SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                   FORM 10-KSB


              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
               THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)


                   For the fiscal year ended December 31, 1998

                                       OR
            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
              THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)


               For the transition period from ________ to ________


                       Commission File Number: 000-29334

                                KIDS STUFF, INC.
             (Exact name of Registrant as specified in its charter)


<TABLE>
<CAPTION>
<S>                                                                                   <C>                
Delaware                                                                              34-1843520         
(State or other jurisdiction of                                                       (I.R.S. Employer
incorporation or organization                                                         (Identification No.)
</TABLE>


                        4450 Belden Village Street, N.W.
                                    Suite 406
                               Canton, Ohio 44718
              (Address of principal executive offices) (Zip Code)


                         Registrant's telephone number,
                      including area code: (330) 492-8090

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

                                      None
--------------------------------------------------------------------------------

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

     Common  Stock,  $.001 par value,  Class A Common Stock  Purchase  Warrants,
Series 1 Preferred Stock, Series 1 Preferred Stock Purchase Warrants


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

                                (Title of Class)

     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant  was required to file such  reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes x . No ___.

     Indicate by check mark if there is no disclosure  of  delinquent  filers in
response to Item 405 of  Regulation  S-B is not  contained in this form,  and no
disclosure  will  be  contained,  to the  best  of  Registrant's  knowledge,  in
definitive proxy or information statements incorporated by reference in part III
of this Form 10-KSB or any amendment to this Form 10-KSB [ ].

     As of March 2, 1999 at 4:00 P.M., the aggregate  market value of the voting
stock held by  non-affiliates,  approximately  1,261,781 shares of Common Stock,
$.001 par value,  was  approximately  $3,628,000 based on the last sale price of
$2.875 for one share of Common Stock on such date.  The number of shares  issued
and  outstanding  of the  Registrant's  Common  Stock,  as of March 2,  1999 was
3,512,856.


<PAGE>
Item 1.           Description of Business

THE COMPANY

     Kids Stuff,  Inc. (the  "Company") was  incorporated  under the laws of the
State of Delaware in July 1996. The Company is a specialty direct marketer which
publishes two catalogs with an emphasis on children's  hardgood  products (i.e.,
products  not  primarily  made from  fabrics)  from  prenatal to age three.  The
Company  believes  that its first  catalog,  "Perfectly  Safe,  The  Catalog For
Parents  Who  Care," is the  nation's  only  catalog  devoted  to child  safety,
child-proofing the home and safety-related  products for the family. The Company
has published  Perfectly  Safe since 1990,  and has  circulated  over 20 million
catalogs and helped to  childproof  over  350,000  homes to date.  In 1995,  the
Company  introduced its second  catalog,  "Jeannie's  Kids Club," to broaden its
market and to introduce a new direct marketing  concept in children's  products.
Jeannie's  Kids Club offers  parents of young  children  who become  members the
opportunity  of saving up to 60%  compared  to the  price  charged  for the same
products in other popular children's catalogs. The current annual membership fee
is $18.00 per year. In July 1997, the Company  acquired The Natural Baby Catalog
from The Natural Baby Company, Inc. ("Baby Co.") which specializes in children's
products made from natural  fiber for children  ages prenatal to age three,  and
consolidated its operations with those of the Company.

     In November 1998, the Company  opened "Kids Catalog  Outlet"  featuring the
Company's  children  clothing  and other  merchandise  which  have not been sold
through  the  Company's  catalogs.  The  Company  is  establishing  a website to
advertise and sell its products under kidstuff.net.

HISTORY OF DUNCAN HILL

     The Company's principal stockholder, Duncan Hill, Inc. ("Duncan Hill"), was
organized  under Ohio law in 1977 for the purpose of developing  and marketing a
designer  line of smoking  pipes,  tobacco  and  accessories.  Duncan  Hill is a
publicly-held  corporation controlled  (approximately 68%) by William L. Miller,
the  Company's  Chief  Executive  Officer  ("W.  Miller")  and Jeanne E. Miller,
President  of the Company  ("J.  Miller").  In 1980,  a Duncan Hill  subsidiary,
Highland Pipe Company,  acquired the pipe manufacturing  business of the Monarch
Pipe Co., of Bristow,  Oklahoma,  and  subsequently  changed its name to Monarch
Pipe Co. ("Monarch"). In 1984, the business of E.A. Carey Co. of Chicago, a mail
order  supplier of smoking  products,  was  purchased by Duncan Hill through its
subsidiary,  E.A. Carey of Ohio,  Inc.  ("Carey").  Subsequently  Carey acquired
Monarch from Duncan Hill. In December  1997,  Carey  reincorporated  in Delaware
through a merger with its then newly formed wholly-owned subsidiary,  The Havana
Group, Inc. ("Havana"), with Havana as the Surviving Corporation. Havana filed a
Form SB-2  Registration  Statement (File No. 333-45863) and completed an initial
public  offering  of its  securities  on May 22, 1998 with  Fairchild  Financial
Group,  Inc. as the Managing  Underwriter.  All references to Havana include the
operations of its predecessor, Carey and its subsidiary, Monarch.


                                        2

<PAGE>
     Perfectly Safe, Inc.  ("Perfectly  Safe") was formed by Duncan Hill in 1990
under Ohio law for the purpose of publishing The Perfectly  Safe Catalog,  which
was acquired from J. Miller in January  1990. J. Miller  purchased the Perfectly
Safe Catalog in 1988 from the catalog's creator.  In July, 1995,  Perfectly Safe
began to publish its second catalog, Jeannie's Kids Club.

     Prior to January 1, 1997, all  fulfillment and  administrative  services of
the  Company and its  predecessors  were  performed  and paid for by Duncan Hill
which also provided  similar  services to its  subsidiary,  Havana.  Fulfillment
services included order taking,  order processing,  customer service,  warehouse
packing and delivery,  telephone contracts and shipping  contracts.  Fulfillment
services  were  charged to  Perfectly  Safe and Havana based on the actual cost.
Administrative  services  included  wages and salaries of officers,  accounting,
purchasing,  executive and  creative/marketing  personnel.  It also included all
leases,  contracts,   equipment  rentals  and  purchases,   audit,  legal,  data
processing,  insurance and building  rent and  maintenance.  The  administrative
costs were  allocated by Duncan Hill to Perfectly Safe and Havana based upon the
percentage  of assets of each  operating  subsidiary  to the total assets of all
operating subsidiaries.

THE REORGANIZATION

     Effective June 30, 1996, the Company  succeeded to the catalog  business of
Jeannie's Kids Club and Perfectly Safe as a result of a reorganization  in which
the Company  acquired from Duncan Hill the assets and  liabilities  of Perfectly
Safe, which was dissolved. The Company, which was incorporated by Duncan Hill in
July 1996, had no operations prior to the reorganization.

     Effective  June 30, 1996,  the Company also  acquired  from Duncan Hill the
assets used by Duncan Hill to perform the telemarketing, order fulfillment, data
processing and administrative functions, so that the Company could perform those
functions  itself.  The Company then entered into a six-month  transition period
ended  December  31,  1996  in  which  telemarketing,   data  processing,  order
fulfillment,  and administrative  functions were transferred from Duncan Hill to
the Company in a manner  consistent  with the  operational  requirements  of the
various  subsidiaries  of Duncan  Hill.  During this period  certain  costs were
allocated  by Duncan  Hill to the  Company,  and in return,  certain  costs were
allocated  by the Company to Duncan Hill and its other  subsidiaries,  depending
upon the transition status of the cost area involved.  In either case, the costs
were allocated pro rata in a manner  consistent with Duncan Hill's  practices in
existence prior to June 30, 1996.

     The purchase  price of Perfectly  Safe and the  aforementioned  Duncan Hill
assets acquired by the Company was $2,613,404,  payable as follows:  The Company
issued to Duncan Hill a  Promissory  Note in the  principal  amount of $366,858,
2,400,000  shares of the  Company's  Common  Stock valued at $.125 per share and
5,000,000  shares of the Company's  Series A Preferred Stock valued at $.001 per
share. Further, the Company agreed to assume all of the liabilities of Perfectly
Safe as of June 30, 1996 in the amount of  $1,291,546,  as well as Duncan Hill's
outstanding  obligations  as of June 30,  1996 under its credit  facility in the
amount of $650,000.  Almost all of the borrowings under the credit facility were
used to support the Company's operations.

                                        3

<PAGE>
SERVICES PROVIDED TO HAVANA

     Since  1997,  the  Company  has  provided  administrative  and  fulfillment
services to Havana.  During 1997, all  fulfillment  services were contracted and
paid by the  Company  and  charged  to  Havana  based on the  actual  cost.  All
administrative  costs were  allocated  between the Company and Havana based upon
the  percentage  of assets for each  respective  operating  company to the total
assets of both  operating  companies  with 33%  charged to Havana for the period
January 1, 1997  through  June 30, 1997 and 21% charged to Havana for the period
July 1, 1997 through  December  31, 1997.  Duncan Hill  incurred  certain  other
costs,  including  legal and outside  accounting/auditing  expenses,  which were
allocated  by Duncan Hill to the Company and Havana based on the same method and
percentages as described above.

     Effective  January 1, 1998,  Havana entered into a one-year  agreement with
the Company whereby the Company will provide administrative  functions to Havana
at an annual cost of $206,100  consisting of: $34,000 for accounting and payroll
services, $51,600 for administration and human resource management,  $34,900 for
data  processing,  $32,200 for office  equipment and facilities use, $38,100 for
merchandising and marketing  services and $15,300 for purchasing  services.  The
Company will also provide fulfillment  services to Havana at a cost of $2.40 per
order processed.  The Company  calculated these fees based on actual 1997 costs.
Management  believes  these fees would  represent  actual  costs  should  Havana
undertake to provide these services itself. Havana was also obligated to pay the
Company an amount  equal to 5% of Havana's  1998 pre-tax  profits as  additional
consideration for the Company providing  administrative and fulfillment services
to Havana.  However,  Havana had no pre-tax profits for 1998. This agreement has
been extended on a month-to-month basis.

ACQUISITION OF THE NATURAL BABY CATALOG

     In July 1997,  the Company  acquired the net assets and  operations  of The
Natural Baby Catalog from Baby Co., a mail order retailer of children's clothing
and toys.  This  acquisition  was funded with the net proceeds of the  Company's
initial public offering and has been accounted for as a purchase.  The aggregate
purchase price  consists of the following:  Cash  $1,444,831  Acquisition  costs
276,998 Issuance of 70,000 Kids Stuff  unregistered  common shares to the former
owners of Baby Co. 245,000 Note Payable 100,000 ----------- Total purchase price
$2,066,829

     All references to the Company  include the  operations  acquired by it from
Perfectly Safe, Duncan Hill and Baby Co. unless the context indicates otherwise.

Company's Operations


                                        4

<PAGE>
     The Company is a specialty  direct  marketer  which  publishes two catalogs
with an emphasis on children's  hardgood products (i.e.,  products not primarily
made from  fabrics)  from  prenatal  to age  three.  Based  upon a review of the
catalog  trade  publication  called "SRDS Direct  Marketing  List  Service," the
Company  believes  that its first  catalog,  "Perfectly  Safe,  The  Catalog For
Parents  Who  Care," is the  nation's  only  catalog  devoted  to child  safety,
child-proofing the home, and safety-related products for the family. Since 1990,
the Company has  published  over 20 million  Perfectly  Safe catalogs and helped
childproof over 350,000 homes.

     During July, 1995 the Company  introduced  "Jeannie's Kids Club" catalog to
broaden  its  market  through  a new  direct  marketing  concept  in  children's
products.  Jeannie's  Kids Club  offers  parents  who become  club  members  the
opportunity of saving up to 60% compared with the same products in other popular
children's catalogs. The current annual membership fee is $18.00.

     In July 1997,  the Company  acquired from Baby Co. its third  catalog,  The
Natural Baby Catalog,  which  specializes  in products made of natural fiber for
children  from  prenatal to age three.  The Natural  Baby  Catalog  carries both
hardgood  products and softgood  products  (i.e.,  products  primarily made from
fabrics).

KIDS CATALOG OUTLET

     The Company has recently  leased a retail store in Canton,  Ohio consisting
of  approximately  3,300  square feet of space.  In November  1998,  the Company
completed  the  installation  of  leasehold  improvements  and opened the retail
store.  The retail  store,  which is named "Kids Catalog  Outlet,"  features the
Company's  children's  clothing and other  merchandise  which have not been sold
through the Company's catalogs.

MARKET

     The  Company's  market for  children's  goods is  affected by the number of
births as well as women in the work  force.  The Company  believes  that a birth
rate of an  estimated  3.8 million  births per year and the high  percentage  of
women in the work  force  place an  emphasis  on the  convenience  and  value of
shopping by catalog.  There can be no  assurance  that the Company is correct in
such belief.

STRATEGIES

     The Company believes that its expertise in the marketing and  merchandising
of  children's  products  provides the basis for future growth by the use of the
following strategies:

EXPAND THE MEMBERSHIP OF JEANNIE'S KIDS CLUB.

     Because  Jeannie's Kids Club offers popular  children's  products for up to
60% less than other  children's  catalogs,  the Company believes that there is a
substantial  market for this type of home shopping service and an opportunity to
substantially  increase the membership of Jeannie's  Kids Club,  which went from
inception in July 1995 to over 39,000 current members. Although

                                        5

<PAGE>
there are costs  associated  with acquiring the initial $18 membership  fee, the
$18  annual  renewal  of such  membership  is  approximately  90%  profit to the
Company.  Under the terms of the Jeannie's  Kids Club  membership,  renewals are
automatically  billed to a member's  credit card prior to the  expiration of the
membership.  The Company  intends to embark upon vigorous  marketing  efforts to
expand Jeannie's Kids Club membership.

MAINTAIN THE GROWTH OF THE NATURAL BABY CATALOG.

     Revenues of The Natural Baby Catalog have increased from $3,876,555 in 1992
to $6,188,586 in 1998.  The Company will endeavor to maintain  continuity in the
merchandising and marketing of this catalog.

CUSTOMER ACQUISITION PROGRAMS.

     Historically,  the Company has relied upon catalog  circulation as the sole
method  to  acquire  new  customers.  Due to the  relatively  short  life of the
acquired  customer  (prenatal to age three) and the increasing  costs of catalog
mailings,  the Company  intends to test and develop new methods of new  customer
acquisition.  The Company believes that its future growth and profitability will
be largely dependent upon the Company's ability to develop alternative  customer
acquisition programs.

RECENTLY REPLACED OUTDATED DATA PROCESSING SYSTEM.

     During 1997, the Company replaced its computer  hardware at an annual lease
cost of $24,000. The Company expects this upgrade to improve the efficiencies of
its operations.  The Company intends to periodically  review software upgrade or
replacement  anticipated to cost  approximately  $25,000  annually,  on a leased
basis,  but does not  expect to replace or upgrade  the  software  until  future
periods.

CATALOG ACQUISITIONS.

     The  Company  believes  that,  because  of the  cost  driven  pressures  to
consolidate,  there may be  opportunities  to  acquire  other  children's  niche
catalogs.  The  Company,  however,  has no short term plans to make any  further
acquisitions  and no  assurances  can be  given  that any  acquisitions  will be
successfully completed in the future.

STABILIZE THE PERFORMANCE OF PERFECTLY SAFE.

     In the past,  many of the safety  products  carried by the  Perfectly  Safe
Catalog were generally hard to find and were not well- stocked by retail stores.
That is no longer the case. As a consequence of this competition,  the inability
of the  Company  to  access  certain  profitable  mailing  lists  following  the
Company's  introduction  of Jeannie's Kids Club, and the decision of the Company
to devote  more of its  available  resources  to building  the mailing  list and
membership base of Jeannie's Kids Club, the future  performance of the Perfectly
Safe  Catalog  will be  highly  dependent  upon the  Company's  ability  to more
efficiently obtain new customers through substantially reduced catalog mailings.

MERCHANDISING

     Through its Perfectly  Safe  Catalog,  the Company  emphasizes  quality and
safety and provides full price merchandise tested by the Company and backed by a
full satisfaction  warranty. The Perfectly Safe Catalog currently consists of 48
pages containing

                                        6

<PAGE>
approximately 250 products,  principally  hardgoods,  approximately 52% of which
directly  relates to child safety and child proofing the home,  with the balance
consisting  of safety  tested  convenience  products  and toys.  Unlike  fashion
catalogs  which  change  their mix of  products  offered  based upon  trends and
seasonality,  Perfectly Safe retains proven products. The merchandising function
for Perfectly Safe is handled by one of the Company's  founders,  J. Miller, the
author of "The Perfectly Safe Home."

     During 1995,  the Company  used its  merchandise  expertise  in  children's
products to launch its Jeannie's Kids Club Catalog.  The target market  selected
by the Company is upper income parents who want quality,  value and  convenience
in products for their children. Jeannie's Kids Club Catalog consists of selected
popular quality  hardgoods  products from other  children's  catalogs offered at
discounts of up to 60%.  Jeannie's  Kids Club Catalog  currently  consists of 48
pages containing approximately 300 products.

     The Natural Baby Catalog emphasizes  alternative hard and softgood products
for babies and their parents. The catalog is 80 pages and contains approximately
400 products,  all of which are natural  fiber,  non-toxic  and  environmentally
safe. Approximately 28% of The Natural Baby Catalog product line is exclusive or
private label products.

     The ratio between  hardgoods to softgoods  contained in the Company's three
catalogs is approximately  3:1.  Substantially all of the products  contained in
The Perfectly Safe and Jeannie's  Kids Club Catalogs are hardgoods.  The Company
continually  identifies  and  tests  new  product  categories  that are  natural
extensions  of the core  business  of its  catalogs.  Each  product  and product
category is measured for its revenue and  profitability,  with advertising costs
allocated to the product based upon the number of square inches of catalog pages
consumed  in  its  presentation.   Products  are  then  rated  by  profitability
performance   with  weaker   products   either   removed  or  altered  in  their
presentation.  Test products are selected  based upon the data  contained in the
analysis of similar or related products,  or sales and feature benefits that the
Company's  merchandising  team  feels  will  appeal to the  demographics  of the
intended catalog customer.

MARKETING

     The Company serves the children's  market at an age where the child changes
rapidly and many of the products become  functionally  obsolete within months of
the date of purchase.  The  Company's  market for its catalog is primarily  from
prenatal  to age three.  The  Company  maintains  proprietary  mailing  lists of
households  with an  average  income  in excess of  $50,000  per year,  a proven
history  of mail  order  purchases  and a newborn  in the  house.  The number of
customers  who purchased in 1998 was over 84,000 for  Perfectly  Safe,  and over
21,000 member and non-member  buyers for Jeannie's Kids Club.  (Nonmember buyers
are not entitled to purchase Jeannie's Kids Club merchandise at a discount.) The
Company also rents mailing lists which meet the Company's  criteria from outside
sources,  which consist of independent list compilers,  as well as directly from
other children's  catalogs.  The Company's present cost of renting mailing lists
is $.09 per  household  per use.  The Company  believes  that The  Natural  Baby
Catalog's  mailing list rentals are  primarily  from  certain  other  children's
catalogs based upon a proven history of recent mail order purchases.

                                        7

<PAGE>
     In order to select those  households  most likely to purchase,  the Company
uses a statistical modeling system. The Company believes that the application of
a statistical  modeling  systems  increases the rate of percentage  response and
profitability  of The Natural Baby Catalog,  although  there can be no assurance
that the Company is correct in such belief.

     The Company uses a selling strategy built around two basic selling seasons:
fall/winter  and  spring/summer.   Each  season  requires  changes  of  products
appropriate to the time period for the life of the catalog.  Catalogs are mailed
on a monthly basis in  approximately  equal  quantities,  with  clearance  sales
advertised on wrappers of selected catalog mailings. Monthly mailing quantities,
however,  are  subject to  significant  variations  due to changes in timing and
availability  of  rental  mailing  lists.  In 1998,  the  catalog  mailings  for
Perfectly   Safe  and  Jeannie's   Kids  Club  were   2,933,037  and  1,369,001,
respectively.

     The Natural  Baby Catalog  uses a selling  strategy  based upon three basic
selling  seasons:  spring,  summer and  fall/winter.  While  catalogs are mailed
monthly, lesser quantities are mailed monthly in the period February-June,  with
quantities  increasing during the fall/winter  season.  The Natural Baby Catalog
mailed approximately 2,599,934 catalogs during 1998.

     Due  to  a  continuing  increase  in  catalog  advertising  costs  and  the
relatively  short  customer  life,  the Company  believes  that it can no longer
afford to use catalog mailings as the sole method of customer name  acquisition.
The Company is  establishing  and developing a website to advertise and sell its
products.

CUSTOMER SERVICE AND TELEMARKETING

     The Company derives  approximately 80% of its revenue through orders placed
over the telephone and emphasizes  superior customer service and friendliness in
its sales  representatives.  The Company's method of receipt of payment includes
major credit cards and checks. The Company's return policy is unconditional, and
provides  that if a customer is not  satisfied  with his or her purchase for any
reason,  it may be returned  within 30 days for a full refund or exchange.  If a
shipping  error  has  occurred  the  Company  will  issue  call  tags to pick up
merchandise shipped in error and will send a corrected shipment.

     The Company employs 46 full-time and 2 part-time warehouse customer service
and telemarketing employees at March 1, 1999. During 1998, the Company processed
over 175,000 telephone orders,  catalog requests and service  requirements.  The
Company also processes orders, catalog requests and service requests for Havana.
The Company charges Havana $2.40 per order processed.

FULFILLMENT AND DELIVERY

     The Company's  fulfillment and delivery  objective is to provide  excellent
customer service within a low cost structure. Its fulfillment operations consist
of 23,000 square feet of leased facilities in North Canton, Ohio. Orders shipped
are  individually  recorded and posted through the use of barcode  scanners,  so
that sales records and credit card deposits

                                        8

<PAGE>
are   electronically   posted.   The  Company's   fulfillment  center  processed
approximately 286,000 shipments in 1996, approximately 302,000 shipments in 1997
and approximately 325,000 shipments in 1998.

INVENTORY/PURCHASING

     The Company  conducts its purchasing  operations at its general  offices in
Canton, Ohio. Each catalog contains approximately 300 products.  Each product is
reviewed  weekly through the use of computerized  reports that provide  detailed
information  regarding  inventory  value,  unit sales,  and purchasing  delivery
times.  Products  are ordered as required  for "just in time"  arrival  into the
Company's inventory.

PRODUCT SOURCING

     The Company  acquires  products  for resale in its catalogs  from  numerous
domestic  vendors.  No single  source  supplied  more than 10% of the  Company's
products in 1998.

SEASONALITY

     Perfectly  Safe's  revenues  are not  significantly  impacted  by  seasonal
fluctuations,  as compared  to many other  retail and  catalog  operations.  The
Perfectly  Safe customer is believed to be generally the end user of the product
so purchases  are spread  throughout  the year,  rather than being  concentrated
between October and December,  as are traditional gift purchases.  The Company's
limited experience does not indicate that Jeannie's Kids Club's revenues will be
subject to significant seasonal  fluctuation.  Natural Baby Products, a division
of the Company,  has a seasonal increase in the fourth quarter.  During 1998 and
1997,  The Natural Baby Catalog sales in the fourth  quarter were  approximately
28% and 34% of The Natural Baby Catalog total respective 1998 and 1997 sales.

 INSTITUTIONAL CREDIT FACILITY

     Effective June 30, 1996, the Company assumed Duncan Hill's  liability under
Duncan Hill's $800,000 line of credit  facility  provided by the United National
Bank and Trust Company to the Company (the "Bank").  The Bank opened an $800,000
line  of  credit  in  the  Company's  name  effective  December  31,  1996,  and
simultaneously  terminated  Duncan  Hill's line of credit.  The $650,000  amount
outstanding  under Duncan Hill's line of credit was transferred upon termination
to the line of credit opened in the Company's name. Almost the entirety of those
borrowings were used to finance the Company's operations.  The line of credit is
for an open  term,  payable  upon  demand  and is  secured  by the assets of the
Company,  Duncan  Hill  and  Havana.  The  repayment  of the line of  credit  is
guaranteed  by W. Miller and Havana.  The amount  outstanding  under the line of
credit as of March 1, 1999 is approximately $762,000. Interest is charged at the
rate of 1% over  prime.  It is the  policy  of the  Bank to  review  the  credit
facility  annually,  and to require that the Company  maintain a zero balance on
the credit  line for a period of thirty  consecutive  days  sometime  during the
course of each year. The Bank agreed to waive the "zero balance" required for

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<PAGE>
the fiscal 1997 and 1998. The line of credit agreement expired June 30, 1998 and
the Company is in the process of renegotiating with the bank.

COMPETITION

     The mail order catalog and retail  clothing  outlet  industries  are highly
competitive.  The Company's  catalogs  compete and its proposed  retail clothing
outlet store  intends to compete  generally  with other mail order  catalogs and
retail stores,  including department stores,  specialty stores,  discount stores
and mass merchants.  Many general and specialty catalog competitors,  as well as
retail stores, have substantially greater financial,  distribution and marketing
resources than the Company.  There are numerous  general and specialty  catalogs
selling  infants'  and  children's  items.  However,  based  upon  type of goods
offered, the Company considers its primary hardgood catalog  competition,  to be
"The Right Start Catalog," "One Step Ahead," "Sensational Beginnings," and "Hand
in Hand." "The Right  Start  Catalog"  and "One Step  Ahead" have  substantially
larger revenues than the Company,  even as adjusted to reflect  consolidation of
the revenues of The Natural Baby Catalog.

     Other  mail order  catalogs  for  children's  hardgood  products  which the
Company  believes are  competitors  to a lesser  extent are "Current  Children's
Products," "Troll Learn and Play," "Just for Kids,"  "Childcraft," "Toys to Grow
On," "Hearthsong,"  "Constructive Playthings," "Music for Little People," "Great
Kids," "The Great Kids Company,"  "Ultimate Baby Catalog," "San Francisco  Music
Box," "Stork Kit/Bundle of Joy," "Play Fair Toys," "Animal Town," "Alvin and the
Chipmunks,"  "Livonia Catalog," "Plus and Company," "Disney Catalog," "Storybook
Heirlooms,"  and "F.A.O.  Schwartz."  Many of those catalogs have  substantially
higher revenues than the Company.

     Certain catalogs,  such as "Hanna Anderson" and "Biobottoms,"  compete with
The Natural Baby Catalog in selected  product  areas,  but do not compete across
the entire  product line.  Other mail order  catalogs for  children's  softgoods
products which the Company  believes are competitors of The Natural Baby Catalog
to a lessor  extent are  "Playclothes,"  "After  the  Stork,"  "Talbot's  Kids,"
"Spiegel  Children's   Clothing,"  "Brights  Creek,"  "Gymboree,"  "Eddie  Bauer
Children's  Fashions,"  and "Spiegel  Kids." The Company  believes  that many of
these catalogs have substantially higher revenues than The Natural Baby Catalog.

     In the past,  many of the safety  products  carried by the  Perfectly  Safe
Catalog  were  generally  hard-to-find,  lower price items,  such as  electrical
outlet  guards,  appliance cord  shorteners and appliance door latches.  Many of
these  items  are now  stocked  by  retail  stores,  discount  stores  and  mass
merchants.

     In 1995, the Company experienced a competitive reaction to its introduction
of Jeannie's Kids Club Catalog which resulted in three other children's catalogs
refusing  to  exchange  with,  or rent  their  mailing  lists to,  the  Company,
resulting in a decrease in sales of the Perfectly Safe Catalog from $5.0 million
in 1994 to $4.7  million in 1995.  During  1997,  the Company  identified  other
mailing lists which have helped to increase the  circulation and revenues of the
Perfectly Safe Catalog. The Company has not experienced

                                       10

<PAGE>
such a reaction from its acquisition of The Natural Baby Catalog, although there
can be no  assurance  that  such a  competitive  reaction  will not occur in the
future,  or that such an  occurrence  would not have an adverse  effect upon the
profitability of The Natural Baby Catalog.

TRADEMARKS AND TRADE NAMES

     The  Company  owns  federally  registered  trademarks:   "Perfectly  Safe";
"Perfectly  Safe, The Catalog For Parents Who Care" with logo;  "Perfectly  Safe
Guarantee"  with logo;  and,  logo.  The Company  recently  registered its mark,
"Jeannie's  Kids Club," as a unique  identification  of its Jeannie's  Kids Club
Catalog.  With the recent  acquisition of The Natural Baby Catalog,  the Company
acquired the ownership of the trademark  "The Natural Baby Co., Inc." with logo,
which is a federally registered  trademark.  There can be no assurance as to the
extent of the  protection  that will be  provided  to the Company as a result of
having  such  trademarks  and trade  names or that the  Company  will be able to
afford the expenses of any complex  litigation which may be necessary to enforce
the proprietary rights.

REGULATORY MATTERS

     The Company's business,  and the catalog industry in general, is subject to
regulation  by a variety of state and  federal  laws  relating  to,  among other
things,  advertising and sales taxes. The Federal Trade Commission regulates the
Company's  advertising  and trade  practices  and the  Consumer  Product  Safety
Commission has issued regulations governing the safety of the products which the
Company sells in its catalogs.  No assurances can be given that the Company will
comply with all state and federal laws affecting its business in the future.

     Under current law, catalog  retailers are permitted to make sales in states
where they do not have a physical  presence  without  collecting  sales tax. The
Company  believes that it collects sales taxes in states where it is required to
do so. However, since 1987, legislation has been introduced  periodically in the
U.S.  Congress which would permit states to require sales tax collection by mail
order companies.  To date, this proposed legislation has not been passed. Should
Congress,  however,  pass such  legislation in the future,  most states could be
expected to require sales tax collection by out-of-state  mail order  companies.
This would  increase  the cost of  purchasing  the  Company's  products in those
states  and  eliminate  whatever  competitive  advantage  that the  Company  may
currently enjoy with respect to in-state competitors in terms of sales taxation,
as well as increasing  the  administrative  and overhead costs to the Company in
connection  with the  collection  of such sales tax.  There can be no assurances
given that these  state  sales tax laws will not be changed in the future to the
detriment of the  Company.  The Company has no claims or  regulatory  matters in
process or pending as of March 1, 1999.

PRODUCT LIABILITY INSURANCE

     Since  1990,  the  Company's  parent,  Duncan  Hill,  has  carried  product
liability  insurance  for the  Company and  Havana.  The current  coverage is $1
million per  occurrence  with an  aggregate  limit of $2 million.  The policy is
supplemented by an umbrella

                                       11

<PAGE>
liability policy providing  coverage of an additional $1 million per occurrence,
$2 million aggregate.  The policies are carried by Duncan Hill, with the Company
and Havana as named  insureds.  The policies are issued for a period of one year
and are currently in effect through  September 17, 1999. The Company may, in the
future,  procure the same  coverage  in its name,  alone.  Although  the Company
believes that its present insurance coverage is sufficient for its current level
of  business  operations,  there is no  assurance  that such  insurance  will be
sufficient to cover potential  claims,  or that adequate,  affordable  insurance
coverage will be available to the Company in the future. An uninsured successful
claim  against  the  Company or a  successful  claim in excess of the  liability
limits or relating to an injury  excluded under the policy could have a material
adverse effect on the Company.

EMPLOYEES

     As of March 1, 1998, the Company had 72 full time employees and 8 part time
employees. Of this total, 13 employees or 16% of total full-time employees, hold
positions  of  managers;  57  employees  or 71% of the total,  hold  hourly paid
positions.  The largest single segment of the Company's  employment is in direct
labor  involving  order entry,  customer  service,  and  distribution,  where 48
employees or 60% of total  Company  employment  is  involved.  The work force is
non-union,  and  the  Company  does  not  anticipate  a  union  presence  in the
foreseeable future.

Item 2.  Description of Property.

     The Company's  principal  offices and  telemarketing  center are located in
Canton,  Ohio.  The facility  consist of 5,600 square feet and is leased through
September  30,  1999 with an  option  to renew  for a period  of one  year.  The
Company's warehouse and distribution center is located in North Canton, Ohio and
consists of  approximately  23,000  square feet,  which is leased at the monthly
rate of $13,329 through  September 30, 1999, and subject to earlier  termination
without  penalty at the option of the lessee upon 90 days written  notice to the
landlord.  All leases are in the name of Duncan  Hill and the rent is charged to
the Company and Havana consistent with past practices.

     In August 1998,  the Company  entered into a lease for retail space at 4418
Belden Village Street, Canton, OH, containing approximately 3,400 square feet of
space.  This lease,  which amends an earlier lease, has a term expiring December
31, 2002. The Company will pay a monthly rent of approximately $2,250 commencing
30 days after the Company  takes  possession  of the  premises  and the landlord
notifies the Company that the space is ready for occupancy.

     The  Company  intends to  establish  and lease a new  operations  center of
approximately  34,000  square  feet in 1999.  This  operation  center,  which is
expected  to be  located  in or  about  Canton,  Ohio,  would  include  customer
relations,  order entry and  warehouse  and  distribution  operations  and would
replace its existing warehouse facility. Moving costs are estimated at $35,000.

Item 3.  Legal Proceedings


                                       12

<PAGE>
     In the normal  course of  business,  the Company may be involved in various
legal proceedings from time to time.  Presently,  however,  the Company is not a
party to any  litigation,  whether  routine or incidental  to its  business,  or
otherwise.

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

     In December  1998, at the Company's  Annual  Meeting,  the Company  elected
William L. Miller,  Jeanne E. Miller,  Clark D. Swisher and Alfred M. Schmidt as
directors  of the  Company.  No other  matters  were  voted  upon at the  Annual
Meeting.



                                       13

<PAGE>
                                    PART II

Item 5.  Market for Common Equity and Related Stockholder Matters.

     In June 1997, the Company sold Units to the public consisting of two shares
of Common Stock and eight Class A Warrants  (the "1997  Units").  The 1997 Units
were quoted from June 1997 to November 1997 and the  Company's  Common Stock and
Class A Common Stock  Purchase  Warrants  ("Class A Warrants")  have been quoted
since June 1997 on the OTC Electronic Bulletin Board of the National Association
of  Securities  Dealers,  Inc.  ("NASD")  under the  symbols  "KDST" and "KDSTW,
respectively." As of March 26, 1999 at 4:00 P.M. Eastern Standard Time, the last
sale price of the  Common  Stock and Class A  Warrants  in the  over-the-counter
market were $2.625 and $.3125,  respectively.  The following  table reflects the
high and low sales prices for the Company's 1997 Units, Common Stock and Class A
Warrants for the periods indicated as reported by the NASD.
<TABLE>
<CAPTION>

                                                    1997 Units
         Fiscal Year Ended December 31, 1997:                      HIGH                               LOW
         -----------------------------------                       ----                               ---
<S>                <C>                                             <C>                                <C>   
              June 1997                                            $62.00.............................$14.00
              Third Quarter                                         62.00............................  54.00
              October through November 1997                         50.00............................  35.00

                                                   Common Stock
         Fiscal Year Ended December 31, 1997:
              June 1997                                            $11.25.............................$ 5.00
              Third Quarter                                         10.00...............................4.00
              Fourth Quarter                                         7.50...............................5.25

         Fiscal Year Ended December 31, 1998:
              First Quarter                                         $6.50............................. $3.625
              Second Quarter                                         5.135..............................2.375
              Third Quarter                                          4.5................................2.125
              Fourth Quarter                                         3.25...............................1.875
                                                 Class A Warrants
         Fiscal Year Ended December 31, 1997:
              June 1997                                           $  6.00............................$  5.00
              Third Quarter                                          6.53........................... ...5.00
              Fourth Quarter                                         5.47.................................63

         Fiscal Year Ended December 31, 1998:
              First Quarter                                       $  2.25..........................  .$ 0.25
              Second Quarter                                         1.75                               0.50
              Third Quarter                                          0.813..............................0.094
              Fourth Quarter                                          .75............................... .125
</TABLE>

     The  quotations in the tables above  reflect  inter-dealer  prices  without
retail markups, markdowns or commissions.

     The  Company had 16 and 1 record  holders of its Common  Stock and Series 1
Preferred Stock, respectively,  as of March 26, 1999 as reported by its transfer
agent (American Stock Transfer & Trust Company).  The foregoing does not include
beneficial

                                       14

<PAGE>
     holders of the Company's Common Stock which are held in "street name" (i.e.
nominee accounts such as Depository Trust Company).

     No cash  dividends have been paid by the Company on its Common Stock and no
such payment is anticipated in the foreseeable future.

     In March 1999,  the  Company  completed  a public  offering  of  securities
through  Fairchild  Financial  Group,  Inc. In the  offering,  the Company  sold
400,000  Units at the public  offering  price of $5.50 per Unit (the  "Preferred
Units").  Each Preferred Unit consisted of one share of Series 1 Preferred Stock
and two Series 1 Preferred  Stock  Purchase  Warrants.  Commencing  September 3,
2000, each share of Series 1 Preferred  Stock is convertible  into two shares of
Common Stock.  Commencing September 3, 2000, each Preferred Warrant entitles the
holder to purchase one share of Series 1 Preferred Stock at an exercise price of
$6.00 per share  until the close of  business  on March 3, 2002.  The  Preferred
Units,  Series 1 Preferred Stock and Series 1 Preferred Stock Warrants commenced
trading on the OTC Electronic Bulletin Board on March 4, 1999 under the symbols,
"KDSPU," "KDSPP" and "KDSPW," respectively. As of the close of business on March
26, 1999,  the closing sales prices of the Preferred  Units,  Series 1 Preferred
Stock and Preferred Warrants were $7.75, $7.00 and $1.0625, respectively.

Item 6.   Managements' Discussion and Analysis or Plan of Operation.

RESULTS OF OPERATIONS

1998 versus 1997

     Total net sales for 1998 increased  $3,156,263,  or 28.7%,  to $14,172,864,
compared with  $11,016,601  for 1997. Net sales include sales from  merchandise,
Jeannie's Kids Club memberships, shipping and handling charges, and mailing list
rentals.

     The increase in sales is mainly  attributable  to The Natural Baby Catalog,
which  recorded 1998 sales of $6,188,586  compared with  $3,876,555 in 1997. The
Natural baby Catalog accounted for 73% of the Company's overall sales increase.

     The net sales of the Perfectly Safe Catalog increased to $4,932,732 in 1998
compared with  $3,937,809 in 1997.  This  increase is  attributable  to improved
catalog  merchandising  which permitted a 44.8% increase in catalog  circulation
from 2,933,037  catalogs mailed in 1998 compared with 2,025,375  catalogs mailed
during 1997.  The  increases in sales of The Natural Baby Catalog and  Perfectly
Safe Catalog were partially  offset by a decrease in net sales of Jeannie's Kids
Club Catalog, which decreased to $3,051,546 in 1998 compared with $3,202,237 for
1997.  The  circulation  of Jeannie's Kids Club was reduced 4.4% to 1,369,001 in
1998,  compared  with  circulation  of  1,432,716 in 1997.  Cost of sales,  as a
percentage of net sales,  remained fairly  consistent at 61.8% for 1997 to 61.5%
for 1998.

     Selling expenses,  which consist of advertising and other marketing related
expenses  expressed as a percentage of sales,  increased  from 26.9% for 1997 to
28.0%

                                       15

<PAGE>
     for 1998.  The  increase  was due to higher  catalog cost as a component of
advertising expense.

     General and administrative expenses were $1,486,889, or 10.5% of net sales,
for 1998, and $1,077,041,  or 9.8% of net sales, for 1997.  Approximately 32% of
the increased  administrative  expense was  attributable  to increased wages and
related costs of employment  due to business  expansion.  Building and occupancy
expense accounted for 21% of the increased  administrative  expense,  and 13% of
increased   administrative   expenses   were  incurred  for   depreciation   and
amortization  of Natural Baby's mailing lists and goodwill.  The above mentioned
increased costs reflect the first full year's impact of the administrative costs
of the Natural Baby Catalog acquisition, which was completed in July 1997.

     Effective January 1, 1998, The Havana Group, Inc. entered into an agreement
with the Company whereby the Company provided administrative functions to Havana
at an annual cost of $206,100  consisting of: $34,000 for accounting and payroll
services, $51,600 for administration and human resource management,  $34,900 for
data  processing,  $32,200 for office  equipment and facilities use, $38,100 for
merchandising and marketing services,  $15,300 for purchasing services and $2.40
per order processed for order fulfillment.  While management believes these fees
would represent  actual costs should Havana  undertake to provide these services
itself,  cancellation  or modification of the agreement would have the impact of
altering the general and administrative expense structure of the Company.

     Net loss for the year ended  December 31, 1998 was $35,788,  or 0.3% of net
sales,  compared to a net profit of  $50,097,  or 0.5% of net sales for the same
period of 1997.  The Company  attributes  this  change  primarily  to  increased
general and administrative  expenses, with slightly higher than expected selling
expenses.

Liquidity and Capital Resources 

     In March 1999,  the  Company  completed  a public  offering  of  securities
through  Fairchild  Financial  Group,  Inc. In the  offering,  the Company  sold
400,000 Units at the public  offering  price of $5.50 per Unit.  Each  Preferred
Unit  consisted  of one  share of  Series 1  Preferred  Stock  and two  Series 1
Preferred  Stock  Purchase  Warrants.  The  Company  realized  net  proceeds  of
approximately $1,960,000 from this Offering.

     At March 1, 1998,  the balance of the  Company's  credit line was $762,000.
The Company's  current credit line is $800,000,  payable on demand.  The line is
secured by the assets of the Company and its  affiliated  companies,  Havana and
Duncan Hill,  and is  guaranteed  by W. Miller,  the  Company'  Chief  Executive
Officer.  The  interest  rate is 1% over prime.  It is the policy of the bank to
review the credit facility annually,  and to require that the Company maintain a
zero balance on the credit line for a period of thirty consecutive days sometime
during the course of each year.  The bank has agreed to waive the "zero balance"
required for the fiscal 1997 and 1998 loan years because the  Company's  current
cash flow would not allow it to comply before then.


                                       16

<PAGE>
     At December  31,  1998,  the Company had a deficit in retained  earnings of
$1,438,371,  compared with a deficit of  $1,402,583  at December 31, 1997.  This
change  resulted from the 1998 net loss of $35,788.  For the year ended December
31, 1998, operating activities provided $120,094 in cash. Funds were provided by
increases in accounts payable of $724,861,  decreases in accounts  receivable of
$83,469,  and non-cash  expenses of depreciation  and  amortization of $181,932.
Funds were  consumed by inventory  increases of $536,903,  increases in deferred
advertising  of $155,435,  and  increases  in prepaid  expenses and other assets
totaling $142,042. For the year ended December 31, 1998, the Company's investing
activities used $351,027 in cash. Property and equipment additions used $130,035
for increases in equipment and the  establishment  of the "Kids Catalog  outlet"
retail store. Additionally, the Company invested $220,992 in catalog development
and redesign to alter the format,  appearance,  design,  and presentation of its
products.

     For the year ended  December 31, 1998, the Company's  financing  activities
provided $154,465 in cash. This consisted of borrowings on its line of credit in
the amount of $91,000,  increases in prepaid expenses for its anticipated public
offering of $77,008, and decreases in amounts due from affiliates of $140,473.

     For the year ended  December  31,  1998,  the  combined  effect of net cash
provided  by  operating  activities  of  $120,094,  net cash  used by  investing
activities  of  $351,027,  and net cash  provided  by  financing  activities  of
$154,465  decreased  cash from  $101,894  at  December  31,  1997 to  $25,426 at
December 31, 1998.

     For the year ended  December 31, 1997,  the operating  activities  consumed
$576,038 in cash  through  increases  in accounts  receivable,  inventories  and
prepaid expenses , but provided  $553,709 in cash through a decrease in deferred
catalog  expense,  and an increase in accounts  payable,  customer  advances and
other.  The net effect of these changes and non cash charges of $80,687 relating
to depreciation and  amortization,  when added to the net profit was an increase
in the  Company's  cash  position,  so  that  net  cash  provided  by  operating
activities  was $108,455.  For the year ended  December 31, 1997,  the Company's
financing  activities provided $1,497,636 in cash, with $2,619,890 from the sale
of common stock,  $21,000 from  borrowings  on the  Company's  bank credit line,
$43,782  from a decrease in prepaid  amounts for the public  offering and $5,000
from  the  sale of  preferred  stock,  while  using  $718,035  from  changes  in
obligations  to/from  affiliates,  $107,143 for the  repurchase of the Company's
Common  Stock from bridge  lenders  relating  to the  Company's  initial  public
offering and $366,858  from the  repayment of debt,  $266,858  which was paid to
related  parties.  For the year ended December 31, 1997, the combined  effect of
net cash  provided by operating  activities  of $108,455,  net cash  provided by
financing  activities of  $1,497,636,  and  investments  in fixed assets and the
acquisition of The Natural Baby Catalog totaling $1,752,845, decreased cash from
$248,648 to $101,894 at December 31, 1997.

     Effective  June 30,  1996,  the  Company  was formed by Duncan Hill for the
purpose of acquiring  certain operating assets of Duncan Hill and the children's
catalog  business of Perfectly  Safe.  The Company paid for those assets through
the  assumption  of Perfectly  Safe  liabilities  and Duncan Hill's bank line of
credit, by a promissory note payable to

                                       17

<PAGE>
Duncan  Hill and by  preferred  and  common  stock  of the  Company.  The  first
installment  of the  promissory  note to Duncan Hill in the principal  amount of
$66,858, plus accrued interest, was paid on July 7, 1997. The remaining $300,000
was satisfied during 1998 in a non-cash  transaction  where Havana, a subsidiary
of Duncan Hill,  issued 110,000 shares of its Series B Preferred Stock to Duncan
Hill.  In return,  Duncan Hill assumed a $300,000  liability due to the Company.
This  $300,000  liability to the Company was used to satisfy the  $300,000  debt
owed from the Company to Duncan Hill.

     In order to finance  operations,  the Company  entered into certain private
financing  agreements  commencing in October,  1996. In that regard, the Company
issued 8% promissory notes in the amount of $125,000 to be repaid with a portion
of the proceeds from its initial  public  offering,  8% promissory  notes in the
amount of $75,000,  convertible upon the effective date of the Company's initial
public offering into Warrants to purchase  1,500,000 shares of Common Stock (the
"8% Convertible  Notes") and 1,300,000  shares of the Company's Common Stock for
$162,500.  Subsequently, the holders of the 8% Convertible Notes, at the request
of the  Representative  agreed to accept a cash  payment  at the  closing of the
initial public offering in the face amount of $75,000,  plus accrued interest at
8% per annum, in lieu of the conversion of their notes into 1,500,000  Warrants.
Also, in July 1997, the Company  repurchased  857,144 shares of the Common Stock
previously  issued in the private  financings at a repurchase price of $.125 per
share.  On July 2,  1997,  the  Company  repaid the 8%  promissory  notes in the
principal amount of $125,000, plus accrued interest, the 8% Convertible Notes in
the principal amount of $75,000, plus accrued interest, and the payment of notes
in the principal amount of $107,143, plus accrued interest for the repurchase of
the 857,144 shares of Common Stock of the Company  mentioned  above,  out of the
proceeds of its initial public offering:

     The Company filed a registration statement in 1997 relating to the offering
by the Company of 300,000 units at an offering price of $12 per unit,  each unit
consisting  of two shares of Common  Stock,  $.001 par value,  and eight Class A
Warrants.  The Company's  initial public offering was declared  effective by the
Commission on June 26, 1997, and the proceeds were distributed to the Company on
July 2, 1997. See "Notes To Financial Statements - Note 7. Public Offering."

     On July 2, 1997, the Company  completed its acquisition of The Natural Baby
Catalog  from  Baby Co.  The  Company  paid the  following:  a cash  payment  of
$1,225,000 to the seller; a cash payment in the amount of $219,831 in payment of
a note  owed by Baby Co.  in the  principal  amount of  $197,603  together  with
accrued  interest in the amount of $22,228  through July 2, 1997; a cash payment
of  $50,134  to Core  States  Bank to pay off Baby  Co's  line of  credit in the
principal amount of $50,000 plus interest of $134; the assumption by the Company
of Baby Co.'s accounts payable incurred in the ordinary course of business which
was  approximately  $266,287  as of June  30,  1997;  assumption  of Baby  Co.'s
remaining lease obligations in the approximate  amount of $24,000 as of June 30,
1997;  a  convertible  promissory  note issued by the Company to Baby Co. in the
amount of $250,000  (Convertible  Note); a second  promissory  note in an amount
which  reflects the pre-tax  profits of Baby Co. in excess of $300,000  from the
date of completion  of the  acquisition  through  December 31, 1997 (the "Excess
Profit  Note");  70,000 shares of the  unregistered  Common Stock of the Company
issued to Baby Co., valued at $3.50

                                       18

<PAGE>
     per share,  which are subject to a two year  lock-up  until June 26,  1999;
and, the agreement on the part of W. Miller to guarantee the payments to be made
by the Company under the  convertible  note on the first and second  anniversary
dates.  Effective  December 31, 1997,  the Company paid $100,000 in exchange for
the  cancellation  of both the $250,000  Convertible  Note and the Excess Profit
Note mentioned above. The Company also signed a four year non-compete  agreement
with the sellers at a cost of $130,000, payable over two years.

     The  Company  uses  the  intrinsic   value-based   method  for  stock-based
compensation to employees.  As a result,  this standard does not have any effect
to the Company's  financial  statements other than to require  disclosure of the
pro forma effect on net income  (loss) of using the fair  value-based  method of
accounting.

     Effective  January 1, 1998 the Company  adopted  SFAS No.  130,  "Reporting
Comprehensive  Income."  SFAS No. 130  establishes  new  standards for reporting
comprehensive  income and its  components.  The effect of the  adoption  was not
material.

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related  Information."  SFAS No.
131 changes the standards for reporting financial results by operating segments,
related products and services, geographic areas and major customers. The Company
adopted SFAS No. 131 for the fiscal year ended  December 31, 1998. The effect of
such adoption in 1998 was not material.

     In March 1998, Statement of Position 98-1, Accounting for Costs of Computer
Software  Developed or Obtained for Internal  Use, was issued.  The SOP provides
guidance on accounting for costs of computer software based on the project stage
and other  criteria and is effective for financial  statements  for fiscal years
beginning  after  December 15,  1998.  The Company  believes  that the effect of
adoption will not be material.

     In June 1998,  the Financial  Accounting  Standards  Board issued SFAS 133,
"Accounting for Derivative  Instruments and Hedging  Activities." This statement
established  accounting  and  reporting  standards for  derivative  instruments,
including certain derivative  instruments  embedded in other contracts,  and for
hedging activities.  It requires recognition of all derivatives as either assets
or liabilities on the balance sheet and measurement of those instruments at fair
value. The Company does not anticipate  engaging in such transactions,  but will
comply with  requirements of SFAS 133 when adopted.  This statement is effective
for all fiscal  quarters  beginning  after June 15, 1999. The effect of adopting
SFAS 133 is not expected to be material.

     The  Company  intends  to meet its cash  requirements  over the next  12-15
months  from  cash  generated  from  operations  and  proceeds  of its  recently
completed offering. The Company intends to seek to expand and/or restructure its
line-of-credit  with its existing  institutional  lender. The Company intends to
establish a new operations center and develop and establish a website.

Year 2000 Issues


                                       19

<PAGE>
     Many existing  computer  programs use only two digits to identify a year in
the date field.  There programs were designed and developed without  considering
the  impact  of the  upcoming  change in the  century.  If not  corrected,  many
computer  applications  could fail or create erroneous results by or at the year
2000.  The Company is currently  working to correct its  computers  and does not
believe that the  expenditures  will  materially  adversely  impact the Company,
although no assurances  can be given in this regard.  The Company  purchases its
materials from numerous  vendors.  While the Company has not determined  whether
all  its  vendors  will  be year  2000  compliant  before  the  problem  arises,
Management believes that since it is not dependent on any major vendor, that its
operations  will not be  materially  adversely  effected by the failure of a few
vendors to timely correct the problem.  However, no assurances can be given that
Management will be correct in its belief.

Forward Looking Statements and Associated Risks

     This  Form  10-KSB  contains  forward  looking   statements  which  reflect
management's  current  views and  estimates  of future  economic  circumstances,
industry  conditions,  company  performance  and the  financial  results.  These
forward-looking  statements are based largely on the Company's  expectations and
are subject to a number of risks and uncertainties, many of which are beyond the
Company's  control,  including,  without  limitation,  competition  and possible
future changes to state sales tax laws.  Actual results could differ  materially
from these  forward  looking  statements as a result of changes in the trends in
the children's mail order catalog industry, competition,  availability and price
of goods and other  factors.  Any changes in such  assumptions  or factors could
produce significantly different results.

Item 7.  Financial Statements

     The information  required by Item 8, and an index thereto commences on page
F-1, which pages follow this page.

Item 8.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure.

                                      Not applicable.


                                       20

<PAGE>
                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons; 
         Compliance with Section 16(a) of the Exchange Act.

(a)      Identification of Directors

         The names,  ages and principal  occupations  of the  Company's  present
directors, and the date on which their term of office commenced and expires, are
as follows:
<TABLE>
<CAPTION>
                                                                   First
                                Term of        Became              Principal
Name                 Age        Office         Director            Occupation  
 
<S>                  <C>        <C>             <C>                <C>
William L. Miller    62         (1)             1981               Chairman of the
                                                                   Board, Chief
                                                                   Executive Officer
                                                                   and Principal
                                                                   Financial Officer of
                                                                   the Company

Jeanne E. Miller (2)  51        (1)             1982               President of the
                                                                   Company

Clark D. Swisher      47        (1)             1971               Senior Vice
                                                                   President of the
                                                                   Employee Benefits
                                                                   Division of the
                                                                   Leonard-McCormick
                                                                   Agency

Alfred M. Schmidt     65        (1)             1998               President of Schmidt
                                                                   Group International,
                                                                   Inc.
</TABLE>

     (1) Directors are elected at the annual  meeting of  stockholders  and hold
office until the following annual meeting.

     (2) Mr. and Mrs. Miller are married.

(b)      Identification of Executive Officers.

     William L.  Miller is  Chairman  of the  Board,  Chief  Executive  Officer,
Principal Financial Officer,  Treasurer and Secretary of the Company.  Jeanne E.
Miller is President of the Company.


                                       21

<PAGE>
     The  terms of all  officers  expire  at the  annual  meeting  of  directors
following the annual stockholders  meeting.  Subject to their contract rights to
compensation,  if any, officers may be removed, either with or without cause, by
the Board of Directors,  and a successor elected by a majority vote of the Board
of Directors, at any time.

(c)      Business Experience

     WILLIAM  L.  MILLER,  Chairman  of  the  Board,  Chief  Executive  Officer,
Principal  Financial  and  Accounting  Officer,  Treasurer  and Secretary of the
Company since its  formation in July 1996.  Mr. Miller serves as Chairman of the
Board,  President and Chief  Executive  Officer of Havana since  December  1997.
Previously,  he was the sole director and an executive  officer of E.A. Carey of
Ohio,  Inc.  from 1984 to  December  1997.  Mr.  Miller had been a  director  of
Perfectly  Safe,  Inc. and its vice President since it was formed by Duncan Hill
in 1990 until July 1996.  Mr.  Miller is  President,  Founder  and a director of
Duncan  Hill,  a  company  he  formed  in  1977,  Mr.  Miller  founded  the  MBI
Corporation,  which designed and developed  packaging machinery  (1975-78).  Mr.
Miller served in executive capacities in the direct marketing industry from 1971
to 1975.  He holds a Bachelors  Degree.  in Mechanical  Engineering  from Purdue
University  and  a  Masters  Degree  in  Business  Administration  from  Indiana
University

     JEANNE E. MILLER has been a director of the  Company  since July 1996,  and
its  President  since  January 1998.  Previously,  she served as Executive  Vice
President of the Company  from July 1996 until  January  1998.  Since July 1996,
Mrs. Miller had been a director of Perfectly Safe, Inc., and its President since
its formation in 1990 until July 1996.  Mrs.  Miller  co-founded  Duncan Hill in
1977 and has been a director and its Vice President  since 1977.  Mrs. Miller is
the author of the child safety book THE PERFECTLY SAFE HOME,  published by Simon
and  Schuster in 1991 and has  appeared on network  television  to speak on that
subject.  Mrs.  Miller  served as Vice  President  and a  director  of Carey and
Highland Pipe Company,  both of which are subsidiaries of Duncan Hill, from 1984
to 1996.

     CLARK D. SWISHER is a director of the Company since July 1996.  Mr. Swisher
has  been  Vice   President   of  the   Employee   Benefits   Division   of  the
Leonard-McCormick  Agency, a general insurance agency, since 1984. Mr. Swisher's
professional  background includes membership in the National Association of Life
Underwriters and the University of Akron Business Advisory Council.  Mr. Swisher
has been a director of Duncan Hill since 1995.

     ALFRED M. SCHMIDT,  JR., a director of the Company since  September 1998 is
President of The Schmidt Group International,  Inc., direct marketing/management
consultants.  Mr.  Schmidt was the  entrepreneur  owner of New  Hampton  General
Store, a consumer catalog  company.  Mr. Schmidt was a Vice President of Hanover
House,  then the first Vice  President of Brooks  Brothers,  a national chain of
apparel  specialty  stores  with 65  stores in the U.S.  and six in  Japan.  Mr.
Schmidt  subsequently  was the  first  Vice  President  of Direct  Marketing  of
Bergdorf Goodman,  N.Y., a designer apparel retailer,  and Senior vice President
in charge of catalogs at the Franklin Mint, Franklin Center,  Pennsylvania.  Mr.
Schmidt finished his public career as President of Myron Manufacturing

                                       22

<PAGE>
     Company, a direct marketing firm selling advertising  specialty products by
catalog, direct mail, and telemarketing.  For the past twelve years, Mr. Schmidt
has led his  company in  catalog  consulting  with  clients  from  Europe to the
Pacific Rim. Mr. Schmidt is a member of the Direct  Marketing  Association,  the
1982 winner of the  prestigious  Henry Hoke Award and the DMA Echo Leader Award.
He was a founder of the Catalog  Leader's  Group.  Mr. Schmidt has served on the
DMA Catalog Council,  The Direct Marketing  Educational  Council, and the Direct
Marketing Idea Exchange.  Mr. Schmidt has been a contributing  writer to Catalog
Age Magazine,  Catalog  Business,  Direct Marketing  Magazine and D.M. News. Mr.
Schmidt has addressed  audiences  extensively  in the U.S. as well as Europe and
the Far East.

     Alfred M. Schmidt,  Jr. is an independent  director and the Company intends
to appoint a second  independent  director  as the fifth  director.  There is no
assurance,  however,  that  the  Company  will  be able to  attract  a  suitable
candidate at this stage of its development.

     The  Company  intends to  identify  and  appoint an  individual  who is not
affiliated  with the  Company  as its  fifth  director.  There is no  assurance,
however,  that the Company will be able to attract a suitable  candidate at this
stage of its development.

     Upon the  appointment of an additional  unaffiliated  director the Board of
Directors intends to establish a Compensation  Committee and an Audit Committee.
The Audit Committee,  which will consist of at least a majority of directors who
are  not   affiliated   with  the  Company,   will  among  other  things,   make
recommendations to the Board of Directors regarding the independent auditors for
the Company, approve the scope of the annual audit activities of the independent
auditors  and review  audit  results  and have  general  responsibility  for all
auditing  related matters.  The Compensation  Committee will consist entirely of
directors who are not affiliated with the Company.  The  Compensation  Committee
will review and recommend to the Board of Directors the  compensation  structure
for the Company's  officers and other  management  personnel,  including  salary
rates,  participation  in  incentive  compensation  and  benefit  plans,  fringe
benefits,  non-cash  perquisites and other forms of compensation.  The Committee
will also administer the Company's 1997 Long-Term Stock Incentive Plan.

     Fairchild Financial Group, Inc., the Managing  Underwriter of the Company's
IPO,  has been  granted by the Company the right to  designate  one  director to
serve on the Company's  Board of Directors for a period of three years from June
26, 1997. As of March 29, 1999, no such person has been designated.

     The Company's Certificate of Incorporation contains a provision eliminating
the personal  monetary  liability of directors to the extent  allowed  under the
General  Corporation  Law of the  State of  Delaware.  Under  the  provision,  a
stockholder  is able to  prosecute  an action  against a director  for  monetary
damages only if he can show a breach of the duty of loyalty, a failure to act in
good faith,  intentional  misconduct,  a knowing  violation  of law, an improper
personal benefit or an illegal dividend or stock  repurchase,  as referred to in
the provision, and not "negligence" or "gross negligence" in satisfying his duty
of care. In

                                       23

<PAGE>
     addition,  the provision  applies only to claims against a director arising
out of his role as a director or not,  if he is also an officer,  his role as an
officer or in any other capacity or to his responsibilities under any other law,
such as the federal securities laws. The provision, however, does not affect the
availability of seeking  equitable relief against a director of the Company.  In
addition,  the  Company's  Bylaws  provide that the Company will  indemnify  its
directors,  officers, employees and other agents to the fullest extent permitted
by Delaware law. Insofar as  indemnification  for liabilities  arising under the
Securities  Act of 1933, as amended (the  "Securities  Act") may be permitted to
directors,  officers  and  controlling  persons of the  Company  pursuant to the
foregoing  provisions,  or otherwise,  the Company has been advised that, in the
opinion of the  Securities  and Exchange  Commission,  such  indemnification  is
against  public  policy as expressed in the  Securities  Act and is,  therefore,
unenforceable.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

     Section  16(a) of the  Securities  Exchange  Act of 1934,  as amended  (the
"Exchange Act"), requires the Company's officers and directors,  and persons who
own  more  than ten  percent  of a  registered  class  of the  Company's  equity
securities,  to file  reports of  ownership  and changes in  ownership  with the
Securities and Exchange Commission (the "Commission").  Officers,  directors and
greater  than  ten  percent   stockholders  are  required  by  the  Commission's
regulations  to furnish the Company with copies of all Section  16(a) forms they
file. To Management's knowledge, no officer, director or person owning more than
10% of the Company's  Common Stock filed any reports late during its fiscal year
ended December 31, 1997,  except Alfred Schmidt filed late a Form 3 and a Form 4
for September  1998,  Clark D. Switzer filed late a Form 3 and William L. Miller
and Duncan Hill, Inc. each filed late a Form 4 for March 1998.

Compensation of Directors

     The Company pays its  directors  who are not also  employees of the Company
$500 for each meeting  attended and  reimburses  such  directors  for travel and
other expenses  incurred by them in connection with attending Board of Directors
meetings. Directors are eligible to participate in 1997 Stock Incentive Plan.


                                       24

<PAGE>
                                KIDS STUFF, INC.

                                FINANCIAL REPORT





                                       F-1


<PAGE>



                                KIDS STUFF, INC.

                                    CONTENTS



----------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                                          Page

<S>                                                                                                          <C>
INDEPENDENT AUDITORS' REPORT                                                                               F-3

FINANCIAL STATEMENTS
    Balance sheet                                                                              F-4 through F-5
    Statements of operations                                                                               F-6
    Statements of stockholders' equity                                                                     F-7
    Statements of cash flows                                                                   F-8 through F-9
    Notes to financial statements                                                            F-10 through F-22

</TABLE>



                                       F-2


<PAGE>
                          Independent Auditors' Report


To the Stockholders and Board of Directors
Kids Stuff, Inc.
Canton, Ohio

     We have audited the  accompanying  balance sheet of Kids Stuff,  Inc. as of
December 31,  1998,  and the related  statements  of  operations,  stockholders'
equity,  and cash flows for the years ended  December  31, 1998 and 1997.  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 Kids Stuff,  Inc. as of
December 31, 1998,  and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997, in conformity  with  generally  accepted
accounting principles.





HAUSSER + TAYLOR LLP





Canton, Ohio
March 20, 1999


                                       F-3


<PAGE>
                                KIDS STUFF, INC.

                                 BALANCE SHEET

                               December 31, 1998
<TABLE>
<CAPTION>

ASSETS

CURRENT ASSETS
<S>                                                                   <C>       
Cash .........................................................        $   25,426
Accounts receivahle ..........................................           251,544
Due from affiliates ..........................................           140,492
Inventories ..................................................         1,925,915
Deferred catalog expense .....................................           415,027
Prepaid expenses .............................................           166,497
                                                                      ----------
     Total Current Assets ....................................         2,924,901

PROPERTY AND EQUIPMENT
Leasehold improvements .......................................            35,982
Machinery and equipment ......................................            65,765
Data processing equipment ....................................           262,474
Furniture and tixtures .......................................            94,411
                                                                      ----------
                                                                         458,632
Less accumulated depreciation and amortization ...............           120,212
                                                                      ----------
                                                                         338,420
OTHER ASSETS, net of accumulated amortization

Goodwill .....................................................         l,072,905
Customer lists ...............................................           402,798
Catalog development and other ................................           289,110
                                                                      ----------
                                                                       1,764,813
                                                                      ----------

                                                                      $5,028,134
                                                                      ==========
</TABLE>




   The accompanying notes are an integral part of these financial statements.


                                      F -4

<PAGE>
                                KIDS STUFF, INC.


                                  BALANCE SHEET

                               December 31, 1998
<TABLE>
<CAPTION>



LIABILITIES AND STOCKHOLDERS' EQUITY


CURRENT LIABILITIES
<S>                                                                  <C>       
  Line of credit ..........................................          $  762,000
Accounts payable ..........................................           2,434,297
Customer advances .........................................               5,100
  Accrued expenses ........................................              39,861
  Total Current Liabilities ...............................           3,241,258


COMMITMENTS AND CONTINGENCIES


STOCKHOLDERS' EQUITY
Preferred stock, $.001 per share,
 10,000,000 shares authorized, 5,000,000
 shares issued and oustanding voting,
 without dividend .........................................               5,000
Common stock - $.001 par value,
 25,000,000 shares authorized,
 3,512,856 shares issued and
 outstanding ..............................................               3,513
Additional paid-in capital ................................           3,216,734
  Retained earnings (defcit) ..............................          (1,438,371)
  Total Stockholders' Equity ..............................           1,786,876

                                                                      5,028,134
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                      F-5

<PAGE>
                                KIDS STUFF, INC.


                            STATEMENTS OF OPERATIONS


                     Years Ended December 31, l998 and 1997

<TABLE>
<CAPTION>


                                                       1998           1997

<S>                                              <C>                 <C>       
SALES ......................................     $ 14,172,864        11,016,601
COST OF SALES ..............................        8,712,876         6,812,422
                                                 ------------      ------------
GROSS PROFIT ...............................        5,459,988         4,204,179


SELLlNG EXPENSES ...........................        3,966,452         4,204,179
GENERAL AND ADMINISTRATIVE EXPENSES ........        1,486,889         1,077,041
                                                 ------------      ------------
INCOME FROM OPERATIONS .....................            6,647           160,209


NET OTHER (EXPENSE) INCOME
  Interest expense .........................          (60,630)         (108,933)
                                                 ------------      ------------
Other ......................................           18,195            (1,179)
                                                 ------------      ------------
                                                      (42,435)         (110,112)

NET (LOSS) INCOME ..........................          (35,788)           50,097
                                                 ============      ============
BASIC AND DILUTED (LOSS) INCOME
  PER SHARE ................................     $       (.01)              .01
                                                 ============      ============
</TABLE>
 

The accompanying notes are an integral part of these financial statements.

                   F-6

<PAGE>
                                KIDS STUFF, INC.
                      STATEMENT'S OF STOCKHOLDERS' EQUITY
                        

                     Years Ended December 31, l998 and 1997
<TABLE>
<CAPTION>


                                        Common    Preferred      Paid-In        Retained       
                                        Stock     Stock          Capital        Earnings       Total



<S>                                     <C>          <C>           <C>         <C>             <C>      
BALANCE - JANUARY 1, 1997 .....         3,700           --         458,800     (1,452,680)     (990,180)

ISSUANCE OF 5,000,000 PREFERRED
 SHARES TO DUNCAN HILL ........          --            5,000          --             --           5,000

REPURCHASE OF 857,144
 COMMON SHARES FROM
 BRIDGE LENDERS ...............          (857)          --        (106,286)          --         (107,143)

NET PROCEEDS FROM THE
 ISSUANCE OF 600,000 COMMON
 SHARES IN PUBLIC OFFERING ....           600           --       2,619,290           --        2,619,890

ISSUANCE OF 70,000 UNREGISTERED
 COMMON SHARES FOR
 PURCHASE OF NATURAL BABY .....            70           --         244,930           --          245,000

NET INCOME  ...................          --             --            --           50,097         50,097
                                        --------       --------  ---------      ----------     ----------
BALANCE - DECEMBER 31, 1997 ...         3,513          5,000     3,216,734     (1,402,583)     1,822,664

NET LOSS ......................          --             --            --          (35,788)       (35,788)
                                        --------       --------  ---------      ----------     ----------
BALANCE - DECEMBER 31, 1998 ...   $     3,513    $     5,000   $ 3,216,734    $(1,438,371)   $ 1,786,876
                                        ========       ========  =========      ==========     ==========
</TABLE>

   The accompanying noLes are an integral part of these Financial statements.


                                       F-7

<PAGE>
                                KIDS STUFF, INC.


                            STATEMENTS OF CASH FLOWS

                     Years Ended December 31, l998 and 1997


<TABLE>
<CAPTION>
                                                            1998           1997
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                     <C>            <C>        
Net (loss) income ...................................   $   (35,788)   $    50,097
Adjustments to reconcile net (loss) income to nel
cash provided by operating activities:
Depreciation and amortization .......................       181,932         80,687
Decrease (increase) in accounts receivable .........         83,469       (139,937)
(Increase)in inventories ............................      (536,903)     (417,847)
(Increase) decrease in deferred catalog expense .....      (155,435)       203,464
(Ilncrease)in prepaid expenses .......................      (67,691)       (18,254)
(Increase) in other assets ..........................       (74,351)          --
Increase in accounts payable, customer
advances and accrued expenses .......................       724,861        350,245
Nct cash provided by operating activities ...........       120,094        108,455

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment and other assets      (130,035)     (157,023)
Amount paid for catalog development .................      (220,992)          --
Decrease in prepaid amounts for
acquisition of Natural Baby Catalog business ........          --          126,007
Purchase of Natural Baby Catalog business ..........           --       (1,721,829)
Net cash (used) by investing activities .............      (351,027)    (1,752,845)

CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on line of credit - net ..................        91,000         21,000
Sale of common stock ................................          --        2,619,890
Purchase of common stock ...........................           --         (107,143)
Sale of preferred stock ............................           --            5,000
Payments on long-term debt - related party .........           --        (266,858)
Payment on note payable for acquisition of ........            --
Natural Baby Catalog ................................          --         (100,000)
(Increase) decrease in prepaid amounts for
public offering .....................................       (77,008)        43,782
(Decrease) in due to attiliates .....................          --         (137,070)
Decrease (increase) in due from affiliates ..........       140,473       (580,965)
Net cash provided by tinancing activities ...........   $   154,465    $ 1,497,636

</TABLE>


   The accompamying notes are an integral part of these financial statements.


                                       F-8

<PAGE>
                                KIDS STUFF, INC.


                            STATEMENTS OF CASH FLOWS


                     Years ended December 31, 1998 and 1997



<TABLE>
<CAPTION>


                                                   1998           1997


<S>                                               <C>           <C>      
NET (DECREASE) IN CASH ........................   $ (76,468)    (146,754)
CASH - BEGINNING ..............................     101,894      248,648


CASH - ENDING .................................      25,426      101,894

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION


  Cash paid during the year for interest ......      60,630      108,778

SUPPLEMENTAL DISCLOSURE OF NON-CASH
  INVESTING ACTIVITY

  Borrowing on note payable for the purchase of
  the Natural Baby Catalog ....................          $-    $ 100,000

  Issuance of 70,000 unregistered common sharcs
  for the purchasc of The Natural Baby Catalog           $-    $ 245,000



SUPPLEMENTAl, DISCLOSURE OF NON-CASH
  FINANCING ACTIVITY


  The Havana Group, a subsidiary of
     Duncan Hill, Inc., issued
  110,000 shares of its Series
  B Preferred Stock to Duncan Hill ............
  In return, Duncan Hill assumed a
  $300,000 liability due to Kids
  Stuff; Inc. This $300,000 liability
  to Kids Stuff; Inc. was  used to satisfy
  the $300,000 debt owed from Kids Stuff;
  Inc. to Duncan Hill .........................   $ 300,000           $-
</TABLE>


   The accompamying notes are an integral part of these financial statements.


                                       F-9

<PAGE>


                                KIDS STUFF, INC.

                          NOTES TO FINANCIAL STATEMENTS




Business Description and Summary of Significant Accounting Policies

     A. Business  Description - Kids Stuff, Inc. ("Kids Stuff" or the "Company")
is in the mail  order  business  and sells to  customers  throughout  the United
States.  Duncan Hill, Inc. owns 85% of the Company's  outstanding voting capital
stock as of December  31,  1998.  Perfectly  Safe,  a division  of the  Company,
primarily  sells  children's  safety products for use up to age 3. Jeanne's Kids
Club, a division of the Company, sells hard good products for children primarily
up to the age of 3. Natural Baby, a division of the Company,  sells clothing and
toys for children  primarily up to the age of 3. Products are  purchased  from a
variety of vendors.

     B. 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.

     C. Fair Value of Financial  Instruments - The fair value of cash,  accounts
receivable,  accounts payable and other short-term obligations approximate their
carrying values because of the short maturities of those financial  instruments.
In accordance with Statement of Accounting  Standards No. 107, "Disclosure About
Fair Value of Financial  Instruments," rates available at balance sheet dates to
the Company are used to estimate the fair value of existing debt.

     D.  Trade  Receivables  - It is the  Company's  policy to  record  accounts
receivable net of an allowance for doubtful accounts.  Management has determined
that no allowance  is  necessary  as of December 31, 1998.  Bad debt expense was
$49,199  and  $37,904  for  the  years  ended   December   31,  1998  and  1997,
respectively.

     E. Inventories  consist of finished goods held for resale and are stated at
the  lower  of cost or  market  with  cost  being  determined  by the  first-in,
first-out (FIFO) method.

     F.  Deferred  catalog  expenses  are costs of catalogs  mailed to customers
which are deferred  and  amortized  over periods  ranging from four weeks to six
months,  the estimated length of time customers  utilize catalogs and other mail
order mailings from the Company.  Catalog  expense was $3,317,565 and $2,473,778
for the years ended December 31, 1998 and 1997, respectively.




                                      F-10


<PAGE>
                                KIDS STUFF, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)




Business Description and Summary of Significant Accounting Policies (continued)

     G.  December  31, 1998 prepaid  expenses  include  $77,008  relative to the
preferred stock public offering which occurred in 1999 (see Note 11).

     H.  Property and equipment  are carried at cost and  depreciated  using the
straight-line  method over their estimated useful lives ranging from five to ten
years.  Depreciation expense amounted to $46,457 and $29,541 for the years ended
December 31, 1998 and 1997, respectively.

     Maintenance,  repairs, and minor renewals are charged against earnings when
incurred. Additions and major renewals are capitalized.

     I.  Intangible  Assets - During 1997, the Company  purchased the net assets
and  operations  of The Natural Baby Company as discussed in Note 4.  Management
has determined the fair value of the customer list acquired in that  acquisition
to be  $505,000.  The  excess  purchase  price over the value  allocated  to the
specifically  identifiable  assets  acquired  amounted  to  $1,148,692  and  was
recorded  as  goodwill.   The  customer  list  is  being   amortized  using  the
straight-line  method over seven years.  Goodwill is being  amortized  using the
straight-line  method over twenty years.  Accumulated  amortization was $102,202
and $78,187, respectively, for the customer list and goodwill as of December 31,
1998.

     During 1998, the Company redesigned the Natural Baby Company, the Perfectly
Safe and the Kids Club catalogs.  Costs of redesigning  these catalogs  totaling
$220,992  were  capitalized  and are being  amortized  over 48 months  using the
straight-line  method.  Accumulated  amortization  was $6,233 as of December 31,
1998.

     J. The Company developed and maintains a mailing list of customers who have
purchased  merchandise in the recent past. The cost of developing,  maintaining,
and updating this list is expensed in the period incurred.

     K. Per  Share  Amounts  - Net  income  per  share is  calculated  using the
weighted average number of shares outstanding during the year for basic earnings
per share.  Diluted  earnings per share are  calculated  to include the dilutive
effect of stock  options  and  warrants.  The  number of shares  outstanding  in
computing basic and diluted earnings per share for 1998 and 1997 are as follows:



                                      F-11


<PAGE>
                                KIDS STUFF, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)




Business Description and Summary of Significant Accounting Policies (continued)
<TABLE>
<CAPTION>

                                                              1998           1997
                                                              ----           ----

Actual weighted average number of common
<S>                                                          <C>           <C>      
shares outstanding for basic earnings per share              3,512,856     3,551,432

Effect of dilutive warrants                                      -           768,000
                                                            ------------- ----------

Weighted average assuming conversion
used for diluted earnings per share                          3,512,856     4,319,432
                                                             =========     =========
</TABLE>

     L. New Authoritative Pronouncements

     In June 1997, SFAS 130, "Reporting  Comprehensive Income," was issued. SFAS
130  established  new  standards  for  reporting  comprehensive  income  and its
components and is effective for fiscal years  beginning after December 15, 1997.
The Company  adopted this new standard  during 1998.  The effect of adoption was
not material.

     In June 1997,  the Financial  Accounting  Standards  Board issued SFAS 131,
"Disclosure About Segments of an Enterprise and Related  Information."  SFAS 131
changes the  standards for reporting  financial  results by operating  segments,
related  products and  services,  geographical  areas and major  customers.  The
Company  adopted this new standard  during 1998.  The effect of adoption was not
material.

     In June 1998,  the Financial  Accounting  Standards  Board issued SFAS 133,
"Accounting for Derivative  Instruments and Hedging  Activities." This statement
established  accounting  and  reporting  standards for  derivative  instruments,
including certain derivative  instruments  embedded in other contracts,  and for
hedging activities.  It requires recognition of all derivatives as either assets
or liabilities on the balance sheet and measurement of those instruments at fair
value. The Company does not anticipate  engaging in such transactions,  but will
comply with  requirements of SFAS 133 when adopted.  This statement is effective
for all fiscal  quarters  beginning  after June 15, 1999. The effect of adopting
SFAS 133 is not expected to be material.




                                      F-12


<PAGE>
                                KIDS STUFF, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)




Business Description and Summary of Significant Accounting Policies (continued)

     In March 1998, Statement of Position 98-1, Accounting for Costs of Computer
Software  Developed or Obtained for Internal  Use, was issued.  The SOP provides
guidance on accounting for costs of computer software based on the project stage
and other  criteria and is effective for financial  statements  for fiscal years
beginning  after  December 15,  1998.  The Company  believes  that the effect of
adoption will not be material.

Note 1. Agreement with Affiliated Company

     Duncan Hill, Inc. owns 89% of the  outstanding  voting capital stock of the
Havana Group, Inc. (Havana). In January 1998, the Company contracted with Havana
to provide administrative,  executive, and accounting services at an annual cost
of  approximately  $206,100  as  outlined  below and $2.40 per order  processed.
Havana is also obligated to pay 5% of its 1998 pre-tax  profits to Kids Stuff in
connection with these administrative and fulfillment services.  However,  Havana
had no pre-tax profits for 1998.  Total costs charged to Havana in 1998 amounted
to  $293,432.  This  agreement  has been  extended  on a  month-to-month  basis.
Management believes that this is substantially the same cost that it would incur
should it procure these services itself.
<TABLE>
<CAPTION>

<S>                                                                                          <C>       
                            Accounting and Payroll Services                                  $   34,000
                            Administrative and Human Resource Management                         51,600
                            Data Processing                                                      34,900
                            Office Equipment and Facilities Use                                  32,200
                            Merchandising and Marketing Services                                 38,100
                            Purchasing Services                                                  15,300
                                                                                               --------
                            Total                                                             $ 206,100
                                                                                                =======
</TABLE>

     Kids Stuff had provided these services during 1997 on an actual cost basis.
Actual  costs are those  direct  costs that can be charged on a per order or per
hour basis, plus general and administrative  costs allocated on a pro rata basis
by dividing the total assets of the operating entity requesting  services by the
sum of the  total  assets  of all  operating  entities  of  Duncan  Hill and the
operating  entity  requesting  services.  The  costs  charged  to Havana in 1997
amounted to $450,443.




                                      F-13


<PAGE>
                                KIDS STUFF, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)




Note 2. Stockholders' Equity

         A.       Common Stock

     In connection  with a  reorganization  effective June 30, 1996, the Company
issued to its parent,  Duncan Hill Co.,  Ltd. (the  Predecessor  of Duncan Hill,
Inc.),  2,400,000  shares  of  Common  Stock  at a value  of  $.125  per  share.
Commencing  October 1996,  the Company sold an aggregate of 1,300,000  shares of
Common Stock to eight  private  investors for the  aggregate  purchase  price of
$162,500.  These 3,700,000 shares of unregistered  securities were issued by the
Company at its inception.  There were no underwriting  discounts and commissions
paid in connection with the issuance of any said securities.

     In June 1997, the Company repurchased 857,144 of the shares sold to five of
the eight  private  investors  at a  repurchase  price of $.125 per  share.  The
Company's  repurchase  payment  was in the  form of  promissory  notes  totaling
$107,143. These notes were paid off in July 1997 with the proceeds of the public
offering.

     In July 1997, the Company completed an initial public offering (see Note 7)
in which 600,000 common shares were issued.

     In July 1997,  the Company  issued 70,000  unregistered  restricted  shares
which represented  $245,000 of the $2,066,829  purchase cost of The Natural Baby
Company (see Note 4).

         B.       Preferred Stock

     The Board of Directors has the  authority,  without  further  action by the
stockholders, to issue up to 10,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges, and restrictions thereof,
including  dividend  rights,   conversion  rights,   voting  rights,   terms  of
redemption,  liquidation preferences,  and the number of shares constituting any
series or the designation of such series.

     During  January  1997,  the  Company  issued  5,000,000  shares of Series A
Preferred Stock,  $.001 par value to Duncan Hill as part of the  reorganization.
The  holders of the Series A Preferred  Stock are  entitled to one vote for each
share held of record on all matters submitted to a vote of the stockholders.



                                      F-14


<PAGE>
                                KIDS STUFF, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)




Note 2. Stockholders' Equity (continued)

     The  Series A  Preferred  Stock is not  subject  to  redemption  and has no
conversion rights or rights to participate in dividend payments. In the event of
any  voluntary  or  involuntary  liquidation,  dissolution  or winding up of the
affairs of the Company, each share of Series A Preferred Stock has a liquidation
preference of $.001 per share.

         C.       Warrants

     In conjunction  with the public  offering  discussed in Note 7, the Company
issued 2,400,000 Class A warrants.  Each warrant entitles the holder to purchase
one  share  of  common  stock at a price of  $5.00  for a period  of four  years
commencing one year after the date of the Company's prospectus.  The Company may
redeem  the  Warrants  at a price of $.05 per  Warrant,  at any time  after they
become  exercisable,  upon not less than 30 days' prior written  notice,  if the
closing bid price of the Common  Stock has been at least $14.40 per share for 20
consecutive  trading days ending on the fifth day prior to the date on which the
notice of redemption is given.

Note 3. Line of Credit

     Kids Stuff,  Inc.  has an $800,000  line of credit from United Bank with an
open term which is payable on demand,  bearing  interest  payable monthly at the
bank's prime  lending  rate plus 1%, for an effective  rate of 8.75% at December
31, 1998. The line of credit had a balance of $762,000 at December 31, 1998. The
line is secured by assets of the  Company,  as well as the assets of Duncan Hill
and another Duncan subsidiary, Havana Group, Inc., formerly E. A. Carey of Ohio,
Inc. The repayment of the facility is guaranteed  by Mr.  Miller,  the Company's
Chief Executive Officer.  The credit facility requires that the Company maintain
a zero  balance  on the  credit  line for a period  of thirty  consecutive  days
sometime  during the course of each year.  The bank has waived the zero  balance
requirement  for 1998.  The weighted  average  interest rate for the years ended
December 31, 1998 and 1997 was 9.3% and 9.4%,  respectively.  Due to the current
nature of the  liability,  the  carrying  amount of the line  approximates  fair
value.  The line of credit  expired  June 30,  1998,  and the  Company is in the
process of renegotiating the agreement with the bank.




                                      F-15


<PAGE>
                                KIDS STUFF, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


Note 4. Acquisition of The Natural Baby Company

     In July 1997,  the Company  acquired the net assets and  operations  of The
Natural Baby Company, a mail order retailer of children's clothing and toys. The
purchase was funded with the net  proceeds of an initial  public  offering.  The
acquisition has been accounted for as a purchase and, accordingly, the operating
results of the acquired  company have been included in the  Company's  financial
statements  since  the date of  acquisition.  The  aggregate  purchase  price is
comprised of the following

Cash paid to former owners and to pay off debt of
The Natural Baby Company                                              $1,444,831

Costs of acquisition                                                  276,998

Issuance of 70,000 Kids Stuff unregistered common shares to
the former owners of The Natural Baby Company                         245,000

Note payable                                                          100,000
                                                                      ----------
Total purchase price                                                  2,066,829

The purchase price was allocated to the net assets acquired      
based on fair values as follows:                  

Accounts receivable                                                   29,297

Inventory                                                             474,769

Deferred catalog costs                                                185,587

Prepaid expenses                                                      3,544

Property and equipment                                                16,151

Customer list                                                         505,000

Accounts payable assumed                                              (296,211)
                                                                      ----------
Net assets acquired                                                   918,137


                                      F-16


<PAGE>
                                KIDS STUFF, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)




Note 4. Acquisition of the Natural Baby Company (continued)

<TABLE>
<CAPTION>
<S>                                                                                            <C>        
                     Excess of the purchase price over value allocated to
                         specifically identifiable assets acquired                             $ 1,148,692
                                                                                                 ---------

                             Total purchase price                                              $ 2,066,829
                                                                                                 =========
</TABLE>


     The excess of the aggregate  purchase price over the value allocated to the
specifically   identifiable  assets  acquired  of  $1,148,692  was  recorded  as
goodwill.

Note 5. Lease Commitments

     Duncan  Hill,  Inc.,  the parent  company of Kids Stuff,  has entered  into
several  operating leases for retail and office space and equipment.  Kids Stuff
currently  makes the required lease payments and allocates a portion of the cost
to the Havana Group under the terms of the agreement discussed in Note 1. Duncan
Hill is  dependent  on Kids  Stuff to meet  monthly  lease  obligations.  Future
minimum  lease  payments  required by Duncan  Hill,  Inc.  under  noncancellable
operating leases for the years ending December 31 are as follows:

                                    1999                               $  97,840
                                    2000                                  81,307
                                    2001                                  52,866
                                    2002                                  17,604

Note 6. Income Tax

     The Company  accounts  for income  taxes in  accordance  with  Statement of
Financial  Accounting Standard No. 109, Accounting for Income Taxes. The Company
files its Federal income tax return as part of a consolidated group.

     Deferred income taxes reflect the effects of temporary  differences between
the carrying amount of assets and liabilities for financial  reporting purposes.
Deferred tax assets  (liabilities)  consisted  of the  following at December 31,
1998 and 1997:



                                      F-17


<PAGE>
                                KIDS STUFF, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)




Note 6. Income Tax (continued)
<TABLE>
<CAPTION>
                                                                                          1998            1997
                                                                                          ----            ----

                        Deferred tax assets:
<S>                                                                                   <C>              <C>      
                            Net operating loss carryforward                           $ 172,832        $ 122,529
                            Inventory obsolescence                                       11,900           37,796
                                                                                       --------         --------
                        Total deferred tax assets                                       184,732          160,325
                        Valuation allowance                                             (22,552)         (62,573)
                                                                                       --------         --------
                        Net deferred tax asset                                          162,180           97,752

                        Deferred tax liabilities:
                            Deferred catalog expense                                   (141,109)         (88,261)
                            Amortization                                                 (8,200)          (4,586)
                            Depreciation                                                (12,871)          (4,905)
                                                                                       --------        ---------
                        Total deferred tax liabilities                                 (162,180)         (97,752)
                                                                                        -------         --------
                        Net deferred income taxes                               $       -        $       -      
                                                                                  =============    =============
</TABLE>

     The  Company's  ability to  recognize  deferred  tax assets is dependent on
generating  future regular taxable income.  In accordance with the provisions of
SFAS 109, management has provided a valuation allowance.

     The Company's tax loss in 1998 was $173,780.  The Company has net operating
loss  carryforwards  of  approximately  $508,000 as of December 31, 1998 for tax
purposes.  The loss  carryforwards  expire in varying  amounts  through the year
2018.

Note 7. Public Offering

     In July 1997,  the Company  completed an initial  public  offering in which
300,000 units were sold for $2,619,890,  net of issuance costs of $980,110. Each
unit consisted of two common shares and eight redeemable  Class A warrants,  and
sold  for  $12  per  unit.   The  common  stock  and  warrants  are   separately
transferable.

     The  proceeds  of the public  offering  were used to acquire net assets and
operations  of The Natural  Baby  Catalog,  to pay  accounts  payable,  to repay
indebtedness to bridge lenders,  to repay  indebtedness to the Company's parent,
Duncan Hill, to consolidate the operations of The Natural Baby Catalog,  and for
general corporate purposes.


                                      F-18


<PAGE>
                                KIDS STUFF, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)




Note 8. Employment Agreement

     The Company has entered into separate five-year employment  agreements with
William L. Miller and Jeanne E. Miller,  effective January 1, 1997,  pursuant to
which Mr.  Miller  is to serve as  Chairman  of the  Board  and Chief  Executive
Officer  of the  Company  and Mrs.  Miller  is to serve  as its  President.  The
employment  agreements  provide for an annual  base  salary of $125,000  for Mr.
Miller and $105,000 for Mrs.  Miller,  subject to annual  review for increase by
the Company. The employment agreements also provide for the eligibility of these
executives  to  receive  annual  cash  bonuses  under  the  Company's  Incentive
Compensation Plan.

     Each of the employment  agreements provides a severance  compensation to be
paid in all instances other than the  executive's  termination for cause. In the
event that the executive  becomes disabled or dies, the Company,  in the case of
W.  Miller,  is  required  to pay an amount  equal to the product of (x) and (y)
where (x) is the sum of the executive's  salary and bonus paid in the prior year
multiplied  by  2.99  and  (y)  the  percentage  of the  employment  agreement's
five-year  term  remaining  from  the date of  death  or  disability;  provided,
however,  that such severance  compensation  will not be less than the officer's
salary and bonus paid in the year prior to the year in which the officer dies or
becomes disabled.  The foregoing benefit is provided in the employment agreement
of J.  Miller,  but only in the  event of  disability.  Each  executive  is also
entitled to be paid severance  compensation in an amount equal to the sum of the
executive's  salary and bonus paid in the prior year  multiplied  by 2.99 in the
event that the executive  elects to terminate the employment  agreement upon the
Company's  material  breach of the  employment  agreement or upon the  Company's
reduction of the executive's responsibilities,  duties, functions, or dignity of
position resulting from a change of control, or otherwise.

     Each of Mr.  Miller and Mrs.  Miller were  granted  under their  respective
employment  agreements  an option to purchase  100,000  shares of the  Company's
Common Stock,  which will vest 25% on each of the first four  anniversary  dates
commencing  January 1, 1998,  regardless of whether the executive is employed on
such dates by the Company.  The vested options will be  immediately  exercisable
and will expire ten years from the date of the agreement.  The exercise price of
the options  shall be $5.00 per share,  subject to downward  adjustments  in the
exercise price if the Company meets certain performance goals.




                                      F-19


<PAGE>
                                KIDS STUFF, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)




Note 8. Employment Agreement (continued)

     Mrs.  Miller also  received  the option to purchase  100,000  shares of the
Company's  unregistered common stock as a signing bonus on October 16, 1998. The
exercise  price of the options  shall be $2.50 per share,  and the options  will
expire 10 years from the date of the grant.

     Additionally,  the Company  granted options to two of its directors under a
non-qualified Stock Option Agreement discussed in Note 10.

     The  Company  accounts  for  employee  stock  options  under  APB  25  and,
accordingly,  no  compensation  cost has been  recognized.  If the  Company  had
elected to recognize  compensation cost consistent with the method prescribed by
SFAS 123, the  Company's  net income  would have been  reduced by  approximately
$319,000 or $.09 per share in 1998. No options  vested  during 1997,  therefore,
there was no effect on 1997 net income.

     For  purposes of the pro forma  disclosures  presented  above,  the Company
computed the fair values of options granted during 1998 using the  Black-Scholes
option pricing model assuming no dividends, 119% volatility, an expected life of
50% of the ten-year  option terms,  and a risk-free  interest rate of 5.0%.  The
fair market value of the options  granted  during 1998 was $334,000.  No options
have been exercised as of December 31, 1998.

     The Company  computed the fair value of options  granted  during 1997 using
the Black-Scholes option pricing model assuming no dividends, 45% volatility, an
expected life of 50% of the ten-year option terms, and a risk-free interest rate
of 6.0%. The fair market value of the options granted during 1997 was $315,000.

Note 9. Incentive Plans

         A.       Incentive Compensation Plan

     During  1997,  the  Company  adopted an  Incentive  Compensation  Plan (the
"Plan").  The Plan is designed to motivate employee  participants to achieve the
Company's annual strategic goals.  Eligibility for  participation in the Plan is
limited to the Chief  Executive  Officer and the Executive Vice President of the
Company,  and such other  employees of the Company as may be  designated  by the
Board of Directors from time to time.  For each fiscal year of the Company,  the
Board will  establish a bonus pool not to exceed 10% of the Company's  operating
income.  The amount of such pool with  respect  to any year shall be  determined
subsequent



                                      F-20


<PAGE>
                                KIDS STUFF, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)




Note 9. Incentive Plans (continued)

     to the end of that year upon the  determination of the Company's  operating
income for that year.  Each  participant in the Plan is eligible to receive from
the bonus pool an annual  award of up to 50% of the  participant's  base salary.
There were no awards in 1997 or 1998.

         B.       Stock Incentive Plan

     During 1997, the Company adopted a Stock  Incentive Plan (Incentive  Plan).
Under the Incentive Plan, the  Compensation  Committee of the Board of Directors
may grant stock  incentives  to key  employees  and the directors of the Company
pursuant  to which a total of  400,000  shares  of Common  Stock may be  issued;
provided, however, that the maximum amount of Common Stock with respect to which
stock  incentives may be granted to any person during any calendar year shall be
20,000  shares,  except  for a grant  made to a  recipient  upon the  recipients
initial  hiring by the  Company,  in which case the number shall be a maximum of
40,000  shares.  These numbers are subject to adjustment in the event of a stock
split and similar events.  Stock incentive grants may be in the form of options,
stock  appreciation  rights,  stock awards or a  combination  thereof.  No stock
incentives were granted under the Incentive Plan in 1997 or 1998.

Note 10. Non-Qualified Stock Option Agreement

     During  1998,  the  Company  entered  into  a  non-qualified  stock  option
agreement  with Clark D. Swisher and Alfred M.  Schmidt,  Jr.,  directors of the
Company. Each of Mr. Swisher and Mr. Schmidt were granted the option to purchase
30,000  shares of the Company's  common stock,  which vest 25% on August 1, 1998
and 25% on each  January 1, 1999,  January 1,  2000,  and  January 1, 2001.  The
vested options will be immediately exercisable and will expire 10 years from the
date of the  agreement.  The exercise price of the options is $2.50 per share of
common  stock.  The pro forma  disclosure  in Note 8 includes  the effect of the
15,000 options vesting in 1998.



                                      F-21


<PAGE>
                                KIDS STUFF, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)




Note 11. Subsequent Event - Public Offering

     In March 1999,  the  Company  completed  a public  offering  of  securities
through  Fairchild  Financial  Group,  Inc. in which 460,000 units were sold for
$1,960,557,  net of issuance costs of $569,443. Each unit consisted of one share
of Series 1 Preferred Stock and two Series 1 Preferred Stock Purchase  Warrants,
and sold for $5.50 per unit.  The  preferred  stock and warrants are  separately
transferable.  Commencing  September  3, 2000,  each share of Series 1 Preferred
Stock is convertible  into two shares of Common Stock.  Commencing  September 3,
2000, each Preferred Warrant entitles the holder to purchase one share of Series
1  Preferred  Stock at an  exercise  price of $6.00 per share until the close of
business on March 3, 2002.

     The  proceeds  of the public  offering  are to be used for the  purchase of
inventory, accounts payable reduction, establishment of a new operations center,
web site  production  and  development,  leasehold  improvements  for the  "Kids
Catalog Outlet" retail store, and general corporate purposes.




                                      F-22


<PAGE>
Item 10. Executive Compensation

     The following table provides a summary  compensation  table with respect to
the compensation of W. Miller,  the Company's Chief Executive Officer (CEO), and
J. Miller, the Company's President for the past three years.
<TABLE>
<CAPTION>

                           SUMMARY COMPENSATION TABLE

====================================================================================================================================
                                                                     Long Term Compensation
------------------------------------------------------------------------------------------------------------------------------------
                                  Annual Compensation                     Awards                      Payouts
------------------------------------------------------------------------------------------------------------------------------------
(a)                      (b)    (c)         (d)        (e)            (f)       (g)           (h)        (i)
                                                      Other                                              All
Name                                                  Annual       Restricted                           Other
and                                                   Compen-        Stock                   LTIP      Compen-
Principal                                             sation        Award(s)   Number of    Payouts    sation
Position                Year   Salary ($)  Bonus ($)  ($)(1)        ($)(2)    Options(3)      ($)        ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                     <C>    <C>            <C>      <C>             <C>       <C>            <C>       <C>
W. Miller, .......      1998   125,000       -0-       4,000          -0-       -0-            -0-       -0-
Chief Executive
Officer
                        1997   125,000       -0-       4,000          -0-       100,000        -0-       -0-
                        1996   100,000       -0-       -0-            -0-       -0-            -0-       -0-
J. Miller, .......      1998    94,000       -0-       4,000          -0-       100,000        -0-       -0-
President
                        1997    90,000       -0-       4,000          -0-       100,000        -0-       -0-
                        1996    65,000       -0-       -0-            -0-       -0-            -0-       -0-
                                                                                ===

(1)      Does  not  include  the  value  of  leased   automobiles   used  almost
         exclusively for the Company's business or key man life insurance on the
         lives of each of W. Miller and J.  Miller in the amount of  $1,000,000,
         payable to the  Company in the event of death.  W.  Miller is  provided
         with a leased automobile by Havana with a monthly cost of approximately
         $1,100  and J.  Miller  is  provided  with a leased  automobile  by the
         Company at a monthly cost of  approximately  $800. The foregoing  table
         does not include the value of any personal use of such automobiles.

(2)      Does not include 2,400,000 shares of the Company's Common Stock and 
         5,000,000 shares of the Company's Series A Preferred Stock issued to 
         Duncan Hill in connection with a reorganization.

(3)      See "Employment Contracts" for a description of these options.

                                       25

<PAGE>
                               OPTION GRANTS TABLE

     The  information  provided in the table  below  provides  information  with
respect to individual  grants of the Company's  stock options during fiscal 1998
of each of the executive officers named in the summary compensation table above.
The Company did not grant any stock appreciation rights during 1998.

                                         Option Grants in Last Fiscal Year

====================================================================================================================================
                                                                                Potential
                                                                                Realizable Value at
                                                                                Assumed Annual
                          Individual Grants                                     Rates of Stock Price
                                                                                Appreciation
                                                                                for Option Term (2)
------------------------------------------------------------------------------------------------------------------------------------
(a)                      (b)       (c)              (d)           (e)           (f)            (g)
                                  % of
                                  Total
                                  Options/
                                  Granted to
                       Options    Employees       Exercise       Expira-
                       Granted    in Fiscal       Price          tion
 Name                    (#)      Year (1)        ($/Sh)         Date           5% ($)         10% ($)
------------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>      <C>          <C>            <C>            <C>            <C>            
W. Miller ..........       -0-       N/A          N/A            N/A            N/A            N/A
                                                                  
J. Miller ..........   100,000       100%         2.50           Oct. 2008      157,000        398,000
                                                                  
</TABLE>


(1)      The percentage of total options granted to the Company's employees in 
         fiscal year is based upon options granted to officers, directors and 
         employees.

(2)      The potential  realizable value of each grant of the Company's  options
         assumes that the market price of its Common Stock  appreciates in value
         from  the date of grant  to the end of the  option  term at  annualized
         rates of 5% and 10%,  respectively,  and after subtracting the exercise
         price from the potential realizable value.

                                       26

<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES

         The information  provided in the table below provides  information with
respect to each  exercise of the  Company's  stock option  during fiscal 1998 by
each of the executive  officers named in the summary  compensation table and the
fiscal year end value of the Company's unexercised options.
<TABLE>
<CAPTION>


=============================================================================================================================
           (a)                    (b)               (c)                     (d)                           (e)

                                                                                                        Value of
                                                                         Number of                    Unexercised
                                Shares                                  Unexercised                   In-the-Money
                               Acquired                                  Options at                     Options
                                  on               Value                FY-End (#)                    at Fy-End($)
                               Exercise           Realized              Exercisable/                  Exercisable/
          Name                    (#)              ($)(1)              Unexercisable                Unexercisable(1)
-----------------------------------------------------------------------------------------------------------------------------
<S>                                <C>               <C>           <C>                                  <C>
William L.. Miller                -0-               -0-            50,000/50,000                       -0-
-----------------------------------------------------------------------------------------------------------------------------
Jeanne E. Miller                  -0-               -0-           150,000/50,000                     44,000/-0-

=============================================================================================================================
</TABLE>


(1)      The  aggregate  dollar  values in column (c) and (e) are  calculated by
         determining the difference  between the fair market value of the Common
         Stock  underlying  the options and the exercise  price of the Company's
         options  at  exercise  or  fiscal  year end  (i.e.  $2.94  per  share),
         respectively.  In calculating  the dollar value realized upon exercise,
         the value of any payment of the exercise price is not included.

     INCENTIVE COMPENSATION PLAN. The Company's Incentive Compensation Plan (the
"Plan") is designed to motivate  employee  participants to achieve the Company's
annual strategic goals.  Eligibility for participation in the Plan is limited to
the executive  officers of the Company,  and such other employees of the Company
as may be  designated  by the Board of  Directors  from  time to time.  For each
fiscal year of the Company,  the Board will establish a bonus pool not to exceed
10% of the Company's  operating income. The Board intends to establish its first
bonus pool for 1999.  The amount of such pool with  respect to any year shall be
determined  subsequent  to the end of that  year upon the  determination  of the
Company's  operating  income  for that  year.  Each  participant  in the Plan is
eligible  to  receive  from the bonus  pool an annual  award of up to 50% of the
participant's base salary.  Upon its establishment,  the Compensation  Committee
shall be  responsible  for  recommending  to the Board of Directors  performance
objectives  and awards for  participants.  Until the  Compensation  Committee is
established and includes at least two outside directors, no compensation will be
awarded under the Plan. W. Miller and J. Miller are expected to be the principal
participants in the Plan and they control the election of all directors. Payouts
are to be determined  annually  following  determination of the Company's fiscal
year-end results. The Plan is subject to amendment of termination

                                       27

<PAGE>
at any time,  but no such action may adversely  affect any rights or obligations
with respect to any awards  theretofore  made under the Plan.  As of the date of
this Form 10-KSB, no compensation has been paid under the Plan.

     1997  STOCK  INCENTIVE   PLAN.  In  March  1997,  the  Company's   majority
stockholder approved the adoption of the Company's 1997 Long-Term Incentive Plan
(the "Incentive Plan"). Under the Incentive Plan, the Compensation  Committee of
the Board of Directors,  which the Company intends to establish after it has two
outside directors, may grant stock incentives to key employees and the directors
of the Company  pursuant to which a total of 400,000  shares of Common Stock may
be issued;  provided,  however,  that the  maximum  amount of Common  Stock with
respect to which  stock  incentives  may be  granted  to any  person  during any
calendar  year shall be 20,000  shares,  except for a grant made to a  recipient
upon the  recipients  initial  hiring by the  Company,  in which case the number
shall be a maximum of 40,000 shares.  These numbers are subject to adjustment in
the event of a stock split and similar events.  Stock incentive grants may be in
the form of options,  stock appreciation  rights,  stock awards or a combination
thereof.

     Options  granted under the Incentive  Plan may be either  "incentive  stock
options,"  which  qualify  for special tax  treatment  under  Section 422 of the
Internal Revenue Code (the "Code"), or nonstatutory stock options,  which do not
qualify.  Incentive  stock  options  may  only be  granted  to  persons  who are
employees of the Company.  Options will expire at such time as the  Compensation
Committee  determines,  provided that no stock option may be  exercisable  later
than ten years from its grant,  except  that the maximum  term of any  incentive
stock option granted to a person who owns,  directly or indirectly,  10% or more
of  the  combined   voting  power  of  the  Company's   capital  stock  (a  "10%
Shareholder")  shall be five years.  If an optionee  ceases to be an employee or
director  by  reason  of death,  incapacity  of  retirement,  the  option  shall
terminate  fifteen  months  after the optionee  ceases to be an employee.  If an
optionee ceases to be an employee because of resignation with the consent of the
Compensation  Committee,  the  option  will  terminate  three  months  after the
optionee  ceases to be an employee.  If an optionee  ceases to be an employee or
director  for any other  reason,  the option will  expire  thirty days after the
optionee ceases to be an employee.

     The option price per share is  determined  by the  Compensation  Committee,
except for  incentive  stock  options which cannot be less than 100% of the fair
market value of the Common Stock on the date such option is granted or less than
110% of such fair market value if the optionee is a 10% shareholder.  Payment of
the  exercise  price may be made in cash,  or unless  otherwise  provided by the
Compensation Committee in shares of Common Stock delivered to the Company by the
optionee or by the withholding of shares issuable upon exercise of the option or
in a combination thereof. Options cannot be exercised until six months after the
date  that  the  option  is  granted  or  such  later  time  determined  by  the
Compensation  Committee.  Each  option  shall be  exercised  in full or in part.
Options  are not  transferable  other  than by will or the laws of  descent  and
distribution,  and may be exercised  during the life of the employee or director
only by him or her. No

                                       28

<PAGE>
options may be granted under the Incentive  Plan after March 27, 2007.  However,
any options  outstanding  on March 27, 2007 will remain in effect in  accordance
with their terms.

     The  Incentive  Plan also  provides for the granting of stock  appreciation
rights  ("SAR"),  which entitle the holder to receive upon exercise an amount in
cash and/or stock which is equal to the appreciation in the fair market value of
the Common  Stock  between the date of the grant and the date of  exercise.  The
number of shares of Common Stock to which a SAR relates,  the period in which it
can be  exercised,  and other terms and  conditions  shall be  determined by the
Compensation Committee, provided however, that such expiration date shall not be
later than ten years from the date of the grant. SARS are not transferable other
than by will or the  laws of  descent  and  distribution,  and may be  exercised
during the life of the grant only by the  grantee.  The SARS are  subject to the
same rules  regarding  expiration  upon a grantee's  cessation of  employment or
directorship, as pertains to options, discussed above.

     The  Compensation  Committee  may also award shares of Common Stock ("stock
awards")  in  payment  of  certain  incentive  compensation,   subject  to  such
conditions and restrictions as the Committee may determine. All shares of Common
Stock  subject to a stock award will be valued at not less than 100% of the fair
market  value of such shares on the date the stock award is granted.  The number
of shares of Common  Stock which may be granted as a stock award in any calendar
year may not exceed 80,000.

     The Incentive  Plan will be  administered  by the  Compensation  Committee,
which has the  authority to prescribe,  amend and rescind rules and  regulations
relating  to the  Plan,  to  accelerate  the  exercise  date of any  option,  to
interpret the Plan and to make all necessary determinations in administering the
Plan.

     The  Incentive  Plan  will  remain  in  effect  until  such  time  as it is
terminated by the Board of Directors.  The Incentive  Plan may be amended by the
Board of Directors upon the recommendation of the Compensation Committee, except
that, without stockholder approval, the Plan may not be amended to: increase the
number of shares subject to issuance under the Plan; change the class of persons
eligible to participate under the Plan;  withdraw the administration of the Plan
from the Compensation  Committee;  or, to permit any option to be exercised more
than ten years after the date it was granted.

     As of the date of this Form 10-KSB, the Compensation Committee has not been
formed  and,  accordingly,  no stock  incentives  have  been  granted  under the
Incentive Plan.

EMPLOYMENT AGREEMENTS

     The Company has entered into separate five-year employment  agreements with
W. Miller and J. Miller,  effective January 1, 1997, pursuant to which W. Miller
is serving as Chief Executive Officer of the Company and J. Miller served as its
Executive  Vice  President.  In January  1998,  the  Company  elected J.  Miller
President of the Company.  In October  1998,  the Company and J. Miller  entered
into an amended agreement. The

                                       29

<PAGE>
employment agreements. as amended, provide for an annual base salary of $125,000
for W. Miller and $105,000 for J. Miller,  subject to annual review for increase
by the Company.  The employment  agreements  also provide for the eligibility of
these  executives to receive  annual cash bonuses under the Company's  Incentive
Compensation  Plan discussed  above.  Each of these  executives is provided with
automobiles,  at the Company's  expense,  for their  exclusive use, the make and
model of which is to be mutually  agreed upon by the  executive and the Company,
from time to time.  These  automobiles are used almost  exclusively for business
purposes. Each of these executives is also to be reimbursed for certain personal
expenses up to $6,500,  which amount shall be subject to increase to pay for any
personal income tax liability  should such  reimbursements  be deemed taxable to
the executive.  (No such personal expenses were incurred in 1997.) Each of these
executives is also entitled to  participate  in any employee  benefit plan which
the Company may create in the future. The Company has also agreed to maintain in
force,  at its  expense,  during  the term of the  employment  agreements,  life
insurance for the benefit of each of the  executives in an amount equal to twice
the base salary of W. Miller and five times the base salary of J. Miller. (As of
September  30, 1998,  the Company has not been  requested by W. Miller and/or J.
Miller to take out such insurance.) Pursuant to the employment agreements,  each
of these executives has agreed not to compete with the Company during employment
and for a period of one year following termination of employment and has further
agreed to maintain as confidential, the Company's proprietary information.

     Each of the employment agreements provide for severance  compensation to be
paid in all instances other than the  executive's  termination for cause. In the
event that the executive  becomes disabled or dies, the Company,  in the case of
W.  Miller,  is  required  to pay an amount  equal to the product of (x) and (y)
where (x) is the sum of the executive's  salary and bonus paid in the prior year
multiplied by 2.99 and (y) the  percentage of the  employment  agreement's  five
year term  remaining from the date of death of  disability;  provided,  however,
that such severance  compensation will not be less than the officer's salary and
bonus  paid in the year prior to the year in which the  officer  dies or becomes
disabled.  The foregoing  benefit is provided in the employment  agreement of J.
Miller, but only in the event of disability.  Each executive is also entitled to
be paid severance  compensation in an amount equal to the sum of the executive's
salary and bonus paid in the prior year multiplied by 2.99 in the event that the
executive  elects to  terminate  the  employment  agreement  upon the  Company's
material breach of the employment  agreement or upon the Company's  reduction of
the  executive's  responsibilities,  duties,  functions  or dignity of  position
resulting  from a change of  control,  or  otherwise.  Assuming  that  severance
payments were due to each of the  executive  officers as of the date of the Form
10-KSB under the  immediately  preceding  sentence,  the amount of the severance
payment to each of W.  Miller and J.  Miller  would be  $299,000  and  $194,350,
respectively.   Each  executive  is  further   entitled  to  be  paid  severance
compensation in the amount equal to the sum of the executive's  salary and bonus
paid in the last year of the executive's  employment agreement in the event that
the executive is not rehired upon terms acceptable to him or her or, in the case
of W. Miller,  a successor  chief  executive  officer is hired with W.  Miller's
consent to replace W. Miller prior to the expiration of the term of his

                                       30

<PAGE>
employment  agreement.   Additionally,   any  executive  entitled  to  severance
compensation,   above,   will   also  be   entitled   to   participate   in  any
Company-sponsored  employee health benefit plan at the Company's expense,  for a
maximum of eighteen months from the date of termination.

     Each  of W.  Miller  and J.  Miller  was  granted  under  their  respective
employment  agreements  an option to purchase  100,000  shares of the  Company's
Common Stock, which option vests 25% on each of the first four anniversary dates
commencing  January 1, 1998,  regardless of whether the executive is employed on
such dates by the Company.  The vested options will be  immediately  exercisable
and will expire on January 1, 2007.  The exercise  price of the options shall be
$5.00 per share,  subject to downward  adjustments  in the exercise price if the
Company  meets certain  performance  goals.  J. Miller also received  options to
purchase an additional  100,000 shares at a purchase price of $2.50 per share in
October  1998.  These  options  have a term of ten  years  and  are  immediately
exercisable.

     W. Miller is permitted  under his agreement to devote such time to managing
the affairs of the various other Duncan Hill  entities as he deems  appropriate,
and to  retain  any  compensation  that he  receives  from  those  entities  for
providing those services. See "Risk Factors."

     The Company also  provides W. Miller and J. Miller and all other  employees
with health  insurance on a  non-discriminatory  basis.  The Company  intends to
provide its executive  officers and employees with certain  fringe  benefits and
may, in the future,  offer  additional  stock or cash incentive bonus plans, and
other  employer  benefits  on such  amounts  and  upon  such  conditions  as the
Company's Board of Directors may, in its sole discretion, determine.

POTENTIAL CONFLICTS OF INTEREST

     W. Miller is a  co-founder,  Chairman of the Board of  Directors  and Chief
Executive Officer of Havana, Duncan Hill and the Company. W. Miller's employment
agreement  with the Company  provides  that he shall be permitted to devote such
time to managing Duncan Hill and Havana as he deems appropriate. Accordingly, W.
Miller will not be devoting his full-time  attention to managing the  operations
of the Company. Thus, conflicts of interest could potentially develop (i) to the
extent that W. Miller is not able to devote his  full-time  and  attention  to a
matter that would  otherwise  require the  full-time and attention of a business
chief executive officer, (ii) involving competition for business  opportunities,
(iii) involving  transactions between the Company and its affiliated  companies;
and (iv) due to the relationship  between W. Miller and J. Miller as husband and
wife and as directors  and officers of the Company.  The Company has not adopted
any  procedure  for dealing with such  conflicts  of  interest,  except that the
Company's  Board of  Directors  has adopted a policy  that all new  transactions
between the Company and Duncan Hill, Havana or any other affiliated company must
be approved by at least a majority of the Company's

                                       31

<PAGE>
     disinterested   directors,   if  any.   Currently,   the   Company  has  no
disinterested  directors  and Duncan Hill and W. Miller  control the election of
the directors.




                                       32

<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.

     The  following  table sets forth as of March 1, 1999,  certain  information
with respect to the beneficial  ownership of Common Stock and Series A Preferred
Stock by each person or entity known by the Company to be the  beneficial  owner
of 5% or more of such shares, each officer and director of the Company,  and all
officers and  directors of the Company as a group.  Shares of Shares of Series A
Common Stock Preferred Stock Beneficially Owned Beneficially Owned
<TABLE>
<CAPTION>

NAME AND ADDRESS OF
BENEFICIAL OWNER(1)                                           NUMBER                 PERCENT(2)       NUMBER              PERCENT(3)
<S>                                                           <C>                     <C>             <C>                      <C> 
Duncan Hill (4)                                               2,251,075               64.1%           5,000,000                100%

William L. Miller and Jeanne E. Miller(4)                     2,401,075(5)            65.6            5,000,000(6)             100%

Clark D. Swisher (7)                                              7,500                 .2                 -0-                 -0-

Alfred M. Schmidt (7)                                             7,500                 .2                 -0-                 -0-

All Officers and Directors
as a Group (4 Persons)                                        2,396,075               64.4%           5,000,000(6)             100%
</TABLE>

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

         (1)      Beneficial  ownership  as reported in the table above has been
                  determined  in  accordance  with Rule 13d-3 of the  Securities
                  Exchange  Act.  Accordingly,  except  as  noted,  all  of  the
                  Company's securities over which the officers and directors and
                  nominees named, or as a group, directly or indirectly have, or
                  share   voting  or   investment   power,   have  been   deemed
                  beneficially  owned.  All addresses are c/o Kids Stuff,  Inc.,
                  4450 Belden Village  Street,  N.W.,  Suite 406,  Canton,  Ohio
                  44718.

         (2)      Calculated   based  upon  3,512,856  shares  of  Common  Stock
                  outstanding  without giving effect to the possible exercise of
                  outstanding Class A Warrants.

         (3)      Calculated  based upon 5,000,000  shares of Series A Preferred
                  Stock outstanding. The holders of the Series A Preferred Stock
                  are  entitled to one vote for each share held of record on all
                  matters submitted to a vote of the stockholders.  The Series A
                  Preferred  Stock  has  no  conversion   rights  or  rights  to
                  participate in dividend payments.

         (4)      The  Millers may be deemed to  beneficially  own all of Duncan
                  Hill's  shares for  purposes of Rule 13d-3 of the Exchange Act
                  based upon their  controlling  ownership of its common  stock.
                  The Millers together control approximately 68% of Duncan Hill.

         (5)      Includes the Miller's deemed beneficial ownership of 2,251,075
                  shares of Common Stock and options to purchase 150,000 shares.

         (6)      Represents the Miller's deemed beneficial ownership of 
                  5,000,000 shares of Series A Preferred Stock, the record 
                  holder of which is Duncan Hill.

         (7)      Messrs.  Swisher and Schmidt have  options to purchase  30,000
                  shares  each,   which   options  vest  in  four  equal  annual
                  installments  beginning  in  1999.  The  table  includes  only
                  options vesting through January 1, 1999.

                                       33

<PAGE>
Item 12. Certain Relationships and Related Transactions.

RULE 504 SHARES

     In connection with its initial capitalization, the Company sold, commencing
October 1996, an aggregate of 1,300,000  shares of Common Stock to eight private
investors at a purchase price of $.125 per share.  Seven of these investors were
customers of the  Representative,  the  Managing  Underwriter  of the  Company's
initial public offering and this offering.  There were no other  affiliations or
relationships  between the seven private investors and either the Company or the
Representative.   The  eighth   investor,   who  was  not  a  customer   of  the
Representative  and has  never  had any  relationship  or  affiliation  with the
Representative,  had once been engaged to provide financial  consulting services
to Duncan Hill. This investor has no other  relationships  or affiliations  with
the Company.

     In June 1997,  the Company  repurchased  an aggregate of 857,144  shares of
Common Stock from five of the  customers of the  Representative  at a repurchase
price  of  $.125  per  share.  This  repurchase  was  required  by the  National
Association  of Securities  Dealers (the "NASD") as a condition to approving the
compensation  to be  received  by the  Representative  in  connection  with  the
Company's  initial  public  offering.   The  Company's  repurchase  payment  was
evidenced  by five  promissory  notes  issued by it in the  aggregate  amount of
$107,143,  which notes have been paid. The notes bore interest at the rate of 8%
per annum  commencing the date that each investor  initially  subscribed for his
Rule 504 Shares.

BRIDGE LOAN

     In October 1996, the Company borrowed an aggregate of $200,000 (the "Bridge
Loan")  from  three  private  investors,  two  of  whom  were  customers  of the
Representative,  and the third of whom was introduced by the  Representative  to
the Company. These three private investors are Clinthill Investments, Ltd., Kurt
Campbell and M&M  Specialties,  Inc. The Bridge Loan,  which has been paid, bore
interest at the rate of 8% per annum.

     As originally structured, $75,000 of the face amount of the Bridge Loan was
convertible  into  1,500,000  Warrants  upon the  effective  date of the  public
offering.  Subsequently, the Bridge Loan was restructured, at the request of the
Representative so that the Bridge Lenders would be paid the entire $200,000 face
amount of the Bridge Loan, in cash,  plus accrued  interest at 8% per annum,  at
the closing of the Company's  initial  public  offering in July 1997,  and would
waive the right to convert $75,000 of the face amount of the loan into 1,500,000
Warrants.

ACQUISITION OF THE NATURAL BABY CATALOG

     In May, 1996, Baby Co. contracted to sell its catalog business, The Natural
Baby Catalog, to Duncan Hill on behalf of the Company, at which time Duncan Hill
paid Baby Co. $25,000 towards the purchase price. See  "Management's  Discussion
and  Analysis or Plan of  Operation"  regarding a  description  of the terms and
conditions  of the Company's  acquisition  of The Natural Baby Catalog from Baby
Co.  In  connection  with  this  transaction,  the  Company  did not  engage  an
independent appraiser to evaluate whether

                                       34

<PAGE>
     or not the  Company  has  agreed to pay a  purchase  price in excess of The
Natural Baby  Catalog's fair value.  However,  management is of the opinion that
the  purchase  price paid by the  Company  was not in excess of the fair  market
value of the National  Baby  Catalog.  In addition,  because the Company did not
complete the  acquisition on or before January 3, 1997, as initially  agreed to,
the Company agreed to pay an additional  $350,000 (the "Additional  Amount") for
the  acquisition  in order to obtain an extension  until no later than April 30,
1997  to  complete  the  acquisition.  $250,000  of the  Additional  Amount  was
reflected in the $250,000 Convertible Note described in "Management's Discussion
and  Analysis or Plan of  Operation"  and $100,000 of the  Additional  Amount is
reflected in the cash  payments  made in July 1997  described  in  "Management's
Discussion  and  Analysis  or Plan of  Operation."  Baby Co.'s  demands  for the
increase in the  purchase  price was  predicated  upon the strong  growth of The
Natural Baby  Catalog's  business  since Baby Co.  initially  agreed to sell its
catalog business in May, 1996.

GENERAL

     Reference is made to "Business" and  "Management's  Discussion and Analysis
or Plan of Operation"  for a description of various  related party  transactions
involving the Company, Havana and Duncan Hill.

     It is the policy of the Company that future  transactions  with  affiliates
will be on terms no less  favorable  than could be  obtained  from  unaffiliated
parties.


Item 13. Exhibits and Reports on Form 8-K.

(a)  Exhibits

<TABLE>
<CAPTION>
         <S>      <C>
         1.01     Revised Form of Underwriting Agreement - 1997 Offering (5)
         1.02     Revised Form of Selected Dealers Agreement - 1997 Offering (5)
         1.03     Revised Form of Warrant Exercise Fee Agreement - 1997 Offering (5)
         1.04     Form of Underwriting Agreement - Series 1 Preferred Stock (7)
         3.01     Certificate of Incorporation of the Company (1)
         3.02     Certificate of Amendment of Certificate of Incorporation of the Company(1)
         3.03     By-Laws of the Company(1)
         3.04     Certificate of Designation of Series A Preferred Stock (2)
         3.05     Certificate of Designation (9)
         4.01     Specimen Certificate for Shares of Common Stock (2)
         4.02     Specimen Certificate for Shares of Series A Preferred Stock (2)
         4.0      Revised Form of Common Stock Purchase Warrant Agreement (5)
         4.04     Revised Specimen Certificate for Common Stock Purchase Warrants (3)
         4.05     Revised Form of Underwriters' Purchase Option - 1997 Offering (5)
         4.06     Form of Representative's Lock-up Letter (2)
         4.07     Form of Representative's Purchase Option Agreement (7)
         4.08     Preferred Stock Agency Agreement (7)
         4.09     Preferred Warrant Agency Agreement (7)
         4.10     Specimen of Preferred Warrant (7)
         4.11     Specimen of Series 1 Preferred Stock (7)

                                       35

<PAGE>
         10.01    Agreement to Acquire the Assets of The Natural Baby Company, Inc., (the
                  "Acquisition Agreement")(1)
         10.02    Addendum to Acquisition Agreement (1)
         10.03    Escrow Agreement under the Acquisition Agreement (1)
         10.04    Form of Consulting Agreement with Jane Martin (1)
         10.05    Asset Purchase Agreement between the Company and its Parent (1)
         10.06    Promissory Note from the Company and its Parent (1)
         10.07    Form of Bridge Loan Agreement (1)
         10.08    Form of Financial Consulting Agreement with Fairchild Financial
                  Group, Inc. (1)
         10.09    Credit Facility with United National Bank and Trust Company (2)
         10.10    Lease for Company's principal offices and telemarketing center (2)
         10.11    Employment Agreement with William L. Miller (2)
         10.12    Revised Employment Agreement with Jeanne E. Miller (7)
         10.13    Incentive Compensation Plan (2)
         10.14    1997 Long-Term Stock Incentive Plan (2)
         10.15    Amendment to Asset Purchase Agreement between the Company
                  and its Parent (2)
         10.16    Form of Amendment to Bridge Loan Agreement (4)
         10.17    Amended Form of Stock Repurchase Agreement and Note (5)
         10.18    Second Addendum to Acquisition Agreement (5)
         10.19    First Addendum to Escrow Agreement (6)
         10.20    Third Addendum to Acquisition Agreement (6)
         10.21    Agreement with The Havana Group, Inc. (8)
         10.22    Form of new Financial Consulting Agreement with Fairchild Financial
                  Group, Inc. (7)
         10.23    Employment Agreement with William T. Evans (7)
         10.24    Other Leases (7)
         23.01    Consent of Hausser + Taylor LLP (7)
         27.00    Revised Financial Data Schedule (9)
</TABLE>

 -----------
(1)      Incorporated by reference to the  Registrant's  Form SB-2  Registration
         Statement,  file no. 333-19423,  filed with the Securities and Exchange
         Commission on January 8, 1997.
(2)      Incorporated by reference to the  Registrant's  Amendment No. 1 to Form
         SB-2  Registration  Statement,  file  no.  333-19423,  filed  with  the
         Securities and Exchange Commission on March 14, 1997.
(3)      Incorporated by reference to the  Registrant's  Amendment No. 2 to Form
         SB-2  Registration  Statement,  file  no.  333-19423,  filed  with  the
         Securities and Exchange Commission on April 2, 1997.
(4)      Incorporated by reference to the  Registrant's  Amendment No. 3 to Form
         SB-2  Registration  Statement,  file  no.  333-19423,  filed  with  the
         Securities and Exchange Commission on April 14, 1997.
(5)      Incorporated by reference to the  Registrant's  Amendment No. 4 to Form
         SB-2  Registration  Statement,  file  no.  333-19423,  filed  with  the
         Securities and Exchange Commission on June 3, 1997.

                                       36

<PAGE>
(6)      Incorporated by reference to the  Registrant's  Amendment No. 5 to Form
         SB-2  Registration  Statement,  file  no.  333-19423,  filed  with  the
         Securities and Exchange Commission on June 25, 1997.
(7)      Incorporated by reference to Form SB-2 Registration Statement, File No.
         333-61463.
(8)      Incorporated by reference to the Registrant's Form 10-KSB filed for its
         fiscal year ended December 31, 1997.
(9)      Filed herewith.


(b)      Reports on Form 8-K

         During the three  months  ended  December  31, 1998, a Form 8-K was not
filed or required to be filed.


                                       37

<PAGE>
                                   SIGNATURES

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

                                                     KIDS STUFF, INC.



                                                 By: /s/ William L. Miller     
                                                         William L. Miller,
                                                         Chief Executive Officer


Dated:   Canton, Ohio
         March 30, 1999

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
Report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>

Signatures                         Titles                             Date

<S>                                <C>                                <C>
/s/ William L. Miller              Chairman of the
William L. Miller                  Board, Chief Executive Officer,
                                   Principal Financial Officer,
                                   Treasurer and Secretary            March 30, 1999



/s/ Jeanne E. Miller               President and
Jeanne E. Miller  Director                                            March 30, 1999


/s/ Clark D. Swisher            
Clark D. Swisher                   Director                           March 30, 1999

/s/ Alfred M. Schmidt         
Alfred M. Schmidt                  Director                           March 30, 1999

</TABLE>

                                       38