<PAGE>
                                    FORM 10-Q



                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549



(MARK ONE)

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
      OF THE SECURITIES EXCHANGE ACT OF 1934
      FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

      OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934
      FOR THE TRANSITION PERIOD FROM           TO
                                     ---------    ---------

                           COMMISSION FILE NO. 0-22545


                                 DSI TOYS, INC.
             (Exact name of Registrant as specified in its charter)

                   TEXAS                                  74-1673513
       (State or other jurisdiction                    (I.R.S. Employer
     of incorporation or organization)                Identification No.)

    1100 WEST SAM HOUSTON PARKWAY NORTH
              HOUSTON, TEXAS                                77043
  (Address of principal executive offices)                (Zip Code)


        Registrant's telephone number including area code: (713) 365-9900


   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 [ ]

     As of May 10, 2001, 9,066,365 shares of common stock, par value $.01 per
share, of DSI Toys, Inc. were outstanding.

<PAGE>
                                TABLE OF CONTENTS


                                                                          PAGE

                               PART I - FINANCIAL INFORMATION


Item 1. FINANCIAL STATEMENTS

        Consolidated Balance Sheet as of March 31, 2001, and
               December 31, 2000 .........................................   1
        Consolidated Statement of Operations for the Three Months
               Ended March 31, 2001, and 2000.............................   2
        Consolidated Statement of Cash Flows for the Three Months Ended
               March 31, 2001, and 2000...................................   3
        Consolidated Statement of Shareholders' Equity....................   5
        Notes to Consolidated Financial Statements........................   6



Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS..........................................   7


                           PART II - OTHER INFORMATION


Item 1. LEGAL PROCEEDINGS.................................................  12

Item 2. CHANGE IN SECURITIES AND USE OF PROCEEDS .........................  12

Item 5. OTHER INFORMATION.................................................  12

Item 6. EXHIBITS AND REPORTS ON FORM 8-K..................................  12

Signatures................................................................  13


                                       i

<PAGE>
                         PART I - FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

                                 DSI TOYS, INC.
                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                        MARCH 31,     DECEMBER 31,
                                                          2001           2000
                                                      ------------    ------------
                                                      (Unaudited)
                    ASSETS
<S>                                                   <C>             <C>
Current assets:
   Cash                                               $    102,808    $    177,682
   Restricted cash                                         150,000         150,000
   Accounts receivable, net                              2,422,646       6,522,883
   Inventories                                           6,289,250       6,687,195
   Prepaid expenses                                      2,814,332       1,740,945
   Deferred income taxes                                 1,251,726         385,000
                                                      ------------    ------------
        Total current assets                            13,030,762      15,663,705

Property and equipment, net                              2,165,398       2,415,084
Deferred income taxes                                    1,780,000       1,780,000
Goodwill, net                                            9,626,175       9,754,524
Other assets                                               540,437         385,827
                                                      ------------    ------------
                                                      $ 27,142,772    $ 29,999,140
                                                      ============    ============
     LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Accounts payable and accrued liabilities           $  6,662,005    $  7,901,290
   Current portion of long-term debt                     1,260,307       1,689,911
   Current portion of long-term debt due to a
     related party                                       1,724,478       1,424,478
   Income taxes payable                                     17,027         112,325
                                                      ------------    ------------
        Total current liabilities                        9,663,817      11,128,004

Long-term debt                                           4,207,936       6,464,268
Long-term debt due to a related party                    3,991,037       4,291,037
Deferred income taxes                                      188,849         188,849
                                                      ------------    ------------
        Total liabilities                               18,051,639      22,072,158
                                                      ------------    ------------
Shareholders' equity:
   Preferred stock, $.01 par value, 5,000,000
     shares authorized, none issued or outstanding
     Common stock, $.01 par value, 35,000,000
     shares authorized, 9,066,365 shares issued and
     outstanding                                            90,664          90,664
   Additional paid-in capital                            5,173,465       5,173,465
   Common stock warrants                                 2,802,500         102,500
   Accumulated other comprehensive loss                    (12,964)        (27,062)
   Retained earnings                                     1,037,468       2,587,415
                                                      ------------    ------------
        Total shareholders' equity                       9,091,133       7,926,982
                                                      ------------    ------------
                                                      $ 27,142,772    $ 29,999,140
                                                      ============    ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       1
<PAGE>
                                 DSI TOYS, INC.
                      CONSOLIDATED STATEMENT OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED
                                            -----------------------------
                                             MARCH 31,         MARCH 31,
                                               2001              2000
                                            -----------       -----------
<S>                                         <C>               <C>
Net sales                                   $ 6,721,223       $ 6,914,462
Cost of goods sold                            4,929,957         5,309,299
                                            -----------       -----------
Gross profit                                  1,791,266         1,605,163
Selling, general and
  administrative expenses                     3,979,454         3,340,630
                                            -----------       -----------
Operating loss                               (2,188,188)       (1,735,467)
Interest expense                               (267,979)         (269,983)
Other income                                     34,375            10,190
                                            -----------       -----------
Loss before income taxes                     (2,421,792)       (1,995,260)
Benefit from income taxes                       871,845           718,347
                                            -----------       -----------
Net  loss                                   $(1,549,947)      $(1,276,913)
                                            ===========       ===========

BASIC EARNINGS (LOSS) PER SHARE

     Loss per share                         $     (0.17)      $     (0.14)
                                            ===========       ===========
     Weighted average shares
       outstanding                            9,066,365         9,014,147
                                            ===========       ===========

DILUTED EARNINGS (LOSS) PER SHARE

     Loss per share                         $     (0.17)      $     (0.14)
                                            ===========       ===========
     Weighted average shares
       outstanding                            9,066,365         9,014,147
                                            ===========       ===========

</TABLE>


          See accompanying notes to consolidated financial statements.


                                       2
<PAGE>
                                 DSI TOYS, INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED
                                                     --------------------------
                                                      MARCH 31,      MARCH 31,
                                                        2001           2000
                                                     -----------    -----------
<S>                                                  <C>            <C>
Cash flows from operating activities:
     Net loss                                        $(1,549,947)   $(1,276,913)
     Adjustments to reconcile net loss to net
       cash provided by (used in) operating
       activities:
         Depreciation and amortization                   355,735        393,964
         Amortization and write-off of debt
           discount and issuance costs                     5,048          8,514
         Amortization of goodwill                        128,349        127,813
         Provision for doubtful accounts                  23,882         35,355
         Deferred income taxes                          (866,726)      (718,347)
         Changes in assets and liabilities,
           net of effects of acquisition:
            Accounts receivable                        4,076,355      3,153,146
            Inventories                                  397,945        149,658
            Income taxes payable                         (95,298)       (93,639)
            Prepaid expenses                          (1,073,387)      (217,197)
            Accounts payable and accrued
              liabilities                             (1,239,285)    (6,348,120)
                                                     -----------    -----------
               Net cash provided by (used in)
                 operating activities                    162,671     (4,785,766)

Cash flows from investing activities:
      Cash used for acquisition of Meritus                             (884,033)
      Capital expenditures                              (106,049)      (377,263)
      Increase  in other assets                         (159,658)      (215,453)
                                                     -----------    -----------
               Net cash used in investing
                 activities                             (265,707)    (1,476,749)

Cash flows from financing activities:
      Net (payments) borrowing  under
        revolving lines of credit                     (2,243,160)     1,689,615
      Net payments on long-term debt                    (442,776)      (652,888)
      Borrowings of long-term debt due to a
        related party                                                 5,000,000
      Net proceeds from issuance of warrants           2,700,000
      Debt and stock issue refunds                                       35,000
                                                     -----------    -----------
               Net cash provided by financing
                 activities                               14,064      6,071,727

Effect of exchange rate changes on cash                   14,098        (12,036)
                                                     -----------    -----------
Net decrease in cash                                     (74,874)      (202,824)
Cash and cash equivalents, beginning of period           177,682        478,970
                                                     -----------    -----------
Cash and cash equivalents, end of period             $   102,808    $   276,146
                                                     ===========    ===========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       3
<PAGE>
                                 DSI TOYS, INC.
                CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED
                                                         ------------------
                                                              MARCH 31,
                                                                2000
                                                            -------------
<S>                                                          <C>
Supplemental disclosure of cash flow information:

Acquisition of Meritus:
  Property, plant and equipment acquired                     $   (748,730)
  Accounts receivable and other assets
    acquired                                                     (838,563)
  Liabilities assumed                                           7,475,172
  Note payable issued to the Reilings                           1,690,000
  Common stock issued (including treasury
    shares)                                                     1,801,415
  Goodwill resulting from Meritus acquisition                 (10,263,327)
                                                             ------------

  Net cash paid for Meritus acquisition                      $   (884,033)
                                                             ============

</TABLE>

          See accompanying notes to consolidated financial statements.


                                       4
<PAGE>
                                 DSI TOYS, INC.
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                            ADDITIONAL
                                  COMMON STOCK                PAID-IN
                                SHARES         AMOUNT        CAPITAL        WARRANTS
                              ----------   ------------   ------------   ------------
<S>                            <C>          <C>            <C>           <C>
Balance, December 31, 1999     8,719,000    $    87,190    $ 4,934,919   $   102,500

   Comprehensive loss:
      Net loss
      Foreign currency
      translation adj
      net of tax

   Comprehensive loss
   Issuance of 347,365
      common shares and
      185,843 shares from
      THE TREASURY               347,365          3,474        238,546
      --------------------------------------------------------------------------------
Balance, December 31, 2000     9,066,365         90,664      5,173,465       102,500

   Comprehensive Loss:
      Net loss
      Foreign currency
      translation adj
      net of tax                  14,098
   Comprehensive loss
   WARRANTS ISSUED                                                         2,700,000
   -----------------------------------------------------------------------------------
   Balance, March 31, 2001     9,066,365    $    90,664    $ 5,173,465   $ 2,802,500
   ===================================================================================
</TABLE>

<TABLE>
<CAPTION>

                               ACCUMULATED
                                  OTHER
                              COMPREHENSIVE   RETAINED      TREASURY
                                  INCOME      EARNINGS       STOCK           TOTALS
                              -------------  -----------   ------------   ------------
<S>                           <C>            <C>           <C>            <C>
Balance, December 31, 1999    $   (12,626)   $ 3,436,401   $(1,559,395)   $ 6,988,989

   Comprehensive loss:
      Net loss                                  (848,986)                    (848,986)
      Foreign currency
      translation adj
      net of tax                  (14,436)                                    (14,436)
                                                                          -----------
   Comprehensive loss                                                        (863,422)
   Issuance of 347,365
      common shares and
      185,843 shares from
      THE TREASURY                                           1,559,395      1,801,415
      -------------------------------------------------------------------------------
Balance, December 31, 2000        (27,062)     2,587,415                    7,926,982

   Comprehensive Loss:
      Net loss                                (1,549,947)                  (1,549,947)
      Foreign currency
      translation adj
      net of tax                   14,098
   Comprehensive loss                                                      (1,535,849)
   WARRANTS ISSUED                                                          2,700,000
   ----------------------------------------------------------------------------------
   Balance, March 31, 2001    $   (12,964)   $ 1,037,468                  $ 9,091,133
   ==================================================================================

</TABLE>

          See accompanying notes to consolidated financial statements.


                                       5
<PAGE>
                                       DSI TOYS, INC.
                         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                        (UNAUDITED)

1.    BASIS OF PRESENTATION

      The accompanying unaudited consolidated financial statements of DSI Toys,
Inc. and its wholly-owned subsidiaries (the "Company") have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements and should be read in conjunction with
the financial statements and notes thereto appearing in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.

      In the opinion of the Company's management, all adjustments necessary for
a fair presentation of the results of operations for all periods reported have
been included. Such adjustments consist only of normal recurring items.

      The results of operations for the three months ended March 31, 2001, are
not necessarily indicative of the results expected for the full year ending
December 31, 2001.

2.    ACCOUNTS RECEIVABLE

      Accounts receivable consist of the following:

<TABLE>
<CAPTION>
                                               MARCH 31,        DECEMBER 31,
                                                 2001              2000
                                              -----------       -----------
<S>                                           <C>               <C>
    Trade receivables ..................      $ 4,641,625       $ 9,642,883
    Provisions for:
    Discounts and markdowns ............         (758,849)       (1,670,229)
    Return of defective goods ..........       (1,090,130)       (1,029,771)
    Doubtful accounts ..................         (370,000)         (420,000)
                                              -----------       -----------
    Accounts receivable, net ...........      $ 2,442,646       $ 6,522,883
                                              ===========       ===========
</TABLE>

3.    SEGMENT INFORMATION

      Financial information for the three months ended March 31, 2001 and 2000
      is as follows:

<TABLE>
<CAPTION>
                                         United
                                         States        Hong Kong     Consolidated
                                      ------------  --------------  --------------
<S>                                   <C>             <C>             <C>
    Three months ended March 31,
       2001:
     Net sales ....................   $  3,794,537    $  2,926,686    $  6,721,223
     Operating loss ...............     (1,801,958)       (386,230)     (2,188,188)
     Total assets at March 31, 2001     24,081,386       3,061,386      27,142,772

    Three months ended March 31,
       2000:
     Net sales ....................   $  3,022,320    $  3,892,142    $  6,914,462
     Operating loss ...............     (1,684,636)        (50,831)     (1,735,467)
     Total assets at March 31, 2000     20,546,958       3,753,013      24,299,971

</TABLE>

                                       6
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

      EXCEPT AS OTHERWISE INDICATED, REFERENCES TO THE "COMPANY" REFER TO DSI
TOYS, INC. AND ITS FOUR WHOLLY OWNED HONG KONG SUBSIDIARIES, DSI(HK) LIMITED
("DSI(HK)"), MERITUS INDUSTRIES LIMITED, RSP PRODUCTS LIMITED AND ELITE DOLLS
LIMITED. THE TERMS "FISCAL YEAR" AND "FISCAL" REFER TO THE COMPANY'S FISCAL
YEAR, WHICH IS THE YEAR ENDING DECEMBER 31 OF THE CALENDAR YEAR MENTIONED (E.G.,
A REFERENCE TO FISCAL 2000 IS A REFERENCE TO THE FISCAL YEAR ENDED DECEMBER 31,
2000). EFFECTIVE DECEMBER 31, 1999, THE COMPANY CHANGED ITS FISCAL YEAR END FROM
JANUARY 31 TO A CALENDAR YEAR END.

GENERAL

      The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto, and the information included
elsewhere herein.

      The Company designs, develops, markets and distributes high quality,
innovative dolls, toys and consumer electronics products. Core products include
youth electronics such as TECH-LINK(R) brand communications products,
EoBRAIN(TM) brand hand-held electronic companions, Kawasaki(R) brand musical
instruments, GEARHEAD(R) brand remote control vehicles and a full range of doll
brands including SWEET FAITH(R), PRIDE & JOY(TM), TOO CUTE TWINS(TM), HUSH
LI'L BABY(R), LITTLE DARLINGS(TM), and THE ELITE(R) brand of LIFETIME PLAY
DOllS(TM). The Company's web site can be reached at www.dsitoys.com.

      The Company has three major product categories: Juvenile Audio Products,
Girls Toys and Boys Toys.

JUVENILE AUDIO PRODUCTS

      The Juvenile Audio Product category consists of Youth Communications
products and Musical Instruments. Products in the Youth Communications line
include walkie-talkies, wrist watch walkie-talkies, and audio products. The
portfolio of brands in this category include TECH-LINK(R) and MICRO LINK(TM)
communications products, Harley-Davidson(R) walkie-talkies and bike alarms and
the Company's new EoBRAIN(TM) brand hand-held electronic companions. The Musical
Instrument line includes the branded category of Kawasaki(R) guitars, drum pads,
saxophone, keyboards and mixer keyboards, as well as the Josie and The
Pussycats(TM) musical products brand.

GIRLS TOYS

      The Girls Toys product category includes dolls, plush toys, play sets,
accessories, and activity toys. The Girls Toys portfolio of brands includes
SWEET FAITH(R), PRIDE & JOY(TM), DEAR GRACE(TM), GOOD WILL(TM), PRECIOUS
PRAYERS(TM), LITTLE DARLINGS(TM), HUSH LI'L BABY(R), BABY BEANS(R) and the
ELITE(R) brand of LIFETIME PLAY DOLLS(TM). New introductions for 2001 in this
category include TOO CUTE TWINS(TM), SUSIE SO SMART(TM), and "Happy Birthday to
You" dolls, KITTY KITTY KITTENS(R) plush toys, and the unique FASHION BUZZ(TM)
AIR NAILS SALON(TM) activity set.

BOYS TOYS

      The Boys Toys product category includes remote control and infra-red
control vehicles. The portfolio of brands in this product category are
GEARHEAD(TM) remote control vehicles, including INSECTOR(TM), and the new,
unique ultra-articulated STREET SAVAGE(TM). The GEARHEAD(TM) brand also includes
GEARHEAD(TM) JR. infra-red control vehicles.


                                       7
<PAGE>
RESULTS OF OPERATIONS

      The following table sets forth for the periods indicated certain income
and expense items expressed as a percentage of net sales:

<TABLE>
<CAPTION>
                                                      PERCENT OF NET SALES
                                                      --------------------
                                                       THREE MONTHS ENDED
                                                       ------------------
                                                      March 31,    March 31,
                                                        2001          2000
                                                     ----------   -----------
<S>                                                     <C>          <C>
    Net sales ....................................      100.0%       100.0%
    Costs of goods sold ..........................       73.3         76.8
                                                        -----        -----
    Gross profit .................................       26.7         23.2
    Selling,  general and administrative
    expenses .....................................       59.2         48.3
                                                        -----        -----
    Operating loss ...............................      (32.5)       (25.1)
    Interest expense .............................       (4.0)        (3.9)
    Other income .................................         .5           .1
                                                        -----        -----
    Loss before income taxes .....................      (36.0)       (28.9)
    Benefit from income taxes ....................       12.9         10.4
                                                        -----        -----
    Net loss .....................................      (23.1)%      (18.5)%
                                                        =====        =====
</TABLE>

THREE MONTHS ENDED MARCH 31, 2001, COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2000

      NET SALES. Net sales for the three months ended March 31, 2001, decreased
$200,000, or 2.8%, to $6.7 million, from $6.9 million in the first quarter of
2000. The decrease was due to decreased sales of girls toys, boys toys and
products in other categories, partially offset by increased sales of juvenile
audio products.

      Net sales of juvenile audio products during the first quarter ended March
31, 2001, increased $900,000, or 53.8%, to $2.7 million, from $1.8 million in
the first quarter of 2000. The major product groups in this category are Youth
Communications and Musical Instruments, providing $1.9 million and $800,000
respectively in sales in the quarter ending March 31, 2001. Increases occurred
in both product groups during the quarter, driven by the continued success of
TECH-LINK(R) walkie-talkies and Kawasaki(R) musical products.

      Net sales of girls toys decreased $900,000, or 22.5%, to $2.9 million
during the first quarter ended March 31, 2001, from $3.7 million in the first
quarter in 2000. The decreased sales for the first quarter reflect decreases in
sales of the PRIDE & JOY(TM) and ELITE(R) doll lines partially offset by sales
oF KITTY KITTY KITTENS(R), which was introduced in the fourth quarter of 2000.

      Net sales of boys toys decreased $113,000, or 12.4%, to $800,000 in the
first quarter ended March 31, 2001, from $913,000 in the first quarter of 2000.
The decrease was primarily due to decreased sales of boys military products
partially offset by sales of the INSECTOR(TM) R/C vehicle introduced in the
third quarter of 2000.

      Net sales of products in other categories during the first quarter ended
March 31, 2001, decreased $149,000 or 49.8%, to $300,000 during the first
quarter ended March 31, 2001, from $449,000 in the first quarter of 2000. The
decrease was due primarily to decreased sales of handheld games and novelties in
the first quarter of 2001 as compared to the first quarter of 2000. The Company
recorded no sales of handheld games in the first quarter of 2001 and sales of
toy electronic doorbells were substantially reduced in the first quarter of 2001
from the same period in 2000.

      International net sales for the three months ended March 31, 2001,
decreased approximately $200,000, or 16.2%, to $900,000, from $1.1 million in
the first quarter of 2000. The decrease was due primarily to decreased sales to
Canada, partially offset by increased sales to the United Kingdom as compared to
the same period of last year.


                                       8
<PAGE>
      GROSS PROFIT. Gross profit increased $200,000, or 11.6%, to $1.8 million
for the first quarter ended March 31, 2001, from $1.6 million in the first
quarter of 2000. Gross profit as a percentage of net sales increased to 26.6% in
the first quarter ended March 31, 2001, from 23.2% in the first quarter of
fiscal 2000. The gross profit dollar increase reflects the emphasis on
proprietary products, which carry higher margins, and the inclusion of sales of
close-out items in the first quarter of 2000.

      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $700,000 to $4.0 million in the
first quarter ended March 31, 2001, compared with $3.3 million for the first
quarter of 2000. The increase primarily was due to additional expenses for
employee costs, professional fees, bad debt expenses, tax expenses and other
operating expenses, which increased $415,000 from the same period in the prior
year, reflecting employee additions, increased credit risk and general
operational needs. Additionally, television and other advertising costs in 2001
increased $185,000 from fiscal 2000 to support sales of KITTY KITTY KITTENS(R)
and the annual industry trades shows.

      INTEREST EXPENSE. Interest expense during the first quarter ended March
31, 2001, decreased to $265,000 from $270,000 in the first quarter of 2000.

LIQUIDITY AND CAPITAL RESOURCES

      The Company historically has funded its operations and capital
requirements by cash generated from operations and borrowings. The Company's
primary capital needs have consisted of acquisitions of inventory, financing
accounts receivable and capital expenditures for product development.

      The Company's operating activities provided net cash of $162,671 during
the first quarter of fiscal 2001, consisting primarily of decreases in accounts
receivable, inventories and accounts payable, and an increase in prepaid
expense. Net cash used in investing activities during the first quarter of
fiscal 2001 was $266,000 and was a result of capital expenditures and an
increase in other assets. Net cash provided by financing activities was $14,064
in the first quarter of fiscal 2001 and was a result of proceeds from the
issuance of common stock warrants net of payments on long-term debt and the
revolving line of credit. The Company's working capital at March 31, 2001, was
$3.3 million and unrestricted cash was $102,000, and the Company's working
capital at March 31, 2000, was $2.5 million and unrestricted cash was $ 276,000.

      The seasonal nature of the toy business results in complex working capital
needs. The Company's working capital needs, which the Company generally
satisfies through short-term borrowings, are greatest in the last two fiscal
quarters. To manage these working capital requirements, the Company maintains
credit facilities secured principally by accounts receivable and inventory. The
Company currently maintains a line of credit facility with State Street Bank and
Trust - Hong Kong Branch (the "Hong Kong Credit Facility") and a revolving
credit facility with Sunrock Capital Corp. (the "Revolver"). At April 30, 2001,
the Company had additional eligible borrowing capacity of $270,000 in the
aggregate under the Hong Kong Credit Facility and the Revolver.

      The Company and Sunrock amended the Revolver on March 30, 2001, resulting
in an increase in the maximum loan amount from $10 million to $17.5 million,
subject to the availability of sufficient, eligible inventory and accounts
receivable. The terms include interest at the banks prime rate plus three
quarters of one percent (.75%) and maturity on March 31, 2004.

      On March 19, 2001, the Company issued to MVII an Investment Warrant to
acquire 1.8 million shares of the Company's Common Stock, in exchange for a cash
purchase price of $2.7 million. The Investment Warrant is exercisable for no
additional consideration, in whole or in part, for a ten-year period beginning
June 3, 2002. Proceeds from the sale of the Investment Warrant were used by the
Company for current working capital. The Investment Warrant is subject to
anti-dilution provisions.

      The Company has budgeted approximately $2.0 million for capital
expenditures for fiscal 2001 consisting primarily of purchases of tools and
molds and information technology systems. Based on projected fiscal 2001
operating results, the Company believes cash flows from operations and available
borrowings under the Revolver and the Hong Kong Credit Facility, as well as
proceeds from the Investment Warrant, will be sufficient to meet the Company's
operating cash requirements and fund its anticipated capital expenditures.
However, there can be no


                                       9
<PAGE>
assurance the Company will meet its projected operating results. In connection
with any future cash needs or acquisition opportunities, the Company may incur
additional debt or issue additional equity or debt securities depending on
market conditions, as well as other factors.

      The Company is obligated to make future minimum royalty payments under
certain of its license agreements. As of March 31, 2001, the Company was
required to make an aggregate of approximately $97,000 in payments of guaranteed
royalties under certain licenses in fiscal 2001 and $125,000 thereafter through
fiscal 2003.


SEASONALITY

      Retail sales of toy products are seasonal, with a majority of retail sales
occurring during the Christmas holiday period: September through December. As a
result, shipments of toy products to retailers are typically greater in each of
the third and fourth quarters than in the first and second quarters combined.
This seasonality is increasing as the large toy retailers are becoming more
efficient in their inventory control systems. See "Risk Factors."

      In anticipation of this seasonal increase in retail sales, the Company
significantly increases its production in advance of the peak selling period
during the second quarter, with a corresponding build-up of inventory levels.
This results in significant peaks in the second and third quarters in the
respective levels of inventories and accounts receivable, which result in
seasonal working capital financing requirements. See "Seasonal Financing."

SEASONAL FINANCING

      The Company's financing of seasonal working capital typically peaks in the
third quarter of the year, when accounts receivable are at their highest due to
increased sales volume and sales programs, and when inventories are at their
highest in anticipation of expected second half sales volume. See "Seasonality."
The Company finances its seasonal working capital requirements by using
internally generated cash and borrowings under its line of credit with the Hong
Kong Credit Facility and the Revolver with Sunrock. The Company entered into an
amendment to the Revolver on March 30, 2001, increasing the line of credit from
$10 million to $17.5 million.

CAUTIONARY STATEMENT

      Certain written and oral statements made or incorporated by reference from
time to time by the Company or its representatives in this Form 10-Q, other
filings or reports with the Securities and Exchange Commission, press releases,
conferences, or otherwise, are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. The Company is
including this Cautionary Statement to make applicable and take advantage of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
for any such forward-looking statements. Forward-looking statements can be
identified by the use of terminology such as "believe," "anticipate," "expect,"
"estimate," "may," "will," "should," "project," "continue," "plans," "aims,"
"intends," "likely," or other words or phrases of similar terminology.
Management cautions you that forward-looking statements involve risks and
uncertainties which may cause actual results to differ materially from the
forward-looking statements. For a discussion of some of the factors that may
cause actual results to differ materially from those suggested by
forward-looking statements, please read carefully the information under Item 1,
"Risk Factors", in the Company's 2000 Annual Report on Form 10-K. In addition to
the Risk Factors and other important factors detailed herein and from time to
time in other reports filed by the Company with the Securities and Exchange
Commission, including Forms 8-K, 10-Q, and 10-K, the following important factors
could cause actual results to differ materially from those suggested by any
forward-looking statements.

      MARKETPLACE RISKS

      o     Increased competitive pressure, both domestically and
            internationally, which may negatively affect the sales of the
            Company's products;

      o     Changes in public and consumer taste, which may negatively affect
            the sales of the Company's products;


                                       10
<PAGE>

      o     Significant changes in the play patterns of children, whereby they
            are increasingly attracted to more developmentally advanced products
            at younger ages, which may affect brand loyalty and the perceived
            value of and demand for the Company's products; and

      o     Possible weaknesses in economic conditions, both domestically and
            internationally, which may negatively affect the sales of the
            Company's products and the costs associated with manufacturing and
            distributing these products.

      FINANCING CONSIDERATIONS

      o     Currency fluctuations, which may affect the Company's reportable
            income; significant changes in interest rates, both domestically and
            internationally, which may negatively affect the Company's cost of
            financing both its operations and investments.

      OTHER RISKS

      o     Changes in laws or regulations, both domestically and
            internationally, including those affecting consumer products or
            trade restrictions, which may lead to increased costs or
            interruption in normal business operations of the Company;

      o     Future litigation or governmental proceedings, which may lead to
            increased costs or interruption in normal business operations of the
            Company; and

      o     Labor disputes, which may lead to increased costs or disruption of
            any of the Company's operations.

      The risks included herein are not exhaustive. Other sections of this Form
10-Q may include additional factors which could materially and adversely impact
the Company's business, financial condition, and results of operations.
Moreover, the Company operates in a very competitive and rapidly changing
environment. New risk factors emerge from time to time and it is not possible
for management to predict all such risk factors on the Company's business,
financial condition or results of operations or the extent to which any factor,
or combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statements. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual results.


                                       11

<PAGE>
                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

      The Company is involved in various legal proceedings and claims incident
to the normal conduct of its business. The Company believes that such legal
proceedings and claims, individually and in the aggregate, are not likely to
have a material adverse effect on its financial position or results of
operations. The Company maintains product liability and general liability
insurance in amounts it believes to be reasonable.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

      On March 19, 2001, the Company issued to MVII an Investment Warrant to
acquire 1.8 million shares of the Company's Common Stock, in exchange for a cash
purchase price of $2.7 million. The Investment Warrant is exercisable for no
additional consideration, in whole on in part, for a ten-year period beginning
June 3, 2002. The Investment Warrant is subject to certain anti-dilution
adjustments, including adjustments in the event the Company issues securities
for a purchase price that is equivalent to less than $1.50 per share of the
Company Common Stock. In connection with the issuance of the Investment Warrant,
the Company and MVII entered into a Registration Rights Agreement, pursuant to
which MVII was granted piggyback registration rights with respect to the shares
of the Company Common Stock underlying the Warrant, under certain circumstances.
Shares of Common Stock acquired by MVII upon exercise of the Warrant are subject
to the terms of a Shareholders' and Voting Agreement dated as of April 5, 1999,
among MVII and certain of the Company's other shareholders. Proceeds from the
sale of the Investment Warrant were used by the Company for current working
capital.

      The Investment Warrant was issued by the Company to MVII in reliance on
the exemption from registration set forth in Section 4(2) of the Securities Act
of 1933, as amended. The Company believes the Section 4(2) exemption from
registration was available based upon the established criteria for effecting a
private offering by virtue of the following facts, among others: (i) MVII had
access to the type of information that would be included in a registration
statement, (ii) MVII's principals have adequate financial means to bear the risk
of MVII's additional investment in the Company and can be described as
sophisticated, (iii) MVII was the only offeree in the transaction, (iv) MVII
acquired the Investment Warrant for investment and not with a view toward
distribution, (v) the Investment Warrant contains restrictions on resale of the
Investment Warrant and the Common Stock issued upon exercise of the Investment
Warrant, and (vi) no underwriters were involved nor were any underwriters'
commissions paid in connection with the transactions.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits

   The information required by this Item 6 (a) is set forth in the Index to
   Exhibits accompanying this quarterly report and is incorporated herein by
   reference.

b) Reports on Form 8-K

   None.


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<PAGE>
                                   SIGNATURES


     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



                               DSI Toys, Inc.


Dated:  May 10, 2001           /s/ MICHAEL J. LYDEN
                               -------------------------------------------------
                               Michael J. Lyden
                               President and Chief Executive Officer



Dated:   May 10, 2001    By:   /s/ ROBERT L. WEISGARBER
                               -------------------------------------------------
                               Robert L. Weisgarber
                               Chief Financial Officer
                               (Principal Financial and Accounting Officer)



                                       13
<PAGE>
                                INDEX TO EXHIBITS

2.1     Articles/Certificate of Merger of Meritus Industries, Inc. into the
        Company, dated January 7, 2000 (filed as Exhibit 2.2 to the Company's
        Form 8-K dated January 7, 2000), incorporated herein by reference.

3.1     Amended and Restated Articles of Incorporation of the Company. (1)

3.1.1   Amendment to Amended and Restated Articles of Incorporation of the
        Company (filed as Exhibit 3.1.1 to the Company's Form 10-Q for the
        quarterly period ended April 30, 1999), incorporated herein by
        reference.

3.2     Amended and Restated Bylaws of the Company. (1)

3.3     Amendment to Amended and Restated Bylaws of the Company. (1)

4.1     Form of Investment Warrant by and between the Company and MVII, LLC,
        dated March 19, 2001 (filed as Exhibit 4.6 to the Company's Form 10-K
        for the fiscal year ended December 31, 2000), incorporated herein by
        reference.

4.2     Registration Rights Agreement by and between the Company and MVII, LLC,
        dated March 19, 2001 (filed as Exhibit 4.7 to the Company's Form 10-K
        for the fiscal year ended December 31, 2000), incorporated herein by
        reference.

10.1    Amendment No. 4 dated March 30, 2001, to the Loan and Security
        Agreement, by and between Sunrock Capital Corp. and the Company (filed
        as Exhibit 10.57 to the Company's Form 10-K for the fiscal year ended
        December 31, 2000), incorporated herein by reference.

10.2    Employment Agreement dated April 1, 2001, but executed April 23, 2001,
        by and between the Company and Gregory A. Barth. *

99.1    Amendment No. 1 to the Audit Committee of the Board of Directors
        Charter, adopted by the Board of Directors on March 31, 2001 (filed as
        Exhibit 99.2 to the Company's Form 10-K for the fiscal year ended
        December 31, 2000), incorporated herein by reference.


*     Filed herewith.


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