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                                GALOOB TOYS, INC.
                        1996 LONG TERM COMPENSATION PLAN

         1. Purpose. Galoob Toys, Inc. 1996 Long Term Compensation Plan (the
"Plan") has been adopted for the purposes of enhancing shareholder value over
the long term by providing meaningful financial rewards to executive management
for exceptional performance as measured by the achievement of rigorous long-term
goals.

         2. Performances Period and Measurement Standard. The Plan shall cover
the financial performance period of July 1, 1996 through December 31, 1998 (the
"Performance Period"). Performance shall be measured by reported earnings per
share for Galoob Toys, Inc. (the "Company") during the Performance Period
("Earnings per Share"). Earnings Per Share for this purpose will be "fully
diluted" or "diluted" Earnings Per Share, whichever may be applicable under
generally accepted accounting principles for the particular reporting period.
The reported Earnings Per Share amount used for measuring performance under the
Plan shall reflect adjustments due to:

                  (a) any extraordinary gains or losses, as defined under
         generally accepted accounting principles ("GAAP");

                  (b) gains or losses resulting from one-time adjustments due to
         changes in tax law or GAAP; and

                  (c) any other extraordinary, unusual, or non-recurring gains
         or losses which are quantified and identified separately in footnotes
         to the annual financial statements or in "Management's Discussion and
         Analysis of Financial Conditions and Results of Operation" appearing in
         an applicable annual report to shareholders of the Company.

         3. Participation. The Compensation Committee (the "Committee") of the
Board of Directors shall select and designate in writing those members of
executive management who shall be eligible to participate in the Plan no later
than September 28, 1996. Each person designated a participant shall be notified
in writing of his or her eligibility to participate in the Plan and of the
dollar amount of his or her Target Award Opportunity (as described below).

         4. Target Award Opportunities. Each participant shall have a target
award opportunity equal to 300% of his or her annualized salary as of July 1,
1996 (a "Target Award




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Opportunity"); provided, however, no participant shall receive an award in
excess of $1.875 million under the Plan with respect to the Performance Period.
The extent, if any, to which this Target Award Opportunity will result in a
monetary payment will depend on the degree of achievement of certain Earnings
Per Share goals during the Performance Period.

         5. Earnings Per Share Goal and Payment Schedule. The Earnings Per Share
performance standard for the Plan shall be cumulative Earnings Per Share, as
reported quarterly during the Performance Period. Upon reaching a 75% threshold
level of % of Plan Achievement (set forth below), the % of Target Award
Opportunity Earned (set forth below) shall begin to increase pro rata up to the
next higher % of Target Award Opportunity Earned.

The following schedule sets forth the amounts to be paid to Plan participants
upon the Company's achievement of certain cumulative Earnings Per Share during
the Performance Period:

                   Plan Achievement
                      (Cumulative
                       Earnings
                     Per Share for                                 % of
                        7/1/96                                 Target Award
                        Through             % of Plan           Opportunity
                       12/31/98)           Achievement            Earned
                       ---------           -----------            ------
                         $6.98                     150%               125%
                         $4.65                     100                100
                         $3.49                      75                 50
                         -----            ------------                ---
                         $3.49            less than 90                  0


         6. Payment Terms. Prior to the time any payments to Plan Participants
are made pursuant to the Plan and in all events prior to March 30, 1999, the
Committee shall certify the cumulative Earnings Per Share for the Performance
Period in writing and direct the Company to make the appropriate payment, if
any, to each participant and/or to establish a deferred payment account in the
name of a participant, provided such participant has filed a valid deferral
payment election with the Committee no later than June 30, 1998. Each
participant shall be notified by the Company prior to April 1, 1998 of the
conditions governing any deferral accounts and delayed payments, including the
interest or investment return rates terms which shall be available.




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         7. Termination of Employment.

                  (a) Termination of employment with the Company for any reason
         prior to January 1, 1999 shall result in full forfeiture of a
         participant's right to any payment under the Plan, except in the event
         of a participant's death or disability or as otherwise determined by
         the Committee. In the event of termination of employment due to death
         or disability of a participant prior to January 1, 1999, the
         participant, or the executor or administrator of the estate of the
         deceased participant, or the person or persons to whom the deceased
         participant's rights hereunder shall pass by will or the laws of
         descent or distribution shall be entitled to a pro rata payment, within
         30 days of such termination of employment, based upon the participant's
         actual period of service during the Performance Period.

                  (b) For purposes of this Section 7, the "pro rata payment
         amount" shall be determined by multiplying (x) the product obtained by
         multiplying the participant's Target Award Opportunity by (y) the
         quotient obtained by dividing (a) the cumulative Earnings Per Share
         during the Performance Period through the date of death or disability,
         as the case may be, by (b) $4.65.

         8. Plan Administration.

                  (a) Authority-The Committee shall be responsible for
         overseeing the administration of the Plan and accordingly has full
         power to interpret the Plan and to adopt such rules and regulations and
         guides for carrying out the Plan as it may deem necessary or proper.
         All decisions shall be made solely in the best interests of the Company
         and in keeping with the purposes of the Plan. The Committee's powers
         include, but are not limited to, selecting participants, establishing
         such additional terms and conditions governing the Plan as it deems
         appropriate, adopting any and all modifications, amendments, procedures
         and regulations, and making all other determinations as it deems
         appropriate for the administration of this Plan. All decisions made by
         the Committee shall be final and binding on all persons affected by
         such decisions.

                  (b) Plan Amendment and Termination-The Committee
         may amend or terminate the Plan in its sole discretion.




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         9. Miscellaneous. The following provisions are generally
applicable to the Plan:

                  (a) Non-transferability-No interest in the Plan shall be
         assignable or transferable other than by will or by laws of descent and
         distribution, or by power of attorney if a participant is deemed
         incompetent.

                  (b) Tax Withholding-The Company shall have the right to deduct
         from any payment made under the Plan a sufficient amount, as may be
         applicable, to cover any statutory withholding tax requirements or to
         take such other action as may be necessary to satisfy any such tax
         withholding obligations.

                  (c) Other Plan "Compensation"-No payments under the Plan shall
         be deemed a part of any participant's regular, recurring compensation
         for purposes of calculating payments or benefits from any other Company
         benefit, compensation, severance or similar plan.

                  (d) No Right to Benefit or to Employment-Except as designated
         by the Committee, no person shall have any right to participate under
         this Plan, and no participant, by virtue of participation in the Plan
         shall have a right to be retained as an employee of the Company.

                  (e) Binding Arbitration-Any dispute or disagreement regarding
         participation and a participant's claim under the Plan shall be settled
         solely by arbitration in accordance with the applicable rules of the
         American Arbitration Association.

                  (f) Unfunded Plan-The Plan shall be unfunded and shall not
         create (or be construed to create) a trust or a separate fund or funds.
         The Plan shall not establish any fiduciary relationship between the
         Company and any participant or beneficiary of a participant. To the
         extent any person holds any obligation of the Company by participation
         in the Plan, such obligation shall merely constitute a general
         unsecured liability to the Company and accordingly shall not confer
         upon such person any right, title or interest in any assets of the
         Company.

                  (g) Effective Date-The Plan shall be effective as of July 29,
         1996, the date on which the Plan was adopted by the Committee (the
         "Effective Date"), provided that



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         the Plan is approved by the stockholders of the Company at an annual
         meeting or any special meeting of stockholders of the Company within 12
         months of the Effective Date, and such approval of stockholders shall
         be a condition to the right of each participant to receive a Target
         Award Opportunity hereunder.




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