Mergers and the Merger Agreement -- Basic
Terms of the Merger Agreement."


                                        4
<PAGE>   560


                              STOCKHOLDER MATTERS


     Fundex stock does not trade on any established market. Similarly, there is
no public trading market for the New Futech common stock. We expect the New
Futech common stock to trade on the OTC Bulletin Board/Nasdaq Stock Market soon
after the mergers, but we cannot be sure it will do so and we cannot predict
what the price might be. We do not expect a trading market to develop for any of
the other securities of New Futech.


     As of October 1, 1999, there were 61 stockholders of record of Fundex
common stock, as shown on our records.


     Fundex has not paid dividends on its common stock and does not anticipate
paying dividends in the foreseeable future. If the mergers do not occur for any
reason, we anticipate that all earnings, in the foreseeable future, will be
retained for development of Fundex's business.

                                        5
<PAGE>   561

                      THE MERGERS AND RELATED TRANSACTIONS

GENERAL


     The merger agreement provides for the merger of Futech with and into New
Futech, promptly followed by the substantially simultaneous merger of Janex,
Trudy and DaMert with and into New Futech and the substantially simultaneous
merger of Fundex with and into New Sub. The discussion in this prospectus/proxy
statement supplement and the related prospectus/proxy statement of the mergers
and the description of the principal terms of the merger agreement contained in
the prospectus/proxy statement are subject to and qualified in their entirety by
reference to the merger agreement, a copy of which is attached to the
prospectus/proxy statement as Appendix A.


EFFECTS OF THE MERGERS

GENERAL


     We intend for the mergers to occur promptly following approval of the
mergers by the requisite vote of the stockholders of each of Janex, Futech,
Trudy, DaMert and Fundex and the satisfaction or waiver of all other conditions
to consummation of the mergers. The mergers will become effective at or about
the time of filing of articles of merger or other appropriate documents with the
applicable government offices or agencies. At that time Futech will
reincorporate in Delaware by merging with New Futech and then Janex, Trudy and
DaMert will merge with and into New Futech with the result that New Futech will
be the surviving corporation. Then, Fundex will merge with and into New Sub with
the result that New Sub will be the surviving wholly owned subsidiary of New
Futech. As part of the mergers, New Futech will change its name to "Futech
Interactive Products, Inc." The stockholders of Fundex will become stockholders
of New Futech, and their rights will be governed by the New Futech certificate
of incorporation and bylaws. See "Comparison of Rights of Stockholders of Fundex
and New Futech." See "Description of the Mergers and the Merger Agreement" in
the prospectus/proxy statement.



     For information regarding the operation of New Futech and New Sub following
the mergers, see "Description of New Futech's Business" in the prospectus/proxy
statement. For information regarding the officers and directors of New Futech
following the mergers, see "New Futech's Management" in the prospectus/proxy
statement.


EXCHANGE RATIOS


     If none of the Fundex stockholders elects the All Cash Alternative, each
share of Fundex common stock outstanding immediately prior to the mergers, other
than dissenting shares, will be converted into the right to receive
approximately 0.3693 shares of New Futech common stock and a promissory note of
New Futech in the amount of approximately $2.7695 that bears interest at the
rate of 10% per annum, is due one year after the mergers occur, and is secured
by New Futech's pledge of all of the stock of New Sub, by a subordinated lien on
New Sub's assets and by the full and unconditional guarantee of New Futech.
Stockholders will also receive the conditional right to exchange their New
Futech stock for the license rights to the Phase 10 family of products as
described in the prospectus/proxy statement under the heading "Special
Arrangements Relating to New Sub and 'Phase 10' Assets."


                                        6
<PAGE>   562

     Any Fundex stockholders who elect the All Cash Alternative will instead
receive cash at the rate of $2.84 per Fundex share. In that case the remaining
Fundex stockholders will receive:

     - one year promissory notes in an aggregate amount of $4,500,000 minus the
       aggregate amount paid to stockholders who elect the All Cash Alternative;
       plus

     - approximately .3693 shares of New Futech common stock per Fundex share;
       plus


     - their pro rata proportion, shared among all Fundex stockholders who do
       not elect the All Cash Alternative, of approximately .184635 shares of
       New Futech for each of the Fundex shares as to which the All Cash
       Alternative is selected.



     Outstanding shares of Futech, Trudy, Janex and DaMert will also be
converted into a combination of cash, promissory notes and common stock of New
Futech. Under some circumstances the former stockholders of Trudy will have the
right to receive additional New Futech stock or to exchange their New Futech
stock for unsecured five year debentures. In addition, outstanding options of
each of the merging companies will be converted into options to purchase common
stock of New Futech. See "Description of the Mergers and the Merger
Agreement -- Basic Terms of the Merger Agreement."


FRACTIONAL SHARES


     Fractional shares of New Futech common stock will be issued in the mergers.


BACKGROUND OF THE MERGER


     On September 3, 1998, Mr. Vince Goett, Chairman of Futech, telephoned Mr.
Chip Voigt, President of Fundex, to express interest in working together on the
development, marketing and production of game products utilizing Futech's
proprietary product. Mr. Goett also wanted to further explore business
synergies.



     On September 11, 1998, Mr. Goett arranged for Mr. Chip Voigt and Mr. Pete
Voigt, Executive Vice President, to visit the Futech offices in Phoenix. During
the meeting the Voigts and Mr. Goett toured the facilities and discussed the
Futech proprietary product and the possibilities for a merger between Futech and
Fundex.


     On January 7, 1999, Mr. Chip Voigt and Fundex counsel met with Mr. Goett to
continue discussions and structure of a possible merger.


     From the visit to the Futech offices in Phoenix in 1998 through March 5,
1999, Mr. Chip Voigt and Mr. Goett engaged in negotiations regarding the merger.
The negotiations culminated in a letter of intent of merger dated March 5, 1999.



     From shortly after the date of the discussions with Futech in 1998 through
the signing of the merger agreement, Mr. Chip Voigt and Mr. George Propsom,
Fundex's Director of Product Development, had lengthy discussions on the
development of games and puzzles utilizing the Futech patents and processes with
Mr. Joe Petter, Futech's Chief Operating Officer, and Mr. Scott Leuthold,
Futech's Director of Product Development.



     From March 5, 1999, through the date of the signing of the agreement, the
parties have engaged in extensive discussions to negotiate the complete and
final terms of the merger agreement and have conducted extensive due diligence
with regard to each other's business.



     On April 29, 1999, the Fundex board of directors met to discuss the
progress of the discussions of the merger agreement.


                                        7
<PAGE>   563


     On May 27, 1999, the Futech board of directors approved the mergers and the
merger agreement. On June 7, 1999, the Fundex board of directors approved the
merger of Fundex into New Sub and the merger agreement, and as of June 7, 1999,
the merger agreement was executed.


REASONS FOR THE MERGERS


     Fundex is a privately held company which has historically found it
difficult to obtain access to sufficient capital to expand its business and make
all of the investments in its products and operations which it felt were
desirable. It has also relied very heavily on a single product line, making
introductions of new products and promotional items more risky, because of the
heavier financial burden these placed on Fundex financial resources than on
larger companies with more diverse and varied product lines and greater
financial resources. Cash flow shortfalls have occurred more frequently than
Fundex desired.



     In the past few years, Fundex's board of directors have considered a number
of alternatives to provide liquidity and greater capital resources for Fundex,
including the following:



     - in 1996, Fundex received $437,077 in the form of a "bridge loan." This
       loan was intended to provide working capital to the company until equity
       could be raised from a public offering.



     - In 1996, Fundex completed the processes necessary to transact an initial
       public offering. However, the IPO was not completed because the public
       market conditions did not favor Fundex, and the company determined the
       expected amount of equity to be raised in the IPO would be insufficient
       to meet its needs.



     - In 1997, Fundex raised $767,645 from 61 shareholders investing in the
       equity of the company and an additional $360,279 from the conversion of
       stock warrants.



     - In 1997, the $437,077 bridge loan was converted to equity.



     - In 1998, Fundex entered a Mezzanine debt agreement by borrowing $1
       million with the anticipation of raising additional capital within the
       next 2 years by merging with another company or acquiring another
       company.


     Fundex believes the mergers will offer a number of benefits to Fundex,
including the following:

     - Fundex expects to benefit from Futech's patented technology as well as
       Futech's established distribution channels in children's publishing.

     - Fundex expects to benefit from the greater financial resources and access
       to capital of the combined entities, especially for product development
       and distribution.

     - Fundex expects to benefit from the combined entities' greater access to
       character licensed products which are essential to continued growth of
       the Fundex product line.

     - Fundex expects to benefit from the greater depth of management which the
       resulting entity will provide.

     - Fundex expects to benefit from the more diverse product line of the
       combined companies and the diminished seasonal impact on its business.

                                        8
<PAGE>   564

     - Fundex expects that stockholders who do not sell their shares for cash
       will benefit because the Futech stock which they will receive is likely
       to be publicly traded and therefore much more liquid than current Fundex
       stock.

     Although Fundex believes the mergers will offer it a number of benefits, as
outlined above, it has no assurances that the post-merger company will provide
it with adequate capital to fund future growth or that additional acquisitions
can be completed to create the economies of scale which it believes that the
merger can provide.


     In addition to the factors outlined above, Fundex's board of directors
considered the following additional factors in arriving at its decision.
Fundex's board of directors viewed the mergers as the best means to obtain
liquidity for the stockholders investment in Fundex. In the past few years,
Fundex's board of directors have considered a number of alternatives to provide
liquidity and greater capital resources for Fundex, including an initial public
offering in 1996. Because it has a niche product line and is a relatively small
company, Fundex's board of directors determined that the prospects for an
advantageous initial public offering were not favorable.



     Fundex's board of directors believes that the mergers are fair and in the
best interests of Fundex and its stockholders and therefore recommends that the
stockholders vote in favor of the merger of Fundex into New Sub.



     Fundex's board of directors believes that the merger of Fundex into New Sub
is the best alternative for Fundex stockholders because Fundex stockholders are
likely to have a public market available for sale of their Futech shares should
they wish to sell them. Moreover, the Fundex board of directors believes that
the two alternatives offered to shareholders for disposition of their Fundex
stock under the merger agreement provide investors with an attractive set of
alternatives for disposition of their interest in Fundex. Fundex's board of
directors has considered the fact that the value of Futech stock may fluctuate
significantly after the mergers.



     For additional information regarding the background of and reasons for the
mergers, see "Description of New Futech's Business -- Reasons for the Mergers"
in the prospectus/ proxy statement.


FUNDEX'S BOARD RECOMMENDATION


     THE BOARD OF DIRECTORS OF FUNDEX HAS DETERMINED THAT THE MERGERS ARE
ADVISABLE AND IN THE BEST INTERESTS OF FUNDEX AND ITS STOCKHOLDERS AND HAS
UNANIMOUSLY RECOMMENDED A VOTE FOR APPROVAL OF THE MERGER PROPOSAL.


RELATED AGREEMENTS; INTERESTS OF CERTAIN FUNDEX AFFILIATES IN THE MERGER


     On June 7, 1999, Fundex and Futech entered into a loan and licensing
agreement pursuant to which Futech agreed both to loan Fundex, or provide
letters of credit for, an aggregate of $1,500,000 and, pending the mergers, to
grant a nonexclusive license permitting certain Fundex products to use Futech's
game board technology in exchange for a royalty equal to 50% of net profits on
the associated products. The debt must be repaid over a period of 24 months. If
the mergers occur and thereafter the former Fundex stockholders foreclose on the
New Sub stock as a result of a default on the promissory notes issued in the
mergers, up to $750,000 of this debt will be cancelled as a penalty. To date,
Futech has loaned $100,000 under this agreement.


                                        9
<PAGE>   565

REGULATORY MATTERS


     Except as disclosed in this prospectus/proxy statement supplement and the
prospectus/proxy statement, Fundex and New Futech are not aware of any
governmental or regulatory approvals required for consummation of the mergers,
other than compliance with the federal securities laws and applicable securities
and "blue sky" laws of the various states.



FEDERAL INCOME TAX CONSEQUENCES



     In the opinion of Quarles & Brady LLP, special tax counsel to New Futech:



     (1) the merger of Fundex into New Sub will be treated for federal income
tax purposes as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, and New Futech, New Sub and Fundex will each be a party
to that reorganization within the meaning of Section 368(b) of the Internal
Revenue Code; and



     (2) the federal income tax consequences described in this prospectus/proxy
statement supplement to the extent that they constitute matters of law or legal
conclusions are correct in all material respects.



     In rendering its opinion, our tax counsel has relied upon and assumed as
accurate and correct, both now and as of the effective time of the merger, the
information contained in this prospectus/proxy statement supplement and the
related prospectus/proxy statement and on representations as to factual matters
made by New Futech, New Sub and Fundex. The representations relied upon include
the following:



     (1) the Fundex stockholders will receive in the merger New Futech common
stock having a fair market value of at least 40% of the fair market value of all
outstanding Fundex common stock immediately before the merger;



     (2) in the merger Fundex will transfer to New Sub assets representing at
least 90% of the fair market value of its net assets and at least 70% of the
fair market value of its gross assets taking into account any redemptions or
distributions by Fundex occurring prior to the merger and certain other items;



     (3) there is no plan or intention on the part of New Futech or a
corporation related to New Futech to purchase any of the New Futech common stock
transferred to the Fundex stockholders in the merger; and



     (4) the source of payment of all cash to any Fundex stockholder in the
merger will be New Futech. Any inaccuracy or change with respect to this
information or these representations, or any actions of New Futech, New Sub or
Fundex contrary to the representations, could adversely affect the conclusions
reached in the opinion and the tax summary set forth below.



     The opinion represents our tax counsel's best legal judgement as to the tax
treatment of the merger, but its opinion is not binding on the Internal Revenue
Service. The parties have not and will not request a ruling from the Internal
Revenue Service in connection with the federal income tax consequences of the
merger.



     The following discussion addresses the material federal income tax
consequences of the merger to a Fundex stockholder. It is based upon our tax
counsel's opinion that the Merger will qualify as a reorganization. It is also
based on the provisions of the Internal Revenue Code, the applicable regulations
thereunder, judicial authority and current administrative rulings and practices,
all of which are subject to change, possibly with


                                       10
<PAGE>   566

retroactive effect. The discussion assumes that the shares of Fundex common
stock are held as capital assets.


     If any Fundex stockholders elect the All Cash Alternative, then those
Fundex stockholders will receive only cash for their Fundex common stock in the
merger. The nonelecting Fundex stockholders will receive shares of New Futech
common stock, New Sub notes, the conditional rights and no cash for their Fundex
common stock in the merger. If no Fundex stockholders elect the All Cash
Alternative, then all Fundex stockholders will receive new Futech common stock,
New Futech Notes, the conditional rights and cash for their Fundex common stock
in the merger.



     A Fundex stockholder that receives solely cash in the merger in exchange
for the stockholder's shares of Fundex common stock generally will recognize
capital gain or loss measured by the difference between the amount of cash
received with respect to each share of Fundex common stock and the tax basis of
each share of Fundex common stock. However, if any stockholder actually or
constructively owns shares of New Futech common stock after the merger, as the
result of constructive ownership of shares of Fundex common stock that are
exchanged for shares of New Futech common stock in the merger, the cash received
by the stockholder may, in some circumstances, be taxed as a dividend. The
circumstances under which dividend treatment may apply and the tax consequences
thereof are similar to those discussed below with respect to the receipt of New
Futech common stock, New Sub Notes, the Phase 10 conditional rights and cash,
except that the amount treated as a dividend would not be limited to the amount
of the stockholder's gain realized in the transaction.


     A Fundex stockholder that receives New Futech common stock, New Sub Notes
and the conditional rights in the merger in exchange for such stockholder's
shares of Fundex common stock will have the same treatment as discussed below
with respect to the receipt of New Futech common stock, New Sub Notes, the
conditional rights and cash.


     A Fundex stockholder will not recognize loss on the receipt of New Futech
common stock, New Sub Notes, the conditional rights and cash in exchange for
Fundex common stock. Under section 356(a)(1) of the Internal Revenue Code, a
Fundex stockholder will not recognize loss but may recognize gain on the receipt
of New Futech common stock, New Sub notes, the conditional rights and cash in
exchange for Fundex common stock. The amount of any gain recognized will not
exceed the sum of the fair market value of the New Sub notes, the conditional
rights and the amount of cash received in exchange for the share of Fundex
common stock. For this purpose, a Fundex stockholder's gain, if any, with
respect to each share of Fundex common stock exchanged is equal to the excess
of:



     (1) the sum of:



          (a) the fair market value of the shares of New Futech common stock,
     plus



          (b) the fair market value of portion of the conditional rights, plus



          (c) the amount of New Sub notes and cash received for the share of
              Fundex common stock, over



     (2) the tax basis of the share of Fundex common stock.



     Any gain recognized will be taxed as either capital gain from the sale or
exchange of stock or as a dividend, to the extent of the stockholder's pro rata
share of earnings and profits of Fundex. This determination will be based upon
whether, in the hypothetical transaction described in the next sentence, the
stockholder's interest in Fundex was reduced sufficiently so as to meet one of
the tests set forth in section 302(b) of the

                                       11
<PAGE>   567


Internal Revenue Code, as described in the next paragraph. For purposes of this
determination, a Fundex stockholder will be treated as if he or she had engaged
in a hypothetical transaction in which the stockholder and all other Fundex
stockholders (1) received solely shares of New Futech common stock in exchange
for all of their shares of Fundex common stock; and (2) thereafter had a portion
of the shares of New Futech common stock redeemed for the portion of the merger
consideration paid in the form of cash, New Sub notes and the conditional
rights. A Fundex stockholder's hypothetical interest in New Futech after step
(1) is compared to the stockholder's interest in New Futech subsequent to the
deemed redemption in step (2). In each case, subject to limited exceptions,
shares of New Futech common stock actually or constructively owned by the
stockholder will be considered owned for purposes of applying the test, even if
the shares of New Futech common stock were not received or deemed received in
the merger.



     Under section 302(b) of the Code, a stockholder's interest in New Futech
will be deemed to have been reduced sufficiently if (1) the stockholder's
interest in New Futech is completely terminated as a result of the transaction;
(2) as a result of the hypothetical redemption described above and taking into
account all other hypothetical redemptions in the merger, the Trudy merger and
the DaMert merger, a stockholder's percentage interest in New Futech is less
than 80% of the stockholder's interest in New Futech before the redemption; or
(3) the stockholder's interest was "meaningfully reduced" by virtue of the
hypothetical redemption. The third test requires a determination based on a
stockholder's particular facts and circumstances. The Internal Revenue Service
has indicated in published rulings that a distribution that results in any
actual reduction in interest of an extremely small minority stockholder in a
publicly held corporation will meaningfully reduce the stockholder's interest in
the corporation if the stockholder exercises no control with respect to
corporate affairs.



     Section 318 of the Internal Revenue Code provides constructive ownership
rules for purposes of the tests under section 302. Under these constructive
ownership rules, a stockholder will generally be treated as owning shares owned
by certain family members and other related entities, or that are subject to
options owned or deemed owned by the stockholder. The actual or constructive
ownership of shares of Fundex common stock may, in some circumstances, have the
effect of causing a Fundex stockholder who would otherwise qualify for capital
gain treatment under the tests described in section 302 to fail to qualify and
subject the stockholder to dividend treatment, which may involve higher tax
rates.



     To the extent that cash, the conditional rights and New Sub notes received
in exchange for shares of Fundex common stock are treated as a dividend to a
corporate stockholder (other than an S corporation), the stockholder will be (1)
eligible for a deduction of the dividend received (subject to applicable
limitations); and (2) subject to the "extraordinary dividend" provisions of
Section 1059 of the Internal Revenue Code. Under recently enacted legislation,
any dividend to a corporate stockholder in a non prorata exchange described in
Section 35608 the Code will constitute an extraordinary dividend, except as
otherwise provided in treasury regulations which have yet to be promulgated.
Consequently, if some Fundex stockholders receive all cash for their Fundex
shares and the other Fundex Stockholders received New Futech common stocks the
conditional rights and New Sub notes for their Fundex shares, the exchange will
be non prorata and the nontaxed portion of any such dividend would reduce the
stockholder's adjusted tax basis in the shares of New Futech common stock
received in the merger but not below zero and would thereafter be taxable as
capital gain. If the exchange is prorata then further analysis is necessary to
determine whether the dividend is a extraordinary


                                       12
<PAGE>   568


dividend. Generally, an extraordinary dividend is a dividend with respect to a
share of stock if the amount of the dividend exceeds one of several threshold
percentages of the tax basis in such share of stock. Dividends paid within
certain periods may be aggregated and treated as one dividend for this purpose.
Various exceptions and special rules apply in determining whether a dividend is
an extraordinary dividend.



     The tax basis of each share of New Futech common stock received in the
merger will be the same as the tax basis of the shares of Fundex common stock
exchanged for it , increased by the amount of gain recognized on the exchange
with respect to the shares of Fundex common stock, including any such gain that
is treated as a dividend, decreased by the amount of New Sub notes, the amount
of the conditional rights and cash received with respect to the shares of Fundex
common stock. The holding period of the shares of New Futech common stock
received will include the holding period of the shares of Fundex common stock
exchanged for them.



     If a Fundex stockholder's recognized gain in the merger is treated as a
gain from the sale or exchange of stock and not as a dividend, a Fundex
stockholder may report the portion of the gain attributable to the New Sub notes
received for the Fundex common stock under the installment method. This means
the gain is reportable in the taxable year in which cash is received under the
New Sub notes.



     A holder of Fundex common stock who receives New Futech common stock, New
Sub notes, the conditional rights and/or cash pursuant to the merger will be
required to retain records and file with the holder's federal income tax return
for the taxable year in which the merger takes place a statement setting forth
all relevant facts in respect of the nonrecognition of gain or loss upon the
exchange. The statement is required to include (1) the holder's basis in the
shares of Fundex common stock surrendered in the merger; and (2) the value of
New Futech common stock, New Sub notes and the conditional rights received,
using fair market value as of the effective time of the merger, and the amount
of any cash received in the merger.



     This tax consequences discussion is intended only as a description of the
material federal income tax consequences of the merger, it is not a complete
analysis or description of all potential tax effects of the merger. In addition,
the discussion does not address all of the tax consequences that may be relevant
to particular taxpayers in light of their personal circumstances or to taxpayers
subject to special treatment under the Internal Revenue Code, such as insurance
companies, financial institutions, dealers in securities, tax exempt
organizations, foreign corporations, foreign partnerships, or other foreign
entities and individuals who are not citizens or residents of the United States
and persons who acquired their New Futech common stock pursuant to the exercise
or termination of employee stock options, warrants or otherwise as compensation.



     No information is provided in this tax consequences discussion with respect
to the tax consequences, if any, of the merger under applicable foreign, state,
local and other tax laws.



     This tax consequences discussion summary is not intended to be, nor should
it be construed to be, legal or tax advice to any particular holder of Fundex
common stock. EACH HOLDER OF FUNDEX COMMON STOCK IS URGED TO CONSULT THEIR OWN
TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO THE HOLDER OF THE MERGER,
INCLUDING THE APPLICATION OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.


                                       13
<PAGE>   569

ACCOUNTING TREATMENT


     The mergers are intended to qualify as a purchase for accounting purposes,
which means that the amount by which the total merger consideration received by
stockholders of the other merging companies plus the amount of their liabilities
exceeds the fair market value of their identifiable assets will initially be
treated as goodwill by New Futech for accounting purposes.



                       RIGHTS OF DISSENTING STOCKHOLDERS



     Pursuant to Sections 92A.300 to 92A.500 of the Nevada Revised Statutes
("NRS"), copies of which are attached to this prospectus/proxy statement
supplement as Appendix 1, stockholders of Fundex may dissent from, and obtain
payment of the fair value of their Fundex shares in the event of the
consummation of the mergers. The fair value of a dissenting stockholder's Fundex
shares is the value of such shares immediately before the effective date of the
mergers, excluding any appreciation or depreciation in anticipation of the
mergers except to the extent that exclusion would be inequitable. A Fundex
stockholder who wishes to assert dissenter's rights in connection with the
mergers must deliver to Fundex, before a vote of the stockholders of Fundex is
taken with respect to the mergers, written notice of the stockholder's intent to
demand payment for the stockholder's Fundex shares if the mergers are
effectuated, and must not vote in favor of the merger proposal.



     If the merger proposal is approved at the Fundex special meeting and if the
other conditions of the mergers are satisfied or waived, New Sub will deliver a
written dissenter's notice to all Fundex stockholders who have satisfied the
requirements described above to assert those rights. New Sub will send the
dissenter's notice no later than ten days after the mergers are effectuated.



     The dissenter's notice delivered by New Sub will:



          (1) state an address at which New Sub will receive payment demands and
     an address at which certificates for Fundex shares must be deposited;



          (2) inform the holders of Fundex shares not represented by
     certificates to what extent the transfer of the shares will be restricted
     after the demand for payment is received;



          (3) include a form for demanding payment that includes the date of the
     first announcement to the news media or to the Fundex stockholders of the
     terms of the proposed mergers and requires that a Fundex stockholder
     asserting dissenter's rights certify whether or not he or she acquired
     beneficial ownership of the Fundex shares before that date;



          (4) set a date by which New Sub must receive the payment demand and by
     which certificates for Fundex shares must be deposited at the address for
     such deposits in the dissenter's notice, which date may not be less than 30
     nor more than 60 days after the date the dissenter's notice is given and



          (5) be accompanied by a copy of NRS Sections 92A.300 to 92A.500.



     A Fundex stockholder to whom a dissenter's notice is sent and who wishes to
exercise dissenter's rights must:



          (1) demand payment on the form provided and within the time period set
     forth in the dissenter's notice;


                                       14
<PAGE>   570


          (2) certify whether he or she acquired beneficial ownership of the
     Fundex shares before the date required to be set forth in the dissenter's
     notice for this certification; and



          (3) deposit certificates of Fundex shares in accordance with the terms
     of the dissenter's notice. A stockholder of Fundex who demands payment as
     described above retains all rights of a stockholder of Fundex until the
     effective time of the mergers and thereafter has only the right to receive
     the fair value of his or her Fundex shares.



     Within 30 days after receipt of a demand for payment, New Sub shall pay
each dissenting Fundex stockholder who has made a proper demand for payment the
amount New Sub estimates to be the fair value of the dissenting Fundex
stockholder's shares, plus accrued interest. A dissenting Fundex stockholder who
does not agree with New Sub's estimation of the fair value of the dissenting
stockholder's Fundex shares or the calculation of the amount of interest due,
must notify New Sub, in writing, of his or her estimate within 30 days after New
Sub made payment for the shares. If a dissenting Fundex stockholder and New Sub
cannot agree upon the fair value of the Fundex shares or the amount of interest
due, New Sub may, within 60 days after receiving the notice of disagreement from
the dissenting stockholder, commence a proceeding and petition the appropriate
court to determine the fair value of the dissenting stockholder's shares and the
amount of interest due. If New Sub does not commence the proceeding within the
60-day period, New Sub must pay each dissenting stockholder whose demand remains
unresolved the amount demanded. The court may appoint one or more persons as
appraisers to receive evidence and recommend a decision on the question of fair
value. The court may determine the fair value to be more than, less than or
equal to the consideration that the dissenting stockholder would otherwise be
entitled to receive pursuant to the merger agreement.



     A stockholder of Fundex who does not demand payment and deposit
certificates as required is not entitled to payment under NRS Sections 92A.300
to 92A.500.


                          NEW FUTECH AND FUNDEX SHARES

NEW FUTECH COMMON STOCK


     For a description of New Futech common stock and its authorized but
unissued preferred stock, see "Description of New Futech Capital Stock" in the
prospectus/proxy statement.


GENERAL DESCRIPTION OF FUNDEX COMMON STOCK


     Fundex is authorized to issue up to 8,000,000 shares of common stock, $.001
par value. There are 1,624,824 shares of common stock outstanding at the date of
this prospectus/proxy statement supplement. At the date of this prospectus/proxy
statement supplement, there were approximately 60 holders of record of the
Fundex's Common Stock.


COMMON STOCK


     Holders of Fundex common stock are entitled to a pro rata share of
dividends as are declared by the Board of Directors of the company out of funds
legally available for the payment of dividends. In the event of any liquidation,
dissolution or winding-up of the Fundex, the holders of common stock will be
entitled to receive a pro rata share of the net


                                       15
<PAGE>   571

assets of the company remaining after payment or provision for payment of the
debts and other liabilities of the company.

     Holders of common stock are entitled to one vote per share in all matters
to be voted upon by stockholders. Cumulative voting for the election of
directors, and all other matters brought before stockholders meetings, whether
annual or special, is not permitted. Holders of Fundex common stock have no
preemptive or subscription rights, and the common stock is not subject to
redemption or assessment.

COMPARISON OF THE RIGHTS OF HOLDERS OF FUNDEX COMMON STOCK AND NEW FUTECH COMMON
                                     STOCK

SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF NEVADA AND DELAWARE

     The corporation laws of Nevada and Delaware differ in many respects.
Although all the differences are not set forth in this prospectus/proxy
statement supplement, provisions which could materially affect the rights of
stockholders are discussed below.

REMOVAL OF DIRECTORS

                                     Nevada


Applicable Nevada law provides that one or more directors of a corporation may
be removed with or without cause, by the vote of stockholders representing not
less than two-thirds of the voting power of the issued and outstanding stock
entitled to vote, subject to certain conditions. These conditions include
certain voting requirements applicable to corporations having cumulative voting
rights and to the removal of a member of a board who is elected by a single
class. The Fundex board of directors is not classified. Fundex stockholders may
not cumulate votes for directors.


                                    Delaware


Under applicable Delaware law any director or the entire board of directors may
be removed, with or without cause, by the holders of a majority of the shares
entitled to vote at an election of directors. Applicable Delaware law also
provides additional requirements for the removal of a member of a board which is
classified as to term or elected by a single class or elected by classes
possessing cumulative voting rights. In the case of a Delaware corporation
having cumulative voting, if less than the entire board is to be removed, a
director may not be removed without cause if the number of shares voted against
such removal would be sufficient to elect the director under cumulative voting.
A director of a corporation with a classified board of directors may be removed
only for cause, unless the certificate of incorporation otherwise provides. The
certificate of incorporation and bylaws of New Futech provide for a classified
board of directors, but not for cumulative voting.


CLASSIFIED BOARD OF DIRECTORS


     A classified or staggered board is one on which a certain number, but not
all, of the directors are elected on a rotating basis each year. This method of
electing directors makes


                                       16
<PAGE>   572

changes in the composition of the board of directors more difficult, and thus, a
change in control of a corporation potentially a lengthier and more difficult
process.

                                     Nevada


Nevada law permits, but does not require, a staggered board of directors, by
which the directors can be divided into as many as three classes with staggered
terms of office, with only one class of directors standing for election each
year. The Fundex articles of incorporation do not provide for a staggered board.


                                    Delaware


Delaware law permits, but does not require, a classified board of directors, by
which the directors can be divided into as many as three classes with staggered
terms of office, with only one class of directors standing for election each
year. The New Futech certificate of incorporation and bylaws provide for a
classified board, consisting of three classes with three directors in each
class.


INDEMNIFICATION AND LIMITATION OF LIABILITY


     Both the Nevada and applicable Delaware laws provide that a director,
employee, officer or agent of a corporation may be indemnified against
liability, other than in an action by or in the right of the corporation, and
other costs incurred by such person in connection with such proceeding. This
indemnification is available only if the person acted in good faith and in a
manner such person reasonably believed to be in, and not opposed to, the best
interests of the corporation, and, with respect to any criminal proceeding, had
no reason to believe the conduct was unlawful. For actions or suits brought by
or in the name of the corporation, both the Nevada and applicable Delaware laws
provide that a director, employee, officer or agent of a corporation may be
indemnified against expenses incurred in connection with such proceeding. This
indemnification is available only if the person acted in good faith and in a
manner the person reasonably believed to be in, or at least not opposed to, the
best interests of the corporation, except that if such person is adjudged to be
liable to the corporation, the person can be indemnified if and only to the
extent that a court determines that despite the adjudication of liability, in
view of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper. On the other
hand, if he/she prevails, indemnification is mandatory. See the following
paragraph for a discussion of the differences in the standards of liability for
Fundex directors compared to New Futech directors.



     The Nevada and Delaware statutes both allow a corporation to include, in
its articles or certificate of incorporation, a provision that limits or
eliminates the personal liability of a director to the corporation and its
stockholders for monetary damages for such person's breach of fiduciary duty.
The Nevada statute also allows the same provision with regard to an officer.
However, Nevada and Delaware law prohibit eliminating a director's liability
for:



     - a breach of his or her duty of loyalty to the corporation (Delaware
only);



     - acts or omissions not in good faith or involving fraud (Nevada only),
intentional misconduct or a knowing violation of law;



     - unlawful payments of dividends, some stock repurchases or redemptions; or



     - any transaction from which the director derived an improper personal
benefit (Delaware only).


                                       17
<PAGE>   573

INSPECTION OF STOCKHOLDER LIST

     Nevada law allows any stockholder who has been a holder of record of shares
for at least six months, or any person holding, or thereunto authorized in
writing by the holder of, at least 5% of all of the outstanding shares of a
corporation to inspect the stockholder list, if the stockholder makes a demand
in good faith and for a proper purpose and the records requested are directly
connected with the stockholder's purpose. Delaware law allows any stockholder to
inspect the stockholder list for a purpose reasonably related to such person's
interests as a stockholder. Both Nevada and Delaware law require the stockholder
to give the corporation written notice of its demand prior to inspection of the
stockholder list.

DIVIDENDS AND REPURCHASES OF SHARES

                                     Nevada


Holders of Fundex common stock are entitled to a pro rata share in such cash
dividends as may be declared from time to time by Fundex's board of directors
out of funds legally available therefor. Nevada law permits a corporation to
declare and pay dividends unless it would render the corporation insolvent.


                                    Delaware

Delaware law permits a corporation to declare and pay dividends out of surplus
or if there is no surplus, out of net profits for the fiscal year as long as the
amount of capital of the corporation following the declaration and payment of
the dividend is not less than the aggregate amount of the capital represented by
the issued and outstanding stock of all classes having preference upon the
distribution of assets. In addition, Delaware law generally provides that a
corporation may redeem or repurchase its shares only if the capital of the
corporation is not impaired and such redemption or repurchase would not impair
the capital of the corporation.

                                       18
<PAGE>   574

STOCKHOLDER VOTING

                                     Nevada

Applicable Nevada law requires that any proposed exchange, merger or
consolidation of a corporation must be approved by the holders of a majority of
the outstanding shares entitled to vote.

                                    Delaware


Applicable Delaware law provides that a merger, consolidation, sale, lease or
exchange of all or substantially all of its assets may be effected upon a vote
of the holders of a majority of a corporation's outstanding shares. Delaware law
does not require a stockholder vote of the surviving corporation in a merger if:



          (a) the merger does not amend the existing certificate of
              incorporation,


          (b) each outstanding share of the surviving corporation before the
              merger is unchanged or becomes a treasury share of the surviving
              corporation, and

          (c) the number of shares to be issued by the surviving corporation in
              the merger does not exceed 20% of the shares outstanding
              immediately prior to such issuance.

STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS UNDER DELAWARE AND NEVADA
LAW


     In recent years, a number of states have adopted special laws designed to
make certain kinds of "unfriendly" corporate takeovers, or other transactions
involving a corporation, and one or more of its significant stockholders, more
difficult. Under Section 203 of the Delaware General Corporation Law, certain
"business combinations" with "interested stockholders" of Delaware corporations
are subject to a three-year moratorium unless specified conditions are met.



     Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the date
that such person or entity becomes an interested stockholder. With some
exceptions, an interested stockholder is:



     - a person or entity who or which owns, individually or with or through
       certain other persons or entities, 15% or more of the corporation's
       outstanding voting stock, including any rights to acquire stock pursuant
       to an option, warrant, agreement, arrangement or understanding, or upon
       the exercise of conversion or exchange rights, and stock with respect to
       which the person has voting rights only;



     - an affiliate or associate of the corporation and was the owner,
       individually or with or through certain other persons or entities, of 15%
       or more of such voting stock at any time within the pervious three years;
       or


                                       19
<PAGE>   575


     - is an affiliate or associate of any of the foregoing.



     For purposes of Section 203, the term "business combination" is defined
broadly to include:



     - mergers with or caused by the interested stockholder;



     - sales or other dispositions to the interested stockholder, except
       proportionately with the corporation's other stockholders, of assets of
       the corporation or a direct or indirect majority-owned subsidiary equal
       in aggregate market value of 10% or more of the aggregate market value of
       either the corporation's consolidated assets or all of its outstanding
       stock;



     - the issuance of transfer by the corporation or a direct or indirect
       majority-owned subsidiary of stock of the corporation or such subsidiary
       to the interested stockholder, except for certain transfers in a
       conversion or exchange or a pro rata distribution or certain other
       transactions, none of which increase the interested stockholder's
       proportionate ownership of any class or series of the corporation's or
       such subsidiary's stock or of the corporation's voting stock;



     - or receipt by the interested stockholder, except proportionately as a
       stockholder, directly or indirectly, of any loans, advances, guarantees,
       pledges or other financial benefits provided by or through the
       corporation or a subsidiary.



     The three-year moratorium imposed on business combinations by Section 203
does not apply if:


     - prior to the date on which such stockholder becomes an interested
       stockholder the board of directors approves either the business
       combination or the transaction that resulted in the person or entity
       becoming an interested stockholder,


     - upon consummation of the transaction that made him or her an interested
       stockholder, the interested stockholder owns at least 85% of the
       corporation's voting stock outstanding at the time the transaction
       commenced, excluding from the eighty-five percent calculation shares
       owned by directors who are also officers of the target corporation and
       shares held by employee stock plans that do not give employee
       participants the right to decide confidentiality whether to accept a
       tender or exchange offer, or



     - on or after the date such person or entity becomes an interested
       stockholder, the board approves the business combination and it is also
       approved at a stockholder meeting by 66 2/3% of the outstanding voting
       stock not owned by the interested stockholder.


     Section 203 only applies to certain publicly held corporations that have a
class of voting stock that is:

     - listed on a national securities exchange,

     - quoted on an interdealer quotation system of a registered national
       securities association, or

     - held of record by more than 2,000 stockholders.


     Under some circumstances, Section 203 of the Delaware General Corporation
Law may make it more difficult for a person who would be an "interested
stockholder" to effect various business combinations with a corporation for a
three-year period.


                                       20
<PAGE>   576


     Applicable Nevada law similarly prohibits such business combinations
between Nevada corporations and interested stockholders for a period of 3 years
after the interested stockholder's date of acquiring shares, unless the
combination or the purchase of the shares made by the interested stockholder is
approved by the board of directors. Applicable Nevada law also prohibits such
business combinations after the expiration of 3 years after the interested
stockholder's date of acquiring shares, unless the combination meets the
requirements specified in Section 78,439 for director and stockholder approvals
or Sections 78,441 to 78,444 inclusive with respect to the consideration to be
received in the combination by all stockholders other than the interested
stockholder. Applicable Nevada law defines interested stockholders to include
persons who, alone or together with affiliates, beneficially own 10% of the
outstanding stock of the corporation. A Nevada corporation may opt-out of the
application of these provisions under certain circumstances.



     Applicable Nevada law also denies voting rights to a stockholder who
acquires a controlling interest in a Nevada corporation, unless such voting
rights are approved by a majority of the voting powers of the corporation. A
Nevada corporation may opt-out of the application of these provisions under some
circumstances. Fundex has not opted out of the application of this statute.



     Nevada law does not require a stockholder vote of the surviving corporation
in a merger if:


     (a) the merger does not amend the existing articles of incorporation,

     (b) each outstanding share of the surviving corporation before the merger
         is unchanged, and

     (c) the number of shares to be issued by the surviving corporation in the
         merger does not exceed 20% of the shares outstanding immediately prior
         to such issuance.

INTERESTED DIRECTOR TRANSACTIONS

                                     NEVADA

     Applicable Nevada law contains a provision similar to Delaware law, except
that the board of directors may approve the transaction only if the vote is
sufficient without counting the vote of the interested directors.

                                    DELAWARE


     Applicable Delaware law states that a transaction involving an interested
director of a Delaware corporation is not void or voidable if:


     (a) the director's interest in the transaction is disclosed to the board
         and a majority of the disinterested directors approve it,

     (b) the interest is disclosed to the stockholders and the transaction is
         approved by a majority of the stockholders, or

     (c) the transaction is fair to the corporation.

                                       21
<PAGE>   577

APPRAISAL/DISSENTERS' RIGHTS

     According to Nevada Revised Statutes Section 92A.420.1, stockholders of
Fundex who wish to assert dissenters' rights:


          - must deliver to Fundex BEFORE the vote is taken at the Special
            Meeting written notice of their intent to demand payment for their
            Fundex common stock if the merger is completed; and



          - must not vote their shares in favor of the merger agreement.


     Stockholders failing to satisfy these requirements will not be entitled to
dissenters' rights under Chapter 92A of the Nevada Revised Statutes.


     According to Delaware law, appraisal rights are not available:


     (a) with respect to the sale of all or substantially all of the assets of a
         corporation,


     (b) with respect to a merger or consolidation by a corporation the shares
         of which are either listed on a national securities exchange,
         designated as a national market system security on an interdealer
         quotation system by the National Association of Securities Dealers,
         Inc. or are held of record by more than 2,000 holders if such
         stockholders receive only shares of the surviving corporation or shares
         of any other corporation that are either listed on a national
         securities exchange, designated as a national market system security on
         an interdealer quotation system by the National Association of
         Securities Dealers, Inc. or held of record by more than 2,000 holders,
         plus cash in lieu of fractional shares of such corporations, or


     (c) to stockholders of a corporation surviving a merger if no vote of the
         stockholders of the surviving corporation is required to approve the
         merger under Delaware law.

                                       22
<PAGE>   578

                  FUNDEX MANAGEMENT'S DISCUSSION AND ANALYSIS
                              OR PLAN OF OPERATION

     The following discussion should be read in conjunction with the Fundex's
audited financial statements and notes thereto for the two years ended December
31, 1997 and 1998 and its unaudited financial statements for the three months
ended March 31, 1999 and 1998, appearing as an attachment to the
prospectus/proxy statement.

OVERVIEW


     Fundex's business is described in detail in the "Description of Fundex's
business" section of this prospectus/proxy statement supplement.



RESULTS OF OPERATIONS OF FUNDEX


     The following table sets forth, for the periods indicated, the relative
percentage that certain income and expense items bear to net sales.


<TABLE>
<CAPTION>
                                                                       SIX MONTHS ENDED
                                         YEAR ENDED     YEAR ENDED    -------------------
                                        DECEMBER 31,   DECEMBER 31,   JUNE 30,   JUNE 30,
                                            1997           1998         1998       1999
                                        ------------   ------------   --------   --------
<S>                                     <C>            <C>            <C>        <C>
Net Sales.............................     100.0%         100.0%       100.0%     100.0%
Cost of Sales.........................      65.4           66.4         72.4       71.4
Gross Profit..........................      34.6           33.6         27.6       28.6
Selling, general and administrative
  expenses............................      48.8           31.4         40.1       54.7
Operating Income (loss)...............     (14.2)           2.2        (12.5)     (26.1)
Other expense.........................      (0.7)          (2.2)        (2.4)      (8.5)
                                           -----          -----        -----      -----
Net (loss)............................     (14.9)          (0.0)       (14.9)     (34.6)
</TABLE>



SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998



     Net Sales.  Net sales for the six months ended June 30, 1999 were
$1,679,891 as compared with net sales of $2,460,738 for the six months ended
June 30, 1998, or a decrease of 31.7% as a result of a decrease in sales volume.
The decrease is related to fewer inventory close-out sales for the six months
ended June 30, 1999 as compared to June 30, 1998.



     Cost of Sales.  Cost of sales of $1,617,891 decreased from $1,782,659 in
the prior year. In percentage terms to net sales, cost of sales decreased from
72.4% to 71.4% principally as a result of the 1998 close-outs of inventory.



     Selling General and Administrative Expense.  Selling, general and
administrative ("SG&A") expenses decreased from $986,861 to $918,056. The
decrease was a result from the company terminating its retirement plan on
January 1, 1999 resulting in a recapture of expenses approximating $198,000.
Depreciation and amortization expense was $156,700 as of June 30, 1999 as
compared to $98,358 on June 30, 1998. The $58,339 increase is primarily a result
of amortization of loan costs. In the third and fourth quarter of 1998, Fundex
secured a mezzanine facility with Liberty BIDCO Investment Company and replaced
lenders on the line of credit facility. The new line of credit is with Wells
Fargo Business Credit (formerly Norwest Business Credit) and the old line of
credit was with NBD Bank, N.A.


                                       23
<PAGE>   579


     Income from Operations.  Consequently, loss from operations of $(437,227)
was increased from $(308,782) in 1998.



     Other Income (Expense).  Other expense was $144,687 as of June 30, 1999 as
compared to $58,094 on June 30, 1998. Interest expense increased to $159,899
from $79,217 in the prior year. Fundex secured a $1,000,000 subordinated term
loan from Liberty BIDCO Investment Corporation in August 1998. Interest is based
on prime plus 3 percentage points and a revenue participation fee of 1.25% of
net sales is also assessed. The interest cost attributable to the term loan was
$46,126. The balance of the interest expenses at March 31, 1999 relates to
Fundex's line of credit. Royalty income increased to $20,000 from $17,666 in the
prior year. Phase 10(TM) international sales accounted for the increase in
royalty income. Interest income decreased to $0 from $2,968 in the prior year.
Fundex changed financial lenders in October 1998 and as a result, changed cash
management processes.



     Taxes.  No tax provision as Fundex has approximately $1,000,000 of net
operating carryforwards, expiring in 2012, which can be utilized to offset
future taxable income. The deferred tax asset of $340,000 has been fully offset
by a valuation allowance because realization is not likely at this time.



     Net Income (Loss).  As a result of the above factors, net loss increased
from ($366,876) as of June 30, 1998 to $(581,914) as of June 30, 1999.


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


     Net Sales.  Net sales for the year ended December 31, 1998 were $8,576,702
as compared with net sales of $7,797,681 for the year ended December 31, 1997,
an increase of $779,021, or an increase of 10.0%. Sales of new products
accounted for approximately $470,000 of this increase in sales volume. Sales of
the new Super Sports Arena game and the continued growth of the Phase 10(TM)
card game accounted for the majority of the increased net sales.


     Cost of Sales.  Cost of sales of $5,693,644 increased in 1998 from
$5,098,750 in the prior year. As a percentage of net sales, cost of sales
increased from 65.4% to 66.4%, principally as a result of a 1997 product
close-out.


     Selling General and Administrative Expense.  Selling, general and
administrative ("SG&A") expenses decreased from $3,810,056 in 1997 to $2,695,853
in 1998. Most of the decrease was the result of a reduction in advertising
expense for 1998 compared to 1997. The 1998 decrease in advertising expense was
partially offset by an increase in personnel costs. Advertising costs decreased
from $1,672,368 in 1997 to $269,117 in 1998, or a decrease of $1,402,251.
Depreciation and amortization expense was $230,512 on December 31, 1998 as
compared to $179,894 on December 31, 1997. The increase in depreciation relates
to new product tooling introduced in the later part of 1997 and in early 1998.



     Loss from Operations.  Income from operations of $187,205 in 1998 was up
from an operating loss of $1,111,125 in 1997, largely due to decreased
advertising expenses.


     Other Income (Expense).  Other income (expense) was ($190,132) as of
December 31, 1998 as compared to ($53,067) on December 31, 1997. Interest
expense increased to $245,895 in 1998 from $86,419 in the prior year. Fundex
secured a $1,000,000 subordinated term loan from Liberty BIDCO Investment
Corporation in August 1998. Interest is based on prime plus 3 percentage points,
and a revenue participation fee of 1.25% of net sales is also assessed. The
interest cost attributable to the term loan was

                                       24
<PAGE>   580


$83,152. The Company's other principal debt, its line of credit was put in place
in March 1997 and resulted in only nine months of interest expense in 1997 as
compared to twelve months in 1998. Royalty income increased to $51,816 from
$28,009 in 1997 compared to twelve months in 1998. Phase 10(TM) international
sales were up significantly resulting in the increase in royalty income.
Interest income decreased to $3,947 in 1998 from $5,343 in the prior year.
Fundex changed financial lenders in October 1998 and as a result, changed cash
management processes.



     Taxes.  No tax provision as company has approximately $1,000,000 of net
operating carryforwards, expiring in 2012, which can be utilized to offset
future taxable income. The deferred tax asset of $340,000 has been fully offset
by a valuation allowance because realization is not likely at this time.



     Net Income (Loss).  As a result of lower advertising costs and slightly
higher royalty income, partially offset by higher costs of sales and interest
expense, Fundex had a net loss of ($2,927) in 1998, improved from a net loss of
($1,164,192) in 1997.


SEASONALITY AND QUARTERLY FLUCTUATIONS

     The demand for Fundex Games' retail products is seasonal, with a majority
of sales to retailers occurring July through November in anticipation of the
Christmas season.

LIQUIDITY AND CAPITAL RESOURCES

     Demand for Fundex Games' products continues to be strong and the company is
continuously developing additional products. Fundex Games' benchmark product,
Phase 10(TM) continues to sell strongly and serves as a product introduction
item with new and existing customers.


     The seasonality of sales has made credit availability an important issue
for Fundex Games. In October 1998, Fundex replaced the existing bank lender with
an asset based lender, resulting in a $2,500,000 line of credit and obtained a
five-year term loan of $1,000,000 to finance seasonal working capital and the
1997 net loss. As of June 30, 1999 Fundex is in default on these two credit
facilities. Fundex is currently negotiating with its lenders to resolve these
deficiencies.



     Accounts receivable decreased to $688,816 at June 30, 1999, compared with
$1,690,571 at beginning of year due in part to decreased sales compared to the
previous year. Fundex had two customers file bankruptcy, with the appropriate
reserve set up; Playtoy Industries ($36,632) in November 1998 and Caldor
($67,414) in January 1999. Inventory levels were $2,112,629 on June 30, 1999,
compared with $1,907,766 on June 30, 1998. The increase of $204,863 was
attributable to new product buildup. Fundex anticipates selling the additional
inventory in the third quarter of 1999. Loans outstanding at June 30, 1999, were
$1,000,000 on the term loan from Liberty BIDCO Investment Corporation and
$1,669,748 on the line of credit due from Wells Fargo (formerly known as
"Norwest Business Credit") as compared to $1,600,000 outstanding at June 30,
1998 from NBD Bank, N.A.


INFLATION


     Management believes that inflation has not had a significant impact on
Fundex's costs and profits during the past two years.


                                       25
<PAGE>   581

YEAR 2000


     Fundex Games' FACTS software, used for accounting, order processing and
inventory management, is Year 2000 compliant. Fundex is now in the process of
receiving certification from its major vendors that their systems are Year 2000
compliant. This survey includes vendors who provide systems related services
including banking, credit card processing, shipping as well as those providing
the company with its game products. We anticipate this will be completed in
November 1999. Fundex does not believe that the failure of any vendor to be Year
2000 compliant would have a material impact on Fundex because we think all of
our vendors will be able to service our company after the end of the year.


SAFE HARBOR DISCLOSURE: FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS


     This prospectus/proxy statement supplement and the related prospectus/proxy
statement contains or incorporates by reference forward-looking statements. The
factors identified above in this section are important factors but not
necessarily all important factors that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, New Futech or any of the merging companies.


     Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, New Futech
cautions that, while such assumptions or bases are believed to be reasonable and
are made in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. We cannot promise that
statements of expectation or belief will be achieved or accomplished. The words
"believe," "expect," and "anticipate" and similar expressions identify forward-
looking statements throughout these materials.

                                       26
<PAGE>   582

                       DESCRIPTION OF FUNDEX'S BUSINESS.


     Fundex was originally incorporated and founded by Carl E. ("Chip") Voigt,
IV and Carl E. ("Pete") Voigt, III in the State of Indiana in 1991 as Third
Quarter, Inc. In August 1996, Fundex was reincorporated in the State of Nevada
by establishing a new Nevada corporation and merging the Indiana corporation
into the Nevada corporation. Fundex's principal place of business is located at
2237 Directors Row, Indianapolis, IN 46241. The Company's telephone number is
(317) 248-1080.



     Fundex develops, markets, and distributes a variety of games and toys for
both children and adults. Fundex principal products include:



     (1) card games, puzzles, and board games;



     (2) skill and action games for children;



     (3) games, puzzles, and toys featuring highly-recognized entertainment
         properties and characters licensed by Fundex from third parties; and



     (4) spring and summer toys for children.


     The Fundex products are sold to mass merchant retailers, chain stores and
specialty stores and are offered at retail prices ranging from $1.00 to $60.00.

BUSINESS

PRODUCTS


     Fundex has a broad and well established line of games and toys, and is
continually developing additional games and toys for children, families, and
adults. The following is a description of Fundex's major product lines:



Phase 10(TM)


     The Phase 10(TM) card game is an established card game for ages eight (8)
to adult. Phase 10(TM) is currently the second best-selling card came in the
United States and the world, with over 6,000,000 units sold. The Phase
10(TM)card game and its sister products, Phase 10 Dice, Phase 10 UPSETS, and
Take Five, comprise Fundex's principal product line. Phase 10(TM) is sold by a
very broad base of retailers and is available at over 20,000 retail locations.
Card games such as Phase 10(TM) and Uno(TM) from Mattel, Inc. typically have
very long product cycles often lasting for decades and a very broad demographic
base of players. As a result, these games are not normally sensitive to economic
volatility. The retail price range for these products is $3.99 to $19.99.

Family Games

     Fundex markets a broad range of family games designed to appeal to ages 8
to adult. These products' retail prices range from $7.99 to $19.99. The family
range of games include "Penguin Pileup", "A to Z", and the "52 Game Chest". This
is the fastest growing of the Fundex product lines due in part to broad age
appeal and games that are classics and critically acclaimed. "A to Z" was
selected as the Best Word Game of 1997 by Games Magazine. This line carries high
gross margins because of the exclusivity of the products. The games are carried
by a broad cross section of the retail base, from mass market retailers to
independent game and toy retailers.

                                       27
<PAGE>   583

Action Games

     Fundex markets several action games, those games that require a degree of
manual dexterity to play. These products range in price from $9.99 to $59.99
retail. The action game category has been one that has been diminished due to
the popularity of electronic games such as Nintendo 64 and Sony Playstation in
the past several years. Fundex positions its products to provide high perceived
value with low retail price points to the retailer so as to make the product
appealing to the consumer. Products such as the "Super Sports Arena" game
comprise this category. These products are highly promotional and lend
themselves to advertising in customer newspaper ads.

Preschool Games and Toys

     Fundex markets a range of products designed for the preschool age child.
These games do not require reading, so the child may play amongst other children
or with parents. These products range in price from $6.99 to $19.99 retail. The
products are sold to a broad range of retailers from mail order catalogs to mass
market retailers and toy specialty chains. Products in this range include the
"Wigglin Wally" fishing game, "Peanut Butter & Jelly", the "Beginners Bible
Noah's Ark Playset", and "Noah's Ark Board Game". Each of these products is
proprietary to Fundex.

Wooden Games


     A growing category for Fundex has been its line of wooden games. These are
competitively priced and well made wood versions of several classic games such
as labyrinths, chess, checkers, Chinese checkers and Mancala. Fundex has gained
market share with its market leading package design and innovative gift sets.
The products range in price from $6.99 to $24.99. Each year Fundex introduces
several new items in this category. Senat, an ancient Egyptian game, and
Kalahari were introduced this year. This product line is sold primarily through
upscale retailers.


Basic Board Games and Mini Games

     Fundex markets a comprehensive line of traditional board games such as
chess and checkers. These products retail in the $2.99 to $9.99 range. Although
this is a large business dominated by two major competitors, Fundex has shown a
profit for these basic board games in its first full year of production. Fundex
expects that margins will improve in this category as volume increases.

Spring & Summer Toys and Games


     Fundex markets a line of spring and summer toys and games to complement its
line. The spring and summer line sells primarily in the first six months of the
year providing some balance to the heavily seasonal second half of the year.
Fundex produces jump ropes, water toys, and water games. The products range in
price from $0.99 to $14.99.


New Products

     In 1998 and 1999, Fundex introduced several new games which management
believes will strengthen and broaden its product mix. Set forth below is an
overview of these products.

          "Electronic Interactive Games" are the first games to utilize the
     patented 'in the gameboard' circuitry developed by Futech Interactive
     Products. The games in this

                                       28
<PAGE>   584

     series include "Blastoid," a space game, "Chat," the race around the
     Internet game, and a series of collectible NASCAR racing circuit games. The
     games features drivers Jeff Gordon, Dale Earnhardt, Dale Jarrett, Rusty
     Wallace and Dale Earnhardt Jr. Die-cast collectible cars that move around
     the race track gameboard with the play dictated by random commands and
     sound effects from the circuitry. The games are expected to retail from $15
     to $25. This product is expected to begin shipment in July 1999.

          "Electronic Interactive Puzzles" are the first puzzles to utilize the
     Futech circuitry. The puzzle asks the child to find certain pieces and when
     the puzzle piece is correctly placed in the puzzle an appropriate sound is
     made by the puzzle to confirm the piece was placed correctly. The puzzle is
     expected to retail for $10. This product is expected to begin shipment in
     July 1999.

          "The Amazing Kreskins Celtic Oracle Game" uses the power of Kreskin,
     the world famous mentalist, to create an intriguing and revealing game.
     Players respond to questions using the Oracle, which reveals their true
     answer. The game is expected to retail for $20. This product is expected to
     begin shipment in July 1999.


          "Super Sports Arena 5 in 1 Game Table" is a versatile game allows
     realistic play of Pool, Bowling, Basketball, Hockey, and Ping Pong in a
     portable system. The Super Sports Arena is expected to retail for
     approximately $60 and is priced about 30 - 40% under its competition from
     Fisher Price, Amav, and Toy Biz. This item is an exceptional value for the
     consumer. Retailer response has been tremendous and management believes
     this will be a staple item in the industry for years to come. This product
     began shipments in 1998.


          "Penguin Pileup" is a family skill game that comes from a renowned
     design firm in London. The game consists of a floating iceberg, and 24
     penguins. The object is to place all of ones penguins on the iceberg
     without them falling off. This product was successfully marketed to the
     educational and specialty toy markets in 1997 and has been successfully
     introduced to the mass market in 1998. Management believes Penguin Pileup
     will be a staple item. The product retails from $15 to $20. This product
     began shipments in 1998.

MARKETING, DISTRIBUTION AND CUSTOMERS


     Fundex sells its products nationwide to retailers primarily through a
network of independent sales representative firms. Fundex's products are
displayed at two major consumer product shows in January and February of each
year, and at a number of smaller specialty market shows throughout the year.
Marketing activities for Fundex's product lines primarily target mass merchant
retailers in the United States and Canada, as well as smaller regional
merchants, drug chains, department stores and gift stores. In 1998, Fundex's 10
largest customers represented more than half of Fundex's revenues.



     Fundex distributes its products primarily out of its facility in
Indianapolis, Indiana. Some orders are sold on an FOB Hong Kong basis and
shipped directly from Fundex's manufacturers.


     Fundex's products are sold primarily in retail mass market, wholesalers,
toy and chain stores.

                                       29
<PAGE>   585

MANUFACTURING

     Fundex's products are currently manufactured by unaffiliated third parties
located in the United States, China, Taiwan, and the Philippines. Approximately
50% of Fundex's products are manufactured within the United States. The
manufacturers are chosen based on their ability to manufacture the products to
meet delivery requirements, quality, reliability, and price. The use of third
party manufacturers not only enables Fundex to avoid fixed operating costs
associated with manufacturing, but also affords Fundex greater flexibility in
the manufacturing process and in the materials used in its products since Fundex
is not restricted by the capabilities of expensive purchased equipment.
Manufacturing costs are paid for by open account with the manufacturer. Fundex
believes that alternative sources of supply are available for each of its
products.

     At its Indianapolis facility, Fundex assembles, packages, and shrink wraps
many of its products. Approximately 40% of Fundex's products, including the
Phase 10(TM) product line, are produced in Indianapolis. Although Fundex does
not manufacture its products, it does participate in the decision of prototype
products, production tooling and molds, printing plates and dies, and seeks to
insure quality control by actively reviewing the production processes and in
testing goods produced by its manufacturers.

     The principal raw materials used in Fundex's products are printed paper and
paperboard, plastics, and wood. Fundex believes there are adequate sources of
supply for such raw materials, and although Fundex does not manufacture all of
its own products, the molds, films, printing plates, and dies used in the
manufacturing process are transferable if Fundex employs different
manufacturers.

PRODUCT DESIGN AND SELECTION


     Fundex's products are generally acquired from others or developed for
Fundex by unaffiliated third parties. Fundex employs an individual to review and
refine new toy, game, and puzzle concepts submitted from these third parties. If
Fundex accepts and develops a third party's concept for a new toy, game or
puzzle, it generally pays a royalty to the inventor on items sold which were
developed from such concept. Generally, Fundex will commit to manufacture and
sell a minimum number of such items. Royalties paid to the inventors range from
1% to 10% of the wholesale sales price for each unit sold by Fundex. Fundex
occasionally pays advance royalties on products where a significant amount of
development has been done by an inventor. Fundex believes that utilizing third
party inventors gives it a wide range of available new products and eliminates
operating costs associated with maintaining full time inventors.



     Safety testing of Fundex's products are conducted by independent third
party contractors to meet safety regulations imposed by federal and state
governmental agencies. Fundex, in conjunction with these contractors, determines
the appropriate warning labels, such as choking hazard and age restrictions, to
be placed on its products.


COMPETITION


     The market for games and toys is served by manufacturers, both foreign and
domestic, many of whom have greater financial resources and have greater name
and product recognition than Fundex. Many products are available over a broad
price range. The market is competitive, includes numerous small manufacturers,
and is dominated by two industry giants. The toy industry is highly competitive
and sensitive to changing consumer preferences and demands. Competition is based
primarily on price, quality, and play value. In recent years the toy industry
has experienced rapid consolidation driven, in part, by the

                                       30
<PAGE>   586

desire of industry competitors to offer a range of products across a broader
variety of categories.


     Generally speaking, Fundex competes with Mattel, Inc., Hasbro, Inc.,
including its Milton Bradley and Parker Bros. Divisions, and Pressman, Inc.
Mattel and Hasbro, the two largest toy companies in the United States, control
approximately 50% of the game and toy market.


PATENTS, TRADEMARKS AND LICENSES


     Carl E. (Chip) Voigt, III and Carl E. (Pete) Voigt, IV (collectively, the
"Voigts") obtained the exclusive rights to manufacture, market and distribute
the Phase 10(TM) card game, and all enhancements, pursuant to an agreement dated
December 18, 1986. The agreement is for a term of ten years, and automatically
renews for successive five year periods unless terminated by the Voigts. The
Voigts assigned such rights to Fundex in respect of the sales of Phase 10(TM) in
the United States effective in 1991, and transferred all foreign rights to
Fundex in 1996. In connection with the assignment of the foreign rights to
Fundex, the Voigts assigned to Fundex all of their rights under various
sub-license agreements. Pursuant to the sub-license agreements, certain rights
to market and sell Phase 10(TM) products were assigned to entities with respect
to individual territories, including Spain, Italy, Canada, Sweden, Germany,
Australia, and New Zealand.



     Because Fundex obtains many of its products through licenses, it relies on
trademark and other protection obtained by its licensors. The license agreements
for such products, including the license relating to Phase 10(TM), permit Fundex
to utilize the trademarks and other proprietary rights owned by the licensor.
Company trademarks granted include Fundex Games, Roundabout, Tyrannorace, Take
Five, Toot R Ville Express, Piranha, and Telephone Tag. Trademarks pending, and
applied for, include Upsets(TM), Penguin Pileup, Wigglin Wally, Search 4, Pegs
and Jokers and Limbo Splash. Fundex has received a patent on a certain game
playing apparatus to be used in connection with its "10 in 1" games. Fundex
recognizes that patents are not totally effective in prohibiting competitors
from producing similar products that could compete with those of Fundex.
Therefore, Fundex does not rely heavily upon patent protection to maintain its
competitive provision, but instead relies to a greater extent on trademark and
copyright protection.


BACKLOG


     Shipment of Fundex's products is anticipated to peak during the summer
months and, consequently, it is expected that Fundex's backlog will be at a
maximum during June, July and August. Orders are normally shipped on the date
upon which the customer has requested shipment.



     Many of Fundex's customers order on an as needed basis and for immediate
shipment. Fundex normally ships these orders within 48 hours.


     At December 31, 1998, the backlog of orders was approximately $216,000 and
at December 31, 1997, the backlog of orders was approximately $206,000.

GOVERNMENT REGULATIONS


     Fundex is subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Products Safety Act. Those
laws empower the Consumer Products Safety Commission (the "CPSC") to protect
children from hazardous products. The CPSC has the authority to exclude from the
market articles which are


                                       31
<PAGE>   587


found to be hazardous and can require a manufacturer to repurchase such products
under certain circumstances. Any such determination by the CPSC is subject to
court review. Similar laws exist in some states and cities in the United States
and in many jurisdictions throughout the world. Fundex endeavors to comply with
all applicable regulations through a program of quality inspections and product
testing. Fundex maintains product liability insurance in the amount of
$2,000,000.


EMPLOYEES


     As of December 31, 1998, Fundex employed twenty-one full-time employees,
including its three executive officers. All of Fundex's employees are located in
the United States. Fundex believes that its relations with its employees are
good. None of Fundex's employees are represented by a union.


PROPERTIES


     Fundex presently leases approximately 32,000 square feet of space at 2237
Directors Row, Indianapolis, Indiana 46241. The term of the lease is for a
period of five years and contains a renewal option for an additional three
years. The monthly rental is $13,985. Fundex also leases approximately 1,000
square feet of showroom and office space at the Toy Center South, 200 Fifth
Avenue, Room 516, New York, NY, at a current rental of approximately $2,200 per
month. The showroom is used to exhibit Fundex's products for the International
Toy Fair in February each year, and is used as an office for the balance of the
year. The showroom lease expires April 30, 2006. Fundex believes it will need a
larger New York showroom as the number of its products and product lines grow.


LEGAL PROCEEDINGS


     There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which Fundex is a party, or of
which, any of its property is subject.


                                       32
<PAGE>   588

                               FUNDEX MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

     The following table sets forth information regarding Fundex's executive
officers and directors as of December 31, 1998:

<TABLE>
<CAPTION>
                                                                       YRS. WITH   YRS. IN
NAME                                 AGE           POSITION               CO.      INDUSTRY
----                                 ---           --------            ---------   --------
<S>                                  <C>   <C>                         <C>         <C>
Carl E. (Chip) Voigt, IV...........  38    President, CEO & Director       8          15
Carl E. (Pete) Voigt, III..........  61    Executive Vice President        9          40
                                           & Director
James E. Money, D..................  36    Chief Financial Officer         1           1
                                           and Treasurer & Director
George Propsom.....................  51    Product Development             3          25
                                           Manager
Eric J. Voigt......................  34    Plant & Purchasing              8           8
                                           Manager
William H. Prophater...............  53    Director                        2          --
Sheldon Drobny.....................  52    Director                        2          --
</TABLE>

     MR. CARL E. (CHIP) VOIGT, IV  Fundex's President, Chief Executive Officer
and Chairman of the Board has been engaged in the toy and game industry for over
15 years. He is one of the founders of Fundex and has been President and Chief
Executive Officer since the inception of Fundex in 1991. Prior to joining
Fundex, Mr. Voigt spent four years as a manufacturer representative in the toy
and game industry. He received a Bachelor of Science degree in Industrial
Management from Purdue University. Mr. Voigt is the son of Carl E. (Pete) Voigt,
III and the brother of Eric J Voigt.

     MR. CARL E. (PETE) VOIGT, III  Fundex's Executive Vice President, Secretary
and Director has been engaged in the game and toy business for over 37 years. He
is one of the founders of Fundex and has been Executive Vice President since its
inception in 1991. Mr. Voigt was a manufacturer's representative in the toy and
game industry from 1974 until 1988, and participated in the development and
implementation of the sales and marketing plan for the card came "Uno", the
best-selling card game in the world. Prior to that time, Mr. Voigt was a
salesman or buyer in the toy and game business. Mr. Voigt is the father of Carl
E. (Chip) Voigt, IV and of Eric J Voigt.

     MR. JAMES E. MONEY, II  Fundex's Chief Financial Officer and Vice President
joined the Company in April 1998. Mr. Money is a Certified Public Account and
has been involved in the services industry for the past ten years. Mr. Money
spent the last two years as Director of Billing & Collections for a
transportation company. Prior to working in the transportation industry, Mr.
Money spent two plus years as controller of a financial service company. Mr.
Money also spent three years in public accounting working for an Indianapolis
area local firm. Mr. Money Graduated from Indiana University with a B. S. in
Accounting,

     MR. GEORGE PROPSOM  Fundex's Director of Development joined the Company in
July of 1996. Mr. Propsom has been in the toy industry since 1971. Mr. Propsom
started with Western Publishing Company as an Associate Designer. Mr. Propsom
spent five years at Parker Brothers as a designer for games and Nerf products.
While at Western Publishing

                                       33
<PAGE>   589

Mr. Propsom spent 17 years as Manager of product development for SkilCraft and
Westerns Game and Activity Department. Mr. Propsom was also employed at Cadaco
in Chicago as Operation Manager.


     MR. ERIC J. VOIGT  Fundex's Plant and Purchasing Manager since October
1996. Prior to joining Fundex, Mr. Voigt was in the hotel and restaurant
business as a head chef with Shelde Restaurant from October 1988 to October
1996. He attended Purdue University and Northern Michigan College. Mr. Voigt is
the son of Mr. Carl E. Voigt, III and brother of Mr. Carl E. Voigt IV.


     MR. WILLIAM H. PROPHATER  Mr. Prophater has been a director of Fundex since
July 1996. Mr. Prophater has been executive vice president of Style-Line, Inc.,
a manufacturer of window treatments since 1992. From 1990 to 1991, Mr. Prophater
was vice president and general merchandise manager of Ames Department Stores.
Prior to that time, Mr. Prophater was senior vice president and general
merchandise manager of Gold Circle Stores. Mr. Prophater received a Bachelor of
Science/Bachelor of Arts degree in management from Creighton University.

     MR. SHELDON DROBNY  Mr. Drobny has been a director of Fundex since
September 1996. He is a registered representative with Merrill Weber & Co., Inc.
Mr. Drobny is a principal in the accounting firm of Adler, Drobny & Fischer, LLC
and is the managing director of Paradigm Venture Investors, LLC, a private
investment firm. Prior to joining Adler, Drobny & Fischer, LLC, Mr. Drobny was
with the Internal Revenue Service. Mr. Drobny received a Bachelor of Science
degree in accounting from Roosevelt University, and Mr. Drobny is a Certified
Public Accountant.

                                       34
<PAGE>   590

                              FUNDEX STOCKHOLDERS


     The following table sets forth information regarding the beneficial
ownership of Fundex common stock at June 30, 1999 with respect to:



     (1) each person known to Fundex to own beneficially more than 5% of the
         outstanding shares of Fundex's common stock,



     (2) each director of Fundex,



     (3) each of the executive officers of Fundex, and



     (4) all directors and executive officers of Fundex as a group.


<TABLE>
<CAPTION>
                                                          SHARES BENEFICIALLY OWNED
                                                               PRIOR TO MERGER
                                                          -------------------------
NAME                                                        NUMBER      PERCENT(1)
----                                                      ----------    -----------
<S>                                                       <C>           <C>
Identity of Stockholder or Group
Carl (Chip) E. Voigt, IV, Officer/Director..............    575,000        35.4
Carl (Pete) E. Voigt, III, Officer/Director.............    575,000        35.4
Sheldon Drobny, Director................................     44,062         2.7
All Executive Officers and Directors as Group...........  1,194,062        73.5
</TABLE>


(1) Based upon 1,624,824 shares of common stock issued and outstanding on June
    30, 1999.


                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


     In connection with the mergers, Chip Voigt will become a director and Vice
President of the Toys/Games Division of New Futech and a director and President
of New Sub. Pete Voigt will become the Vice President of New Sub. Chip Voigt and
Pete Voigt will each receive an employment agreement providing for a base salary
of $150,000 per year for a three year term and providing each with options for
33,333 shares of New Futech common stock that vest over the three year period
and have an exercise price of $4.50 per share. The amount of options and the
exercise price for the option were arrived at by negotiation between Futech and
each of Chip Voigt and Pete Voigt. Some of the officers and directors of other
merging companies will also receive employment agreements and stock options in
connection with the mergers. Certain officers and directors of the merging
companies have given personal guarantees of the indebtedness of those companies,
and New Futech is required to obtain releases of those personal guarantees. See
"Description of the Mergers and the Merger Agreement -- Employment Agreements
with Affiliates" and "New Futech's Management -- Employment Agreements" in the
prospectus/proxy statement.


                                       35
<PAGE>   591

                                                                      APPENDIX 1


     NEV. REV. STAT. ANN. @ 92A.300 DEFINITIONS



     As used in NRS 92A.300 to 92A.500, inclusive, unless the context otherwise
requires, the words and terms defined in NRS 92A.305 to 92A.335, inclusive, have
the meanings ascribed to them in those sections.



     NEV. REV. STAT. ANN. @ 92A.305 "BENEFICIAL STOCKHOLDER"
DEFINED. -- "Beneficial stockholder" means a person who is a beneficial owner of
shares held in a voting trust or by a nominee as the stockholder of record.



     NEV. REV. STAT. ANN. @ 92A.310 "CORPORATE ACTION" DEFINED. -- "Corporate
action" means the action of a domestic corporation.



     NEV. REV. STAT. ANN. @ 92A.315 "DISSENTER" DEFINED. -- "Dissenter" means a
stockholder who is entitled to dissent from a domestic corporation's action
under NRA 92A.380 and who exercises that right when and in the manner required
by NRS 92A.410 to 92A.480, inclusive.



     NEV. REV. STAT. ANN. @ 92A.320 "FAIR VALUE" DEFINED. -- "Fair Value," with
respect to a dissenter's shares, means the value of the shares immediately
before the effectuation of the corporate action to which he objects, excluding
any appreciation or depreciation in anticipation of the corporate action unless
exclusion would be inequitable.



     NEV. REV. STAT. ANN. @ 92A.325 "STOCKHOLDER" DEFINED. -- "Stockholder"
means a stockholder of record or a beneficial stockholder of a domestic
corporation.



     NEV. REV. STAT. ANN. @ 92A.330 "STOCKHOLDER OF RECORD"
DEFINED. -- "Stockholder of record" means the person in whose name shares are
registered in the records of a domestic corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee's certificate on file
with the domestic corporation.



     NEV. REV. STAT. ANN. @ 92A.335 "SUBJECT CORPORATION" DEFINED. -- "Subject
corporation" means the domestic corporation which is the issuer of the shares
held by a dissenter before the corporate action creating the dissenter's rights
becomes effective or the surviving or acquiring entity of that issuer after the
corporation action becomes effective.



     NEV. REV. STAT. ANN. @ 92A.340 COMPUTATION OF INTEREST.



     Interest payable pursuant to NRS 92A.300 to 92A.500, inclusive, must be
computed from the effective date of the action until the date of payment, at the
average rate currently paid by the entity on its principal bank loans or, if it
has no bank loans, at a rate that is fair and equitable under all of the
circumstances.



     NEV. REV. STAT. ANN. @ 92A.350 RIGHTS OF DISSENTING PARTNER OF DOMESTIC
LIMITED PARTNERSHIP.



     A partnership agreement of a domestic limited partnership or, unless
otherwise provided in the partnership agreement, an agreement of merger or
exchange, may provide that contractual rights with respect to the partnership
interest of a dissenting general or limited partner of a domestic limited
partnership are available for any class or group of partnership interests in
connection with any merger or exchange in which the domestic limited partnership
is a constituent entity.


                                       A-1
<PAGE>   592


     NEV. REV. STAT. ANN. @ 92A.370 RIGHTS OF DISSENTING MEMBER OF DOMESTIC
NONPROFIT CORPORATION.



     1. Except as otherwise provided in subsection 2 and unless otherwise
provided in the articles or bylaws, any member of any constituent domestic
nonprofit corporation who voted against the merger may, without prior notice,
but within 30 days after the effective date of the merger, resign from
membership and is thereby excused from all contractual obligations to the
constituent or surviving corporations which did not occur before his resignation
and is thereby entitled to those rights, if any, which would have existed if
there had been no merger and the membership had been terminated or the member
had been expelled.



     2. Unless otherwise provided in its articles of incorporation or bylaws, no
member of a domestic nonprofit corporation, including, but not limited to, a
cooperative corporation, which supplies services described in chapter 704 of NRS
to its members only, and no person who is a member of a domestic nonprofit
corporation as a condition of or by reason of the ownership of an interest in
real property, may resign and dissent pursuant to subsection 1.


     NEV. REV. STAT. ANN. @ 92A.380 (1998) Right of stockholder to dissent from
certain corporate actions and to obtain payment for shares

     1.  Except as otherwise provided in NRS 92A.370 to 92A.390, a stockholder
is entitled to dissent from, and obtain payment of the fair value of his shares
in the event of any of the following corporate actions:

          (a) Consummation of a plan of merger to which the domestic corporation
     is a party:

             (1) If approval by the stockholders is required for the merger by
        NRS 92A.120 to 92A.160, inclusive, or the articles of incorporation and
        he is entitled to vote on the merger; or

             (2) If the domestic corporation is a subsidiary and is merged with
        its parent under NRS 92A.180.

          (b) Consummation of a plan of exchange to which the domestic
     corporation is a party as the corporation whose subject owner's interests
     will be acquired, if he is entitled to vote on the plan.

          (c) Any corporate action taken pursuant to a vote of the stockholders
     to the event that the articles of incorporation, bylaws or a resolution of
     the board of directors provides that voting or nonvoting stockholders are
     entitled to dissent and obtain payment for their shares.

     2.  A stockholder who is entitled to dissent and obtain payment under NRS
92A.300 to 92A.500, inclusive, may not challenge the corporate action creating
his entitlement unless the action is unlawful or fraudulent with respect to him
or the domestic corporation.

     NEV. REV. STAT. ANN. @ 92A.400 (1998) LIMITATIONS ON RIGHT OF
DISSENT: Assertion as to portions only to shares registered to stockholder;
assertion by beneficial stockholder

     1.  A stockholder of record may assert dissenter's rights as to fewer than
all of the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the subject corporation
in writing of the name and

                                       A-2
<PAGE>   593

address of each person on whose behalf he asserts dissenter's rights. The rights
of a partial dissenter under this subsection are determined as if the shares as
to which he dissents and his other shares were registered in the names of
different stockholders.

     2.  A beneficial stockholder may assert dissenter's rights as to shares
held on his behalf only if:

          (a) He submits to the subject corporation the written consent of the
     stockholder of record to the dissent not later than the time the beneficial
     stockholder asserts dissenter's rights; and

          (b) He does so with respect to all shares of which he is the
     beneficial stockholder or over which he has power to direct the vote.

     NEV. REV. STAT. ANN. @ 92A.410 (1998) Notification of stockholders
regarding right of dissent

     1.  If a proposed corporate action creating dissenters' rights is submitted
to a vote at a stockholders' meeting, the notice of the meeting must state that
stockholders are or may be entitled to assert dissenters' rights under NRS
92A.300 to 92A.500, inclusive, and be accompanied by a copy of those sections.

     2.  If the corporate action creating dissenters' rights is taken by written
consent of the stockholders or without a vote of the stockholders, the domestic
corporation shall notify in writing all stockholders entitled to assert
dissenters' rights that the action was taken and send them the dissenter's
notice described in NRS 92A.430.

     NEV. REV. STAT. ANN. @ 92A.420. Prerequisites to demand for payment for
shares

     1.  If a proposed corporate action creating dissenters' rights is submitted
to a vote at a stockholders' meeting, a stockholder who wishes to assert
dissenter's rights:

          (a) Must deliver to the subject corporation, before the vote is taken,
     written notice of his intent to demand payment for his shares if the
     proposed action is effectuated; and

          (b) Must not vote his shares in favor of the proposed action.

     2.  A stockholder who does not satisfy the requirements of subsection 1 is
not entitled to payment for his shares under this chapter.

     NEV. REV. STAT. ANN. @ 92A.430 (1998) DISSENTER'S NOTICE: Delivery to
stockholders entitled to assert rights

     1.  If a proposed corporate action creating dissenters' rights is
authorized at a stockholders' meeting, the subject corporation shall deliver a
written dissenter's notice to all stockholders who satisfied the requirements to
assert those rights.

     2.  The dissenter's notice must be sent no later than 10 days after the
effectuation of the corporate action, and must:

          (a) State where the demand for payment must be sent and where and when
     certificates, if any, for shares must be deposited;

          (b) Inform the holders of shares not represented by certificates to
     what extent the transfer of the shares will be restricted after the demand
     for payment is received;

                                       A-3
<PAGE>   594

          (c) Supply a form for demanding payment that includes the date of the
     first announcement to the news media or to the stockholders of the terms of
     the proposed action and requires that the person asserting dissenter's
     rights certify whether or not he acquired beneficial ownership of the
     shares before that date;

          (d) Set a date by which the subject corporation must receive the
     demand for payment, which may not be less than 30 nor more than 60 days
     after the date the notice is delivered; and

          (e) Be accompanied by a copy of NRS 92A.300 to 92A.500, inclusive.


     NEV. REV. STAT. ANN. @ 92A.440



     1.  A stockholder to whom a dissenter's notice is sent must:



          (a) Demand payment;



          (b) Certify whether he acquired beneficial ownership of the shares
     before the date required to be set forth in the dissenter's notice for this
     certification; and



          (c) Deposit his certificates, if any, in accordance with the terms of
     the notice.



     2.  The stockholder who demands payment and deposits his certificates, if
any, before the proposed corporate action is taken retains all other rights of a
stockholder until those rights are canceled or modified by the taking of the
proposed corporate action.



     3.  The stockholder who does not demand payment or deposit his certificates
where required, each by the date set forth in the dissenter's notice, is not
entitled to payment for his shares under this chapter.



     NEV. REV. STAT. ANN. @ 92A.450



     1.  The subject corporation may restrict the transfer of shares not
represented by a certificate from the date the demand for their payment is
received.



     2.  The person for whom dissenter's rights are asserted as to shares not
represented by a certificate retains all other rights of a stockholder until
those rights are canceled or modified by the taking of the proposed corporate
action.


     NEV. REV. STAT. ANN. @ 92A.460 (1998) Payment for shares: General
requirements:

     1.  Except as otherwise provided in NRS 92A.470, within 30 days after
receipt of a demand for payment, the subject corporation shall pay each
dissenter who complied with NRS 92A.440 the amount the subject corporation
estimates to be the fair value of his shares, plus accrued interest. The
obligation of the subject corporation under this subsection may be enforced by
the district court:

          (a) Of the county where the corporation's registered office is
     located; or

          (b) At the election of any dissenter residing or having its registered
     office in this state, of the county where the dissenter resides or has its
     registered office. The court shall dispose of the complaint promptly.

     2.  The payment must be accompanied by:

          (a) The subject corporation's balance sheet as of the end of a fiscal
     year ending not more than 16 months before the date of payment, a statement
     of income for that

                                       A-4
<PAGE>   595

     year, a statement of changes in the stockholders' equity for that year and
     the latest available interim financial statements, if any;

          (b) A statement of the subject corporation's estimate of the fair
     value of the shares;

          (c) An explanation of how the interest was calculated;

          (d) A statement of the dissenter's rights to demand payment under NRS
     92A.480; and

          (e) A copy of NRS 92A.300 to 92A.500, inclusive.


     NEV. REV. STAT. ANN. @ 92A.470 Payment for Shares: Shares Acquired on or
After Date of Dissenter's Notice.



     1.  A subject corporation may elect to withhold payment from a dissenter
unless he was the beneficial owner of the shares before the date set forth in
the dissenter's notice as the date of the first announcement to the news media
or to the stockholders of the terms of the proposed action.



     2.  To the extent the subject corporation elects to withhold payment, after
taking the proposed action, it shall estimate the fair value of the shares, plus
accrued interest, and shall offer to pay this amount to each dissenter who
agrees to accept it in full satisfaction of his demand. The subject corporation
shall send with its offer a statement of its estimate of the fair value of the
shares, an explanation of how the interest was calculated, and a statement of
the dissenters' right to demand payment pursuant to NRS 92A-480.


     NEV. REV. STAT. ANN. @ 92A.480 (1998) DISSENTER'S ESTIMATE OF FAIR VALUE:
Notification of subject corporation; demand for payment of estimate

     1.  A dissenter may notify the subject corporation in writing of his own
estimate of the fair value of his shares and the amount of interest due, and
demand payment of his estimate, less any payment pursuant to NRS 92A.460, or
reject the offer pursuant to NRS 92A.470 and demand payment of the fair value of
his shares and interest due, if he believes that the amount paid pursuant to NRS
92A.460 or offered pursuant to NRS 92A.470 is less than the fair value of his
shares or that the interest due is incorrectly calculated.

     2.  A dissenter waives his right to demand payment pursuant to this section
unless he notifies the subject corporation of his demand in writing within 30
days after the subject corporation made or offered payment for his shares.

     NEV. REV. STAT. ANN. @ 92A.490 (1998) Legal proceeding to determine fair
value: Duties of subject corporation; powers of court; rights of dissenter

     1.  If a demand for payment remains unsettled, the subject corporation
shall commence a proceeding within 60 days after receiving the demand and
petition the court to determine the fair value of the shares and accrued
interest. If the subject corporation does not commence the proceeding within the
60-day period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.

     2.  A subject corporation shall commence the proceeding in the district
court of the county where its registered office is located. If the subject
corporation is a foreign entity without a resident agent in the state, it shall
commence the proceeding in the county

                                       A-5
<PAGE>   596

where the registered office of the domestic corporation merged with or whose
shares were acquired by the foreign entity was located.

     3.  The subject corporation shall make all dissenters, whether or not
residents of Nevada, whose demands remain unsettled, parties to the proceeding
as in an action against their shares. All parties must be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.

     4.  The jurisdiction of the court in which the proceeding is commenced
under subsection 2 is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend a decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or any amendment thereto. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.

     5.  Each dissenter who is made a party to the proceeding is entitled to a
judgment:

          (a) For the amount, if any, by which the court finds the fair value of
     his shares, plus interest, exceeds the amount paid by the subject
     corporation; or

          (b) For the fair value, plus accrued interest, of his after-acquired
     shares for which the subject corporation elected to withhold payment
     pursuant to NRS 92A.470.


     NEV. REV. STAT. ANN. @ 92A.500  LEGAL PROCEEDING TO DETERMINE FAIR VALUE:
ASSESSMENT OF COSTS AND FEES.



     1.  The court in a proceeding to determine fair value shall determine all
of the costs of the proceeding, including the reasonable compensation and
expenses of any appraisers appointed by the court. The court shall assess the
costs against the subject corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously or not
in good faith in demanding payment.



     2.  The court may also assess the fees and expenses of the counsel and
experts for the respective parties, in amounts the court finds equitable:



          (a) Against the subject corporation and in favor of all dissenters if
     the court finds the subject corporation did not substantially comply with
     the requirements of NRS 92A.300 to 92A.500, inclusive; or



          (b) Against either the subject corporation or a dissenter in favor of
     any other party, if the court finds that the party against whom the fees
     and expenses are assessed acted arbitrarily, vexatiously or not in good
     faith with respect to the rights provided by NRS 92A.300 to 92A.500,
     inclusive.



     3.  If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the subject corporation, the
court may award to those counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who were benefited.



     4.  In a proceeding commenced pursuant to NRS 92A.460, the court may assess
the costs against the subject corporation, except that the court may assess
costs against all or some of the dissenters who are parties to the proceedings,
in amounts the court finds


                                       A-6
<PAGE>   597


equitable, to the extent the court finds that such parties did not act in good
faith in instituting the proceeding.



     5.  This section does not preclude any party in a proceeding commenced
pursuant to NRS 92A.460 to 92A.490 from applying the provisions of N.R.C.P. 68
or NRS 17.115.


                                       A-7
<PAGE>   598

                                 DAMERT COMPANY
                               1609 FOURTH STREET
                           BERKELEY, CALIFORNIA 94710

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

                   NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
                        TO BE HELD                , 1999
                           -------------------------

     You are invited to attend a Special Meeting of Stockholders of DaMert
Company that will be held at      a.m. local time on              , 1999 at
                     . The DaMert board of directors has called this special
meeting for the following purposes:

     - To consider and vote upon a proposal to approve and adopt the Merger
       Agreement dated as of June 7, 1999, by and among DaMert, Futech
       Interactive Products, Inc., Trudy Corporation, Fundex Games, Ltd., Janex
       International, Inc., and two newly formed companies that we are referring
       to as "New Futech" and "New Sub." Under the Merger Agreement, first
       Futech and then Janex, Trudy, and DaMert will merge with and into New
       Futech, which will survive the merger, and Fundex will merge into New
       Sub, which will survive as a wholly-owned subsidiary of New Futech. Each
       share of DaMert common stock outstanding immediately prior to the mergers
       (other than dissenting shares) will be converted into the right to
       receive approximately 613.07 shares of New Futech common stock, $285.00
       in cash, and a promissory note of New Futech in the amount of $2,375.00.

     - To transact such other business as may properly come before the special
       meeting or any adjournment or postponement of the special meeting.

     These matters are more fully described in the prospectus/proxy statement
supplement and related prospectus/proxy statement that are attached to this
Notice.

     We, the board of directors of DaMert, unanimously recommend that you vote
FOR the mergers.

     You will be entitled to vote at the special meeting or any adjournment or
postponement of the special meeting only if you are a holder of record of DaMert
common stock at the close of business on              , 1999.

                                  BY ORDER OF THE BOARD OF DIRECTORS

                                  Frederick A. DaMert
                                  Chairman

Berkeley, California
             , 1999

                                   IMPORTANT
 We cordially invite all stockholders to attend the special meeting in person.
<PAGE>   599


                  Subject To Completion, Dated October 8, 1999


                  FUTECH INTERACTIVE PRODUCTS (DELAWARE) INC.


                           FUTECH TOYS & GAMES, INC.


                                 DAMERT COMPANY



                     Prospectus/Proxy Statement Supplement



     The board of directors of DaMert Company has called a special meeting of
stockholders to consider and vote upon a proposal to (a) merge Futech
Interactive Products, Inc. with Futech Interactive Products (Delaware) Inc., a
newly-formed company, so that New Futech is a Delaware corporation, (b) merge
DaMert and two other companies into New Futech, and (c) merge another company
into a subsidiary so that it becomes a subsidiary of New Futech. This
prospectus/proxy statement supplement and the accompanying prospectus/proxy
statement are intended to give you important information about the special
meeting and about the proposed mergers and the combined company that would
result from the mergers. PLEASE READ THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS/PROXY STATEMENT TOGETHER WITH EACH OTHER AS IF
THEY WERE A SINGLE DOCUMENT. THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT ALONE
DOES NOT INCLUDE ALL OF THE INFORMATION THAT WE BELIEVE MAY BE IMPORTANT TO YOU.



     Under the merger agreement, first Futech and then DaMert, Trudy
Corporation, and Janex International, Inc. will merge with and into New Futech,
and Fundex Games, Ltd. will merge into the newly formed subsidiary, Futech Toys
& Games, Inc. ("New Sub"), which will survive as a wholly-owned subsidiary of
New Futech. Each share of outstanding stock of any of the merging companies
immediately prior to the mergers, other than dissenting shares, is expected to
be converted into the right to receive cash, shares of New Futech stock,
promissory notes of New Futech or New Sub, or a combination of these things, in
the amounts specified on the cover page of the prospectus/proxy statement, but
subject to changes in accordance with the elections and conditional rights
described under "Description of the Mergers and the Merger Agreement" in the
prospectus/proxy statement beginning at page 12. The table does not include
outstanding options and warrants of Futech, Janex and Fundex, which would be
converted into New Futech options and warrants in the mergers.



     There is no trading market for any DaMert securities. We expect the New
Futech common stock to trade on the OTC Bulletin Board or on other markets after
the mergers, but we cannot be sure it will do so and we cannot predict what the
price might be. We do not expect a trading market to develop for any of the
other securities of New Futech or New Sub.



     THESE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROSPECTUS/PROXY STATEMENT
SUPPLEMENT AND THE RELATED PROSPECTUS/PROXY STATEMENT. THE PROPOSED MERGERS ARE
COMPLEX TRANSACTIONS. WE STRONGLY URGE YOU TO READ AND CONSIDER CAREFULLY THIS
PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE PROSPECTUS/PROXY STATEMENT IN
THEIR ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO UNDER "RISK FACTORS"
BEGINNING ON PAGE 6 OF THE PROSPECTUS/PROXY STATEMENT.



     Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus/proxy statement supplement or the accompanying prospectus/proxy
statement is truthful or complete. Any representation to the contrary is a
criminal offense.



     This prospectus/proxy statement supplement and the related prospectus/proxy
statement are first being mailed to stockholders of Futech, Janex, Trudy, Fundex
and DaMert on or about             , 1999.



       The date of this prospectus/proxy statement supplement is             ,
                                     1999.

<PAGE>   600

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS/PROXY STATEMENT. WE HAVE NOT, AND NEW FUTECH AND NEW SUB HAVE NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE
PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON
IT. NEW FUTECH AND NEW SUB ARE NOT MAKING AN OFFER TO SELL THESE SECURITIES IN
ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME
THAT THE INFORMATION APPEARING IN THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS/PROXY STATEMENT IS ACCURATE AS OF THE DATE ON THE
FRONT OF THIS PROSPECTUS/PROXY STATEMENT SUPPLEMENT ONLY. OUR BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE
THAT DATE.

                      WHERE YOU CAN FIND MORE INFORMATION

     We will send to you, without charge, any material information that we have
or can obtain without unreasonable effort or expense concerning DaMert or any
other merging company, concerning the Merger Agreement and related contracts or
concerning the proposed management and operations of New Futech. You may direct
requests for additional information regarding DaMert, Futech, Trudy, Fundex, or
Janex to Frederick B. Gretsch, Sr. at 2999 N. 44th Street, suite 225, Phoenix,
Arizona 85018-7247, (602) 808-8765.


     TO OBTAIN TIMELY DELIVERY OF THESE DOCUMENTS, YOU MUST MAKE YOUR REQUEST NO
LATER THAN       , 1999, FIVE BUSINESS DAYS BEFORE THE DATE OF THE DAMERT
STOCKHOLDERS MEETING.


                                        i
<PAGE>   601

                               TABLE OF CONTENTS


<TABLE>
<S>                                                           <C>
Summary Information -- Q&A..................................    1
Other Information About the Mergers.........................    3
  The Companies.............................................    3
  The Special Meeting.......................................    3
  The Merger Agreement......................................    3
Stockholder Matters.........................................    4
The Mergers and Related Transactions........................    4
  General...................................................    4
  Effects of the Mergers....................................    4
  Background of the Merger..................................    5
  Reasons for the Merger....................................    6
  DaMert's Board Recommendation.............................    6
  Related Agreements; Interests of Certain DaMert Affiliates
     in the Merger..........................................    6
  Regulatory Matters........................................    6
  Federal Income Tax Consequences...........................    7
  Accounting Treatment......................................    9
Rights of Dissenting Stockholders...........................    9
New Futech and DaMert Shares................................   12
  New Futech Common Stock...................................   12
  DaMert Capital Stock......................................   12
Comparison of the Rights of Holders of DaMert Common Stock
  and New Futech Common Stock...............................   12
Management's Discussion and Analysis or Plan of Operation...   22
  Overview..................................................   22
  Results of Operations of DaMert...........................   22
  Seasonality and Quarterly Fluctuations....................   24
  Liquidity and Capital Resources...........................   24
  Inflation.................................................   25
  Year 2000.................................................   25
  Safe Harbor Disclosure: Forward-Looking Statements and
     Associated Risks.......................................   26
Description of DaMert's Business............................   27
  General...................................................   27
  Products..................................................   27
  Sales, Marketing and Distribution.........................   27
  Customers.................................................   28
  Manufacturing.............................................   29
  Seasonality...............................................   29
  Backlog...................................................   29
</TABLE>


                                       ii
<PAGE>   602

<TABLE>
<S>                                                           <C>
  Product Design and Selection..............................   29
  Competition...............................................   29
  Patents, Trademarks and Licenses..........................   30
  Government Regulations....................................   30
  Employees.................................................   30
  Properties................................................   31
  Legal Proceedings.........................................   31
DAMERT MANAGEMENT...........................................   32
  Directors and Executive Officers..........................   32
  Employment Arrangements...................................   33
DAMERT STOCKHOLDERS.........................................   35
  Security Ownership of Certain Beneficial Owners and
     Management.............................................   35
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............   35
APPENDICES
Appendix 1 -- California General Corporation Law Dissenters'
  Rights....................................................  A-1
</TABLE>


                                       iii
<PAGE>   603

                           SUMMARY INFORMATION -- Q&A


     This summary highlights selected information from this document and may not
contain all the information that is important to you. For a more complete
understanding of the proposed mergers, you should carefully read the
prospectus/proxy statement and this prospectus/proxy statement supplement and
the additional documents mentioned. You should pay special attention to the
"Risk Factors" section beginning on page 6 of the prospectus/proxy statement.


WHY ARE THE FIVE COMPANIES PROPOSING TO MERGE?


     The five companies are proposing to merge because the directors of each
company believe the combination will provide significant benefits to
stockholders. We believe the mergers will allow us to take advantage of the
strategic fit of our respective businesses by marketing through additional
channels of distribution. We also believe the mergers will improve the
likelihood that stockholders will have a more liquid market should they wish to
sell their stock and that the combined companies will be able to efficiently
access the markets for debt and equity when appropriate. To review the
background and reasons for the mergers in greater detail, see "Background of the
Mergers" in the prospectus/proxy statement.


WHAT WILL I RECEIVE IN THE MERGERS?


     You and all DaMert stockholders will receive a combination of cash,
promissory notes and common stock of New Futech in exchange for your DaMert
stock. Stockholders of the other merging companies will receive cash, promissory
notes and common stock of New Futech. Employment contracts and other agreements
with affiliates of the merging companies are also part of the deal. See
"Description of the Mergers and the Merger Agreement" in the prospectus/proxy
statement.


WHAT RISKS SHOULD I CONSIDER?


     You should review "Risk Factors" beginning on page 6 of the
prospectus/proxy statement.


WHAT STOCKHOLDER VOTE IS REQUIRED TO APPROVE THE MERGERS?

     The following table shows the proportions of the outstanding shares that
must vote in favor of the mergers, together with the proportion of the
outstanding shares that are held by directors, executive officers and their
affiliates, the majority of whom have indicated that they intend to vote in
favor of the mergers.


<TABLE>
<CAPTION>
                            SHARES OWNED BY DIRECTORS,
COMPANY  VOTE REQUIRED   EXECUTIVE OFFICERS AND AFFILIATES
-------  -------------   ---------------------------------
<S>      <C>             <C>
DaMert     Majority                    100.0%
Fundex     Majority                     70.8%
Futech     Majority                     56.4%
Janex      Majority                     79.2%
Trudy      Majority                     60.9%
</TABLE>



     The presence in person or by proxy of a majority of the outstanding shares
of each company constitutes a quorum for business to be conducted at the
meeting. Abstentions and broker non-votes will be treated as present for
purposes of determining a quorum for


                                        1
<PAGE>   604


each company's stockholders' meeting, but since they will not be counted as
votes in favor of the merger, they will have the same effect as votes against
the merger.


WHAT CIRCUMSTANCES MIGHT PREVENT THE MERGERS?


     New Futech has the right to terminate the merger agreement if stockholders
from all of the merging companies combined exercise dissenters' rights with
respect to more than 5% of the aggregate merger consideration to be issued in
the mergers. See "Description of the Mergers and the Merger
Agreement -- Conditions to Closing" in the prospectus/proxy statement for a
description of the other conditions to the mergers.


HOW WILL THE MERGERS BE TREATED FOR ACCOUNTING PURPOSES?

     We expect the mergers to be treated as purchases by Futech, which means
that the amount by which the total merger consideration received by stockholders
of the other merging companies plus the amount of their liabilities exceeds the
fair market value of their identifiable assets will initially be treated as
goodwill by New Futech for accounting purposes.

WHEN DO YOU EXPECT THE MERGERS TO BE COMPLETED?


     We are working to complete the mergers during the third quarter of 1999.
However, the merger agreement does not include any express deadline for the
mergers to proceed.


WHAT ARE THE TAX CONSEQUENCES OF THE MERGERS TO ME?


     We and the other merging companies have structured the merger agreement
with the intent and expectation that the exchange of shares by DaMert
shareholders will be tax-free for federal income tax purposes. THERE WILL BE
FEDERAL INCOME TAXES DUE ON THE CASH AND PROMISSORY NOTES THAT YOU RECEIVE. You
should review the more detailed description of federal tax consequences that
appear on pages 9 through 10 of this prospectus/proxy statement supplement.
State and local taxes may also become due as a result of the mergers.


     The precise tax consequences of the mergers will depend on your own
situation. You should consult your tax advisor for a full understanding of the
tax consequences of the mergers to you.

WILL I HAVE DISSENTERS' RIGHTS?


     Yes, provided you do not vote in favor of the mergers and meet all other
requirements of the dissenter's rights statute. See "Rights of Dissenting
Shareholders" on pages 10 through 12 of this prospectus/proxy statement
supplement, and the California dissenters' rights statute which is attached to
this supplement as Appendix 1.



HOW DO I VOTE AND HOW ARE THE VOTES COUNTED?



     In order to vote, you merely need to participate in the stockholders
meeting that has been called to consider the mergers. The stockholders meeting
will take place on             , at        local time, at                     .
If you do not vote at the meeting or if you abstain, it will have the same
effect as a vote against the mergers. You must attend the special stockholders
meeting in order to vote. No proxies will be sent to the DaMert stockholders.
The votes will be tabulated by the President of DaMert or by such other person
as the President of DaMert may designate.


                                        2
<PAGE>   605

SHOULD I SEND IN MY STOCK CERTIFICATES NOW?

     No. After the mergers are completed we will send you written instructions
for exchanging your stock certificates for the New Futech stock, cash and
promissory notes to which you are entitled.

                      OTHER INFORMATION ABOUT THE MERGERS

THE COMPANIES


     Each of Futech, Janex, Trudy, DaMert, Fundex, New Futech and New Sub are
described in the "Summary" and "New Futech's Business" sections of the
prospectus/ proxy statement.



THE SPECIAL MEETING


DATE, TIME AND PLACE

     The DaMert special meeting will be held on             , at      at
       .

PURPOSE OF THE SPECIAL MEETING


     We have called the special meeting so the DaMert stockholders can vote on
whether to approve the mergers pursuant to the merger agreement. The directors
of Futech, Trudy, Fundex and Janex have called for special meetings of the
stockholders of their companies so that they also can vote whether to approve
the mergers.


THE MERGER AGREEMENT


     Under the merger agreement, first Futech and then Janex, Trudy, and DaMert
will merge with and into New Futech, which will survive the mergers, and Fundex
will merge into New Sub, which will survive as a wholly-owned subsidiary of New
Futech. Under the merger agreement, DaMert stockholders who do not exercise
dissenters' rights will receive a combination of cash, promissory notes of New
Futech and common stock of New Futech as described in the prospectus/proxy
statement under the heading "Description of the Mergers and the Merger
Agreement -- Basic Terms of the Merger Agreement." Stockholders of Fundex and
Trudy will also have certain conditional rights to receive additional stock or
to exchange their New Futech stock for promissory notes or certain other assets
under specified circumstances. See "Description of the Mergers and the Merger
Agreement -- Basic Terms of the Merger Agreement."


                                        3
<PAGE>   606

                              STOCKHOLDER MATTERS

     DaMert stock does not trade on any established market. Similarly, there is
no public trading market for the New Futech common stock. We expect the New
Futech common stock to trade on the OTC Bulletin Board/Nasdaq Stock Market soon
after the mergers, but we cannot be sure it will do so and we cannot predict
what the price might be. We do not expect a trading market to develop for the
other securities of New Futech.


     As of June 30, 1999, the record date, there was one stockholder of record
of DaMert common stock. Another person is expected to exercise employee options,
and a third person will exchange SAR's in exchange for DaMert common stock
immediately before the mergers.


     DaMert has not paid dividends on its common stock and does not anticipate
paying dividends in the foreseeable future. If the mergers do not occur for any
reason, we anticipate that all earnings, in the foreseeable future, will be
retained for development of DaMert's business.

                      THE MERGERS AND RELATED TRANSACTIONS

GENERAL


     The merger agreement provides for the merger of Futech into New Futech,
promptly followed by the substantially simultaneous merger of Janex, Trudy and
DaMert with and into New Futech and the substantially simultaneous merger of
Fundex with and into New Sub. The discussion in this prospectus/proxy statement
supplement and the related prospectus/proxy statement of the mergers and the
description of the principal terms of the merger agreement contained in the
prospectus/proxy statement are subject to and qualified in their entirety by
reference to the merger agreement, a copy of which is attached to the
prospectus/proxy statement as Appendix A, and incorporated herein by reference.


EFFECTS OF THE MERGERS

GENERAL


     We intend for the mergers to occur promptly following approval of the
mergers by the requisite vote of the stockholders of each of Janex, Futech,
Trudy, DaMert and Fundex and the satisfaction or waiver of all other conditions
to consummation of the mergers. The mergers will become effective at or about
the time of filing of articles of merger or other appropriate documents with the
applicable government offices or agencies. At that time Futech will
reincorporate in Delaware by merging with New Futech and then Janex, Trudy and
DaMert will merge with and into New Futech with the result that New Futech will
be the surviving corporation. Then Fundex will merge with and into New Sub with
the result that New Sub will be the surviving wholly owned subsidiary of New
Futech. As part of the mergers New Futech will change its name to "Futech
Interactive Products, Inc." The stockholders of DaMert will become stockholders
of New Futech, and their rights will be governed by the New Futech certificate
of incorporation and bylaws. See "Comparison of Rights of Stockholders of DaMert
and New Futech." See "Description of the Mergers and the merger agreement" in
the prospectus/proxy statement.



     For information regarding the operation of New Futech and New Sub following
the mergers, see " Description of New Futech's Business" in the prospectus/proxy
statement.


                                        4
<PAGE>   607


For information regarding the officers and directors of New Futech following the
mergers, see "New Futech's Management" in the prospectus/proxy statement.


EXCHANGE RATIOS

     Each outstanding share of DaMert common stock at the effective date of the
mergers will be converted into the right to receive approximately:

     - $285.00 in cash,


     - a non-interest bearing promissory note, secured by a lien that is
       subordinated to New Futech's bank debt, in the amount of approximately
       $2,375.00, payable $475.00 one month after the mergers and $1,900.00
       seven months after the mergers, and


     - 613.07 shares of New Futech common stock.

     The promissory notes do not bear interest, but substantial penalties will
apply should New Futech default on its payment obligations.


     Outstanding shares of Futech, Janex, Fundex and Trudy will also be
converted into a combination of cash, common stock of New Futech and promissory
notes of New Futech or New Sub. In some cases the former stockholders of Fundex
will have the right to exchange their New Futech stock for the license rights in
the "Phase 10" family of games now owned by Fundex. Under other circumstances
the former stockholders of Trudy will have the right to receive additional New
Futech stock or to exchange their New Futech stock for unsecured five year
debentures. In addition, outstanding options for shares of Trudy, Futech, Janex
and Fundex will be converted into options for shares of common stock of New
Futech. See "Description of the Mergers and the Merger Agreement -- Basic Terms
of the Merger Agreement" in the prospectus/proxy statement.


FRACTIONAL SHARES


     Fractional shares of New Futech common stock will be issued in the mergers.


BACKGROUND OF THE MERGER


     In January 1999, the DaMert Company's merger consultant, Robert P. Oliver,
President CorDev Corporation, was in merger discussions with several
manufacturers of toys, games and puzzles. On January 16, 1999, Mr. Jeffrey Gold,
President Goldmark Advisors, Inc., a merger and acquisition firm, informed Mr.
Oliver that Futech Interactive Products, Inc., could be a strategic buyer
prospect for DaMert. Mr. Oliver agreed that Mr. Gold could introduce DaMert to
Futech.



     On January 25, 1999, Mr. Gold met with Futech, described DaMert and
provided Mr. Goett with a copy of DaMert's detailed information book. A
representative of Futech visited the DaMert Booth at the New York Toy Fair in
early February. On February 18, 1999, Mr. Goett and Mr. Oliver discussed
Futech's serious interest, and DaMert product samples and additional financial
information were sent. Subsequently, Fred DaMert and Mr. Oliver spent March 4,
1999, at Futech, in Phoenix, for detailed discussions with Mr. Goett and other
Futech executives. At that time, the terms of an acquisition of DaMert by Futech
or its affiliate were agreed upon.



     An additional visit to Futech was made by Gail and Fred DaMert the
following week. A letter of intent was presented to DaMert at its facility by a
representative of Futech on March 24, 1999. After this, both companies performed
due diligence, strategic planning,


                                        5
<PAGE>   608


structural decisions, personnel assignments and merger documentation. On May 27,
1999, the Futech board of directors approved the mergers and the merger
agreement. On June 7, 1999, the merger agreement was signed by all parties.



REASONS FOR THE MERGER



     Over the past 26 years, DaMert has established a well-regarded leadership
reputation for product innovation in the fields of nature, science and learning
toys. Over these years there has been a growing retail environment supported by
"baby boomer" consumers who wish to provide their children and family members
with products that educate as well as entertain. Most recently, however, there
has been increasing consumer interest in electronic and interactive products
coupled with increasing competition in the more traditional puzzle, game and
science toy categories.



     DaMert, through its product design staff, developed many new ideas for
products. These ideas could not be carried to the stage of development or
production because DaMert had limited capital resources. This led to frustration
because DaMert, while it could continue to provide working capital for
operations, could not generate enough cash from normal operations to fund the
development of new products. Because of this frustration, DaMert decided in
September 1998, to actively seek a strategic partnership with an external
company or investors. The interactive technology and cross-marketing
opportunities presented by the merger will allow DaMert's product innovation
strengths to carry forward into the twenty-first century.



     For additional information regarding the reasons for the merger, see
"Specific Reasons for Previous Acquisitions and Proposed Merger Partners" in the
prospectus/proxy statement.


DAMERT'S BOARD RECOMMENDATION


     THE BOARD OF DIRECTORS OF DAMERT HAS DETERMINED THAT THE MERGERS ARE
ADVISABLE AND IN THE BEST INTERESTS OF DAMERT AND ITS STOCKHOLDERS AND HAS
UNANIMOUSLY RECOMMENDED A VOTE FOR APPROVAL OF THE MERGER PROPOSAL.


RELATED AGREEMENTS; INTERESTS OF CERTAIN DAMERT AFFILIATES IN THE MERGER


     Fred and Gail DaMert will enter into employment agreements with New Futech
in connection with the merger. See "Description of the Mergers and the Merger
Agreement -- Employment Agreements with Affiliates" and "New Futech's
Management -- Employment Agreements" in the prospectus/proxy statement.



     SEE "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" IN THIS
PROSPECTUS/PROXY STATEMENT SUPPLEMENT AND THE CORRESPONDING HEADING IN THE
PROSPECTUS/PROXY STATEMENT.


REGULATORY MATTERS

     Except as disclosed in this prospectus/proxy statement supplement and the
prospectus/proxy statement, DaMert and New Futech are not aware of any
governmental or regulatory approvals required for consummation of the mergers,
other than compliance with the federal securities laws and applicable securities
and "blue sky" laws of the various states.

                                        6
<PAGE>   609


FEDERAL INCOME TAX CONSEQUENCES



     In the opinion of Quarles & Brady LLP, special tax counsel to Futech and
New Futech:



     (1) the merger of DaMert into New Futech will be treated for federal income
         tax purposes as a reorganization within the meaning of Section 368(a)
         of the Internal Revenue Code ("Code"), and DaMert and New Futech will
         each be a party to that reorganization within the meaning of Section
         368(b) of the Code; and



     (2) the federal income tax consequences described in this prospectus/proxy
         statement supplement, to the extent that they constitute matters of law
         or legal conclusions, are correct in all material respects.



     In rendering its opinion, our tax counsel has relied upon and assumed as
accurate and correct, both now and as of the effective time of the mergers, the
information contained in this prospectus/proxy statement supplement and the
related prospectus/proxy statement and on representations as to factual matters
made by DaMert and New Futech.



     The opinion represents our tax counsel's best legal judgement as to the tax
treatment of the merger, but the opinion is not binding on the Internal Revenue
Service. The parties have not and will not request a ruling from the Service in
connection with the federal income tax consequences of the merger. The following
summary of material United States federal income tax consequences of the merger
is based upon the conclusions reached in our tax counsel's opinion.



     The following discussion addresses the material federal income tax
consequences of the merger to a DaMert stockholder. It is based on the
provisions of the Code, applicable tax regulations, court decisions and current
administrative rulings and practices, all of which are subject to change,
possible with retroactive effect. The discussion assumes that the shares of
DaMert common stock are held as capital assets.



     Under section 356(a)(1) of the Code, a DaMert stockholder will not
recognize loss but may recognize gain on the receipt of New Futech common stock,
New Futech notes and cash in exchange for DaMert common stock. The amount of any
gain recognized will not exceed the sum of the fair market value of the portion
of the New Futech notes and the amount of cash received in exchange for the
share of DaMert common stock. For this purpose, a DaMert stockholder's gain, if
any, with respect to each share of DaMert common stock exchanged is equal to the
excess of: (1) the sum of (a) the fair market value of the shares of New Futech
common stock, plus (b) the portion of the New Futech notes, plus (c) the amount
of cash received for the share of DaMert common stock, over (2) the tax basis of
the share of DaMert common stock.



     Any gain recognized will be taxed as either capital gain from the sale or
exchange of stock or as a dividend, to the extent of the stockholder's pro rata
share of earnings and profits of DaMert. This determination will be based upon
whether, in the hypothetical transaction described in the next sentence, the
stockholder's interest in DaMert was reduced sufficiently so as to meet one of
the tests set forth in section 302(b) of the Code, as described in the next
paragraph. For purposes of this determination, a DaMert stockholder will be
treated as if he or she had engaged in a hypothetical transaction in which the
stockholder and all other DaMert stockholders (1) received solely shares of New
Futech common stock in exchange for all of their shares of DaMert common stock;
and (2) thereafter had a portion of the shares of New Futech common stock
redeemed for


                                        7
<PAGE>   610


the New Futech notes and cash portion of the merger consideration. A DaMert
stockholder's hypothetical interest in New Futech after step (1) is compared to
the stockholder's interest in New Futech subsequent to the deemed redemption in
step (2). In each case, subject to limited exceptions, shares of New Futech
common stock actually or constructively owned by the stockholder will be
considered owned for purposes of applying the test, even if the shares of New
Futech common stock were not received or deemed received in the merger.



     Under section 302(b) of the Code, a stockholder's interest in New Futech
will be deemed to have been reduced sufficiently if (1) the stockholder's
interest in New Futech is completely terminated as a result of the transaction;
(2) as a result of the hypothetical redemption described above and taking into
account all other hypothetical redemptions in the merger, the Fundex merger and
the Trudy merger, a stockholder's percentage interest in New Futech is less than
80% of the stockholder's interest in New Futech before the redemption; or (3)
the stockholder's interest was "meaningfully reduced" by virtue of the
hypothetical redemption. The third test requires a determination based on a
stockholder's particular facts and circumstances.



     Section 318 of the Code provides constructive ownership rules for purposes
of the tests under section 302. Under these constructive ownership rules, a
stockholder will generally be treated as owning shares owned by certain family
members and other related entities, or that are subject to options owned or
deemed owned by the stockholder. The actual or constructive ownership of shares
of DaMert common stock may, in some circumstances, have the effect of causing a
DaMert stockholder who would otherwise qualify for capital gain treatment under
the tests described in section 302 to fail to qualify and subject the
stockholder to dividend treatment, which may involve higher tax rates.



     The tax basis of each share of New Futech common stock received in the
merger will be the same as the tax basis of the shares of DaMert common stock
exchanged for it, increased by the amount of gain recognized on the exchange
with respect to the shares of DaMert common stock, including any gain that is
treated as dividend, decreased by the amount of New Futech notes and cash
received with respect to the shares of DaMert common stock. The holding period
of the shares of New Futech common stock received will include the holding
period of the shares of DaMert common stock exchanged for them.



     If a DaMert stockholder's recognized gain in the merger is treated as a
gain from the sale or exchange of stock and not as a dividend under the tests
described above, a DaMert stockholder may report the portion of the gain
attributable to the New Futech notes received for the DaMert common stock under
the installment method. This means the gain is reportable in the taxable year in
which cash is received under the New Futech notes.



     A holder of DaMert common stock who receives New Futech common stock
pursuant to the merger will be required to retain records and file with the
holder's federal income tax return for the taxable year in which the merger
takes place a statement setting forth all relevant facts in respect of the
nonrecognition of gain or loss upon the exchange. The statement is required to
include (1) the holder's basis in the shares of DaMert common stock surrendered
in the merger; and (2) the value of New Futech common stock and New Futech notes
received, using fair market value as of the effective time of the merger, and
the amount of any cash received in the merger.


                                        8
<PAGE>   611


     THIS TAX CONSEQUENCES DISCUSSION IS INTENDED ONLY AS A DESCRIPTION OF THE
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. IT IS NOT A COMPLETE
ANALYSIS OR DESCRIPTION OF ALL POTENTIAL TAX EFFECTS OF THE MERGER. The
discussion does not address all of the tax consequences that may be relevant to
particular taxpayers in light of their personal circumstances or to taxpayers
subject to special treatment under the Code, such as, insurance companies,
financial institutions, dealers in securities, tax exempt organizations, foreign
corporations, foreign partnerships, or other foreign entities and individuals
who are not citizens or residents of the United States and persons who acquired
their New Futech common stock pursuant to the exercise or termination of
employee stock options, warrants or otherwise as compensation.



     No information is provided in this tax consequences discussion with respect
to the tax consequences, if any, of the merger under applicable foreign, state,
local and other tax laws.



     THIS TAX CONSEQUENCES SUMMARY IS NOT INTENDED TO BE, NOR SHOULD IT BE
CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER OF DAMERT COMMON
STOCK. EACH HOLDER OF DAMERT COMMON STOCK IS URGED TO CONSULT THEIR OWN TAX
ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO THE HOLDER OF THE MERGER,
INCLUDING THE APPLICATION OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS.


ACCOUNTING TREATMENT

     The mergers are intended to qualify as a purchase for accounting purposes.
Under this accounting treatment, the amount by which the total merger
consideration received by stockholders of the other merging companies plus the
amount of their liabilities exceeds the fair market value of their identifiable
assets will initially be treated as goodwill by New Futech for accounting
purposes.

                       RIGHTS OF DISSENTING STOCKHOLDERS


     The rights of DaMert stockholders who dissent in connection with the
mergers are governed by specific legal provisions contained in Chapter 13 of the
California General Corporation Law. The following summary of the provisions of
Chapter 13 is not intended to be a complete statement of such provisions and is
qualified in its entirety by reference to the full text of Chapter 13, a copy of
which is attached to this prospectus/proxy statement as Appendix 1 and is
incorporated by reference. Failure to follow the steps required by Chapter 13
for perfecting dissenters' rights may result in the loss of such rights.



     Under Chapter 13, if the mergers are completed, any shares of DaMert common
stock, as to which dissenters' rights are properly exercised, will not be
converted by virtue of the mergers, into the right to receive the merger
consideration pursuant to the merger agreement. Instead, the stock will be
converted into the right to receive the "fair market value" of such shares in
cash, determined as of the day before the first announcement of the terms of the
mergers, and excluding any appreciation or depreciation in consequence of the
mergers. For shares of DaMert common stock to qualify as dissenting shares, (1)
the holders of such shares must not have voted in favor of approval of the
merger agreement and (2) the holder of this stock must submit stock certificates
for endorsement, as described below.



     If the mergers are approved at the DaMert special meeting, DaMert will,
within ten days after approval, mail to any stockholder who may have a right to
require DaMert to


                                        9
<PAGE>   612


purchase his, her or its shares for cash as a result of making a demand, as
described below, a notice that the required approval of the merger agreement was
obtained, accompanied by a copy of Chapter 13. The notice of approval will set
forth the price determined by DaMert to represent the fair market value of any
dissenting shares, which will constitute an offer by DaMert to purchase the
dissenting shares at the stated price, and will have a brief description of the
procedures to be followed by the stockholders who wish to exercise their
dissenters' rights.



     Within 30 days after the date on which the notice of approval was mailed,
DaMert must receive the demand of the dissenting stockholders. The demand is
required by law to contain a statement with the number and class of shares of
DaMert stock held of record by the dissenting stockholder and what the
stockholder claims to be the fair market value of the dissenting shares as of
the close of business on the day immediately prior to the announcement of the
merger. The statement of fair market value in the demand by the dissenting
stockholder constitutes an offer by the dissenting stockholder to sell the
dissenting shares at that price. The dissenting stockholder must submit DaMert
stock certificate(s) representing the dissenting shares to DaMert at DaMert's
principal office within the 30 day period. The DaMert stock certificate(s) will
be stamped or endorsed with a statement that the shares are dissenting shares.
If the price contained in the notice of approval is acceptable to the dissenting
stockholder, the dissenting stockholder may demand the same price. This would
constitute an acceptance of the offer by DaMert to purchase the dissenting
stockholder's stock at the price stated in the notice of approval.



     If DaMert and a dissenting stockholder agree on the price to be paid for
the dissenting shares, the agreed price, together with interest at the legal
rate on judgments from the date of the agreement between DaMert and the
dissenting stockholder, is required by law to be paid to the dissenting
stockholder within 30 days after that agreement or within 30 days after any
statutory or contractual conditions to the mergers are satisfied, whichever is
later, subject to the surrender of the DaMert stock certificates.



     If DaMert and a dissenting stockholder disagree about the price for the
dissenting shares or disagree as to whether the dissenting shares are entitled
to be classified as dissenting shares, the stockholder may, within six months
after the notice of approval is mailed, file a complaint in the Superior Court
of the proper county. The complaint should request the court to make the
determinations or, alternatively, intervene in any pending action brought by
another dissenting stockholder. The court may determine, or may appoint one or
more impartial appraisers to determine the fair market value of the dissenting
shares. If the court appoints one or more appraisers, within the time fixed by
the court, the appraisers shall make and file a report in the office of the
clerk of the court. On the motion of any party, the report shall be submitted to
the court and considered evidence as the court considers relevant. If the court
finds the report reasonable, the court may confirm it. If the appraisers
appointed fail to make and file a report within the time period allowed by the
court or the report is not confirmed by the court, the court will determine the
fair market value of the dissenting shares. The court may determine the fair
market value to be more than, less than or equal to the consideration that the
dissenting stockholder would otherwise be entitled to receive pursuant to the
merger agreement. Costs of the action, including compensation of appraisers, are
required to be assessed in a manner the court considers equitable, but must be
assessed against DaMert if the appraised value determined by the court exceeds
the price offered by DaMert.


     The court action to determine the fair market value of the shares will be
suspended if litigation is instituted to test the sufficiency or regularity of
the votes of the stockholders in

                                       10
<PAGE>   613

authorizing the mergers. Furthermore, no stockholder who is entitled to assert
dissenters' rights under Chapter 13 shall have any right to attack the validity
of the mergers or to have the mergers set aside or rescinded, except in an
action to test whether the number of shares required to authorize or approve the
mergers has been legally voted in favor of the mergers.


     Dissenting shares may lose their status as such and the right to demand
payment will terminate, among other reasons, if (1) the mergers are abandoned,
(2) the shares are transferred before being submitted for endorsement or are
surrendered for conversion into shares of another class, (3) the dissenting
stockholder and DaMert do not agree upon the status of the shares as dissenting
shares or upon the price of such shares and the dissenting stockholders fails to
file suit against DaMert or intervene in a pending action within six months
following the date on which the notice of approval was mailed to the
stockholder, or (4) the dissenting stockholder withdraws his or her demand for
the purchase of the dissenting shares with the consent of DaMert.


                                       11
<PAGE>   614

                          NEW FUTECH AND DAMERT SHARES

NEW FUTECH COMMON STOCK


     For a description of New Futech common stock and its authorized but
unissued preferred stock, see "Description of New Futech Capital Stock" in the
prospectus/proxy statement.


DAMERT CAPITAL STOCK


     The following description of DaMert's capital stock is a summary only and
is subject to, and qualified in its entirety by reference to, DaMert's articles
of incorporation and Bylaws, copies of which are included as exhibits to the
registration statement of which this prospectus/proxy statement supplement is a
part, and by reference to California law under which DaMert is incorporated.


COMMON STOCK


     As of June 30, 1999 there were 1,000 shares of DaMert common stock
outstanding which were held of record by one stockholder. There is no public
market for DaMert common stock. DaMert has not paid any dividends on its common
stock. However, since DaMert is qualified under internal revenue code as a Sub
Chapter S corporation, it has made distributions to its shareholder in respect
to tax liabilities associated with income from DaMert. The merger agreement
provides that DaMert will not declare or pay any dividend without the prior
written approval of New Futech.


         COMPARISON OF THE RIGHTS OF HOLDERS OF DAMERT COMMON STOCK AND
                            NEW FUTECH COMMON STOCK


     DaMert is a California corporation and the rights of its shareholders are
governed by the California General Corporation Law and the articles of
incorporation and bylaws of DaMert. New Futech is a Delaware corporation and the
rights of it stockholders are governed by the Delaware General Corporation Law
and the certificate of incorporation and Bylaws of New Futech. By the merger
agreement, the DaMert shareholders will become New Futech stockholders and as
such their rights will be governed by the Delaware General Corporation Law and
the New Futech certificate of incorporation and bylaws.


SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF CALIFORNIA AND DELAWARE

     The corporation laws of California and Delaware differ in many respects.
Although all the differences are not set forth in this prospectus/proxy
statement supplement, provisions which could materially affect the rights of
shareholders are discussed below.

                                       12
<PAGE>   615

REMOVAL OF DIRECTORS


<TABLE>
<CAPTION>
                   California                                              Delaware
<S>                                                    <C>
Any director of a corporation that does not have       Any director of a corporation that does not have
a classified board may be removed with or              a classified board or cumulative voting may be
without cause with approval of the majority of         removed with or without cause with approval of
the outstanding shares entitled to vote at an          the majority of the outstanding shares entitled
election of directors; provided, however, that         to vote at an election of directors. In the case
no director may be removed if the votes cast           of a Delaware corporation having cumulative
against removal would be sufficient to elect the       voting, if less than the entire board is to be
director if voted cumulatively at an election at       removed, a director may not be removed without
which the same total number of votes were cast         cause if the number of shares voted against such
and the entire number of directors were then           removal would be sufficient to elect the
being elected. A director of a corporation with        director under cumulative voting. A director of
a classified board may not be removed if the           a corporation with a classified board of
votes cast against removal would be sufficient         directors may be removed only for cause, unless
to elect the director if voted cumulatively at         the certificate of incorporation otherwise
an election at which the same total number of          provides. The certificate of incorporation and
votes were cast and either the number of               bylaws of New Futech provide for a classified
directors elected at the most recent annual            board of directors, but not for cumulative
meeting of shareholders or, if greater, the            voting.
number of directors for whom removal is being
sought were then being elected. In addition, the
holders of at least 10% of the number of
outstanding shares of any class of stock may
initiate a court action to remove any director
for cause. DaMert does not have a classified
board of cumulative voting.
</TABLE>


                                       13
<PAGE>   616

CLASSIFIED BOARD OF DIRECTORS


     A classified, the term used in Delaware, or staggered board is one on which
a certain number, but not all, of the directors are elected on a rotating basis
each year. This method of electing directors makes changes in the composition of
the board of directors more difficult, and thus a change in control of a
corporation potentially a lengthier and more difficult process.


<TABLE>
<CAPTION>
                   California                                              Delaware
<S>                                                    <C>
California law permits, but does not require,          Delaware law permits, but does not require, a
"listed corporations" to have a classified board       classified board of directors, by which the
of directors, by which the directors can be            directors can be divided into as many as three
divided into as many as three classes with             classes with staggered terms of office, with
staggered terms of office, with only one class         only one class of directors standing for
of directors standing for election each year. A        election each year. The New Futech certificate
"listed company" is a company that meets certain       of incorporation and bylaws provide for a
requirements such as having its shares listed          classified board, consisting of three classes
for trading on the New York Stock Exchange,            with three directors in each class.
American Stock Exchange or the NASDAQ. The
DaMert articles of incorporation and bylaws do
not provide for a classified board, nor is
DaMert a "listed company."
</TABLE>

                                       14
<PAGE>   617

INDEMNIFICATION AND LIMITATION OF LIABILITY


     Delaware and California have similar laws respecting indemnification by a
corporation of its officers, directors, employees and other agents. The laws of
both states also permit, with certain exceptions, a corporation to adopt a
provision in its articles of incorporation or certificate of incorporation, as
the case may be, eliminating the liability of a director to the corporation or
its stockholders for monetary damages for breach of the director's fiduciary
duty. There are, nonetheless, certain differences between the laws of the two
states respecting indemnification and limitation of liability. More importantly,
because DaMert's articles of incorporation do not provide for the elimination of
directors' liability as permitted by California law, the directors can be held
personally liable for monetary damages for breaches of their fiduciary duties to
the company and its shareholders. New Futech's certificate of incorporation will
provide for the elimination of directors' monetary liability to the fullest
extent permitted by Delaware law.



<TABLE>
<CAPTION>
                   California                                              Delaware
<S>                                                    <C>
The articles of incorporation of DaMert do not         The certificate of incorporation of New Futech
discuss the liability of directors to the              eliminates the liability of directors to the
corporation, so California law applies.                corporation or its stockholders for monetary
California law permits the elimination of              damages for breach of fiduciary duty as a
directors' monetary liability if so provided in        director to the fullest extent permissible under
a company's articles of incorporation, except          Delaware law. Under Delaware law, such provision
where such liability is based on:                      may not eliminate or limit director monetary
                                                       liability for:
- intentional misconduct or knowing and culpable
  violation of law,                                    - breaches of the director's duty of loyalty to
                                                         the corporation or its stockholders,
- acts or omissions that a director believes to
  be contrary to the best interests of the             - acts or omissions not in good faith or
  corporation or its stockholders, or that               involving intentional misconduct or knowing
  involve the absence of good faith on the part          violations of law,
  of the director,
                                                       - the payment of unlawful dividends or unlawful
- receipt of any improper personal benefit,              stock repurchases or redemptions, or
- acts or omissions that show reckless disregard       - transactions in which the director received an
  for the director's duty to the corporation or          improper personal benefit.
  its stockholders, where the director in the
  ordinary course of performing a director's           Such limitation of liability provisions also may
  duties should have been aware of a risk of           not limit a director's liability for violation
  serious injury to the corporation or its             of or otherwise relieve directors from the
  shareholders,                                        necessity of complying with federal or state
                                                       securities laws, or affect the availability of
- acts or omissions that constitute an unexcused       non-monetary remedies such as injunctive relief
  pattern of inattention that amounts to an            or rescission.
  abdication of the director's duty to the
  corporation and its stockholders,                    Delaware law generally permits indemnification
                                                       of expenses, including attorneys' fees, actually
- interested transactions between the                  and reasonably incurred in the defense or
  corporation and the director, in which a             settlement of a derivative or third-party
  director has a material financial interest, or       action, provided there is a determination by a
                                                       majority vote
</TABLE>


                                       15
<PAGE>   618


<TABLE>
<CAPTION>
                   California                                              Delaware
<S>                                                    <C>
                                                       of disinterested directors, by independent legal
- liability for improper distributions, loans or       counsel or by a majority vote of the
  guarantees.                                          stockholders that the person seeking
                                                       indemnification acted in good faith and in a
California law permits indemnification of              manner reasonably believed to be in or not
expenses in a derivative or third party action,        opposed to the best interest of the corporation.
except that with respect to derivative actions         Delaware law requires indemnification of
(1) no indemnification may be made when a person       expenses when the individual being indemnified
is adjudged liable to the corporation in the           has successfully defended any action, claim,
performance of that person's duty to the               issue, or matter therein, on the merits or
corporation and its stockholders, unless and           otherwise.
only to the extent that a court determines that
the person is fairly and reasonably entitled to        Delaware law also permits a Delaware corporation
indemnity for expenses, and (2) no                     to provide indemnification in excess of that
indemnification may be made in respect of              provided by statute.
amounts paid or expenses incurred in settling or
otherwise disposing of a threatened pending            A provision of Delaware law states that the
action without court approval or expenses              indemnification provided by statute shall not be
incurred in an action settled or disposed of           deemed exclusive of any other rights under any
without court approval. Indemnification is             bylaw, agreement, vote of stockholders or
permitted by California law only for acts taken        disinterested directors or otherwise.
in good faith and reasonably believed to be in
the best interests of the corporation and its
stockholders, as determined by a majority vote
of a disinterested quorum of the directors,
independent legal counsel, if a quorum of
independent directors is not obtainable, a
majority vote of a quorum of the stockholders,
excluding shares owned by the indemnified party,
or the court handling the action, and (3) in the
case of a criminal proceeding, indemnification
is permitted if the indemnified party had no
reasonable cause to believe his or her conduct
was unlawful.
</TABLE>



     Both California and Delaware law require indemnification when the
individual has defended successfully the action on the merits.


     Expenses incurred by an officer or director in defending an action may be
paid in advance, under California law and Delaware law, if such director or
officer undertakes to repay such amounts if it is ultimately determined that he
or she is not entitled to indemnification. In addition, the laws of both states
authorize a corporation's purchase of indemnity insurance for the benefit of its
officers, directors, employees and agents whether or not the corporation would
have the power to indemnify against the liability covered by the policy.

                                       16
<PAGE>   619

INSPECTION OF STOCKHOLDER LIST


     The California General Corporation Law provides for an absolute right of
inspection of the stockholder list for persons holding five percent or more of a
corporation's voting shares or persons holding one percent or more of such
shares who have filed a Schedule 14A with the Securities and Exchange Commission
relating to the election of directors. Both the California General Corporation
Law and the Delaware General Corporation Law allow any stockholder to inspect
the stockholder list for a purpose reasonably related to such person's interest
as a stockholder or shareholder. However, the Delaware General Corporation Law
contains no provision comparable to the absolute right of inspection provided by
the California General Corporation Law to certain shareholders.


DIVIDENDS AND REPURCHASES OF SHARES


<TABLE>
<CAPTION>
                   California                                              Delaware
<S>                                                    <C>
Generally, under the California General                Delaware law permits a corporation to declare
Corporation Law, a California corporation may          and pay dividends out of surplus or if there is
pay dividends out of retained earnings if, (1)         no surplus, out of net profits for the fiscal
the assets, excluding goodwill and certain other       year as long as the amount of capital of the
assets, of the corporation are at least equal to       corporation following the declaration and
1.25 times its liabilities, excluding certain          payment of the dividend is not less than the
deferred credits, and (2) the current assets of        aggregate amount of the capital represented by
such corporation are at least equal to its             the issued and outstanding stock of all classes
current liabilities or 1.25 times its current          having preference upon the distribution of
liabilities if the average of the earnings of          assets. In addition, Delaware law generally
such corporation before taxes and interest             provides that a corporation may redeem or
expense for the two preceding fiscal years was         repurchase its shares only if the capital of the
less than the average of the interest expense of       corporation is not impaired and such redemption
such corporation for such fiscal years. In             or repurchase would not impair the capital of
addition, the ability of a California                  the corporation.
corporation to pay dividends is restricted by
certain limitations for the benefit of certain
preference shares.
</TABLE>


                                       17
<PAGE>   620

STOCKHOLDER VOTING


<TABLE>
<CAPTION>
                   California                                              Delaware
<S>                                                    <C>
Generally requires that a majority of the              Generally requires that a majority of the
stockholders of both acquiring and target              shareholders of both acquiring and target
corporations approve statutory mergers.                corporations approve statutory mergers.
Does not require a stockholder vote of the             Does not require a stockholder vote of the
surviving corporation in a merger if:                  surviving corporation in a merger, unless the
                                                       corporation provides otherwise in its
- such stockholders shall own, immediately after       certificate of incorporation, if:
  the merger, equity securities, not including
  any warrants or similar rights to purchase           - the merger agreement does not amend the
  such equity securities, of the surviving or            existing certificate of incorporation,
  acquiring corporation, or
                                                       - each share of the stock of the surviving
  - a parent party possesses more than                   corporation outstanding immediately before the
    five-sixths of the voting power of the                 effective date of the merger is to be
    surviving or acquiring corporation or parent           identical outstanding or treasury share of
    party.                                                 the surviving corporation after the merger,
                                                           and
However, California law does require that the
principal terms of a merger be approved by the         - either no shares of common stock of the
outstanding shares of the surviving corporation          surviving corporation and no shares,
if any amendment is made to its articles which           securities or obligations convertible into
would otherwise require approval.                        such stock are to be issued or delivered under
                                                         the plan of merger, or the authorized unissued
                                                         shares or the treasury shares of common stock
                                                         of the surviving corporation to be issued or
                                                         delivered under the plan of merger plus those
                                                         initially issuable upon conversion of any
                                                         other shares, securities or obligations to be
                                                         issued or delivered under such plan do not
                                                         exceed 20% of the shares of common stock of
                                                         the surviving corporation outstanding
                                                         immediately prior to the effective date of the
                                                         merger.
</TABLE>



     With certain exceptions, the California General Corporation Law requires
that a merger, sale of assets or similar transaction be approved by a majority
vote, and in some cases a two-thirds vote, of each class of shares outstanding.
The Delaware General Corporation Law does not generally require such class
voting, except in certain transactions involving an amendment to the certificate
of incorporation that adversely affects a specific class of shares or where the
class of securities designates such a right. However, Delaware law does require
that a sale of all or substantially all of the assets of a corporation be
approved by a majority of the outstanding voting shares of the corporation
transferring such assets.


                                       18
<PAGE>   621

STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS UNDER DELAWARE LAW

     In recent years, a number of states have adopted special laws designed to
make certain kinds of "unfriendly" corporate takeovers, or other transactions
involving a corporation and one or more of its significant shareholders, more
difficult. Under Section 203 of the Delaware General Corporation Law, certain
"business combinations" with "interested stockholders" of Delaware corporations
are subject to a three-year moratorium unless specified conditions are met.


     Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the date
that such person or entity becomes an interested stockholder. With certain
exceptions, an interested stockholder is:



     - a person or entity who or which owns, individually or with or through
       certain other persons or entities, 15% or more of the corporation's
       outstanding voting stock, including any rights to acquire stock pursuant
       to an option, warrant, agreement, arrangement or understanding, or upon
       the exercise of conversion or exchange rights, and stock with respect to
       which the person has voting rights only,



     - is an affiliate or associate of the corporation and was the owner,
       individually or with or through certain other persons or entities, of
       fifteen percent or more of such voting stock at any time within the
       pervious three years, or



     - is an affiliate or associate of any of the foregoing.



     For purposes of Section 203, the term "business combination" is defined
broadly to include:



     - mergers with or caused by the interested stockholder;



     - sales or other dispositions to the interested stockholder, except
       proportionately with the corporation's other stockholders of assets of
       the corporation or a direct or indirect majority-owned subsidiary equal
       in aggregate market value of 10% or more of the aggregate market value of
       either the corporation's consolidated assets or all of its outstanding
       stock;



     - the issuance of transfer by the corporation or a direct or indirect
       majority-owned subsidiary of stock of the corporation or such subsidiary
       to the interested stockholder, except for certain transfers in a
       conversion or exchange or a pro rata distribution or certain other
       transactions, none of which increase the interested stockholder's
       proportionate ownership of any class or series of the corporation's or
       such subsidiary's stock or of the corporation's voting stock; or



     - receipt by the interested stockholder, except proportionately as a
       stockholder, directly or indirectly, of any loans, advances, guarantees,
       pledges or other financial benefits provided by or through the
       corporation or a subsidiary.


     The three-year moratorium imposed on business combinations by Section 203
does not apply if:

     - prior to the date on which such stockholder becomes an interested
       stockholder the board of directors approves either the business
       combination or the transaction that resulted in the person or entity
       becoming an interested stockholder,

     - upon consummation of the transaction that made him or her an interested
       stockholder, the interested stockholder owns at least eighty-five percent
       of the

                                       19
<PAGE>   622


       corporation's voting stock outstanding at the time the transaction
       commenced, excluding from the eighty-five percent calculation shares
       owned by directors who are also officers of the target corporation and
       shares held by employee stock plans that do not give employee
       participants the right to decide confidentially whether to accept a
       tender or exchange offer, or


     - on or after the date such person or entity becomes an interested
       stockholder, the board approves the business combination and it is also
       approved at a stockholder meeting by sixty-six and two-thirds percent of
       the outstanding voting stock not owned by the interested stockholder.

     Section 203 only applies to certain publicly held corporations that have a
class of voting stock that is:

     - listed on a national securities exchange,

     - quoted on an interdealer quotation system of a registered national
       securities association, or

     - held of record by more than 2,000 stockholders.


     Under certain circumstances, Section 203 of the Delaware General
Corporation Law may make it more difficult for a person who would be an
"interested stockholder" to effect various business combinations with a
corporation for a three year period.



     There is no provision in the California General Corporation Law equivalent
to Section 203 of the Delaware General Corporation Law. However, under the
California General Corporation Law, if an "interested party proposal" exists,
then, (1) an affirmative opinion in writing as to the fairness of the
consideration to the stockholders of such corporation must be delivered to
stockholders of such corporation, and (2) such stockholders must be (a) informed
of certain later tender offers or written proposals for a reorganization or sale
of assets made by other persons, and (b) afforded a reasonable opportunity to
withdraw any vote, consent or proxy previously given or shares previously
tendered in connection with the interested party proposal. An interested party
proposal exists if a party that makes a tender offer or proposes to acquire a
corporation by a reorganization or certain sales of assets is controlled by such
corporation or is controlled by an officer or director of such corporation, or
if a director or executive officer of such corporation has a material financial
interest in such party.


INTERESTED DIRECTOR TRANSACTIONS


     Under the laws of both California and Delaware, contracts or transactions
between a corporation and one or more of its directors, or between a corporation
and any other entity in which one or more of its directors are directors or have
a financial interest, are not void or voidable because of such interest or
because such director is present at a meeting of the board which authorizes or
approves the contract or transaction, provided that particular conditions, such
as obtaining the required approval and fulfilling the requirements of good faith
and full disclosure, are met. The conditions are similar under the California
General Corporation Law and the Delaware General Corporation Law. Under the
California General Corporation Law, either (1) the stockholders or shareholders
or the board of directors must approve any such contract or transaction in good
faith after full disclosure of the material facts and, in the case of board
approval other than for a common directorship, the California General
Corporation Law requires that the contract or transaction must also be "just and
reasonable" to the corporation, or (2) the contract or transaction must have
been "fair," in Delaware, or, in the case of a common directorship,

                                       20
<PAGE>   623


in California, "just and reasonable," as to the corporation at the time it was
approved. The California General Corporation Law explicitly places the burden of
proof of the just and reasonable nature of the contract or transaction on the
interested director.



     Under the Delaware General Corporation Law, if board approval is sought,
the contract or transaction must be approved by a majority of the disinterested
directors, even though less than a majority of a quorum. Under the California
General Corporation Law, if stockholder approval is sought, the interested
director is not entitled to vote his or her shares at a stockholder meeting with
respect to any action regarding such contract or transaction. If board approval
is sought, the contract or transaction must be approved by a majority vote of a
quorum of the directors, without counting the vote of any interested directors,
except that interested directors may be counted for purposes of establishing a
quorum.


APPRAISAL/DISSENTERS' RIGHTS

     Under both Delaware and California law, a stockholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal/dissenters' rights by which such
stockholder may receive cash in the amount of the fair market value of his or
her shares in lieu of the consideration he or she would otherwise receive in the
transactions. Under both Delaware and California law, such fair market value is
determined exclusive of any element of value arising from the accomplishment or
expectation of the merger or consolidation.


<TABLE>
<CAPTION>
                   California                                              Delaware
<S>                                                    <C>
Under California law, in connection with the           Appraisal rights are not available (a) with
merger of a corporation for which the approval         respect to the sale of all or substantially all
of outstanding shares is required, dissenting          of the assets of a corporation, (b) with respect
stockholders of such corporation who follow            to a merger or consolidation by a corporation,
prescribed statutory procedures are entitled to        the shares of which are either listed on a
receive payment of the fair market value of            national securities exchange, designated as a
their shares. No such rights are available,            national market system security on an
however, if the shares are listed on a national        interdealer quotation system by the National
securities exchange certified by the California        Association of Securities Dealers, Inc. or are
Commissioner of Corporations or appear on the          held of record by more than 2,000 holders, if
Federal Reserve Board list of over-the-counter         such stockholders receive only shares of the
margin stocks unless (1) such shares are subject       surviving corporation or shares of any other
to certain restrictions on transfer, or (2) the        corporation that are either listed on a national
holders of at least five percent of such shares        securities exchange, designated as a national
elect dissenter's rights. In connection with the       market system security on an interdealer
merger, holders of DaMert common stock may, by         quotation system by the National Association of
complying with required procedures, be entitled        Securities Dealers, Inc. or held of record by
to dissenters' rights under the California             more than 2,000 holders, plus cash in lieu of
General Corporation Law. See "Rights of                fractional shares of such corporations, or (c)
Dissenting Stockholders."                              to stockholders of a corporation surviving a
                                                       merger if no vote of the stockholders of the
                                                       surviving corporation is required to approve the
                                                       merger under Delaware law.
</TABLE>


                                       21
<PAGE>   624

           MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.


     The following discussion should be read in conjunction with the DaMert's
audited consolidated financial statements and footnotes appearing elsewhere in
the prospectus/ proxy statement.


OVERVIEW


     DaMert's business is described in detail in the "Description of DaMert's
Business" section of this prospectus/proxy statement supplement.



RESULTS OF OPERATIONS OF DAMERT


     The following table sets forth, for the periods indicated, the relative
percentage that certain income and expense items bear to net sales.


<TABLE>
<CAPTION>
                                       YEARS ENDED:                       SIX MONTHS ENDED:
                           -------------------------------------   -------------------------------
                           DECEMBER 31, 1998   DECEMBER 31, 1997   JUNE 30, 1999    JUNE 30, 1998
                           -----------------   -----------------   --------------   --------------
                                PERCENT             PERCENT           PERCENT          PERCENT
                           -----------------   -----------------   --------------   --------------
<S>                        <C>                 <C>                 <C>              <C>
Sales....................       100.00%             100.00%            100.00%          100.00%
Cost of Sales............         62.8                60.0               59.4             63.3
                                ------              ------             ------           ------
Gross Profit.............         37.2                40.0               40.6             36.7
                                ------              ------             ------           ------
Operating Expenses
  Product
    Development..........          8.0                 5.5               10.1             13.1
  Marketing and Sales....         14.6                14.9               17.5             20.0
  General and Admin......         27.5                18.6               34.7             35.8
                                ------              ------             ------           ------
    Total Op. Exp........         50.1                39.0               62.3             68.9
                                ------              ------             ------           ------
Income (loss) before
  taxes..................        (12.8)                1.0              (21.8)           (32.1)
Provision for income
  taxes..................          0.1                 0.0                0.0              0.0
                                ------              ------             ------           ------
Net income (loss)........        (12.9)                1.0              (21.8)           (32.1)
                                ------              ------             ------           ------
</TABLE>



SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED


JUNE 30, 1998



     Net Sales.  For the six month period ended June 30, 1999, net sales were
$2,574,001 an increase of $77,139 or 3.1%, compared to $2,496,862 for the six
month period ended June 30, 1998 as a result of an increase in sales volume. The
domestic portion of these sales for this period increased 14.9%, from $1,946,351
in 1998 to $2,236,022 in 1999. This increase resulted from restructuring the
domestic sales management team to have more regional contact with accounts.
International sales declined 38.6% during this period, from $550,511 in 1998 to
$337,979 in 1999. Large product purchases made by international distributors in
the last quarter of 1998 minimized demand in 1999.



     Gross Profit.  For the six months ended June 30, 1999, gross profit was
$1,043,779, 40.6% of sales, an increase of $126,405 or 13.8% compared to gross
profit of $917,374, 36.7% of sales, for the same period in 1998. International
sales were 13.1% of sales as of June 30, 1999 compared to 22.0% as of June 30,
1998. Since these sales are highly discounted, less relative contribution leads
to higher gross profit. Additionally, cost control in the shipping and inventory
control departments contributed to higher gross profit.


                                       22
<PAGE>   625


     General and Administrative Expenses.  For the six months ended June 30,
1999, general and administrative expenses (G&A), which includes interest
expense, were $892,852, a decrease of $1,755 or 0.2%, compared to G&A expenses
of $894,607 for the same period in 1998. Cost control in each department's fixed
overhead lowered expenses in 1999 relative to 1998. Interest expenses for the
period ending June 30, 1999 were $106,633, an increase of $22,191 or 26.3%
compared to interest expenses of $84,442 for the same period in 1998. Higher
borrowing was necessitated by lower receivables at year end 1998 compared to
year end 1997.



     Product development and Marketing Costs.  For the six months ended June 30,
1999, product development costs were $260,978, a decrease of $65,018 or 19.9%,
compared to product development costs of $325,996 for the same period in 1998.
This decrease is due to staffing reductions and salary cuts. For the six months
ended June 30, 1999, marketing costs were $450,558, a decrease of $48,744 or
9.8%, compared to marketing costs of $499,302 for the same period in 1998. This
decrease is due also to staffing reductions.



     Net Income.  For the six months ended June 30, 1999, the net loss was
$560,609, an increase of $241,922 or 30.1% over a net loss of $802,531 for the
same period in 1998. Because of the seasonal nature of the business, profit is
not expected until the third quarter.



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



     Net Sales.  Net sales for 1998 were $6,837,280, a decrease of $2,039,182,
or 23% from $8,876,462 in 1997. This decline was due primarily to lost sales
orders and a reduction in sales volume that resulted from terminating the
national sales manager in first quarter of 1998 and not finding suitable
replacement personnel until November 1998, when the holiday buying season was
essentially over.



     Gross Profit.  Gross profit for 1998 was $2,545,426, a decrease of
$1,002,583, or 28.3% from $3,548,009 million in 1997. Margins decreased from
40.0% to 37.2%. This was due to a higher percentage of international sales,
which are highly discounted, relative to total sales, 17.7% in 1998 compared to
15.9% in 1997. The international sales volume was not affected by the
termination of the national sales manager since it was not under his
jurisdiction.



     Operating Expenses, including interest expense.  Operating expenses which
include product development, marketing and sales, G&A, and interest expenses for
1998 were $3,423,513 a decrease of $33,308, or 1% from $3,456,821 in 1997.
Higher product development expenses of $58,068 in 1998 consisted of an increase
of $33,500 due the expansion of our game product category and an increase of
$24,568 due to the hiring of additional personnel. Marketing and sales expense
decreased in 1998 due to a $101,000 reduction in sales commissions paid because
of lower revenue, a reclassification of the $135,000 salary of the marketing
director to G&A expense when he was promoted to President, and a savings of
about $100,000 from the termination of the national sales manager. G&A expenses
increased in 1998 due to the salary reclassification mentioned above, a $31,594
increase in interest expense, and higher consulting fees of $28,000 in
preparation for the sale of the business to a third party. Lower receivables
necessitated higher borrowing to meet working capital requirements.


                                       23
<PAGE>   626

SEASONALITY AND QUARTERLY FLUCTUATIONS


     The demand for DaMert's retail product has a large seasonal component, with
a majority of sales to retailers during the 3rd and 4th fiscal quarters.
Quarterly revenue breakdowns, stated in % of total sales, are as follows: 1st
quarter, 16-20%; 2nd quarter, 16-20%; 3rd quarter, 30-34%, 4th quarter, 30-34%.


LIQUIDITY AND CAPITAL RESOURCES

     The seasonality of sales has made credit availability an important issue.
It is necessary to build inventory during the summer in anticipation of the
heavy fall buying by retailers. However, receivables are at their lowest in the
first two quarters of the year when the buying decisions for product and
materials must be made. On May 15, 1998, DaMert renewed an annual bank revolving
line of credit of $2,500,000 to finance working capital needs. On August 15,
1998, a short term loan of $500,000 was added to DaMert's credit facilities.
This loan was due December 15, 1998. It was rewritten into a $400,000 loan due
January 30, 1999. There is currently $300,000 remaining on this note.


     Accounts receivables were $925,590 on December 31, 1998, compared with
$1,765,871 on December 31, 1997, a decrease of $840,281. This decrease was due
primarily to lower sales in 4th quarter 1998 than in 4th quarter 1997,
$2,157,600 in 1998 compared to $3,041,200 in 1997.



     DaMert had negative cash flow from operating activities of $226,654 for the
six months ended June 30, 1999, as compared to negative operating cash flow for
the six months ended June 30, 1998 of $118,422 as an increase of inventory to
prepare DaMert for its busy season.



     During the six months ended June 30, 1999 the company purchased $67,827 of
property and equipment. This number compares to $91,517 spent on plant and
equipment for the six months ended June 30, 1998.



     DaMert generated $426,547 from financing activities during the six months
ended June 30, 1999 compared to $26,905 used in financing activities during the
same period in 1998. The cash generating from financing activities came from the
net borrowed from the line of credit in the amount of $636,543 with repayments
on the term loan in the amount of $209,996 in 1999. DaMert made payments of
$12,699 on the line of credit, borrowed $18,794 on term note and distributed
$33,000 to stockholders during the same period of 1998.



     DaMert had negative cash flow from operating activities of $160,714 for the
year ended December 31, 1998, as compared to negative operating cash flow for
the year ended December 31, 1997 of $664,330. This was primarily due to lower
sales and increased speed of accounts receivable collections during 1998,
compared to 1997.



     DaMert invested $191,245 in additions to property, plant and equipment for
the year ended December 31, 1998, compared to 189,618 for the year ended
December 31, 1997.



     DaMert generated $403,943 from financing activities during the year ended
December 31, 1998 compared to $846,337 during the year ended December 31, 1997.
The cash generating from financing activities came from payments on the line of
credit in the amount of $45,690, borrowing on the term loan of $502,698,
repayments on the term loan in the amount of $20,065 and distributed $33,000 to
stockholders during 1998. DaMert borrowed $1,051,402 on the line of credit,
repaid $20,065 on the term note and distributed $185,000 to stockholders during
1997.


                                       24
<PAGE>   627


     DaMert had the ability to borrow up to $2,500,000 under a revolving line of
credit note with its bank that expired on May 15, 1999. The bank approved an
extension to July 31, 1999, but has not granted any further extensions. However,
the bank has verbally agreed to not call the loan, pending payment or
refinancing called for in the merger. The revolving line of credit note bears
interest at the bank's prime rate plus 0.75%. The revolving line of credit note
is secured by a first priority security interest in all of DaMert's accounts
receivable and other rights of payment, general intangibles and inventory. As
part of the revolving line of credit note, DaMert has the ability to obtain
letters of credit in the aggregate amount of $250,000 outstanding at any one
time. This feature has been eliminated in the credit line extension dated May
15, 1999. The indebtedness of DaMert under the revolving line of credit note is
guaranteed pursuant to a personal guarantee of Frederick A. DaMert. As stated
above, an additional loan of $400,000 was written December 15, 1998. This Loan
was due January 30, 1999. The bank approved an extension until June 30, 1999,
but has granted no further extensions and the loan is technically in default.
This loan bears interest at the bank's prime rate plus 3.75% and is secured by a
first priority security interest in all of DaMert's accounts receivable and
other rights of payment, general intangibles and inventory. The indebtedness of
DaMert under the Loan was personally guaranteed by Frederick A. DaMert. There is
an outstanding balance of $300,000 on this Loan.



     As of December 31, 1997, DaMert was not in compliance with certain
covenants required by the credit agreement with its bank. The bank subsequently
waived compliance with these covenants for the year ended December 31, 1997. As
of June 30, 1999, DaMert was not in compliance with certain covenants required
by its credit agreement with its bank. All interest payments are current.



     DaMert had previously borrowed $80,260 in a Term Loan to finance office
equipment for the Berkeley facility. This Term Loan was financed with a first
priority security interest in the equipment and bears interest at the bank's
prime rate plus 0.75%. This loan is current and as of December 31, 1998 and June
30, 1999 had an outstanding principal balance of $29,451 and $19,455,
respectively.


     The agreement with the bank does not allow DaMert to merge or consolidate
with any other entity unless the bank otherwise consents in writing. The bank
will agree to the Merger contingent on refinancing of the current credit
facilities by New Futech.


     DaMert has also borrowed funds from Frederick A. DaMert, the founder. See
"Certain Relationships and Related Transactions", in this prospectus/proxy
statement supplement.


INFLATION

     The Company does not believe inflation has a significant impact on its
operations.

YEAR 2000


     DaMert utilizes a local area network system of computers and a commercially
produced software package called Macola. Software Y2K upgrades provided by
Macola have not yet been installed. Some computers are not Y2K compliant and
will need to be replaced. Cost estimates for replacement of dated hardware are
currently in process. Management thinks that replacement costs will be
approximately $50,000 and will install software Y2K upgrades provided by Macola
when DaMert has sufficient funds. DaMert does not believe that failure of any
vendor to be Year 2000 compliant would have a material impact on the company.

                                       25
<PAGE>   628

SAFE HARBOR DISCLOSURE: FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS


     This prospectus/proxy statement and each related prospectus/proxy statement
supplement contains or incorporates by reference forward-looking statements. The
factors identified above in this section are important factors, but not
necessarily all important factors, that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, New Futech or any of the merging companies.


     Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, New Futech
cautions that, while such assumptions or bases are believed to be reasonable and
are made in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending upon the circumstances. We cannot promise that
statements of expectation or belief will be achieved or accomplished. The words
"believe," "expect," and "anticipate" and similar expressions identify forward-
looking statements throughout these materials.

                                       26
<PAGE>   629

                        DESCRIPTION OF DAMERT'S BUSINESS

GENERAL


     DaMert's principal place of business is located at 1609 Fourth Street,
Berkeley, California 94710. The Company's telephone number is (510) 524-7400.
DaMert creates and produces affordable, high quality gifts and toys that
entertain, educate and endure, incorporating themes that capture the magic of
imagination, the wonders of nature and science, the beauties of art and the
mysteries of space. DaMert markets approximately 200 products to a nationwide
customer base of 8000 accounts and internationally distributes to over 48
countries.


     DaMert was founded by Fred DaMert on February 5, 1973 in San Rafael,
California. It was incorporated in the State of California on January 1, 1979,
and elected subchapter-S status on January 1, 1989. Up until its acquisition by
New Futech, DaMert has been self capitalized and wholly owned by Fred DaMert and
his wife Gail Patton DaMert.

     In September of 1998, frustrated by the limitations of its internally
generated capital base, DaMert began to actively seek a strategic partnership
with an external company or investors. DaMert engaged an outside consultant to
assist and advise in this scenario.

PRODUCTS


     DaMert focuses on six categories of about 200 affordable toy and gift
products designed for the specialty toy, museum and gift markets:
Puzzles/Brainteasers, Glow-In-The-Dark, Activity Kits, Great Gizmos, Games and
Rainbows. These products are targeted primarily to children ages 6-12. However,
many of these items are designed to be enjoyed by adults and children together.


     Approximately 35% of current sales are derived from Puzzles/Brainteasers,
including the cardboard Triazzle Puzzle Collection and the plastic 3D Slide
Puzzle Collection. Triazzle(R) Puzzles, a significant volume contributor since
1991, are manufactured under a long-term exclusive license from inventor Dan
Gilbert, through December 2002.

     Glow represents 26% of sales, followed by Great Gizmos and Activity Kits,
covering a broad variety of science and discovery topics, together totaling 17%.
Games, a relatively new category, has grown to approximately 12% of total sales
with new product expansion underway. Prisms, diffraction and other Rainbow
themed items comprise approximately 9% of sales.

     DaMert has a significant R&D staff but also works in conjunction with
outside inventors and product designers throughout the country. DaMert products
have been the recipient of numerous excellence awards including the National
Parenting Center Seal of Approval, Parent's Choice, Gold Seal of Excellence from
The Oppenheim Toy Portfolio, and Great American TV Toy Test. In 1998 alone,
DaMert was included in Dr. Toy's 100 Best Children's Products, Dr. Toy's Best
Vacation Products, Child Magazine Best Toys of the Year, and was the recipient
of the prestigious Family Fun's T.O.Y. (Toy of the Year) for its proprietary
game Impact Zone.

SALES, MARKETING AND DISTRIBUTION


     DaMert marketing and overall business strategy is based on creating
excellence in its niche. In the product area, this means that DaMert is placing
more emphasis and support


                                       27
<PAGE>   630


on creating a DaMert "brand" that crosses all six product categories. To
accomplish this goal, DaMert introduced new packaging in 1998 that helped build
recognition of DaMert as a key player in the toy, museum and gift retail market.
Its reputation for products that blend fun with education created significant
demand for custom orders from retailers such as The Nature Company/Discovery
Channel Stores, Natural Wonders, Warner Bros.' retail stores, the Smithsonian
catalog, and most recently, Restoration Hardware.



     However, DaMert's formula for success goes beyond its products. Its prices
are kept within an affordable range of $5 to $25 for retail stores and catalogs.
This price-value ratio has enabled DaMert to prosper through recessions because
its products offer more value -- more hours of fun and learning -- for the same
price as competing products.



     DaMert sells products to a balanced and broad range of accounts including
museums, zoos, aquariums, specialty toy and gift retailers, traditional and
electronic catalogs, prominent national chains, plus an international
distribution network which reaches over 48 countries. DaMert currently
distributes products to over 4,000 retailers nationwide, handling many larger
accounts directly. Other retailers are covered by a nationwide sales network of
approximately 100 representatives. DaMert's domestic sales effort is managed by
three internal regional directors. The internal team is supported by a small
customer service staff responsible for order processing and telemarketing.
DaMert also attends major gift and toy trade shows, and uses public relations
and trade advertising to increase awareness and sales.



     DaMert's domestic market enjoys a continued popularity for science and
learning toys as retail opportunities evolve and expand. A growing number of
specialty retail chains are thriving with this merchandising platform, including
Discovery Channel Stores, Learning Express, LeamingSmith, Natural Wanders,
Noodle Kidoodle, Zany Brainy and World Of Science. These segments comprise over
600 total locations nationwide.



     Electronic commerce, or retailers selling products on the Internet, has
emerged in the toy segment over the last 12 months, and DaMert has opened
several electronic commerce accounts including EToy.com, Amazon.com,
Toysmart.com and Red Rocket.com, a division of Nickelodeon. At this time, DaMert
also promotes its products through its own website but is not currently offering
them for direct consumer purchasing.



     In 1998, for the first time in DaMert's 26 year history, DaMert allowed
selective testing of a few specialty toy products at Target Stores. The success
of this venture has led to product expansion in Target in 1999.



     DaMert began international distribution of its product line in 1992. Over
the last several years, popularity of the product line grew throughout the
international community. DaMert currently has distribution in over 48 countries
around the world.


     International sales comprised 18% of total sales in 1998, predominantly
through key distribution agreements in the major industrial countries. Volume
purchases, significant discounts and factory-direct shipping are common to major
distributors in this business segment, with a common strategy to replicate
American retail price points in all foreign markets.

CUSTOMERS

     DaMert had over 4200 active customers in 1998. The single largest customer
represented 5.93% of sales in 1998 as compared to 2.91% of sales in 1997. The
next largest customer represented 4.67% of sales in 1998 and 4.69% of sales in
1997. Approximately

                                       28
<PAGE>   631

80% of sales were represented by 622 customers in 1998 as compared to 677
customers in 1997.

MANUFACTURING


     DaMert produces the majority of its products by subcontracting with a
number of independent factories located in China and Taiwan. Less than 5% of the
products are produced domestically. One independent agent is responsible for
approximately 40% of the foreign manufacturing which is spread out over many
different factories. A direct relationship between DaMert and another
manufacturer accounts for approximately another 25% of its overseas
manufacturing. Some customers require direct shipments from these factories.
However, approximately 95% of manufactured products are shipped to DaMert.
Certain minimum order requirements necessitate holding inventory in the Berkeley
warehouse in advance of expected retail sales. Most payments to factories are
made by wire transfer upon confirmation of shipment. However, DaMert's loan
facility allows a line of credit to be used for certain transactions.


SEASONALITY


     The demand for DaMert's retail product has a large seasonal component, with
a majority of sales to retailers during the 3rd and 4th fiscal quarters. DaMert
experiences 32-40% of its sales in the first half of the year and 60-68% in the
second half of the year.


BACKLOG


     Due to the high seasonal demand of DaMert's business, all December orders
in the system were shipped by December 18, 1998. As a matter of accounting
policy, all back orders of value less than $40 were cancelled. There were no
significant cancellations due to product unavailability. Future orders, due
January 1, 1999 and beyond, in the system as of December 31, 1998, were
$176,731, an increase of $79,956 or 82.6%, from $96,775 of future orders on
December 31, 1997.


PRODUCT DESIGN AND SELECTION


     DaMert has established a reputation for product innovation in the area of
nature, science and learning toys and gifts. Internally, DaMert has created a
team of extremely capable and inventive concept and product developers. However,
over the years DaMert has built a reputation among independent innovators as a
company who can maximize their ideas in fair, mutually beneficial relationships.
This reputation, coupled with DaMert's location in the creatively acclaimed San
Francisco Bay Area, results in a continuous flow of ideas from external sources.
DaMert works with these "creative partners" in a variety of ways including
licensing, purchase of the concept, or exclusive purchase of the manufactured
product.



     DaMert is fundamentally market-oriented and product driven. Fred and Gail
DaMert, as well as the four operating executives, participate fully in the
product development process. This process starts with the creative idea and
carries all the way into product introduction and sales, and inventory
management and quality control.


COMPETITION


     DaMert strives to be a leading innovator in each of its six major product
categories, introducing 40 to 50 new additions annually. Because of the
diversity of its six product categories, DaMert has competitors in each of these
areas. Competition in DaMert's


                                       29
<PAGE>   632

market is defined primarily as competing for the business of the same retailers.
DaMert identifies its key competitors in each product category as follows:


<TABLE>
<CAPTION>
             Product Category                           Competitors
             ----------------                           -----------
<S>  <C>                                     <C>
(1)  Puzzles/Brainteasers                    Binary Arts and Bedazzled
(2)  Glow-in-the-Dark                        Great Explorations and
                                             Illuminations
(3)  Activity Kits                           Creativity for Kids and Curiosity
                                             Kits
(4)  Great Gizmos                            Wild Planet
(5)  Rainbows                                Lightrix and White Eagle
(6)  Games                                   University Games and Briarpatch
</TABLE>



     DaMert believes that its unique mix of product categories provides
competitive strength in two key ways. First, DaMert offers cross-merchandising
opportunities among the categories, as well as strong thematic presentations
including space, ocean and insects, allowing retailers to offer a broad range of
merchandise. DaMert further enhanced these merchandising opportunities in 1998
when it began rolling out a comprehensive look for all packaging and
presentation material, which tied together the product categories in an attempt
to build stronger overall brand recognition and preference. The second
competitive advantage offered by DaMert is the retailer's opportunity to
consolidate vendors and order a wide variety of merchandise from one place. This
is further supported by DaMert's low minimum order requirement and low to no
minimum case quantity requirement on many items.


PATENTS, TRADEMARKS AND LICENSES


     In the normal course of business DaMert makes every effort to patent or
trademark internally developed concepts as well as the licensing of patents and
trademarks from submissions provided by outside developers. DaMert currently has
no fantasy character license. Although the procurement of patents, trademarks
and licenses does not eliminate the possibility of infringement it has proven to
be an effective deterrent to competitors.


     Licenses for rights to use patents and trademarks from outside product
designers typically run for two to five years, are world wide in scope, have
automatic renewals and are transferable in the event of a change in ownership of
DaMert Company.

GOVERNMENT REGULATIONS


     DaMert is subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Products Safety Acts. Those
laws empower the Consumer Products Safety Commission (the "CPSC") to protect
children from hazardous products. The CPSC has the authority to exclude from the
market articles which are found to be hazardous and can require a manufacturer
to repurchase such products under certain circumstances. Any such determination
by the CPSC is subject to court review. Similar laws exist in some states and
cities in the United States and in many jurisdictions throughout the world.
DaMert endeavors to comply with all applicable regulations through a program of
quality inspections and product testing. DaMert maintains product liability
insurance in the amount of $4,000,000.


EMPLOYEES


     As of December 31, 1998, DaMert had 31 full-time employees, all in its
Berkeley facility, consisting of 18 in marketing, sales and administration, 8 in
shipping and 5 in


                                       30
<PAGE>   633

product design and development. Seasonal warehouse personnel are hired in the
summer and fall to assist with the greater volume of orders being shipped.

PROPERTIES


     On July 27, 1995, DaMert entered into a six-year lease commencing December
1, 1995, for 32,000 square feet of office and warehouse space in a building
located at 1609 Fourth Street, Berkeley, California (the "Facility"). This
leased facility is located in a mixed industrial, retail and residential area 15
miles east of San Francisco. It is divided into a 24,000 square feet of
warehouse and 8,000 square feet of office. DaMert feels that the facility will
meet its foreseeable requirements.



     The lease provides for one six-year extension option. The base monthly rent
for the initial six-year term is fixed at $23,295. Rent for the option period
shall be set at the then fair market rental rate for a similar industrial gross
lease. In addition to the base rent, DaMert is liable for its share of any
increase in operating cost over the base year operating expenses. Future minimum
rental payments per year for the lease of the facility are $279,540 for 1999
through 2000 and $256,245 for 2001. The lease grants DaMert a right of first
refusal to lease additional portions of the building which become available.



     Pursuant to the lease, Fred DaMert entered into a lease guaranty with the
landlord. Under the terms of the lease guaranty, Fred DaMert has guaranteed the
obligations of DaMert under the lease for the initial six-year term of the
lease. If there is a change in control of DaMert, the new shareholders would
have to execute a similar lease guaranty in order for Fred DaMert to be released
from the current lease guaranty.


LEGAL PROCEEDINGS


     There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which DaMert is a party, or of
which, any of its property is subject.


                                       31
<PAGE>   634

                               DAMERT MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

     The following table sets forth information regarding DaMert's executive
officers and directors as of April 1, 1999:


<TABLE>
<CAPTION>
NAME                                 AGE                   TITLE
----                                 ---                   -----
<S>                                  <C>    <C>
Frederick A. DaMert................  52     Chairman of the Board and Director
                                            Chief Executive Officer and
Gail Patton DaMert.................  48     Director
Joyce DaMert.......................  80     Director
Lynne McDonald.....................  47     Secretary of Board and Director
Greg McVey(A)......................  45     President
Larry Waide(B).....................  45     Director of Operations
Tom Santilena......................  50     Controller and Director of Finance
</TABLE>


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


(A) Mr. McVey submitted a letter of resignation to DaMert Company effective
    September 30, 1999.



(B) Mr. Waide submitted a letter of resignation to DaMert Company effective
    April 29, 1999.



     FREDERICK A. DAMERT.  Fred DaMert is Chairman and Founder of DaMert. Since
February 1973, he has owned and operated the company and is responsible for
creating and sourcing toy and gift products. He was a Humanities major at San
Francisco State University.



     GAIL PATTON DAMERT.  Gail DaMert became a member of the Board of Directors
of DaMert shortly after her marriage to Fred DaMert in 1983. In December of
1989, she joined DaMert Company as the Director of Finance. In January 1994, she
became the Chief Executive Officer. Prior to 1989, Gail was a systems
engineering manager at Lockheed Missiles and Space Company. Gail holds a B.A.
Degree in Mathematics and Astronomy from Smith College, and a Ph.D. in Astronomy
from State University of New York at Stony Brook.


     JOYCE DAMERT.  Joyce DaMert is the mother of Fred DaMert and is retired and
living in Piedmont, California. She has served as the President of the Oakland
Museum Board and the Vice President of the Albert Baker Foundation. She has a
B.A. in Art from Pomona College.


     LYNNE MCDONALD.  Lynne McDonald was elected to the Board in January 1982
and has served as its Secretary since January 1986. She has been an employee of
DaMert since October of 1981 and has held various positions in almost all
functional areas of DaMert including administration, accounting, sales and
marketing. She is currently the Managing Supervisor for Customer Service. Lynne
holds a degree in Early Childhood Development from St. Cloud State University.



     GREG MCVEY.  Greg McVey joined DaMert in April 1992 as Director of
Marketing and Sales, with responsibility for all product development, marketing,
promotional and sales functions. He was promoted to President in September 1997.
Prior to his employment with DaMert, McVey owned his own marketing consulting
business and has held senior


                                       32
<PAGE>   635

marketing positions at Laurel Burch, Inc. and Lucky Stores, Inc. He holds a
Liberal Arts Degree in Retail Business Administration and Marketing from
Saddleback College.


     LARRY WAIDE.  Larry Waide joined DaMert in January 1991 to manage the
company's worldwide sourcing, manufacturing, engineering and distribution
functions. His industry experience includes R. Dakin & Company, Discovery Toys,
Child's Play USA and YES! Entertainment. He holds a B.A. degree in Mathematics
from California State University at Fresno.



     TOM SANTILENA.  Tom Santilena joined DaMert in June 1994. He is responsible
for all policies and procedures concerning records, finance, and accounting as
well as human resource management. Prior to DaMert, Tom was the company
controller at Laurel Burch, Inc. and Leaseway Transportation Corporation. He
majored in Accounting at Armstrong Business College.


EMPLOYMENT ARRANGEMENTS


     On April 28, 1999, DaMert entered into an employment agreement with Julie
Nunn, Director of Product Development. The agreement provides that in the event
of a change in control occurring within two years from the date of the
agreement, Nunn will continue in her present capacity with DaMert or its
successor, but her annual base salary will increase to $82,000 at the time of
the change in control. According to the employment agreement, a change of
control occurs if at least 51% of the assets of DaMert are transferred or sold
to another entity, or if DaMert is merged or consolidated with or into another
entity. Subsequent to a change in control, if Nunn's employment with DaMert or
its successor is involuntarily terminated for other than cause before the
one-year anniversary of the change in control, then DaMert or its successor will
pay Nunn four months severance pay at the rate of her then current base salary.
It is the intent of New Futech to honor the agreement in its entirety.



     In 1995, DaMert established a 401K Profit Sharing Plan ("401K") for the
benefit of the employees of DaMert. Under the provisions of the 401K, employees
may make contributions on a tax deferred basis to their 401K account, up to the
legal limits provided for by United States income tax regulations. DaMert makes
a non-elective matching contribution of 10% of the employee's salary deferral.
Participants are immediately vested in the balance of their matching account.
DaMert may also make discretionary contributions at the discretion of the board
of directors. Such contributions are allocated between participants of the 401K
based on a pre-stated formula. Participants become vested in such discretionary
contributions as follows: 20% after two years of service and an additional 20%
each year thereafter until a participant reaches 100% at six years or more of
service. For the years ended December 31, 1997 and December 31, 1998, DaMert
made discretionary contributions of $0 and $0, respectively.


     DaMert has a health insurance plan, which covers all employees in a non-
discriminatory manner. With the exception of the health insurance plan and the
401K, DaMert has no insurance or medical reimbursement plans covering its
officers or directors, nor do they contemplate implementing any such plans at
this time.


     DaMert has granted stock appreciation rights ("SARs") to certain employees
pursuant to a Special Executive Incentive Compensation Plan which was
established in 1995. A participating executive is awarded by the board of
directors a certain number of "units" each of which is hypothetically assumed to
represent one share of stock in the


                                       33
<PAGE>   636


company. The SARs are adjusted for dilutive events to maintain a targeted
percentage interest in DaMert until the aggregated interests of all employees
equals 20%. A participant of the plan at no time owns any capital stock of
DaMert, nor any rights of a stockholder. The SARs earn a proportionate share of
the increase in book value of DaMert, payable upon a sale of at least 50%, or a
public offering, of DaMert's stock, or the termination of employment. The
employees' interest in the SARs vest 20% annually over 5 years. At the present
time, the employees participating in this plan and their percentage interests
are as follows: Greg McVey, 4% and Larry Waide, 3%. DaMert is in the process of
repurchasing Mr. Waide's SARs. Mr. McVey's SAR's are to be exchanged for 42.10
shares of DaMert common stock prior to and in connection with the mergers.


                                       34
<PAGE>   637

                              DAMERT STOCKHOLDERS

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


     The following table sets forth information, as of June 30, 1999, with
respect to the beneficial ownership of DaMert's common stock by each person
known by DaMert to

be the beneficial owner of more than five percent of the outstanding common
stock, by each of DaMert's directors, and by the officers and directors of
DaMert as a group:

<TABLE>
<CAPTION>
                                                       SHARES OWNED      PERCENT
                  BENEFICIAL OWNERS                    BENEFICIALLY    OF CLASS(1)
                  -----------------                    ------------    -----------
<S>                                                    <C>             <C>
Security ownership of certain beneficial owners:
  Frederick A. DaMert and Gail Patton DaMert.........     1,000            100%
  as Trustees of the DaMert Trust UDT
  September 28, 1998
Security ownership of management:
  No direct ownership, but 100% beneficial
  ownership as trustees of the DaMert Trust..........     1,000            100%
All officers and directors as a group (5 persons):...     1,000            100%
</TABLE>

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


(1) Based upon 1,000 shares of common stock issued and outstanding on June 30,
    1999.


     There are no contracts or other arrangements, including any pledge of
DaMert's securities, that could result in a change in the control of the
company.

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS


     As of December 31, 1998, DaMert has borrowed an aggregate of $128,849 from
Fred DaMert. These are in the form of two promissory notes, the first dated July
1, 1987 for $58,849 and the second dated November 1, 1996 for $70,000. These
notes are paying interest at the rate of 10% per annum. They were used to
supplement working capital requirements at the time they were issued.


     On February 29, 1996, DaMert entered into an option agreement with Lynne
McDonald, a director, which restated a previous option agreement of March 9,
1989 and granted McDonald rights to acquire 52.63 shares of the common stock of
DaMert at an exercise price of $1.00. The option is exercisable in the event of
(a) disposition of 50% or more of DaMert's voting stock via transaction to any
person or persons or merger with any other entity in which the stockholders of
DaMert hold less than 50% of the surviving corporate entity or (b) prior to any
registered public offering. The rights granted pursuant to the option agreement
expire on March 3, 2024. The option agreement also contains an anti-dilution
clause to adjust the number of shares covered by the option for certain types of
transactions in DaMert's common stock. The rights to this option are personal to
Lynne McDonald and are not assignable.


     Fred and Gail DaMert will enter into employment agreements with New Futech
in connection with the merger. See "Description of the Mergers and the Merger
Agreement -- Employment Agreements with Affiliates" and "New Futech's
Management -- Employment Agreements" in the prospectus/proxy statement.


                                       35
<PAGE>   638

                                                                      APPENDIX 1

                       CALIFORNIA GENERAL CORPORATION LAW

                               DISSENTERS' RIGHTS

     1300. (a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.

     (b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:

          (1) Which were not immediately prior to the reorganization or
     short-form merger either (A) listed on any national securities exchange
     certified by the Commissioner of Corporations under subdivision (o) of
     Section 25100 or (B) listed on the list of OTC margin stocks issued by the
     Board of Governors of the Federal Reserve System, and the notice of meeting
     of shareholders to act upon the reorganization summarizes this section and
     Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
     does not apply to any shares with respect to which there exists any
     restriction on transfer imposed by the corporation or by any law or
     regulation; and provided, further, that this provision does not apply to
     any class of shares described in subparagraph (A) or (B) if demands for
     payment are filed with respect to 5 percent or more of the outstanding
     shares of that class.

          (2) Which were outstanding on the date for the determination of
     shareholders entitled to vote on the reorganization and (A) were not voted
     in favor of the reorganization or, (B) if described in subparagraph (A) or
     (B) of paragraph (1) (without regard to the provisos in that paragraph),
     were voted against the reorganization, or which were held of record on the
     effective date of a short-form merger; provided, however, that subparagraph
     (A) rather than subparagraph (B) of this paragraph applies in any case
     where the approval required by Section 1201 is sought by written consent
     rather than at a meeting.

          (3) Which the dissenting shareholder has demanded that the corporation
     purchase at their fair market value, in accordance with Section 1301.

          (4) Which the dissenting shareholder has submitted for endorsement, in
     accordance with Section 1302.

     (c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.

     1301. (a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to
purchase their shares for cash, such

                                       A-1
<PAGE>   639

corporation shall mail to each such shareholder a notice of the approval of the
reorganization by its outstanding shares (Section 152) within 10 days after the
date of such approval, accompanied by a copy of Sections 1300, 1302, 1303, 1304
and this section, a statement of the price determined by the corporation to
represent the fair market value of the dissenting shares, and a brief
description of the procedure to be followed if the shareholder desires to
exercise the shareholder's right under such sections. The statement of price
constitutes an offer by the corporation to purchase at the price stated any
dissenting shares as defined in subdivision (b) of Section 1300, unless they
lose their status as dissenting shares under Section 1309.

     (b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.

     (c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.

     1302. Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.

     1303. (a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.

     (b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or

                                       A-2
<PAGE>   640

within 30 days after any statutory or contractual conditions to the
reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.

     1304. (a) If the corporation denies that the shares are dissenting shares,
or the corporation and the shareholder fail to agree upon the fair market value
of the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152) or
notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court of
the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.

     (b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.

     (c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.

     1305. (a) If the court appoints an appraiser or appraisers, they shall
proceed forthwith to determine the fair market value per share.

     Within the time fixed by the court, the appraisers, or a majority of them,
shall make and file a report in the office of the clerk of the court. Thereupon,
on the motion of any party, the report shall be submitted to the court and
considered on such evidence as the court considers relevant. If the court finds
the report reasonable, the court may confirm it.

     (b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.

     (c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.

     (d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.

     (e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).

     1306. To the extent that the provisions of Chapter 5 prevent the payment to
any holders of dissenting shares of their fair market value, they shall become
creditors of the
                                       A-3
<PAGE>   641

corporation for the amount thereof together with interest at the legal rate on
judgments until the date of payment, but subordinate to all other creditors in
any liquidation proceeding, such debt to be payable when permissible under the
provisions of Chapter 5.

     1307. Cash dividends declared and paid by the corporation upon the
dissenting shares after the date of approval of the reorganization by the
outstanding shares (Section 152) and prior to payment for the shares by the
corporation shall be credited against the total amount to be paid by the
corporation therefor.

     1308. Except as expressly limited in this chapter, holders of dissenting
shares continue to have all the rights and privileges incident to their shares,
until the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.

     1309. Dissenting shares lose their status as dissenting shares and the
holders thereof cease to be dissenting shareholders and cease to be entitled to
require the corporation to purchase their shares upon the happening of any of
the following:

          (a) The corporation abandons the reorganization. Upon abandonment of
     the reorganization, the corporation shall pay on demand to any dissenting
     shareholder who has initiated proceedings in good faith under this chapter
     all necessary expenses incurred in such proceedings and reasonable
     attorneys' fees.

          (b) The shares are transferred prior to their submission for
     endorsement in accordance with Section 1302 or are surrendered for
     conversion into shares of another class in accordance with the articles.

          (c) The dissenting shareholder and the corporation do not agree upon
     the status of the shares as dissenting shares or upon the purchase price of
     the shares, and neither files a complaint or intervenes in a pending action
     as provided in Section 1304, within six months after the date on which
     notice of the approval by the outstanding shares or notice pursuant to
     subdivision (i) of Section 1110 was mailed to the shareholder.

          (d) The dissenting shareholder, with the consent of the corporation,
     withdraws the shareholder's demand for purchase of the dissenting shares.

     1310. If litigation is instituted to test the sufficiency or regularity of
the votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.

     1311. This chapter, except Section 1312, does not apply to classes of
shares whose terms and provisions specifically set forth the amount to be paid
in respect to such shares in the event of a reorganization or merger.

     1312. (a) No shareholder of a corporation who has a right under this
chapter to demand payment of cash for the shares held by the shareholder shall
have any right at law or in equity to attack the validity of the reorganization
or short-form merger, or to have the reorganization or short-form merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the reorganization have been legally voted in
favor thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
                                       A-4
<PAGE>   642

     (b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.

     (c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.

                                       A-5
<PAGE>   643

                                    PART II

                     INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 20.  INDEMNIFICATION OF DIRECTORS AND OFFICERS


     Section 145(a) of the Delaware General Corporation Law provides that a
Delaware corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
other than an employee by or in the right of the corporation, by reason of the
fact that he is or was a director, officer, employee or agent of the corporation
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or enterprise, against expenses,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no cause to believe his conduct was unlawful.


     Section 145(b) provides that a Delaware corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted under similar standards, except that no
indemnification may be made in respect to any claim, issue or matter as to which
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the court in which such action or suit was brought shall
determine that despite the adjudication of liability, such person is fairly and
reasonably entitled to be indemnified for such expenses which the court shall
deem proper.


     Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to in subsections (a) and (b) or in the defense or any claim, issue or
matter therein, he shall be indemnified against expenses actually and reasonably
incurred by him in connection therewith; that indemnification provided for by
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and that the corporation may purchase and
maintain insurance on behalf of a director or officer of the corporation against
any liability asserted against him or incurred by him in any such capacity or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liabilities under such Section 145. Section
102(b)(7) of the Delaware General Corporation Law provides that a corporation in
its original certificate of incorporation or an amendment thereto validly
approved by stockholders may eliminate or limit personal liability of members of
its board of directors or governing body for violations of a director's duty of
care. However, no such provision may eliminate or limit the liability of a
director for breaching his duty of loyalty, acting or failing to act in good
faith, engaging in intentional misconduct or knowingly violating a law, paying
an unlawful dividend or approving an unlawful stock repurchase, or obtaining an
improper personal benefit. A provision of this type has no effect on the
availability of equitable remedies, such as injunction or rescission, for breach
of fiduciary duty. New Futech's certificate of incorporation contains this type
of provision.


                                      II-1
<PAGE>   644


     New Futech's bylaws provide that New Futech shall indemnify officers and
directors to the full extent permitted by and in the manner permissible under
the laws of the State of Delaware.



     The holders of New Futech's capital stock or warrants to purchase capital
stock who have contractual registration rights are required to be indemnified by
New Futech against losses, claims, damages or liabilities arising out of any
untrue statement of a material fact or omission thereof in a Registration
Statement under the Securities Act of 1933. New Futech's obligation to indemnify
such holders includes the officers, directors and partners of such holders, some
of whom are currently directors of New Futech. New Futech shall not be liable
for any such indemnity to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or material
omission in reliance upon and in conformity with written information furnished
by such person to New Futech, specifically for use therein.



     The indemnification provided as set forth above is not exclusive of any
rights to which a director or officer of New Futech may be entitled. The general
effect of the foregoing provisions may be to reduce the circumstances in which a
director or officer may be required to bear the economic burdens of the
foregoing liabilities and expenses.


ITEM 21.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     (a) EXHIBITS.

     See Exhibit Index following the Signatures page which is incorporated
herein by reference.

     (b) FINANCIAL STATEMENT SCHEDULES

     Schedules have been omitted because they are not applicable or are not
required or the information required to be set forth herein is included in the
Financial Statements or Notes thereto.

ITEM 22.  UNDERTAKINGS.


     The undersigned registrant hereby undertakes:



     (1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:



        (i)  To include any prospectus required by Section 10(a)(3) of the
             Securities Act of 1933;



        (ii)  To include in the prospectus any facts or events arising after the
              effective date of the registration statement, or the most recent
              post-effective amendment thereof, which, individually or in the
              aggregate, represent a fundamental change in the information set
              forth in the registration statement. Notwithstanding the
              foregoing, any increase or decrease in volume of securities
              offered, if the total dollar value of securities offered would not
              exceed that which was registered, and any deviation from the low
              or high end of the estimated maximum offering range may be
              reflected in the form of prospectus filed with the Commission
              pursuant to Rule 424(b) if, in the aggregate, the changes in
              volume and price represent no more than a 20% change in the
              maximum aggregate offering price set forth in the "Calculation of
              Registration Fee" table in the effective registration statement;
              and


                                      II-2
<PAGE>   645


        (iii) To include any material information with respect to the plan of
              distribution not previously disclosed in the registration
              statement or any material change to such information in the
              registration statement.



     (2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona find offering
there.



     (3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.



     (4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the registrant undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.



     (5) That every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.



     (6) To respond to requests for information that is incorporated by
reference into the prospectus/joint proxy statement pursuant to Items 4, 10(b),
11 or 13 of Form S-4, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of respecting to
the request.



     (7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.



     (8) Insofar as indemnification for liabilities arising under the Act, as
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities, other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in a
successful defense of any action, suit or proceeding, is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy, as expressed in the Act, and will be governed by the final
adjudication of such issue.


                                      II-3
<PAGE>   646


     (9) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934, and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934, that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.


                                      II-4
<PAGE>   647

                                   SIGNATURES


     Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in their
capacities as officers, executives and directors of the Registrants, Futech
Interactive Products (Delaware) Inc. and Futech Toys & Games, Inc., or caused
this amendment to the registration statement to be signed on their behalf by the
undersigned, as indicated, on the dates indicated below.



FUTECH INTERACTIVE PRODUCTS (DELAWARE) INC.



<TABLE>
<CAPTION>
                      PERSON                                     TITLE                     DATE
                      ------                                     -----                     ----
<C>                                                  <S>                             <C>
               /s/ VINCENT W. GOETT*                 Chairman of the Board, Chief    October 8, 1999
---------------------------------------------------    Executive Officer and
                 Vincent W. Goett                      Director (Principal
                                                       Executive Officer)

                /s/ PAUL C. OURSLER                  President                       October 8, 1999
---------------------------------------------------
                  Paul C. Oursler

               /s/ JOSEPH K. PETTER*                 Chief Operating Officer         October 8, 1999
---------------------------------------------------
                 Joseph K. Petter

           /s/ FREDERICK B. GRETSCH, SR.             Chief Financial Officer,        October 8, 1999
---------------------------------------------------    Treasurer and Secretary
             Frederick B. Gretsch, Sr.                 (Principal Financial and
                                                       Accounting Officer)

              /s/ CARL E. VOIGT, IV*                 Vice President of Games/Toys    October 8, 1999
---------------------------------------------------    Division and Director
                 Carl E. Voigt, IV

              /s/ WILLIAM W. BURNHAM*                Vice President of Speciality    October 8, 1999
---------------------------------------------------    Items Division and Director
                William W. Burnham

              /s/ RODERICK L. TURNER*                Director                        October 8, 1999
---------------------------------------------------
                Roderick L. Turner

                 /s/ GARY A. OMAN*                   Director                        October 8, 1999
---------------------------------------------------
                   Gary A. Oman

              /s/ ROBERT J. ROSEPINK*                Director                        October 8, 1999
---------------------------------------------------
                Robert J. Rosepink

             /s/ F. KEITH WITHYCOMBE*                Director                        October 8, 1999
---------------------------------------------------
                F. Keith Withycombe
</TABLE>


                                       S-1
<PAGE>   648

FUTECH TOYS & GAMES, INC.


<TABLE>
<CAPTION>
                       PERSON                                     TITLE                    DATE
                       ------                                     -----                    ----
<C>                                                    <S>                           <C>
               /s/ CARL E. VOIGT, IV*                  President and Director        October 8, 1999
-----------------------------------------------------    (Principal Executive
                  Carl E. Voigt, IV                      Officer)

            /s/ FREDERICK B. GRETSCH, SR.              Secretary, Treasurer and      October 8, 1999
-----------------------------------------------------    Director (Principal
              Frederick B. Gretsch, Sr.                  Financial and Accounting
                                                         Officer)

                /s/ VINCENT W. GOETT*                  Director                      October 8, 1999
-----------------------------------------------------
                  Vincent W. Goett
</TABLE>



*Signed by Frederick B. Gretsch, Sr. on behalf of signatory pursuant to a Power
of Attorney dated June 7, 1999, included on the signature page of the
Registrants' Registration Statement on Form S-4 filed on June 7, 1999.


                                       S-2
<PAGE>   649

                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
 2.1FT      Agreement for Purchase        (1)
            and Sale of Assets dated
            September 30, 1997 by and
            between Gick Publishing,
            a California Corporation,
            James W. and Terri L.
            Gick, and Futech
            Educational Products,
            Inc. ("Futech")
 2.2FT      Agreement for Purchase        (1)
            and Sale of Assets dated
            as of October 17, 1997 by
            and between XYZ Group
            Inc. and Futech
 2.3FT      Amendment to Agreement        (2)
            for Purchase and Sale of
            Assets dated December 31,
            1997 by and between XYZ
            Group Inc. and Futech
 2.4FT      Second Amendment to           (2)
            Agreement for Purchase
            and Sale of Assets dated
            April 29, 1998 by and
            between XYZ Group Inc.
            and Futech
 2.5FT      Stock Purchase and Sale       (1)
            Agreement dated as of
            September 30, 1998 by and
            between Les Friedland,
            Dan Lesnick, Howard W.
            Moore and Helen Z. Moore
            Revocable Trust, dated
            November 1, 1996, Howard
            Moore Associates, Inc.,
            Defined Benefit Plan &
            Trust, Howard Moore
            Associates, Inc. and
            Howard W. Moore and
            Futech
 3.1FT      Amended and Restated          (1)
            Articles of Incorporation
            of Futech
 3.1J       Articles of Incorporation              Filed as Exhibit 3.1 to
            of Pacific Acquisitions,               Janex's Registration
            Inc. as filed July 28,                 Statement on Form 8-A (file
            1986                                   00017929) and incorporated
                                                   herein by reference
</TABLE>

<PAGE>   650


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
 3.1T       Certificate of                         Filed as Exhibit 3a. to
            Incorporation of Trudy                 Trudy's Registration
            Corporation ("Trudy"), as              Statement on Form S-18 (file
            adopted February 24, 1987              33-4379B) dated May 22, 1987
                                                   and
 3.1FD      Articles of Incorporation     (1)
            of Fundex Games, Ltd.
            ("Fundex") dated July 16,
            1996
 3.1D       Articles of Incorporation     (1)
            of DaMert Company
            ("DaMert"), dated January
            31, 1979
 3.2FT      Amended and Restated          (1)
            Bylaws of Futech
 3.2J       Articles of Amendment to               Filed as Exhibit 3.2 to
            the Articles of                        Janex's Registration
            Incorporation of Pacific               Statement on Form S-1 (file
            Acquisitions, Inc. as                  00017929) dated August 8,
            adopted July 18, 1988                  1990 and incorporated herein
                                                   by reference
 3.2T       Agreement of Merger,          (1)
            dated as of March 23,
            1987 between Trudy
            Corporation, a
            Connecticut Corporation,
            and Trudy, a Delaware
            corporation
 3.2FD      Certificate of Amendment      (1)
            to Fundex dated August
            24, 1997
 3.2D       By-Laws of DaMert, as         (1)
            adopted March 25, 1979
 3.3J       Statement of Resolution                Filed as Exhibit 3.3 to
            Establishing Series for                Janex's Registration
            Shares as adopted October              Statement on Form S-1 (file
            4, 1988                                00017929) dated August 8,
                                                   1990 and incorporated herein
                                                   by reference
 3.3T       Certificate of Amendment               Filed as Exhibit 3b. to
            of Certificate of                      Trudy's Registration
            Incorporation of Trudy,                Statement on Form S-18 (file
            as adopted May 13, 1987                33-4379B) dated May 22, 1987
                                                   and incorporated herein by
                                                   reference
 3.3FD      Bylaws of Fundex              (1)
</TABLE>

<PAGE>   651


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
 3.4J       Articles of Amendment to               Filed as Exhibit 3.4 to
            the Articles of                        Janex's Registration
            Incorporation of With                  Statement on Form S-1 (file
            Design In Mind                         00017929) dated August 8,
            International, Inc. as                 1990 and incorporated herein
            adopted July 11, 1990                  by reference
 3.4T       Bylaws of Trudy                        Filed as Exhibit 3c. to
                                                   Trudy's Registration
                                                   Statement on Form S-18 (file
                                                   33-4379B) dated May 22, 1987
                                                   and incorporated herein by
                                                   reference
 3.5J       Articles of Amendment to               Filed as Exhibit 3.6 to
            the Articles of                        Janex's Registration
            Incorporation of With                  Statement on Form S-A (file
            Design In Mind                         00017929) dated December 20,
            International, Inc. as                 1994 and incorporated herein
            adopted August 11, 1994                by reference
 3.6J       Articles of Amendment to      (1)
            the Articles of
            Incorporation of Janex
            International, Inc. as
            adopted December 11, 1998
 3.7J       Certificate of Correction     (1)
            for Articles of Amendment
            to the Articles of
            Incorporation of Janex
 3.8J       Bylaws of Janex                        Filed as Exhibit 3.6 to
                                                   Janex's Registration
                                                   Statement on Form 8-A (file
                                                   00017929) dated August 15,
                                                   1989 and incorporated herein
                                                   by reference
 3.9J       Amendment to Article IV       (1)
            of the Bylaws of With
            Design In Mind
            International, Inc. dated
            September 3, 1991
 4.1FT      Section 4.1 of the            (1)
            Amended and Restated
            Articles of Incorporation
            of Futech. See Exhibit
            3.1FT
</TABLE>

<PAGE>   652


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
 4.1J       Articles IV, V, VI, X,                 Exhibits 3.1J to 3.7J to this
            XI, XII, XIII, XIV, and                Registration Statement
            XV of the Articles of
            Incorporation of Janex,
            as amended. See Exhibits
            3.1J (Incorporated by
            Reference) to 3.7J
 4.1T       Articles 4, 9, 10, 11 and              Filed as Exhibit 3 a. to
            12 of the Certificate of               Trudy's Registration
            Incorporation of Trudy                 Statement on Form S-18 (file
            Corporation. See Exhibit               33-4379B) dated May 22, 1987
            3.1T and Exhibit 3.3T                  and incorporated herein by
                                                   reference
 4.1FD      Sections 3.2 and 3.3 of       (1)
            the Articles of
            Incorporation of Fundex
            Games, Ltd. See Exhibit
            3.2
 4.1D       Articles IV, V, VI and        (1)
            VIII of the By-Laws of
            DaMert. See Exhibit 3.2D
 4.2FT      Articles II, III, VI and      (1)
            VII of the Amended and
            Restated Bylaws of
            Futech. See Exhibit 3.2FT
 4.2J       Articles II, VI, and VIII
            of the Bylaws of Janex,
            as amended. See Exhibits
            3.8J (Incorporated by
            Reference) to 3.9J
 4.2T       Articles 5 and 6 of the       (1)
            Agreement of Merger,
            dated as of March 23,
            1987 between Trudy
            Corporation, a
            Connecticut corporation,
            and Trudy Corporation, a
            Delaware corporation. See
            Exhibit 3.2T
 4.2FD      Articles 11, VIII, and IX     (1)
            of the Bylaws of Fundex
            Games, Ltd. See Exhibit
            3.3
 4.3D       Specimen Common Stock                                                     *
            Certificate of DaMert
 4.3FT      Specimen Common Stock                                                     *
            Certificate of Futech
</TABLE>

<PAGE>   653


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
 4.3J       Specimen Common Stock                  Filed as Exhibit 4.1 to
            Certificate                            Janex's Registration
                                                   Statement on Form S-1 (file
                                                   00017929) dated August 8,
                                                   1990 and incorporated herein
                                                   by reference
 4.3T       Articles 11, 111, V, IX                Filed as Exhibit 3 b. to
            and X of the Bylaws Trudy              Trudy's Registration
                                                   Statement on Form S-18 (file
                                                   33-4379B) dated May 22, 1987
                                                   and incorporated herein by
                                                   reference
 4.3FD      Specimen Stock                                                            *
            Certificate of Fundex
 4.3T       Specimen Common Stock                                                     *
            Certificate of Trudy
 4.4FT      Stock Restrictions and        (1)
            Sale Agreement dated
            January 27, 1994 by and
            between Vincent W.Goett
            and Melissa Turner Goett
            and Futech
 4.5FT      Stock Purchase Agreement      (1)
            dated January 27, 1994 by
            and between Vincent W.
            Goett and Melissa Turner
            Goett and Futech
 4.6FT      First Amendment to Stock      (1)
            Purchase Agreement dated
            February 7, 1994 by and
            among Vincent W. Goett
            and Melissa Turner Goett,
            Gary and Darilyne Goett,
            and Futech
 4.7FT      First Amendment to Stock      (1)
            Restrictions and Sale
            Agreement dated February
            7, 1994, by and between
            Vincent W. Goett and
            Melissa Turner Goett and
            Futech
 4.8FT      Registration Rights           (1)
            Agreement dated January
            5, 1998 by and between
            Manmohan Singh Bhatia and
            Futech
</TABLE>

<PAGE>   654


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
 4.9J       Settlement Warrant                     Filed as Exhibit 4.9 to
            Agreement dated March 26,              Janex's Registration
            1996 by and between Janex              Statement on Form 10-KSB
            and Deco Disc Industries,              (file 00017929) for the
            Inc.                                   fiscal year ended December
                                                   31, 1995 and incorporated
                                                   herein by reference
 5.1        Legality Opinion and                                                      *
            Consent of Quarles &
            Brady LLP
 8.1FT      Form of Tax Opinion of                                                    *
            Quarles & Brady LLP for
            Futech
 8.1J       Form of Tax Opinion of                                                    *
            Quarles & Brady LLP for
            Janex
 8.1T       Form of Tax Opinion of                                                    *
            Quarles & Brady LLP for
            Trudy
 8.1FD      Form of Tax Opinion of                                                    *
            Quarles & Brady LLP for
            Fundex
 8.1D       Form of Tax Opinion of                                                    *
            Quarles & Brady LLP for
            DaMert
 9.1FT      Voting Agreement dated        (1)
            December 3, 1998 by the
            shareholders of Futech or
            the benefit of F. Keith
            Withycombe and Patricia
            A. Withycombe
10.1FT      Lease Agreement dated         (1)
            August 5, 1996 by and
            between Concord Equities,
            L.L.C. and Futech
10.1T       Security Interest             (1)
            Agreement dated May 16,
            1991 between Trudy and
            William W. Burnham
            regarding Mr. Burnham
            hypothecating and
            assigning his personal
            Investment Savings
            Account at Union Trust as
            collateral for Trudy to
            effect the opening of the
            Letters of Credit for
            $8,160 and $28,300
</TABLE>

<PAGE>   655


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
10.1FD      Warrant Agreement dated       (1)
            as of August 31, 1996 by
            and among Fundex and Toy
            Paradise Partnership
10.1D       Option to Purchase            (1)
            Corporate Common Stock
            dated February 29, 1996
            by and between DaMert and
            Lynne McDonald
10.2FT      1998 Stock Option Plan        (1)
            for Futech
10.2T       Security Interest             (1)
            Agreement (#2) dated July
            31, 1991 between Trudy
            and William W. Burnham
            regarding a $16,000 loan
10.2FD      Purchase Agreement dated      (1)
            March   , 1997 between
            Fundex and Harbor Court
            LP1
10.2D       Employment Agreement          (1)
            dated April 28, 1999
            between DaMert and Julie
            Nunn
10.3FT      Employment Agreement          (1)
            dated December 31, 1997
            by and between Vincent
            Goett and Futech
10.3T       Security Interest             (1)
            Agreement (#3) dated
            August 5, 1991 between
            Trudy and William W.
            Burnham regarding Mr.
            Burnham hypothecating and
            assigning his personal
            Investment Savings
            Account and Union Trust
            as collateral for Trudy
            to effect the opening of
            the Letters of Credit for
            $12,960 for T.E.
            Squirrels and $11,180 for
            Wolves
10.3FD      Fundex 1996 Stock Option      (1)
            Plan for Non-Employee
            Directors Terms and
            Conditions
</TABLE>

<PAGE>   656


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
10.3D       Credit Agreement dated        (1)
            December 15, 1998 by and
            between DaMert and Wells
            Fargo Bank, N.A.
10.4FT      Confidentiality Agreement     (1)
            dated September 2, 1997
            by and between Fred B.
            Gretsch and Futech
10.4T       Security Interest             (1)
            Agreement (#4) dated
            August 20, 1991 between
            Trudy and William S.
            Burnham regarding a
            $30,000 loan
10.4(A)FD   Fundex 1996 Stock Option      (1)
            Plan for Non-Employee
            Directors
10.4(B)FD   Fundex Gamer, LTD. 1996       (1)
            Stock Option Plan for
            Non-Employee Directors
            nonstatutory Stock Option
            Agreement
10.4D       Corporation Promissory        (1)
            Note dated July 1, 1987
            of DaMert and payable to
            Frederick A. DaMert
10.5FT      Futech Employment             (1)
            Contract dated September
            2, 1997 by and between
            Fred B. Gretsch and
            Futech
10.5T       Security Interest             (1)
            Agreement (#5) dated
            September 5, 1991 between
            Trudy and William W.
            Burnham regarding a
            $30,000 loan
10.5FD      Fundex 1996 Employee          (1)
            Stock Option Plan
10.5D       Office Lease dated July       (1)
            27, 1995 by and between
            Cedar/Fourth Street
            Partners and DaMert
10.6FT      Agreement Regarding           (1)
            Confidentiality
            Information and
            Technology dated March 4,
            1996 by and between
            Joseph K. Petter and
            Futech
</TABLE>

<PAGE>   657


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
10.6T       Security Interest             (1)
            Agreement (#6) dated
            October 18, 1991 between
            Trudy and William W.
            Burnham regarding a
            $10,000 loan
10.6FD      Fundex 1996 Stock Option      (1)
            Plan Nonstatutory Stock
            Option Agreement
10.6D       Finder Agreement dated        (1)
            June 15, 1998 by and
            between CorDev
            Corporation and DaMert
10.7FT      Futech Employment             (1)
            Contract dated February
            1, 1997 by and between
            Joseph K. Petter and
            Futech
10.7T       Security Interest             (1)
            Agreement (#7) dated
            January 24, 1992 between
            Trudy and William W.
            Burnham regarding a
            $12,500 loan
10.7FD      Fundex Nonstatutory           (1)
            Employee Stock Option
            Agreement
10.7D       Special Executive             (1)
            Incentive Compensation
            Plan Agreement dated July
            13, 1995 by and between
            DaMert and Gregory McVey
10.8FT      Agreement Regarding           (1)
            Inventions dated October
            17, 1997 by and between
            Zeb Billings and Futech
10.8T       Security Interest             (1)
            Agreement (#9) dated
            April 30, 1992 between
            Trudy and William W.
            Burnham regarding a
            $15,000 loan
10.8FD      Fundex Stock Purchase         (1)
            Agreement
</TABLE>

<PAGE>   658


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
10.8D       Special Executive             (1)
            Incentive Compensation
            Plan Agreement dated
            November 30, 1995 by and
            between DaMert and Larry
            A. Waide
10.9FT      Agreement dated August        (1)
            14, 1996 by and between
            Golden Books Family
            Entertainment, Inc. and
            Futech
10.9T       Security Interest             (1)
            Agreement (#12) dated
            August 25, 1992 between
            Trudy and William N.
            Burnham regarding a
            $16,000 loan
10.9FD      Fundex Incentive Stock        (1)
            Option Agreement
10.9D       Master License Agreement
            dated November 1, 1994 by
            and between Dan Gilbert,
            Inc., d.b.a. Dan Gilbert
            Art Group and DaMert
10.10FT     Operating Agreement of        (1)
            Little Tiger Press
            U.S.A., L.L.C.
10.10T      Security Interest             (1)
            Agreement (#13) dated
            September 25, 1992
            between Trudy and William
            W. Burnham regarding a
            $50,000 loan
10.10FD     Credit and Security           (1)
            Agreement dated October
            30, 1998 between Fundex
            and Norwest Business
            Credit, Inc.
10.11FT     Distribution Agreement        (1)
            dated January 5, 1998 by
            and between Little Tiger
            Press USA, L.L.C. and
            Futech
10.11T      Security Interest             (1)
            Agreement (#14) dated
            October 5, 1992 between
            Trudy and William W.
            Burnham regarding a
            $13,000 loan
</TABLE>

<PAGE>   659


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
10.11FD     Business Loan Note with       (1)
            Covenants in an amount up
            to $1,000,000 dated
            August 27, 1998 payable
            to Liberty Bidco
            Investment Corporation
            ("Liberty")
10.12FT     Consulting Agreement          (1)
            dated January 5, 1998 by
            and between Manmohan
            Singh Bhatia and Little
            Tiger Press USA, L.L.C.
10.12J      Settlement Agreement                   Filed as Exhibit 10.13 to
            dated October 17, 1994,                Janex's Registration
            by and between Janex and               Statement on Form 8-K (File
            Dentsu Prox Inc.                       00017929) dated October 14,
                                                   1994 and incorporated herein
                                                   by reference
10.12T      Security Interest             (1)
            Agreement (#15) dated
            March 12, 1993 between
            Trudy and William W.
            Burnham regarding a
            $45,000 loan
10.12FD     Continuing Security           (1)
            Agreement dated August
            27, 1998 between Liberty
            and Fundex
10.13FT     Co-Publishing Agreement       (1)
            (U.S. Materials) dated
            January 5, 1998 by and
            between Magi Publications
            and Little Tiger Press
            USA, L.L.C.
10.13T      Security Interest             (1)
            Agreement (#16) dated May
            19, 1993 between Trudy
            and William W. Burnham
            regarding a $15,000 loan
10.13FD     Revenue and Participation     (1)
            Agreement dated August
            27, 1998 between Liberty
            and Fundex
10.14FT     Co-Publishing Agreement       (1)
            (U.K. Materials) dated
            January 5, 1998 by and
            between Magi Publications
            and Little Tiger Press
            USA, L.L.C.
</TABLE>

<PAGE>   660


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
10.14T      Security Interest             (1)
            Agreement (#17) dated
            March 29, 1995 between
            Trudy and William W.
            Burnham regarding a
            $4,800 loan
10.14FD     Articles of Merger dated      (1)
            August 27, 1996 of Third
            Quarter, Inc. with and
            into Fundex
10.15FT     Multiple Advance              (1)
            Promissory Note dated
            January 5, 1998 by Little
            Tiger Press USA, L.L.C.
            to the order of Futech
10.15T      Security Interest             (1)
            Agreement (#18) dated
            July 10, 1998 between
            Trudy and William W.
            Burnham regarding a
            $28,900 loan
10.15FD     Lease Agreement dated         (1)
            January 8, 1997 by and
            between Dugan Realty,
            L.L.C. and Fundex
10.16FT     Registration Rights           (1)
            Agreement dated January
            5, 1998 by and between
            Manmohan Singh Bhatia and
            Futech
10.16T      Security Interest             (1)
            Agreement (#19) dated
            August 5, 1998 between
            Trudy and William W.
            Burnham regarding a
            $310,000 loan
10.16FD     Agreement dated May 21,       (1)
            1993 by and between
            Random Games, Inc.dba
            Random Games & Toys and
            Third Quarter Corporation
10.17T      Loan Agreement dated          (1)
            March 30, 1998 between
            First Union National Bank
            and Trudy
</TABLE>

<PAGE>   661


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
10.17FD     Assignment of                 (1)
            Intellectual Property
            Rights dated August 1,
            1996 among Carl E. Voigt,
            III, Carl E. Voigt, IV,
            and Third Quarter
            Corporation.
10.18J      Settlement Agreement and               Filed as Exhibit 10.19 to
            Specific Release by and                Janex's Registration
            between Janex, Deco Disc               Statement on Form 10-KSB
            Industries, Inc., and its              (filed 00017929) for the
            shareholders, Donald                   fiscal year ended December
            Spector, Michael Deutch,               31, 1995 and incorporated
            Barbara Carver and James               herein by reference
            McGraw dated March 26,
            1996
10.18T      Security Agreement dated      (1)
            March 30, 1998 between
            First Union National Bank
            and Trudy
10.18FD     Addendum to Agreement         (1)
            dated December 18, 1986
            by and between K & K
            International, Kenneth
            Johnson, and Carl E.
            Voigt, III and Carl E.
            Voigt.
10.19T      First Union Bank              (1)
            Modification Number Two
            to Loan Agreement dated
            March 1, 1999.
10.19FD     License Agreement dated       (1)
            November 1, 1995 by and
            between Hollywood
            Ventures Corporation and
            Third Quarter Corporation
            dba Fundex
10.20T      Landlord Subordination        (1)
            and Waiver dated March
            30, 1998 between First
            Union National Bank and
            Noreast Management LLC
10.20FD     License Agreement dated       (1)
            June 1, 1996 by and
            between Hollywood
            Ventures corporation and
            Third quarter Corporation
            dba Fundex
</TABLE>

<PAGE>   662


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
10.21FT     Agreement dated August 7,     (1)
            1996 by and between
            Stephen I. McTaggart and
            Futech
10.21T      Promissory Note dated         (1)
            March 30, 1998 in the
            amount of $1,200,000 by
            Trudy d/b/a TMC
            Soundprints in favor of
            First Union National Bank
10.22FT     Agreement to amend            (1)
            payment terms of patent-
            related and royalty
            promissory notes dated
            March 27, 1997 by and
            between Vincent W. Goett,
            Stephen I. McTaggart, and
            Debra McTaggart
10.22T      Promissory Note dated         (1)
            March 30, 1998 in the
            amount of $250,000 by
            Trudy d/b/a TMC
            Soundprints in favor of
            First Union National Bank
10.23FT     Agreement for Purchase        (1)
            and Sale of Assets dated
            October 29, 1997 by and
            between Newtech
            Consulting, Inc. and
            Futech
10.23T      Lease Agreement between       (1)
            Noreast Management LLC
            and TMC/Soundprints, Inc.
            (Trudy) dated December 5,
            1994
10.24FT     Promissory Note in the        (1)
            principal amount of
            $2,000,000 dated October
            29, 1997 by Futech to the
            order of Newtech
            Consulting, Inc.
10.24T      The Nature Conservancy        (1)
            letter of understanding
            with Soundprints (Trudy)
            dated December 5, 1994
10.25FT     Agreement for Purchase        (1)
            and Sale of Assets dated
            December 31, 1997 by and
            between Newtech
            Consulting, Inc. and
            Futech
</TABLE>

<PAGE>   663


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
10.25J      Indemnification Agreement                                                 *
            wherein Janex Company is
            indemnifying its former
            accountants BDO Seidman,
            LLP for claims arising
            out of the reissuance of
            the Company's 1997
            financial statements.
10.25T      Smithsonian/Soundprints       (1)
            Agreement dated June
            17,1997 between
            Smithsonian Institution
            and Soundprints, a
            division of Trudy
10.26FT     Agreement for                 (1)
            Reassignment of
            Promissory Note dated
            January 21, 1998 by and
            between Newtech
            Consulting, Inc., Vincent
            W. Goett and Futech
10.26T      Consent to Assignment of      (1)
            the June 17, 1997
            Smithsonian/Soundprints;
            Agreement from
            Soundprints; to Futech
            Interactive Products,
            dated March 3, 1999
10.27FT     Consulting Agreement          (1)
            dated January 28, 1998 by
            and between Stephen
            McTaggart and Futech
10.27T      Trudy 1987 Stock Option       (1)
            Plan
10.28FT     Promissory Note in the        (1)
            amount of $1,130,000
            dated June 1, 1995 by and
            between Vincent W. Goett
            and Futech
10.29FT     Financing Agreement dated     (1)
            August 1, 1995 for
            $7,000,000 by and between
            Republic Acceptance
            Corporation and XYZ
            Group, Inc.
10.30FT     Amendment to Financing        (1)
            Agreement dated July 25,
            1996 by and between XYZ
            Group, Inc. and Republic
            Acceptance Corporation
</TABLE>

<PAGE>   664


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
10.31FT     Guaranty of Payment for       (1)
            Existing and/or Future
            Indebtedness dated August
            4, 1995
10.32FT     Assignment of Life            (1)
            Insurance Policy As
            Collateral dated August
            1, 1995
10.33FT     Subordination Agreement       (1)
            dated August 1, 1995 by
            and between Republic
            Acceptance Corporation,
            Gary R. Billings and XYZ
            Group, Inc.
10.34FT     Subordination Agreement       (1)
            dated August 1, 1995 by
            and between Republic
            Acceptance Corporation,
            Gary Billings, as legal
            guardian for Allison
            Billings, a minor, and
            XYZ Group, Inc.
10.35FT     Loan Agreement dated          (1)
            December 12, 1995 for
            $1,000,000 by and between
            Roderick L. Turner, Garry
            Goett and Vincent W.
            Goett and Futech
10.36FT     Master Promissory Note in     (1)
            the principal amount of
            $1,000,000 dated December
            12, 1995 payable to
            Roderick L. Turner, Garry
            Goett and Vincent W.
            Goett
10.37FT     Shareholder Loan and          (1)
            Master Promissory Note
            for Credit Line Agreement
            dated January 1, 1997
            between Vincent W. Goett
            and Futech
10.38FT     Final Resolution on Loan      (1)
            Due dated February 26,
            1997 executed by Vincent
            W. Goett
10.39FT     Promissory Note in the        (1)
            principal amount of
            $350,000 dated April 2,
            1997 payable to Vincent
            W. Goett
</TABLE>

<PAGE>   665


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
10.40FT     Stock Option and Loan         (1)
            Agreement dated April 4,
            1997 by and between
            Roderick L. Turner and
            Futech
10.41FT     Promissory Note in the        (1)
            principal amount of
            $1,000,000 dated April
            25, 1997 payable to
            Roderick Turner and
            Vincent W. Goett
10.42FT     Addendum 1 to Promissory      (1)
            Note for $1 Million
            loaned to Futech by
            Roderick Turner and
            Vincent W. Goett dated
            April 25, 1997
10.43FT     Addendum 2 to Promissory      (1)
            Note for $1 Million
            loaned to Futech by
            Roderick Turner and
            Vincent W. Goett dated
            September 2, 1997
10.44FT     Promissory Note in the        (1)
            principal amount of
            $250,000 dated October
            29, 1997 payable to
            Roderick Turner and
            Vincent W. Goett
10.45FT     Financing Agreement dated     (1)
            March 31, 1998 by and
            between U.S. Bancorp
            Republic Commercial
            Finance, Inc. and Futech
10.46FT     Collateral Assignment of      (1)
            Patents dated March 31,
            1998 by and between U.S.
            Bancorp Republic
            Commercial Finance, Inc.
            and Futech
10.47FT     Collateral Assignment of      (1)
            Trademarks dated March
            31, 1998 by and between
            U.S. Bancorp Republic
            Commercial Finance, Inc.
            and Futech
</TABLE>

<PAGE>   666


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
10.48FT     Personal Guarantee            (1)
            Agreement and Promissory
            Note made and entered
            into March 31, 1998 by
            and between Vincent W.
            Goett and Futech
10.49FT     Promissory Note for $1.5      (1)
            Million loan to Futech
            from Roderick L. Turner
            and Vincent W. Goett
10.50FT     Promissory Note for $1        (1)
            Million credit line to
            Futech from Roderick L.
            Turner and Vincent W.
            Goett
10.51FT     First Amendment to            (1)
            Financing Agreement dated
            July 2, 1998 by and
            between U.S. Bancorp
            Republic Commercial
            Finance, Inc. and Futech
10.52FT     Promissory Note in the        (1)
            principal amount of
            $2,000,000 dated August
            10, 1998 payable to The
            Chase Manhattan Bank by
            Futech
10.53FT     Promissory Note Agreement     (1)
            for $2.0 Million Loan to
            Futech from Melissa
            Turner Goett and Vincent
            W. Goett made and entered
            into August 10, 1998
10.54FT     Business Loan Agreement       (1)
            dated December 1, 1998
            between Bank of America
            National Trust and
            Savings Association and
            Futech
10.55FT     Guarantor Agreement           (1)
            relating to $7 million
            line of credit dated
            December 3, 1998 by and
            between Vincent W. Goett
            and Futech
10.56FT     Futech Stock Purchase         (1)
            Warrant for Robert J.
            Rosepink to purchase
            4,000,000 shares of
            common stock dated
            December 3, 1998
</TABLE>

<PAGE>   667


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
10.57FT     Futech Stock Purchase         (1)
            Warrant for Palmilla
            Management Trust to
            purchase 21,000,000
            shares of common stock
            dated December 3, 1998
10.58FT     Futech Stock Purchase         (1)
            Warrant for F. Keith
            Withycombe and Patricia
            A. Withycombe to purchase
            21,000,000 shares of
            common stock dated
            December 3, 1998
10.59FT     Master Promissory Note        (1)
            for Loan and/or Credit
            Line Agreements for a
            principal amount totaling
            $8,000,000, dated
            December 15, 1998 by and
            between Vincent W. Goett,
            Roderick L. Turner and
            Futech
10.60FT     Collateral Agreements         (1)
            regarding transfer of the
            secured interests of.
            Roderick L. Turner, Terry
            C. Turner and T.
            Valdetaire Turner to The
            Chase Manhattan Bank
10.61FT     Subordination, Priority       (1)
            and Security Agreement
            dated December 3, 1998 by
            and among Vincent W.
            Goett, F. Keith
            Withycombe and Patricia
            A. Withycombe and Futech
10.62FT     Cash Advance Conversion       (1)
            Agreement dated March 1,
            1999 by and between
            Roderick L. Turner and
            Futech
10.63FT     F. Keith Withycombe           (2)
            Business Loan Agreement
            dated May 21, 1999
10.64FT     Futech Employment                                                         *
            Contract dated April 1,
            1999 by and between
            William E. Hermes and
            Futech
</TABLE>

<PAGE>   668


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
10.65FT     Settlement Agreement and                                                  *
            Mutual Release for
            Purchase and Sale of
            Assets of XYZ Group,
            Inc., dated September 16,
            1999
10.66FT     Settlement Agreement and                                                  *
            Mutual Release for
            Employment Contract of
            Gary Roy Billings, dated
            September 16, 1999
10.67FT     Futech Employment                                                         *
            Contract dated July 15,
            1999 by and between
            Stephen S. Stuhmer and
            Futech
10.68FT     Futech Employment                                                         *
            Contract dated September
            1, 1999 by and between
            Paul C. Oursler and
            Futech
21.J        Subsidiaries of Janex
            International, Inc.
23.1FT      Consent of Ernst & Young                                                  *
            LLP, Independent Auditors
23.1J       Consent of BDO Seidman,                                                   *
            LLP
23.1T       Consent of Abrams and                                                     *
            Company, P.C.
23.1FD      Consent of BDO Seidman                                                    *
            LLP
23.1D       Consent of Armanino                                                       *
            McKenna LLP
23.1G       Consent of Sparks, Nelson                                                 *
            & Jacobson, CPAs
23.1X       Consent of Virchow,                                                       *
            Krause & Company, LLP
23.2        Consent of Quarles &                   Included in Exhibit 5.1 of         *
            Brady LLP                              this Registration Statement
23.3J       Consent of Ernst & Young                                                  *
            LLP, Independent Auditors
23.3T       Consent of Ernst & Young                                                  *
            LLP, Independent Auditors
23.3X       Consent of Virchow,                                                       *
            Krause & Company, LLP
23.4        Consent of Gary A. Oman                                                   *
23.5        Consent of Joseph K.                                                      *
            Petter
</TABLE>

<PAGE>   669


<TABLE>
<CAPTION>
 EXHIBIT                               PREVIOUSLY                                  FILED
   NO.             DESCRIPTION           FILED     INCORPORATED BY REFERENCE TO:  HEREWITH
 -------           -----------         ----------  -----------------------------  --------
<C>         <S>                        <C>         <C>                            <C>
23.6        Consent of Robert J.                                                      *
            Rosepink
23.7        Consent of Roderick L.                                                    *
            Turner
23.8        Consent of William W.                                                     *
            Burnham
23.9        Consent of Vincent W.                                                     *
            Goett
23.10       Consent of Paul C.                                                        *
            Oursler
23.11       Consent of Frederick B.                                                   *
            Gretsch, Sr.
23.12       Consent of Carl E. "Chip"                                                 *
            Voigt IV
23.13       Consent of F. Keith                                                       *
            Withycombe
24          Power of Attorney for
            certain Future directors
            and officers of New
            Futech
27.FT       Financial Data Schedule                                                   *
27.J        Financial Data Schedule                                                   *
27.T        Financial Data Schedule                                                   *
27.FD       Financial Data Schedule                                                   *
27.D        Financial Data Schedule                                                   *
</TABLE>


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

(1) Previously filed, with Registration Statement on Form S-4 (Filed 333-80131)
    Dated June 7, 1999.


(2) Previously filed with Registration Statement on Pre-effective amendment No.
    2 to Form S-4 (Filed 333-80131) Dated August 6, 1999.