<PAGE>

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

                                   FORM 10-KSB

         [X] Annual Report under Section 13 or 15(d) of the Securities Exchange
             Act of 1934

                   For the fiscal year ended December 31, 2000

         [ ] Transition Report under Section 13 or 15(d) of the Securities
             Exchange Act of 1934

             For the transition period from ________________ to _______________

                         Commission file number: 0-24608

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

                               FOTOBALL USA, INC.
                 (Name of small business issuer in its charter)
          Delaware                                               33-0614889
-------------------------------                            --------------------
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               Identification No.)

                   6740 Cobra Way, San Diego, California 92121
                   -------------------------------------------
               (Address of principal executive offices) (Zip Code)

                    Issuer's telephone number: (858) 909-9900

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

         Securities registered under Section 12(b) of the Exchange Act:
                                      None

         Securities registered under Section 12(g) of the Exchange Act:
                          Common Stock, $.01 par value
                         Preferred Stock Purchase Right

         Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 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
                                    -----     -----

         Check if 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. [ X]

         The Issuer's revenues for the fiscal year ended December 31, 2000 were
$26,929,331.

         The aggregate market value of the Issuer's Common Stock held by
non-affiliates, computed by reference to the average bid and ask prices of such
stock, as of March 16, 2001, was $4,131,066.

         As of March 16, 2001, the Company had 3,579,032 shares of Common Stock
issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the Proxy Statement for the Company's 2001 Annual Meeting
of Stockholders are incorporated by reference into Part III of this Form 10-KSB.

         Transitional Small Business Disclosure Format:  Yes        No   X
                                                             -----     ---



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CAUTIONARY STATEMENTS PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995:

This report contains forward-looking statements within the meaning of the
federal securities laws. These forward-looking statements involve risks,
uncertainties and assumptions that, if they never materialize or prove
incorrect, could cause the results of the Company to differ materially from
those expressed or implied by such forward-looking statements. All statements
other than statements of historical fact are forward-looking statements,
including statements regarding expanding the promotion business, expanding
retail capabilities, launching the new Rawlings Golf division, adding product
lines, adding new license properties, overall sales trends, gross margin trends,
operating cost trends, the Company's expectations as to funding its capital
expenditures and operations during 2001, the Company's ability to renew expiring
license agreements and other statements of expectations, beliefs, future plans
and strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts. The risks, uncertainties and assumptions
referred to above include the risk factors listed in Part I, Item 1 and the
"Disclosure of Certain Significant Risks and Uncertainties" included in the
Notes to Financial Statements in this report and as listed from time to time in
the Company's filings with the Securities and Exchange Commission.



                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

         Fotoball USA, Inc., a Delaware corporation (the "Company"), designs,
develops, manufactures and markets high quality custom sports and non-sports
related products. These products are sold in the licensed product retail market
through a nationwide network of over 3,000 retail stores including Target,
Wal-Mart, Toys "R" Us, Sears, J.C. Penney and The Sports Authority.
Additionally, the Company provides custom sports and non-sports related products
for corporate promotions and non-licensed specialty sports products to
corporations for resale, including sales to amusement parks and
entertainment-related companies. The Company currently holds licenses with Major
League Baseball Properties and Major League Baseball Players Association, NHL
Enterprises and National Hockey League Players Association, National Football
League Properties and NFL Players Inc., over 300 National Collegiate Athletic
Association colleges and universities, the United States Professional Softball
League, the XFL and certain entertainment properties including Warner Bros.
Looney Tunes(R) and Scooby-Doo, Nickelodeon's "Rugrats" and "Blue's Clues"
characters, Saban's "Digimon" and The Coca-Cola Company. Pursuant to these
licenses, the Company has the right to use, for commercial purposes, the names,
logos, characters, likenesses and signatures of the licensors on various sports
and non-sports related products.

         In December 2000, the Company entered into an agreement with Rawlings
Sporting Goods Company, Inc. ("Rawlings") for the exclusive global rights to
sell golf clubs and golf related merchandise under the Rawlings brand name
beginning January 1, 2001. In January 2001, the Company established a new
Rawlings Golf division to design, develop, manufacture and market golf products
under the Rawlings brand name.

         The Company sells its products to two distinct types of customers.

         o        Retail customers, which includes both the sale of licensed
                  products directly to mass merchants, sports teams and
                  concessionaires (its "national retail sales" customer) and the
                  sale of non-licensed specialty sports and non-sports products
                  to amusement park and entertainment-related companies for
                  resale and promotional use (its "entertainment" customer).

         o        Promotion customers, to whom the Company directly sells
                  custom-designed products.



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         The Company's national retail sales represents a customer base of over
3,000 retailers, including selected department stores and mass merchants (such
as Target, Wal-Mart, Toys "R" Us, Sears and J.C. Penney), airport and hotel
concessionaires, various licensed sports specialty and sporting goods chains
(such as The Sports Authority, Champs, Modell's Sporting Goods and Dick's
Sporting Goods), various consumer catalogs, e-commerce sites and professional
sports stadiums (including all 30 Major League Baseball stadiums, the majority
of professional minor league baseball stadiums and selected football stadiums).
The Company's entertainment business designs, develops and manufactures
specialty products for large companies such as Walt Disney, Paramount, Six Flags
and Busch Gardens theme parks, QVC, Home Shopping Network and Sports
Illustrated.

         The Company's promotion customers, which include large companies such
as General Mills, Castrol, Bank of America, McDonalds and Burger King, purchase
the Company's products for use in promotional campaigns and in connection with
their sponsorship of sports teams. The Company provides its promotion customers
with a wide range of graphic design, product development and manufacturing
services. These services include assisting customers in the negotiation of
corporate sponsorships with professional sports teams and their associations, in
designing and developing promotions and in procuring product licenses and
authorizations. The Company is responsible for all phases of production,
including creative design, manufacturing, quality control, packaging and
shipping.

         The Company intends to sell its Rawlings Golf products to certain of
its existing national retail sales customers and to select on-course and
off-course golf retailers. The Company anticipates having products available for
sale beginning in the second quarter of 2001.

         Fotoball USA, Inc., a California corporation and the predecessor to the
Company ("Fotoball California"), was incorporated under the laws of the State of
California on December 13, 1988. The Company then was incorporated under the
laws of the State of Delaware on April 27, 1994, for the purpose of merging and
continuing the business of Fotoball California. On July 29, 1994, Fotoball
California merged with and into the Company, with Fotoball USA, Inc. being the
surviving corporation.

PRODUCTS

         The Company offers a variety of custom-imprinted sports and non-sports
products across a broad range of price points. The Company currently markets
over 500 custom-imprinted sports and non-sports related products with general
wholesale prices ranging from approximately $1.00 to $22.95 per item. The
following is a description of each of the Company's main product lines:

    Baseball:
         The Company uses a synthetic leather, official size and weight
baseball, as well as a synthetic leather, composite core jumbo baseball, on
which it prints or embosses various images. The baseball product line includes
baseballs featuring a player's image and statistics, embroidered baseballs, logo
team baseballs featuring logos of Major League Baseball ("MLB") and minor league
baseball teams (collectively "Professional Baseball"), mini-glove and baseball
gift sets, specialty baseballs including mini-hanging baseballs, Softee(R) soft
vinyl polyester filled baseballs licensed by Professional Baseball, colleges and
universities and several entertainment properties and promotional baseballs
custom-printed and used for promotions.

    Football:
         The Company uses a synthetic leather football in a variety of sizes and
finishes. The football product line includes Teamball TM and the National
Football League ("NFL") Player Fotoball(R), mini-footballs featuring NFL team
logos and full color images of NFL players, official size footballs and
Sofgrip(TM) footballs featuring university or college logos, NFL Souvenir
official size footballs featuring team and Super Bowl logos and NFL marks
produced in limited edition, performance/official size footballs featuring color
images for specialty retailers such as Walt Disney and promotional full-size,


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Sofgrip(TM) and miniature footballs custom-printed and used for promotions.

    Basketball:
         The Company uses a basketball with a high-grade synthetic leather
finish on six panels and white synthetic leather on two panels for its official
size and miniature basketballs. The Company uses an official size basketball
constructed of vulcanized rubber and an official size basketball constructed of
synthetic leather for its brand licensed and college product line. The
basketball product line includes University Teamball(R) made from synthetic
leather, both full and youth-size vulcanized rubber basketballs featuring a
full-color image of a university or college logo and nickname, National
Basketball Association ("NBA") team logo ball featuring full-color logos of
several NBA teams sold to individual teams for exclusive sale by the respective
team within the arena, basketball hoop sets with backboards featuring college
logos combined with a mini-basketball, performance/official size basketballs
featuring full-color images for specialty retailers and promotional basketballs
in all sizes made primarily from vulcanized rubber featuring graphic designs of
team, college or corporate logos for promotions.

    Soccer Ball:
         The Company uses a 16-inch, 12-panel machine stitched synthetic leather
soccer ball for its miniature soccer balls. The Company uses a size 5 machine
stitched soccer ball for its brand-licensed products. The soccer product line
includes size 3 and performance/size 5 soccer ball featuring color images for
specialty retailers and promotional soccer balls custom-printed and used for
promotions.

    Hockey Puck:
          The Company uses a hockey puck that is officially licensed with the
National Hockey League ("NHL"). The hockey product line includes team puck
featuring NHL team logos on a brass medallion that adheres to the puck, player
images and player facsimile autographs on pucks packaged in a mini-net or with a
stand.

    Lapel Pin:
          The Company produces a variety of lapel pin styles including
cloisonne, die struck, brass etched and steel for the licensed product retail
market, for corporate promotions and to brand licensed retail customers. The
lapel pin product line includes customized lapel pins for entertainment
customers, NCAA lapel pins for the NCAA championship series and the Final
Four(TM) tournament licensed by the NCAA and promotional pins custom
manufactured and used for corporate promotions and programs.

    Playground Ball:
         The Company uses a soft vulcanized rubber ball in various sizes for its
entertainment-related licensed products such as for Warner Bros. Looney Tunes
and Scooby Doo and Nickelodeon's "Rugrats" and "Blue's Clues" characters. The
Company uses an 8-inch playground ball for its MLB team logo playground ball
featuring all MLB teams, as well as for its NFL team logo playground ball
featuring all NFL teams.

    Softee(R)Sports Products:
         The Company uses polyester-filled soft vinyl for its Softee(R) sport
balls. The Softee(R) product line includes a miniature bat and baseball set with
major league baseball and entertainment property logos, a Teamball(R) basketball
featuring college and minor league team logos and promotional miniature
footballs and baseballs custom-printed and used for promotions.

    Coins:
         The Company uses fully minted solid metal coins with an industry first
printed metal insert custom manufactured for its entertainment customers and
used for corporate promotions and programs.

    Golf Line:
         Beginning in the second quarter of 2001, the Company will offer a
complete line of Rawlings


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Golf golf clubs, golf balls, bags and non-motorized golf carts.

         Sets. The Company will offer three golf club sets that include three
woods with graphite shafts and/or eight irons with either graphite or steel
shafts. The Company will sell an irons only set or woods only set and a complete
woods and irons set. The three lines are the Tour Response, which has dual
tungsten inserts in the irons for a low center of gravity and is designed for
the more experienced golfer, the EneroG+, which has a twin back cavity in the
irons for more control and is designed for players of all levels and the Phase
II, which has oversized perimeter weighted irons for the less experienced
golfer. The Company will also offer two junior sets with a driver, three irons,
a putter and a golf bag.

         Utility drivers. The Company will offer the FTi series of fused
titanium utility drivers, which has a tungsten weighting system with a patented
titanium face construction and will come with graphite shafts in three head
sizes, 320cc, 360cc and 400cc.

         Utility irons. The Company will offer two series of utility wedges,
each of which will come in three different lofts. The DTI wedges have a heel and
toe tungsten weighting system for a low center of gravity. The Short Stop wedges
have an oversized head for a larger sweet spot. The T-Iron is a driving iron
designed for driving off the tee or for use in the fairway.

         Putters. The Company will offer a series of putters called DTI putters
with tungsten and copper toe and heel weighting system and a vibration absorbing
face insert.

         Golf balls. The Company will offer two three-piece performance balls
that contain a solid core, a mantle and a Suryln cover with the mantle and cover
containing a titanium powder coating. The Company also will offer a lower priced
two-piece golf ball constructed with a solid core and Surlyn cover with a
titanium powder coating. Each of the golf ball lines is designed with a unique
482-dimple pattern. The pattern and dimple depths are designed to create
aerodynamic properties that produce a long, straight flight with a trajectory
and spin that allow the ball to hold the green.

         Accessories. The Company will offer two different non-motorized pull
carts - one for junior golfers and one for adults. The Company anticipates
developing additional accessories such as golf gloves, umbrellas, towels, caps
and shirts for sale later in 2001 and early 2002.

MANUFACTURING, SUPPLY AND DISTRIBUTION

         Significant portions of all raw materials used in the production of the
Company's retail products are purchased from unaffiliated manufacturers in Asia.
An increasingly greater percentage of the Company's retail products are
manufactured overseas, requiring only inflation and packaging of the products to
be completed at the Company's San Diego, California facility. Additionally, the
majority of the Company's promotion products are manufactured according to
Company and customer specifications by these same unaffiliated manufacturers. In
2000, the Company purchased approximately 88% of its raw materials and finished
retail and promotion goods, consisting primarily of synthetic baseballs,
footballs, basketballs, hockey pucks and playground balls, from six companies
located in China, with two manufacturers accounting for 78% of total raw
materials and finished goods purchased. The imprinting process, which involves
the application of an image onto a blank ball, is performed either at the
Company's San Diego, California facility or in China, depending upon the
complexity of the printing process required. The complex four-color process is
performed exclusively at the San Diego facility and the less sophisticated
printing can be performed either at the San Diego facility or in China. The
Company's senior management periodically visits its suppliers to supervise the
manufacturing of its products and to ensure compliance with the Company's
quality control standards and specifications. The Company is not a party to any
written contract with any supplier and relies on its long-standing relationships
to ensure quality, responsiveness and efficiency. All of the Company's products
manufactured abroad are paid for in United States dollars.

         Foreign manufacturing is subject to a number of risks, including
production and transportation


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delays and interruptions, political and economic disruptions, the imposition of
tariffs, quotas and other import or export controls and changes in government
policies. China currently enjoys most favored nation ("MFN") trading status with
the United States, although there can be no assurance that China will continue
to enjoy MFN trading status in the future or that conditions on China's MFN
status will not be imposed. Any conditions imposed by the President of the
United States and any legislation in the United States revoking or placing
further conditions on China's MFN trading status could have a material adverse
impact on the cost of the Company's products because products originating from
China could be subjected to substantially higher rates of duty. Although
alternative suppliers may be available in other countries at competitive prices
and the Company continues to evaluate their ability to compete in terms of cost,
quality, production capacity and other considerations, there can be no assurance
that the Company would be able to find alternative suppliers in a timely manner
or that such suppliers would meet the Company's cost, quality or production
capability standards.

         All of the Company's golf products will initially be purchased from
unaffiliated manufacturers in Asia. Golf clubs will be purchased fully assembled
and packaged with only re-packaging for final shipment to customers occurring in
the Company's San Diego, California facility. During 2001, the Company will
establish a low volume golf club assembly capability within its San Diego
facility to handle specialized orders and replacement product. All components
for clubs assembled at the Company's San Diego facility will continue to be
manufactured by the Asian manufacturers. Golf balls will be purchased both in
retail packaging and in bulk. The Company will purchase golf balls in bulk
pre-printed with the Rawlings logo for use in fulfilling customized and
promotion orders.

         The Company is dependent on a limited number of suppliers for its golf
clubs and golf balls. While the Company believes that alternative suppliers for
its clubs and balls are available at competitive prices, there can be no
assurance that the Company would be able to find alternative suppliers in a
timely manner or that such suppliers would meet the Company's cost, quality or
production capability standards. Any disruption of the current suppliers could
have a material adverse effect on the results of operation of the Company's golf
division.

         The Company is also dependent upon its golf suppliers for product
development and design. The Company relies upon its suppliers to produce new and
innovative golf clubs and balls that comply with the standards set by the United
States Golf Association ("USGA") and Royal and Ancient Golf Club of St. Andrews
("R&A"). The Company's inability to obtain products that incorporate current
technology and designs or that do not comply with USGA or R&A standards could
have a material adverse effect on the results of operation of the Company's golf
division.

         Demand in the golf marketplace for new technology and products can
change rapidly. As the Company attempts to compete by introducing new products
based on current technology, it may render its existing inventories of older
products obsolete which could lead to higher than normal close-out sales at low
or negative gross margins which could have a material adverse effect on the
results of operation of the Company's golf division.

         The Company is new to the golf industry and does not have a history in
forecasting demand for its new Rawlings Golf products. Actual demand for its
golf products may be greater or less than forecasted. Such variations in demand
may lead to overstocking or shortages of inventory for certain products.
Overstocking of products could lead to excess obsolete inventory and closeout
sales at low or negative gross margins and inventory shortages may lead to lost
sales for those products, both of which could have a material adverse effect on
the results of operation of the Company's golf division.

PRODUCT WARRANTIES

         The Company does not offer warranties for its sports balls or other
non-golf products. The Company will offer limited warranties only on its golf
clubs. To reduce the Company's financial exposure under its warranties, the term
of the warranties will be based upon the warranty period extended to the Company
by its golf suppliers. The Company will monitor the incidence of broken and


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defective clubs and work with its golf suppliers to correct design and
manufacturing problems. A high rate of defective or broken products may
adversely affect the Company's image and sales performance in the marketplace.

LICENSE AGREEMENTS

         The Company's business is based primarily upon its use of the insignia,
logos, names, colors, likeness and other identifying marks and images borne by
many of its products pursuant to license arrangements with MLB, the NFL, various
colleges and universities and, to a lesser extent, other licensors include the
National Hockey League, the XFL, Coca-Cola, Warner Bros. Looney Tunes(R) and
Scooby-Doo, MTV Networks' (Nickelodeon) "Rugrats" and "Blue's Clues" characters
and Saban Merchandising, Inc.'s "Digimon: Digital MonstersTM". The Company's new
license with Rawlings will be the Company's first venture into the golf products
business. The Company may acquire additional licenses for new product lines;
however, there can be no assurance that the Company will be successful in
obtaining new licenses. The non-renewal or termination of one or more of the
Company's current material licenses, particularly with MLB, the NFL or
collectively the various colleges and universities, could have a material
adverse effect on the Company's business as a whole. The following is a brief
description of the Company's material license arrangements with its licensors:

         The Company was granted by National Football League Properties, Inc.
("NFLP") the non-exclusive right to utilize in the United States and Canada, the
names, symbols, designs and colors of the following: "National Football League,"
"NFL," "NFC," "AFC," "Super Bowl," "Pro Bowl," the Member Clubs of the NFL
(including the helmet designs, uniforms, team names, nicknames, identifying
slogans and logos and other member club indicia) (the "Team" license) and the
names, likeness, portraits, pictures, photographs, signatures and biographical
information of the NFL Quarterback Club(TM) and its members ("Quarterback Club"
license). The Company also received from NFLP the right to utilize team and
league logos on limited edition, collectible, official size synthetic-leather
footballs. The terms of the licenses extend through March 31, 2003. The Company
is obligated to pay a royalty based on net sales of licensed products subject to
an annual minimum royalty fee. There can be no assurance that the Company will
be able to renew its license agreements with the NFLP upon acceptable terms at
its expiration.

         The Company was granted by the Major League Baseball Players
Association ("MLBPA") the non-exclusive right to utilize in the United States,
its territories and Canada the "MLBPA" and "Major League Baseball Players
Association" trade names, the MLBPA logo and the names, nicknames, likeness,
signatures, pictures, playing records and/or biographical data of all active
baseball players of the National League and the American League who have entered
into commercial agreements with the MLBPA. The term of the license extends
through December 31, 2000 with two renewal periods from January 1, 2001 to
December 31, 2001 and from January 1, 2002 to December 31, 2002. The Company has
renewed its license for 2001. The Company is obligated to pay a royalty based on
net sales of licensed products, subject to an annual minimum royalty fee. There
can be no assurance that the Company will be able to renew its license
agreements with the MLBPA upon acceptable terms at its expiration.

         The Company was granted by Major League Baseball Properties, Inc.
("MLBP") the non-exclusive right to utilize in the United States the names,
symbols, logos and other similar or related identification of "MLBP." The term
of the license extends through December 31, 2001. The Company is obligated to
pay a royalty based on net sales of licensed products, subject to an annual
minimum royalty fee. There can be no assurance that the Company will be able to
renew its license agreements with the MLBP upon acceptable terms at its
expiration.

         The Company maintains licenses with various colleges and universities
to use their names and logos on the Company's products. The Company was granted
a license by The Collegiate Licensing Company and the Licensing Resource Group,
both of which provide the licensing rights to several colleges and universities.
In addition, the Company has individual licenses with several colleges and


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universities. No single college or university license represents a material
portion of the Company's license sales business. However, taken as a whole, all
of the college and university license sales are a material portion of the
Company's license sales business. There can be no assurance that the Company
will be able to renew all of its various college and university license
agreements upon acceptable terms at their expirations.

         In December 2000, the Company entered into a five-year license
agreement, beginning January 1, 2001, with two five-year renewal terms, with
Rawlings for the exclusive global rights to sell golf clubs and golf related
merchandise under the Rawlings brand name. The Company paid a one-time licensing
fee of $500,000, and is obligated to pay a royalty based on net sales of
licensed products, subject to an annual minimum royalty fee. The annual minimum
royalty fees are: year one - $250,000, year two - $350,000, year three -
$500,000, year four - $600,000 and year five - $700,000. The agreement
automatically renews for the five-year renewal periods provided the Company has
met its minimum royalty commitments. The Company may terminate the agreement for
any reason upon 12-months' notice and payment of the minimum royalty for such
12-month period. There can be no assurance that the Company will meet its
minimum royalty commitments allowing it to renew its license agreement beyond
the initial term.

         Historically, the Company's licenses have been renewed by its
licensors. Although the Company believes it will be able to renew its licenses
upon their expiration, there can be no assurance that such renewal can be
obtained on terms acceptable to the Company. The inability of the Company to
renew existing licenses and/or acquire additional licenses could have a material
adverse effect on the Company's sales and earnings.

GROSS MARGINS

         The Company realized gross margins of 36% for the year ending December
31, 2000, a decrease from 41% during the prior year period. The Company's gross
margins may fluctuate, based in part on the concentration of promotion, retail
sales, sales direct to licensors, volume of close out sales and product mix
during the reporting period. The types of products sold, the size of the
promotion and the extent of competition also may create variability in realized
gross margins. The Company currently relies on the retail sales channel for most
of its revenue. The retail channel is very competitive and price sensitive for
certain of the Company's products and there is no guarantee that the Company
will not be required to reduce prices or change its product mix to replace
higher margin products with lower margin products in the future to remain
competitive in the marketplace. Such price reductions and product changes could
lead to overall lower gross margins. Under the Company's new Rawlings Golf
license, the Company will be entering the golf marketplace for the first time.
Without a history in the golf business, the Company cannot be certain of the
gross margins it will realize on its golf product sales. Golf product margins
will vary depending on customer acceptance of the Company's initial pricing and
changes in manufacturing costs as the Company ramps up production. The overall
Company gross margins may vary based on the volume of golf product sales.

SEASONALITY

         The Company has historically experienced significant quarter-to-quarter
variability in its sales and net income resulting primarily from two factors.
The first factor was the seasonality of the sporting industry and the effect
this had on the Company's licensed sports product business. The continued
introduction of quality product lines involving a diverse group of sports and
entertainment-related products has helped to mitigate this seasonality. The
second factor, which significantly contributed to prior years' variability of
the Company's operations, was its dependence on the promotion business. However,
the Company has successfully grown the retail distribution channel of the
business to help mitigate this variability. The Company's retail and promotion
business for the year ending December 31, 2000 accounted for approximately 92%
and 8%, respectively, of total sales. Under the Company's new Rawlings Golf
license, the Company will be entering the golf marketplace for the first time.
The golf club and golf ball markets are generally seasonal due to lower demand
in the cold weather months which fall during the Company's first and fourth
quarters. Once the Company has fully ramped up its


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production capabilities, it anticipates that its golf product sales will follow
the seasonality of the market.

CONCENTRATION ON RETAIL SALES

         Retail sales were 92% of total sales for the year ended December 31,
2000, as compared to 87% of total sales for the year ended December 31, 1999.
One large customer, The Walt Disney Company, accounted for approximately 20% and
25% of total sales for the years ended December 31, 2000 and 1999, respectively.
No other customer accounted for 10% or more of total sales in 2000 or 1999.

DEPENDENCE UPON KEY PERSONNEL

         The success of the Company is largely dependent on the personal efforts
of Michael Favish, its President and Chief Executive Officer. Mr. Favish has
entered into a three-year employment agreement with the Company, commencing on
August 10, 1999, which, among other things, precludes Mr. Favish from competing
with the Company for a period of two years following termination of his
employment with the Company. The loss of the services of Mr. Favish could have a
material adverse effect on the Company's business and prospects. The Company
maintains "key man" life insurance on the life of Michael Favish.

COMPETITION AND TECHNOLOGICAL CHANGE

         The promotion and sports related retail businesses are highly
competitive, diverse and constantly changing. The Company experiences
substantial competition in most of its product categories from a number of
companies, some of which have greater financial resources, marketing and
manufacturing capabilities than the Company.

         The Company competes primarily on the basis of customer service,
creativity in product design, quality and uniqueness of products, prompt
delivery and a reputation of reliability. The Company believes that it
successfully competes in each of the above areas and that the Company has an
advantage by offering a full range of services from design through distribution.

         The licensed sports-related product industry differentiates itself from
other industries in that the licensors control the extent of competition among
licensees and typically do not grant exclusive licenses. Generally, licensors
allow vendors to use licensed products under non-exclusive license agreements
and such licensors may license more than one vendor in a particular product
line. Although the Company has been successful in obtaining and renewing such
licenses and in being the sole vendor of certain licensed product lines, there
can be no assurance that other competitors will not obtain competing licenses to
sell the same or similar products in the future. The Company's expansion into
recreational vulcanized rubber sports balls and broadened licensed product lines
will result in substantially more competition within these product categories
due to a greater number of well-established companies, including Franklin Sports
Inc., Baden Sports Inc. ("Baden"), Play by Play Inc. and Wilson Sporting Goods
Co. The Company also competes directly with Rawlings in the team logo baseball
business and for certain promotional baseball programs, as noted below.

         The technology currently being used by the Company has contributed to
restricting direct competition of its product lines. The future success of the
Company will be dependent, in part, upon its proprietary printing process and
ability to keep pace with advancements in printing and graphic designs. There
can be no assurance that new printing technology will not be developed that
renders the Company's current printing process and products obsolete or
inferior, or that other competitors will not develop the technology currently
used by the Company. The future success of the Company is increasingly dependent
upon the creativity of its design team, its ability to reproduce these designs
onto sports products with high quality output and new product development.



                                       9
<PAGE>

         The domestic promotion business is highly competitive. The Company
competes frequently with the same companies as in its licensed sports product
business, particularly Inglasco, Spalding, Wilson and Rawlings. Additionally, a
variety of companies who outsource sports ball products from China do compete
against the Company for certain promotional orders. However, the Company
believes that its creativity, higher quality and reliable service result in a
competitive advantage. The Company's competitors include companies that have
significantly greater financial and other resources than the Company. There can
be no assurance that the Company will be able to compete effectively against
such companies in the future.

         Within its retail business, the Company competes on the basis of its
quality manufacturing process, its strong relationships with its licensors, its
price point, brand equity of the Fotoball name in the marketplace and its use of
selected distribution channels for retail products. As previously noted, a
significant competitive advantage of the Company is its creative design
capabilities and its ability to reproduce these designs onto high quality
products.

         The golf industry is highly competitive. There are several established
companies with recognized brand names and substantially more financial resources
than the Company. Rather than competing directly with premium club brands such
as Callaway, Taylor Made, Titleist and Ping, the Company will focus its products
at the middle of the market and will directly compete with Wilson, Spalding and
numerous lesser-known brands. The Company will compete in this segment of the
market based upon having a well-known brand name in Rawlings and producing
premium quality clubs at more affordable prices. There is also the possibility
that Nike may enter into the golf club business. It is unknown at what level
Nike would position its clubs within the market, but it has substantial
financial resources to heavily promote its products which could be competitive
with the Company's products. In the golf ball market, Titleist is a recognized
brand in the premium ball segment with several competitors including Nike and
Callaway heavily promoting their entries into the premium ball segment. The
Company's golf balls will more directly compete with Spalding's well-established
Top Flite and Strata brands, which represent a substantial portion of the golf
ball market. There can be no assurance that the Company's products will gain
acceptance in the marketplace or that the Company will have the resources to be
able to compete with more established golf brands.

TRADEMARKS, PROPRIETARY INFORMATION AND PATENTS

         Fotoball(R) is a registered trademark of the Company. The Company
believes that Fotoball(R) is the best known brand name for baseballs and other
sports balls with imprinted color images. The Company also uses trademarks, such
as Teamball(TM), Fotopuck(TM), Dunk This(TM) and Heads Up(TM), which are
registered with the U.S. Patent and Trademark Office. The Company considers the
Fotoball(R) trademark to be material to its business. The Company has filed
registrations with the U.S. Patent and Trademark Office for DTI, Dual Tungsten
Inserts, EneroG+, FTI, Phase II, Short Stop, Soft Blade, S.S. Cavity, TIP,
Tungsten Impact Power, Tour Response and T-Iron for use in its Rawlings Golf
division. There can be no assurance that the Company will be granted trademark
registrations for these names.

         The Company is able to successfully reproduce a variety of intricate
designs on its products with detail and accuracy, using the Company's
proprietary printing process. The Company developed this process by combining
several pre-existing techniques that are used in other similar industries. To
the Company's knowledge, no other company currently has the ability to perform
the complete process. The Company does not rely upon any material patents or
licensed technology in the operation of its business. The Company does not
believe that it is possible to be issued a patent on its proprietary printing
process and, accordingly, there can be no assurance that the Company's
techniques, processes and formulations will not otherwise become known to, or
independently developed by, competitors of the Company.

         The cost of advancing the technology used in its printing process and
research and development costs associated with designing and creating new
products are presently not considered significant.



                                       10
<PAGE>

         The Company relies upon its golf product suppliers to develop the
technology used in its golf products. The Company may sell products that utilize
patents of its suppliers but does not directly own any golf-related patents. The
golf industry has experienced a high level of copying of popular club designs.
Several of the larger club manufacturers have begun filing patents to protect
their proprietary rights and aggressively pursuing companies they believe to be
in violation of their patents. Although the Company does not believe that any of
its golf products infringe on any third party's rights, there can be no
assurance that a competitor will not assert and/or a court will not find that
the Company's golf products infringe on a patent or other proprietary right. If
the Company's golf products are found to infringe on a proprietary right, there
can be no assurance that the Company will be able to obtain a license to such
technology and the Company could incur substantial costs to redesign its
products and/or defend legal actions.

GOVERNMENTAL REGULATIONS

         In the United States, the Company is subject to the provisions of,
among other laws, the Federal Hazardous Substances Act and the Federal Consumer
Products Safety Act. These laws empower the Consumer Product Safety Commission
(the "CPSC") to protect consumers from hazardous toys and other articles. The
CPSC has the authority to exclude from the market articles that are found to be
unsafe or hazardous and can require a recall of such products under certain
circumstances. Similar laws exist in some states and cities in the United
States, as well as in Canada and Europe. The Company has established a strong
quality assurance program (including the inspection of goods at the factories,
the retention of independent testing laboratories and the independent testing by
certain licensors of which product must pass certain external safety standards
for their own purposes) to ensure compliance with applicable laws. While the
Company believes that its products comply in all material respects with
regulatory standards, there can be no assurance that the Company's products will
not be found to violate applicable laws or rules and regulations which could
have a material adverse effect on the business, financial condition and results
of operations of the Company. In addition, there can be no assurance that more
restrictive laws, rules and regulations will not be adopted in the future, or
that the Company's products will not be marketed in the future in countries with
more restrictive laws, rules and regulations, either of which could make
compliance more difficult or expensive and which could have a material adverse
effect on the business, financial condition and results of operations of the
Company.

         The Company is engaged in a business that could result in possible
claims for injury or damage resulting from its products. The Company is not
currently, nor has it been in the past, a defendant in any product liability
lawsuit. The Company currently maintains product liability insurance coverage in
amounts that it believes are adequate. There can be no assurance that the
Company will be able to maintain such coverage or obtain additional coverage on
acceptable terms, or that such insurance will provide adequate coverage against
all potential claims.

         The Company's operations are subject to federal, state and local laws
and regulations relating to the environment, health and safety and other
regulatory matters. Certain processes of the Company's operations may, from time
to time, involve the use of substances that are classified as toxic or hazardous
within the meaning of these laws and regulations. The Company's imprinting
process involves the use of inks, ink thinners and xylene in the cleaning
process of the ball. The Company believes that it has obtained all material
permits and that its operations are in substantial compliance with all material
applicable environmental laws and regulations. Any non-compliance with
environmental laws and regulations is not likely to have a material adverse
effect on the Company under current operations, its results of operations or its
liquidity due primarily to the small quantities used in the processes. The cost
of compliance with environmental laws and regulations are not considered to be
significant at this time.

EMPLOYEES

         As of March 1, 2001, the Company employed 120 persons, all on a
full-time basis, including 6 in executive positions, 13 in sales, 12 in graphic
production, 38 in administrative support positions and


                                       11
<PAGE>

51 in factory production and shipping. None of the Company's employees are
covered by a collective bargaining agreement. The Company's relationship with
its employees is satisfactory.

ITEM 2. DESCRIPTION OF PROPERTY

         The Company's headquarters and warehouses are located in approximately
101,000 square feet of leased space at 6740 Cobra Way, San Diego, California
92121. The headquarters are leased from an unaffiliated party under a ten-year
lease agreement, which commenced in August 2000 and expires July 2010 with
monthly rent increasing incrementally from $79,498 to $101,461.

ITEM 3. LEGAL PROCEEDINGS

         The Company is not a party to any material litigation or legal
proceeding.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         The Company did not submit any matter to a vote of security holders
during the fourth quarter of the year ended December 31, 2000.



                                       12
<PAGE>

                                     PART II


ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's common stock ("Common Stock") is traded over-the-counter
on the Nasdaq National Market. The following table sets forth the range of trade
prices for the Common Stock during the periods indicated and represents
inter-dealer prices, without retail mark-ups, mark-downs or commissions to the
broker-dealer and may not necessarily represent actual transactions.

<TABLE>
<CAPTION>
                                           Symbol                 High                   Low
                                      ------------------    ------------------    ------------------
Common Stock:                         (FUSA)
     1999
<S>                                                               <C>                   <C>
         First quarter                                            $ 4.38                $ 3.13
         Second quarter                                           $ 5.88                $ 3.44
         Third quarter                                            $ 7.25                $ 3.53
         Fourth quarter                                           $ 8.91                $ 5.63

     2000
         First quarter                                            $ 6.56                $ 4.63
         Second quarter                                           $ 5.00                $ 3.25
         Third quarter                                            $ 4.25                $ 3.13
         Fourth quarter                                           $ 3.00                $ 1.13
</TABLE>

         On March 16, 2001, there were approximately 70 holders of record of the
Common Stock. Based on information provided by the Company's transfer agent and
registrar, the Company believes that there are approximately 1,377 beneficial
owners of the Common Stock.

         The Company has never paid dividends on the Common Stock and does not
anticipate paying any dividends in the foreseeable future.


                                       13
<PAGE>


ITEM 6.       MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2000 AND 1999:

         The following table sets forth certain operating data (in whole dollars
and as a percentage of the Company's sales) for the years ended December 31,
2000 and 1999:

<TABLE>
<CAPTION>
                                                      2000               %               1999               %
                                               -------------------     -------     ------------------     -------
<S>                                               <C>                     <C>         <C>                    <C>
         Sales                                    $   26,929,331          100         $   28,690,211         100
         Cost of Sales                                17,241,579           64             16,922,249          59
         Gross Profit                                  9,687,751           36             11,767,962          41
         Operating Expenses                            9,517,331           35              8,939,658          31
         Operating Income                                170,420            1              2,828,304          10
         Interest Expense                                 32,249           --                120,711          --
         Interest Income                                 127,100           --                 51,473          --
         Income Before Income Tax                        265,271            2              2,759,066          10
         Income Tax Expense                               86,000           --                113,000          --
         Net Income                             $        179,271            1         $    2,646,066           9
</TABLE>
SALES:
         Sales decreased $1.8 million, or 6%, for the year ended December 31,
2000 from sales for the year ended December 31, 1999. The decrease in sales was
mainly due to a decrease in promotion sales of $1.2 million, or 41%, as compared
to the prior year period. Total retail sales decreased by 1%, mostly as a result
of a decrease in sales to The Walt Disney Company, which was nearly offset by an
increase in non-entertainment retail sales of 16% for the year 2000 compared to
1999. During 2000, the Company realized product sales increases of soccer balls
(195%), playground balls (133%) and coins (growth percentage is not meaningful,
as 2000 was the first year of coin sales). This growth was offset by declines in
the sales of baseballs (8%), lapel pins (75%), Softees(R) (49%) and hockey
(19%).

         Retail sales were 92% of total sales for the year ended December 31,
2000, as compared to 87% of total sales for the year ended December 31, 1999.
The decrease in retail sales was primarily due to the decrease in entertainment
retail sales, which decreased 22% from the prior year. The decrease in
entertainment retail sales related to a 93% decrease in lapel pin sales to The
Walt Disney Company. The Company believes the decline in sales to this customer
is due to the unusual success of this customer's pin promotion in 1999. The Walt
Disney Company continues to be the Company's largest customer and the Company
believes it is on favorable terms with this customer and anticipates that its
sales to this customer will increase in 2001 from 2000. The increase in
non-entertainment retail sales of 16% nearly offset the decrease in
entertainment retail sales. The increase in non-entertainment retail sales was
primarily due to increases in sales to large national retailers.

         The promotion sales decrease was due primarily to a general decline in
the number and size of corporate promotions in 2000 compared to the prior year.
In 2000, promotion sales were 8% of total sales, compared to 13% of total sales
in 1999. Although reducing its dependence upon promotion sales, the Company will
continue to pursue its objective of expanding its promotion business and its
contribution to operating profits. In July 2000, the Company re-hired the person
that previously oversaw the promotion division from January 1998 to September
1999. In addition, the Company will attempt to leverage its relationships with
its existing licensors to secure promotions with companies who sponsor sports
related organizations along with obtaining new licensing opportunities.

GROSS PROFIT:

         Gross profit decreased 17% for the year ended December 31, 2000 from
gross profit for the year ended December 31, 1999. Gross margins as a percentage
of sales for the year ended December 31, 2000 decreased to 36% from 41% for the
prior year period. The Company's gross margins as a percentage of sales
decreased from 1999 to 2000 due primarily to a greater percentage of lower
margin retail sales. The decline in the Company's gross margins as a percentage
of sales can be attributed


                                       14
<PAGE>

primarily to product mix including a decrease in lapel pin sales from the prior
year, which carried higher than average gross margins and an increase in
playground and soccer balls in the current year which sell at lower margins than
some of the Company's other products. As previously noted, the Company's gross
margins may fluctuate, particularly between quarters, based on several factors
including sales and product mix (See Part I, Item 1. "Description of Business").
The Company anticipates that the trend in gross margins will stabilize in 2001
as it does not project an increase in sales of low margin products in 2001 of
the magnitude that playground balls and soccer balls increased in 2000.

OPERATING EXPENSES:

         Total operating expenses increased 7% for the year ended December 31,
2000 from total operating expenses for the year ended December 31, 1999.
Operating expenses as a percentage of sales increased to 35% in 2000 from 31% in
1999. Operating expenses increased in absolute terms due to an increase in
personnel and salary expenses, costs incurred moving to new facilities and the
loss on the sale of equipment and the write-off of tenant improvements related
to the move.

         Royalty expense decreased 2% for the year ended December 31, 2000 from
royalty expense for the year ended December 31, 1999 due to the decrease in
overall sales. Royalty expense, as a percentage of sales, was the same in both
2000 and 1999 (7%). The Company expects that, in absolute terms, royalty expense
will increase in 2001 reflecting the anticipated Rawlings Golf sales. As
previously noted, the Company is dependent upon its licensing arrangements and
their successful renewals. To broaden the Company's scope of product lines and
expand market share, the Company will continue to pursue additional license
agreements with various organizations and licensors in the future.

         Marketing expenses increased 9% for the year ended December 31, 2000
from marketing expenses for the year ended December 31, 1999. Marketing expenses
as a percentage of sales increased to 12% in 2000 from 10% in 1999, reflecting
additional retail and entertainment sales personnel and related expenses and
increased cooperative advertising allowances as a result of the Company's
increased mass merchant retail sales.

         General and administrative expenses increased 6% for the year ended
December 31, 2000 from general and administrative expenses for the year ended
December 31, 1999. General and administrative expenses as a percentage of sales
increased to 14% in 2000 from 13% in 1999. General and administrative expenses
increased in absolute terms in 2000 from 1999 due in part to increases in
salary-related expenses, increased facilities cost and one-time expenses and
losses incurred when the Company relocated its facilities. The Company added
personnel in 2000 to its creative and product development departments to enable
them to develop new and innovative products and to its operations department to
provide for better inventory management. While still less than 1% of the
Company's total operating expenses, utility costs increased by 104% in 2000 from
1999. The increased utility costs were due to the Company's larger facility and
due to significantly higher electric rates resulting from the deregulation of
the wholesale electricity market in California. With the uncertainty in
California's electricity market, there can be no assurance that the Company's
utility costs will not continue to dramatically increase and/or that the Company
will not experience power outages which disrupt its operations and could have a
material adverse impact on the Company's results of operations.

         On July 31, 2000, Fotoball relocated its corporate headquarters and
manufacturing facilities to 6740 Cobra Way, San Diego CA. As a result of the
relocation, the Company incurred relocation costs of $64,024 and a loss of
$122,541 on the sale of equipment and write-off of tenant improvements at the
old facilities. The move was made in 2000 in anticipation of the loss of the
former facilities' lease in 2001 and the anticipated increase in rental rates if
a new lease was negotiated at that time. The Company did not incur any material
expense associated with terminating its prior lease.




                                       15
<PAGE>


OTHER INCOME (EXPENSE):

         Interest expense was $32,249 for the year ended December 31, 2000, a
decrease of $88,462 from interest expense of $120,711 for the year ended
December 31, 1999 due to the Company not utilizing its revolving credit line
during 2000. As of December 31, 2000, there were no borrowings under the credit
line.

         Interest income was $127,101 for the year ended December 31, 2000, an
increase of $75,628 from interest income of $51,473 for the year ended December
31, 1999. This increase is due to the Company's average cash balances available
for investment being substantially higher in 2000 as compared to 1999. Excess
cash is deposited into an interest-bearing depository account.

INCOME TAX EXPENSE:

         Income tax expense of $86,000 was recorded for the year ended December
31, 2000, compared to $113,000 for the year ended December 31, 1999. Income tax
benefits recognized during 1999 relate primarily to the elimination of a
deferred tax valuation allowance established in a prior year for uncertainty
relating to the utilization of a net operating loss carryforward. As of December
31, 1999, the Company had utilized all of its available net operating loss
carryforward from prior years. The Company incurred a net operating loss in 2000
of $170,000 which was primarily due to the excess of the tax loss over the book
loss on the disposition of fixed assets related to the Company's facility move
in 2000. Had the Company been taxed at a combined Federal and state effective
tax rate of 32% in 2000 and 1999, then diluted earnings per share would have
been as follows:

<TABLE>
<CAPTION>
                                                                       2000                1999
                                                                 -----------------    ----------------
<S>                                                                <C>                   <C>
         Income before income taxes                                $     265,272         $  2,759,066
         Proforma income tax expense (32% tax rate)                       84,887              882,901
                                                                 -----------------    ----------------
         Proforma net income                                       $     180,385         $  1,876,165
                                                                 =================    ================
         Proforma diluted earnings per share                       $         .05         $        .59
                                                                 =================    ================
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

         The Company's net working capital decreased by $.6 million, or 6%, from
December 31, 2000 to December 31, 1999, to net working capital of $9.9 million
at December 31, 2000 from net working capital of $10.5 million at December 31,
1999.

         Cash flow provided by operations decreased $1.0 million from cash
provided in operations of $1.5 million for the year ended December 31, 1999 to
cash provided by operations of $.5 million for the year ended December 31, 2000.
This decrease was primarily the result of net income decreasing $2.5 million, or
93%, partially offset by decreases in accounts receivable. Accounts receivable
decreased by $.4 million from December 31, 1999 to December 31, 2000. The
decrease in accounts receivable is due primarily to tighter credit policies and
more timely follow up on past due accounts, leading to lower days outstanding.
The allowance for doubtful accounts, which offsets accounts receivable,
decreased in 2000 due to better collection methods and an increase in resources
allocated to collections. The Company's inventory remained flat due primarily to
better inventory control processes being implemented with the consolidation of
all warehouse and manufacturing facilities.

         Cash and equivalents aggregated $2.9 million at December 31, 2000, a
decrease of $.9 million from approximately $3.8 million cash and equivalents at
December 31, 1999. This decrease is primarily due to the purchase of property
and property improvements during 2000. During 2000, the Company purchased
property and equipment of approximately $.7 million, of which $.1 million was
acquired under capital leases and $.25 million was financed via a 48-month term
loan with the Company's bank (see below). During 2000 the Company incurred
tenant improvements costs of $1.0 million net of landlord reimbursement, of
which $.4 million was financed under a 36-month term loan with the Company's
bank (see below). For the next twelve months, the Company anticipates that its
capital expenditure requirements will approximate $.6 million, which will be
used to purchase additional computer equipment, product molds, production
machinery and equipment needed to


                                       16
<PAGE>

support the new Rawlings Golf division.

         In March 2000, the Company executed a lease, including headquarter and
warehousing space, consisting of approximately 101,000 square feet at 6740 Cobra
Way, San Diego, California 92121. The space is being leased from an unaffiliated
party, which provides for a 123-month term commencing in August 2000, with two
five-year option periods. Monthly rent is $79,500 per month, with 5% fixed
increases to occur every two years. A security deposit of $.2 million and first
month's rent of $79,500 was paid to the landlord in March 2000. The Company
received a three-month rent credit during its first three months of occupancy
and has received certain other improvement allowances from the landlord. All
improvements were paid in advance by the Company and reimbursed by the landlord.
The Company's net cash outlay for improvements was $1.0 million as of December
31, 2000. The Company terminated its lease commitments at 3738 Ruffin Road and
4000 Ruffin Road effective July 31, 2000 without any penalties and does not
expect to incur any additional material expenses associated with such
termination.

         At December 31, 2000, the Company has commitments for minimum
guaranteed royalties under licensing agreements totaling approximately $3.6
million in the aggregate through 2005, of which approximately $1.0 million is
due at various times in 2001, including our commitment for Rawlings Golf. Based
upon the net income realized by the Company in 2000 and the expectation of
continuing increases in its business as a whole, management expects these
guaranteed royalties to be funded from normal operating cash flows.

         In January 2001, the Company expanded and extended its one-year credit
line with U.S. Bank National Association (formerly Scripps Bank) ("US Bank")
including an increase in the credit line from $4.0 million to $6.0 million and
an extension of the expiration date from April 15, 2001 to July 15, 2001. The
assets of the Company collateralize this credit line and actual borrowings are
limited to available collateral, as defined in the agreement. Borrowings under
the credit line bear interest at the "Wall Street Journal" prime rate. The
credit line contains financial covenants requiring the Company to maintain
minimum net worth levels, minimum working capital and debt to equity ratios. The
Company is in compliance with the covenants as of December 31, 2000. There were
no outstanding borrowings under the credit line at December 31, 2000 or December
31, 1999. The Company has entered into a letter of credit for $158,911 with US
Bank and the Company has a $150,000 ACH hold on its credit line relating to
funding its payroll on a semi-monthly basis. Both the letter of credit and the
ACH hold reduce the Company's ability to borrow against its credit line. The
Company is presently reviewing its options, relating to its credit line for the
period after July 15, 2001.

         The Company has a $3.0 million line of credit facility (the "facility")
with Merrill Lynch International Bank Limited at an interest rate of 1.75% above
the London Interbank Offering Rate term that the Company chooses to select. Any
borrowing under the facility, which is used solely to collateralize the issuance
of stand-by letters of credit to manufacturers, are required to be secured by
cash collateral deposited with Merrill Lynch equal to the credit outstanding.
The facility extends until December 10, 2001. There were no borrowings under the
facility as of December 31, 2000 and 1999.

         In June 2000, the Company signed a term loan agreement with US Bank
with a loan advance period effective June 13, 2000 through September 20, 2000.
The Company was allowed to submit capital expenditures for property and
equipment up to $250,000 to finance under the agreement at an interest rate of
9.5% per annum. The Company received, in accordance with the loan, $250,000 on
September 1, 2000. After the money was received, a 48-month term loan originated
with one (1) monthly interest payment on September 20, 2000, followed by 48
equal monthly payments of $6,281 beginning October 20, 2000 and ending on
September 20, 2004. The assets purchased under the agreement collateralize the
loan.

         In August 2000, the Company signed a term loan agreement with US Bank
with a loan advance period effective August 9, 2000 through October 20, 2000.
During the advance period, the Company was allowed to submit capital
expenditures for tenant improvements up to $400,000 to finance under


                                       17
<PAGE>

the agreement at an interest rate of 9.5% per annum. The Company received, in
accordance with the loan, $400,000 on October 12, 2000. After the money was
received, a 36-month term loan originated with 36 equal monthly payments of
$12,813 beginning November 20, 2000 and ending on October 20, 2003. The loan is
collaterized by the Company's receivables, inventory, equipment and furniture.

         In December 2000, the Company signed a term loan agreement with US Bank
with a loan advance period effective December 19, 2000 through March 30, 2001.
During this period the Company may submit any expenses related to the Rawlings
Golf division up to $1,500,000 to finance under the agreement. On March 30,
2001, the amount advanced will be converted to a term loan. The loan provides
for a variable interest rate equal to the "Wall Street Journal" prime rate.
Interest only payments are due on January 30, 2001, February 28, 2001 and March
30, 2001 followed by 36 consecutive monthly payments necessary to fully amortize
the loan balance outstanding as of March 30, 2001. The Company's receivables,
inventory, equipment and furniture collaterialize the loan. The Company received
no money under this loan as of December 31, 2000.

         Management believes that the Company's existing cash position, credit
facilities, combined with internally generated cash flows, will be adequate to
support the Company's liquidity and capital needs at least through 2001.

2001 OUTLOOK

         The Company anticipates that its revenue in 2001 will increase over
fiscal year 2000. The Company does not expect significant growth in overall
retail sales. While the Company expects growth from entertainment retail sales,
non-entertainment retail sales are not expected to grow and may decline
slightly. The Company expects significant growth on a percentage basis in its
promotion revenue in 2001. With its new Rawlings Golf division, 2001 will mark
the first year that the Company begins selling performance products. Since the
Rawlings Golf division is new, its revenues will be incremental when compared to
2000 and, when combined with increases in the promotion revenue, is expected to
give the Company higher overall revenues in 2001.

         An increase in income for the Company in 2001 will depend on the
Company being able to control the downward trend in gross margins that the
Company experienced in 2000 as compared to 1999, its ability to control
operating expenses and a successful launch of the Rawlings Golf division. As
noted above, the Company's product mix of lower margin products was the primary
reason for the lower gross margin in 2000 compared to 1999. To ensure that its
overall gross margin does not decrease in 2001, the Company will need to balance
the level of low margin and high margin products sold to its retail customers.
Also as noted above, the Company will not begin selling Rawlings Golf products
until the second quarter of 2001. Until the Company is able to ramp up the sales
of Rawlings Golf products, the division will reduce the Company's overall
earnings. While the Company anticipates being profitable for the year 2001, it
may incur net losses in the first two quarters as a result of launching the
Rawlings Golf division and a soft retail market.

         There can be no assurance given that the Company will be able to
successfully increase its revenue or income in 2001. The most important factors
that could prevent the Company from achieving these goals - and cause actual
results to differ materially from those expressed in the forward-looking
statements - include, but are not limited to, the following:

         o        The ability of the Company to maintain its retail division
                  sales by maintaining the appeal and desirability of its
                  existing product lines and continuing to develop new product
                  offerings.

         o        Increasing competition from other sports product licensed
                  companies, including companies that have or may receive the
                  same or similar licensing rights as the Company and may have
                  substantially greater financial resources than the Company.

         o        The ability to maintain and renew its significant licensing
                  arrangements.

         o        The popularity of current or future licensing properties and
                  the ability of the Company to


                                       18
<PAGE>

                  leverage these properties to produce sales.

         o        Growth in the popularity of licensed sports products.

         o        The effectiveness of the independent sales representative
                  organizations to expand the breadth of the Company's customer
                  base and significantly increase sales.

         o        The employment and retention of high producing sales staff.

         o        The ability to maintain or increase its overall gross margins,
                  or its inability to maintain the higher level of gross margins
                  realized from its sports related products.

         o        The potential negative impact on operating margins resulting
                  from an expansion of the Company's cost infrastructure at a
                  rate that exceeds its growth in sales and gross margins.

         o        The potential negative impact on operating results from
                  continued substantial increases in electricity rates and/or
                  power outages resulting from the instability of California's
                  electricity market.

         o        The ability to expand its customer base, particularly in its
                  promotion business and decrease its concentration of sales
                  among a few significant customers.

         o        The acceptance in the marketplace of the Company's Rawlings
                  Golf products.

         o        The ability to source products from Asia at competitive prices
                  without delays, increased tariffs, other restrictions or
                  unanticipated costs.

         o        The ability to effectively meet customer demands regarding
                  timely delivery and order fulfillment.

         These and other risks and uncertainties affecting the Company are
discussed in greater detail in this report.

ITEM 7. FINANCIAL STATEMENTS

         Reference is made to the Financial Statements referred to in the
accompanying index setting forth the financial statements of Fotoball USA, Inc.,
together with the report, dated February 2, 2001, of Hollander, Lumer & Co. LLP,
the Company's independent auditor.



ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

         None.



                                       19
<PAGE>

                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The following table sets forth certain information as of March 15, 2001
concerning the executive officers and directors of the Company:

<TABLE>
<CAPTION>
NAME                                AGE              POSITION
----                                ---              --------
<S>                                 <C>     <C>
Salvatore T. DiMascio1,2            61      Director
Michael Favish                      52      President, Chief Executive Officer and Director
Nicholas A. Giordano2               58      Director
Joel K. Rubenstein1                 64      Director
John J. Shea2                       63      Director
Thomas R. Hillebrandt               39      Vice President and Chief Financial Officer
Carl E. Francis                     42      Senior Vice President, Sales and Marketing
Karen M. Betro                      50      Vice President, Operations
Steven B. Katzke                    34      Vice President, Specialty Sales and Marketing
Jon D. Schneider                    33      Vice President, Promotions
</TABLE>

--------
      1.  Member of compensation committee
      2.  Member of audit committee

         SALVATORE T. DIMASCIO has served as a director of the Company since
August 1997. Since 1986, Mr. DiMascio has been President of DiMascio Venture
Management, Inc., a management and investment firm. Additionally, from 1994 to
1997, Mr. DiMascio was Executive Vice President of Anchor Gaming, Inc., a public
gaming company. From 1978 to 1986, Mr. DiMascio was Senior Vice President and
Chief Financial Officer of Conair Corporation, a public manufacturer of health
and beauty products. Mr. DiMascio's previous business experience includes Audit
Manager with Arthur Young & Co., a national CPA firm and as Controller of Revlon
Inc. Mr. DiMascio is currently serving on the Board of Directors of H.E.R.C.
Products Inc., a publicly held corporation.

         MICHAEL FAVISH has served as President and a director of the Company
since his founding of the Company in December 1988 and as President, Chief
Executive Officer and a director of the Company since March 1994. Mr. Favish has
over 27 years of product design, manufacturing and sourcing experience and has
established a number of strategic international sourcing alliances.

         NICHOLAS A. GIORDANO has served as a director of the Company since July
1998. In July 1998, Mr. Giordano was appointed interim President of LaSalle
University for a one-year term. Additionally, from 1971 through August 1997, Mr.
Giordano held various positions at The Philadelphia Stock Exchange, including
from 1981 to 1997 as President and Chief Executive Officer. He also served as
Chairman of the Board of the exchange's two subsidiaries: Stock Clearing
Corporation of Philadelphia and Philadelphia Depository Trust Company. Mr.
Giordano's previous business experience includes serving as Chief Financial
Officer at two brokerage firms (1968-1971) and as a Certified Public Accountant
at Price Waterhouse (1965-1971). Mr. Giordano is currently serving on the Board
of Directors of W.T. Mutual Fund, Kalmar Investment, Daisy Tek International,
and Selas Corporation of America, all of which are publicly-held corporations.

         JOEL K. RUBENSTEIN has served as a director of the Company since August
1994. From April 1990 through April 1992 and from March 1994 to present, Mr.
Rubenstein has been a partner of the Contrarian Group, Inc., an operating
management company. In addition, from April 1994 to present, Mr. Rubenstein has
been a principal of Oracle One Partners, Inc., a marketing management company.
From April 1992 through March 1994, Mr. Rubenstein served as the Senior Project
Manager, Business


                                       20
<PAGE>

& Economic Development for Rebuild L.A., the recovery organization created after
the Los Angeles riots. Prior to such time, from January 1985 through April 1990,
Mr. Rubenstein served as the Vice President, Corporate Marketing for Major
League Baseball, Office of the Commissioner.

         JOHN J. SHEA has served as Director of the Company since August 1999.
Mr. Shea served as President and Chief Executive Officer of Spiegel, Inc. from
1985 through 1997 and Vice Chairman of Spiegel from 1989 to 1997. Before joining
Spiegel, Mr. Shea worked 21 years at the John Wanamaker Company, Philadelphia,
serving ultimately as Senior Vice President and a member of the Executive Board.
Mr. Shea also served as Chairman of the Board of the National Retail Federation,
the world's largest retail trade association. Mr. Shea also serves as the
Chairman of the Board of Trustees of LaSalle University and a member of the
Advisory Board of the Kellogg Graduate School of Management at Northwestern
University. Mr. Shea is currently serving, and has served, as a member of the
Board of Directors of Pulte Corporation, a publicly-held corporation, since
January 1995. Mr. Shea is also currently serving on the Board of Directors of
Home Place of America, a publicly held corporation.

         THOMAS R. HILLEBRANDT has served as Vice President and Chief Financial
Officer of the Company since July 2000. Prior to joining Fotoball, from August
1998 through July 2000, Mr. Hillebrandt served as the Vice President and Chief
Financial Officer of ChatSpace, Inc., a privately held Internet software and
services company. From May 1996 through July 1998, Mr. Hillebrandt was Chief
Financial Officer of Link sandiego.com, Inc. and DITR Marketing, Inc., both
privately held Internet service companies. From January 1994 to April 1996, Mr.
Hillebrandt was the Chief Financial Officer of Emerald Systems/St. Bernard
Software a privately held PC networks management software company. From March
1990 to December 1993, Mr. Hillebrandt was the Director of Finance of Ventura
Software, a multinational Xerox subsidiary and from September 1985 to February
1990 he was a CPA with the firm KPMG Peat Marwick.

         CARL E. FRANCIS has served as Senior Vice President, Sales and
Marketing since January 1998, as Vice President, Retail Development of the
Company from January 1996 through December 1997 and as Director of Retail
Development from November 1994 through December 1995. Prior to such time, he was
a Customer Service Analyst for Prudential Mutual Funds Services, a mutual funds
service company and Charmont, a Japanese eyewear company. From June 1987 through
December 1990, Mr. Francis was employed as Retail Sales Manager for Major League
Baseball Properties in New York City. Prior to this, from January 1981 through
May 1987, Mr. Francis was a retail buyer for J.C. Penney Company (1982-1987) and
Abraham & Straus (1981-1982), of which both are retail department store chains.

         KAREN M. BETRO has served as Vice President, Operations of the Company
since January 1996 and previously served as Controller of the Company from its
organization in December 1988. During this time, Ms. Betro was responsible for
the administration and operation systems of the Company. Ms. Betro has served as
Controller and Administrative Manager of several large corporations, including
Hill & Knowlton.

         STEVEN B. KATZKE has served as Vice President, Specialty Sales and
Marketing since January 1998 and as Manager of Retail Sales since January 1993.
From 1989 through 1992, Mr. Katzke was employed as the sales manager of Robert
Katzke and Associates.

         JON D. SCHNEIDER has served as Vice President, Promotions of the
Company since July 2000. From October 1999 through June 2000, Mr. Schneider was
Senior Vice President for Communicator Sports and Entertainment, a sports
marketing company. From April 1993 through September 1999, the Company employed
Mr. Schneider in various positions including Vice President, Marketing, Team
Business from January 1998 through September 1999. From 1990 to 1993, Mr.
Schneider was employed in various positions in the sports industry, including
Assistant General Manager of the Newport Beach Dukes and positions with the
Oakland Athletics and Sun City Rays.



                                       21
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

         The information required by Item 10 is incorporated herein by reference
to the section labeled "Executive Compensation" in the Company's definitive
Proxy Statement in connection with the Company's 2001 Annual Meeting of
Stockholders.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by Item 11 is incorporated herein by reference
to the section labeled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive Proxy Statement in connection with the
Company's 2001 Annual Meeting of Stockholders.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by Item 12 is incorporated herein by reference
to the section labeled "Election of Directors" and "Executive Compensation" in
the Company's definitive Proxy Statement in connection with the Company's 2001
Annual Meeting of Stockholders.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
         (A). Exhibits

         EXHIBIT
         NUMBER                           DESCRIPTION

         1.1(P)     Form of Underwriting Agreement (incorporated by reference to
                    Exhibit 1.1 of the Registration Statement on Form SB-2 (File
                    No. 33-80508) (the "Form SB-2")).

         3.1(2)(P)  Amended and Restated Certificate of Incorporation of
                    Fotoball USA, Inc., a Delaware corporation (incorporated
                    herein by reference to Exhibit 3.1(2) of the Registration
                    Statement on Form SB-2).

         3.2(2)(P)  Amended and Restated By-laws of Fotoball USA, Inc., a
                    Delaware corporation (incorporated herein by reference to
                    Exhibit 3.2(2) of the Form SB-2).

         4.4(P)     Specimen Stock Certificate (incorporated herein by reference
                    to Exhibit 4.4 of the Form SB-2).

         4.5(1)     Specimen Form of Rights Certificate (incorporated herein by
                    reference to Exhibit 2.1 of the Registration Statement on
                    Form 8-A/A No. 1 (File No. 0-21239) (the "Amended Form
                    8-A")).

         4.5(2)     Form of Amended and Restated Rights Agreement, dated as of
                    August 19, 1996, as amended and restated as of May 18, 2000,
                    between Fotoball USA, Inc. and Continental Stock Transfer &
                    Trust Company (incorporated herein by reference to Exhibit
                    2.2 of the Amended Form 8-A).

         4.5(3)     Form of Certificate of Designation, Preferences and Rights
                    of Series A Preferred Stock (incorporated herein by
                    reference to Exhibit 2.3 of the Registration Statement on
                    Form 8-A (File No. 0-21239)).

         4.5(4)     Summary of Rights Plan (incorporated herein by reference to
                    Exhibit 2.4 of the Amended Form 8-A).

         10.1(1)    License Agreement with Major League Baseball Properties,
                    Inc., dated May 14, 1997 (incorporated herein by reference
                    to the Company's Annual Report on Form 10-KSB for the year
                    ended December 31, 1997).

         10.1(2)    Amended License Agreement with Major League Baseball
                    Properties, Inc., dated December 11, 1998 (incorporated
                    herein by reference to the Company's Annual Report on Form
                    10-KSB for the year ended December 31, 1998).

         10.1(3)    License Agreement with Major League Baseball Players
                    Association dated March 29, 1997 (incorporated herein by
                    reference to the Company's Annual


                                       22
<PAGE>

                    Report on Form 10-KSB for the year ended December 31, 1997).

         10.1(4)    License Agreement with National Football League Properties,
                    Inc., dated April 14, 1998 (incorporated herein by reference
                    to the Company's Annual Report on Form 10-KSB for the year
                    ended December 31, 1998).

         10.3(5)*   Stock Option Agreement dated January 30, 1998 with Salvatore
                    T. DiMascio (incorporated herein by reference to the
                    Company's Annual Report on Form 10-KSB for the fiscal year
                    ended December 31, 1997).

         10.3(6)*   1998 Stock Option Plan of the Company (incorporated herein
                    by reference to Exhibit 4.1 of the Form S-8 filed on July
                    23, 1998).

         10.3(7)*   Form of Stock Option Agreement (incorporated herein by
                    reference to Exhibit 4.2 of the Form S-8 filed on July 23,
                    1998).

         10.4(1)*   Form of Employment Agreement with Michael Favish dated
                    August 10, 1999 (incorporated herein by reference to the
                    Form 10-QSB for the period ended September 30, 1999).

         10.6       Lease, dated March 13, 2000, by and between the Company and
                    LBA VF-II, LLC, with respect to 6740 Cobra Way, San Diego,
                    California (incorporated herein by reference to Exhibit 10.6
                    of the 1999 Form 10-KSB).

         10.9(2)    Merrill Lynch International Bank Limited irrevocable
                    stand-by letter of credit dated December 1, 1995
                    (incorporated herein by reference to Exhibit 10.9(2) of the
                    Form SB-2).

         10.10      Revolving Credit Agreement dated November 13, 1996 between
                    Fotoball USA, Inc. and Scripps Bank (incorporate herein by
                    reference to Exhibit 10.10(1) of the Form SB-2).

         10.10(1)   Amended Revolving Credit Agreement dated February 19, 1998
                    between Fotoball USA, Inc. and Scripps Bank (incorporated
                    herein by reference to Exhibit 10.10(1) of the 1997 Form
                    10-KSB).

         10.10(2)   Amended Revolving Credit Agreement dated December 28, 1998
                    between Fotoball USA, Inc. and Scripps Bank (incorporated
                    herein by reference to Exhibit 10.10(2) of the 1998 Form
                    10-KSB).

         10.10(3)   Amended Revolving Credit Agreement dated April 6, 2000
                    between Fotoball USA, Inc. and Scripps Bank (incorporated
                    herein by reference to the Form 10-QSB for the period ended
                    March 31, 2000).

         10.10(4)   Loan Advance Agreement dated June 13, 2000 between Fotoball
                    USA, Inc. and Scripps Bank (incorporated herein by reference
                    to the Form 10-QSB for the period ended June 30, 2000).

         10.10(5)   Loan Advance Agreement dated August 9, 2000 between Fotoball
                    USA, Inc. and Scripps Bank (incorporated herein by reference
                    to the Form 10-QSB for the period ended September 30, 2000).

         10.10(6)   Amended Loan Advance Agreement dated June 13, 2000 between
                    Fotoball USA, Inc. and U.S. Bank National Association.

         10.10(7)   Amended Loan Advance Agreement dated August 9, 2000 between
                    Fotoball USA, Inc. and U.S. Bank National Association.

         10.10(8)   Loan Advance Agreement dated December 19, 2000 between
                    Fotoball USA, Inc. and U.S. Bank National Association.

         10.10(9)   Amended Revolving Credit Agreement dated January 22, 2001
                    between Fotoball USA, Inc. and U.S. Bank National
                    Association.

         11         Statement re: computation of per share earnings.



                                       23
<PAGE>

         *          Indicates exhibits relating to executive compensation.

         (P)        Indicates that document was originally filed with the
                    Securities and Exchange Commission in paper form and that
                    there have been no changes or amendments to the document
                    which would require filing of the document electronically
                    with this Form 10-KSB.

         (B)        Reports on Form 8-K

         The Company did not file any reports on Form 8-K during the fourth
quarter of the year ended December 31, 2000.


                                       24
<PAGE>

                                   SIGNATURES


In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

<TABLE>
<CAPTION>
                                                                        Fotoball USA, Inc.
                                                                      ---------------------
                                                                          (Registrant)
<S>                                                    <C>
Dated: March 29, 2001                                  By:  /s/ Michael Favish
                                                            ------------------
                                                            Michael Favish
                                                            President and Chief Executive Officer

In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

Dated: March 29, 2001                                  By:  /s/ Michael Favish
                                                            ------------------
                                                            Michael Favish
                                                            President and Chief Executive Officer


Dated: March 29, 2001                                  By:  /s/ Thomas R. Hillebrandt
                                                            -------------------------
                                                            Thomas R. Hillebrandt
                                                            Vice President and Chief Financial Officer
                                                            (Principal Financial and Accounting Officer)


Dated: March 29, 2001                                  By:  /s/ Salvatore T. DiMascio
                                                            --------------------------
                                                            Salvatore T. DiMascio
                                                            Director


Dated: March 29, 2001                                  By:  /s/ Nicholas A. Giordano
                                                            ------------------------
                                                            Nicholas A. Giordano
                                                            Director


Dated: March 29, 2001                                  By:  /s/ Joel K. Rubenstein
                                                            ----------------------
                                                            Joel K. Rubenstein
                                                            Director



Dated: March 29, 2001                                  By:  /s/ John J. Shea
                                                            ----------------
                                                            John J. Shea
                                                            Director
</TABLE>


                                       25
<PAGE>

                               FOTOBALL USA, INC.
                                INDEX TO EXHIBITS

EXHIBIT
NUMBER              DESCRIPTION

10.10(6)            Amended Loan Advance Agreement dated June 13, 2000 between
                    Fotoball USA, Inc. and Scripps Bank.

10.10(7)            Amended Loan Advance Agreement dated August 9, 2000 between
                    Fotoball USA, Inc. and Scripps Bank.

10.10(8)            Loan Advance Agreement dated December 19, 2000 between
                    Fotoball USA, Inc. and U.S. Bank National Association.

10.10(9)            Amended Revolving Credit Agreement dated January 22, 2001
                    between Fotoball USA, Inc. and U.S. Bank National
                    Association.

11                  Statement re: computation of per share earnings.



                                       26
<PAGE>

                               FOTOBALL USA, INC.
                          INDEX TO FINANCIAL STATEMENTS
                     YEARS ENDED DECEMBER 31, 2000 AND 1999

<TABLE>
<CAPTION>
<S>                                                                               <C>
Report of Independent Auditors                                                            F-1
Balance Sheets at December 31, 2000 and 1999                                              F-2
Statements of Operations for the years ended December 31, 2000 and 1999                   F-3
Statement of Stockholders' Equity for the years ended December 31, 2000 and 1999          F-4
Statements of Cash Flows for the years ended December 31, 2000 and 1999                   F-5
Notes to Financial Statements                                                     F-6 to F-18
</TABLE>




                                       27
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS



         To the Board of Directors and Stockholders FOTOBALL USA, INC.

         We have audited the accompanying balance sheets of FOTOBALL USA, INC.
         as of December 31, 2000 and 1999 and the related statements of
         operations, stockholders' equity and cash flows for the years then
         ended. These financial statements are the responsibility of the
         Company's management. Our responsibility is to express an opinion on
         these financial statements based on our audits.

         We conducted our audits in accordance with generally accepted auditing
         standards of the United States of America. Those standards require that
         we plan and perform the audit to obtain reasonable assurance about
         whether the financial statements are free of material misstatements. 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 FOTOBALL
         USA, INC. as of December 31, 2000 and 1999 and the results of
         operations, stockholders' equity and cash flows for the years then
         ended in conformity with generally accepted accounting principles of
         the United States of America.



                                                      HOLLANDER, LUMER & CO. LLP

         Los Angeles, California
         February 2, 2001


                                      F-1
<PAGE>

                               FOTOBALL USA, INC.
                                 BALANCE SHEETS
                           DECEMBER 31, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                                                2000                 1999
                                                                                          -----------------    -----------------
                                                                     ASSETS
          Current assets
<S>                                                                                         <C>                 <C>
               Cash and equivalents                                                         $   2,921,358       $   3,797,918
               Accounts receivable less uncollectible allowances of $250,000 in 1999
                    and $163,188 in 2000
               Other Receivables                                                                  298,559                  --
               Inventories                                                                      4,033,094           4,105,675
               Prepaid expenses and other                                                         567,275             253,659
               Deferred income taxes                                                              729,000             592,000
                                                                                          -----------------    -----------------
                            Total current assets                                               11,826,986          12,462,267
                                                                                          -----------------    -----------------

          Property and equipment, net                                                           2,229,133           1,263,626
                                                                                          -----------------    -----------------

          Other assets
               Deposits and other                                                                 752,767              98,985
                                                                                          -----------------    -----------------
                            Total other assets                                                    752,767              98,985
                                                                                          -----------------    -----------------
                                                                                             $ 14,808,886        $ 13,824,878
                                                                                          =================    =================

                                                      LIABILITIES AND STOCKHOLDERS' EQUITY
          Current liabilities
               Current portion of long term debt                                           $       178,309     $           --
               Current portion of capital leases                                                   103,494            135,197
               Accounts payable and accrued expenses                                             1,647,828          1,671,035
               Income taxes payable                                                                     --            158,185
                                                                                          -----------------    -----------------
                            Total current liabilities                                            1,929,631          1,964,417

          Long term liabilities
               Long term debt, net of current portion                                              440,350                 --
               Capital leases, net of current portion                                              222,498            271,740
               Deferred rent                                                                       234,884                 --
               Deferred income taxes                                                               175,000                 --
                                                                                          -----------------    -----------------
                            Total liabilities                                                    3,002,363          2,236,157
                                                                                          -----------------    -----------------

          Stockholders' equity
               Preferred stock, $.01 par value;
                   Authorized - 1,000,000 shares; issued and outstanding-none
               Common stock, $.01 par value; authorized - 15,000,000 shares;
                   Issued and outstanding - 3,566,536 shares in 1999 and 3,579,032
               Additional paid-in capital                                                       11,674,877         11,636,471
               Retained earnings/(Accumulated deficit)                                              95,856            (83,415)
                                                                                          -----------------    -----------------
                            Total stockholders' equity                                          11,806,523         11,588,721
                                                                                          -----------------    -----------------
                                                                                              $ 14,808,886       $ 13,824,878
                                                                                          =================    =================
</TABLE>



                                      F-2
<PAGE>

<TABLE>
<CAPTION>
                                                               FOTOBALL USA, INC.
                                                            STATEMENTS OF OPERATIONS
                                                     YEARS ENDED DECEMBER 31, 2000 AND 1999

                                                                                                2000                 1999
                                                                                          -----------------    -----------------
<S>                                                                                          <C>                 <C>
          Net sales                                                                          $ 26,929,330       $  28,690,211
          Cost of sales                                                                        17,241,579          16,922,249
                                                                                          -----------------    -----------------
               Gross profit                                                                     9,687,751          11,767,962
                                                                                          -----------------    -----------------
          Operating expenses
               Royalties                                                                        1,951,647           1,993,212
               Marketing                                                                        3,184,901           2,932,889
               General and administrative                                                       3,807,588           3,610,320
               Depreciation and amortization                                                      450,654             403,237
               Loss from sale of equipment                                                        122,541                  --
                                                                                          -----------------    -----------------
                            Total operating expense                                             9,517,331           8,939,658
                                                                                          -----------------    -----------------
                            Income from operations                                                170,420           2,828,304
                                                                                          -----------------    -----------------
          Other income (expense)
               Interest expense                                                                   (32,249)           (120,711)
               Interest income                                                                    127,100              51,473
                                                                                          -----------------    -----------------
                            Total other income (expense)                                           94,851             (69,238)
                                                                                          -----------------    -----------------
          Income before income tax                                                                265,271           2,759,066
               Income tax expense                                                                  86,000             113,000
                                                                                          -----------------    -----------------
          Net income                                                                         $    179,271       $   2,646,066
                                                                                          =================    =================

          Weighted average number of common shares outstanding:
                            Basic                                                               3,576,472           3,011,044
                                                                                          =================    =================
                            Diluted                                                             3,720,952           3,201,494
                                                                                          =================    =================
          Net income per common share:
                            Basic                                                            $        .05       $         .88
                                                                                          =================    =================
                            Diluted                                                          $        .05       $         .83
                                                                                          =================    =================
</TABLE>




                                      F-3
<PAGE>



                               FOTOBALL USA, INC.
                       STATEMENTS OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 2000 AND 1999

<TABLE>
<CAPTION>

                                                     Common Stock               Additional           Retained
                                            ------------------------------       Paid-in            Earnings/
                                               Shares        Amount              Capital          (Deficiency)          Total
                                            -------------    -------------    ---------------    ---------------    ---------------

<S>                                           <C>            <C>               <C>                 <C>              <C>
      BALANCE, December 31, 1998              2,699,242      $    26,992       $  8,590,994        $(2,729,481)     $  5,888,505
      Stock-based compensation expense                                               36,613                               36,613
      Exercise of stock options                 159,127            1,591            369,731                              371,322
      Common stock issued to underwriter         22,000              220               (220)                                  --
      Exercise of warrants                      686,167            6,862          2,639,353                            2,646,215
      Net income                                                                                     2,646,066         2,646,066
                                            -------------    -------------    ---------------    ---------------    ---------------
      BALANCE, December 31, 1999              3,566,536           35,665         11,636,471            (83,415)       11,588,721
      Stock-based compensation expense                                               15,772                               15,772
      Exercise of stock options                  12,496              125             22,634                               22,759
      Net income                                                                                       179,271           179,271
                                            -------------    -------------    ---------------    ---------------    ---------------
      BALANCE, December 31, 2000              3,579,032      $    35,790        $11,674,877      $      95,856       $11,806,523
                                            =============    =============    ===============    ===============    ===============
</TABLE>



                                      F-4
<PAGE>

<TABLE>
<CAPTION>
                                                               FOTOBALL USA, INC.
                                                            STATEMENTS OF CASH FLOWS
                                                     YEARS ENDED DECEMBER 31, 2000 AND 1999

                                                                                                2000                 1999
                                                                                          -----------------    -----------------
          Cash flows from operating activities
<S>                                                                                        <C>                   <C>
               Net income                                                                  $      179,271        $  2,646,066
               Adjustments to reconcile net income to net cash provided by (used in)
                   operating activities:
                   Depreciation and amortization of property and equipment                        463,174             427,907
                   Amortization of stock compensation expense                                      15,772              36,613
                   Loss on sale of equipment                                                      122,541                  --
                   Provision for doubtful accounts                                                 25,200             250,000
          Changes in operating assets and liabilities:
                   Accounts receivable                                                            410,115            (921,382)
                   Other receivables                                                             (298,559)                 --
                   Inventories                                                                     72,581            (667,123)
                   Prepaid expenses and other                                                    (313,616)            (96,051)
                   Deferred income taxes                                                          107,000            (571,000)
                   Accounts payable and accrued expenses                                         (323,206)            355,204
                   Income taxes payable                                                          (158,185)            118,385
                   Deferred rent                                                                  234,884                  --
                                                                                          -----------------    -----------------
          Net cash provided by operating activities                                               536,972           1,578,619
                                                                                          -----------------    -----------------

          Cash flows from investing activities
               Purchase of property and equipment                                              (1,548,513)           (564,982)
               Increase in long-term deposits                                                    (422,782)              1,782
                                                                                          -----------------    -----------------
          Net cash used in investing activities                                                (1,971,295)           (563,200)
                                                                                          -----------------    -----------------

          Cash flows from financing activities
               Proceeds from capitalized leases and term loans                                    747,025             245,169
               Payments of capitalized leases and term loans                                     (212,021)            (88,705)
               Proceeds of short term credit facilities                                                --           1,975,000
               Payment of short term credit facilities                                                 --          (2,375,000)
               Proceeds from exercise of warrants                                                      --           2,646,215
               Proceeds from exercise of stock options                                             22,759             371,322
                                                                                          -----------------    -----------------
          Net cash provided by financing activities                                               557,763           2,774,001
                                                                                          -----------------    -----------------

          Net increase (decrease) in cash and equivalents                                        (876,560)          3,789,420
          Cash and equivalents, beginning of period                                             3,797,918               8,498
                                                                                          -----------------    -----------------
          Cash and equivalents, end of period                                                $  2,921,358       $   3,797,918
                                                                                          =================    =================

          Supplemental disclosure of cash flow information:
               Interest paid                                                                 $     32,249       $     120,711
               Incomes taxes paid                                                            $    305,000       $     532,800

          Supplemental schedule of noncash investing and financing activities:
               Equipment acquired under capital leases                                       $     99,735       $     292,207
</TABLE>



                                      F-5
<PAGE>

                               FOTOBALL USA, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 2000 AND 1999

     1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

              DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS - The Company
              designs, develops, manufactures and markets high quality custom
              sports and non-sports related products. These products are sold in
              the licensed product retail market through a nationwide network of
              over 3,000 retail stores including Target, Wal-Mart, Toys "R" Us,
              Sears, J.C. Penney and The Sports Authority. Additionally, the
              Company provides custom sports and non-sports related products for
              corporate promotions and non-licensed specialty sports products to
              corporations for resale, including sales to amusement parks and
              entertainment-related companies. The Company currently holds
              licenses with Major League Baseball Properties and Major League
              Baseball Players Association, NHL Enterprises and National Hockey
              League Players Association, National Football League Properties
              and NFL Players Inc., over 300 National Collegiate Athletic
              Association colleges and universities, the XFL and certain
              entertainment properties including Warner Bros. Looney Tunes(R)
              and Scooby-Doo, Nickelodeon's "Rugrats" and "Blue's Clues"
              characters, Saban's "Digimon" and The Coca-Cola Company.

              In December 2000, the Company entered into an agreement with
              Rawlings Sporting Goods Company Inc. ("Rawlings") for the
              exclusive global rights to sell golf clubs and golf related
              merchandise under the Rawlings brand name beginning January 1,
              2001. In January 2001, the Company established a new Rawlings Golf
              division to design, develop, manufacture and market golf products
              under the Rawlings brand name.

              CASH AND EQUIVALENTS - Cash and equivalents include money market
              funds and marketable securities that are highly liquid and have
              original maturities of three months or less at the date of
              purchase.

              Cash and cash equivalents consist of the following:

<TABLE>
<CAPTION>
                                                      2000                 1999
                                                 ----------------    -----------------
<S>                                                    <C>                  <C>
                    Cash deposits                   $    661,440          $   553,805
                    Short-term securities              2,259,918            3,244,113
                                                 ----------------    -----------------

                       Total                         $ 2,921,358          $ 3,797,918
                                                 ================    =================
</TABLE>

              Short-term securities (money market fund account maturing in less
              than three months) are stated at fair market value including
              earned interest.

              CONCENTRATION OF CREDIT RISK - The Company invests its excess cash
              in various investment grade instruments such as treasury bills,
              certificates of deposit, commercial paper and money market funds.
              The Company invests its cash in what it believes to be
              credit-worthy financial institutions and has established
              guidelines relative to diversification and maturities with the
              objectives of maintaining safety and liquidity. These guidelines
              are periodically reviewed and modified to take advantage of trends
              and interest rates. The Company has not experienced any losses on
              its cash equivalents or short-term investments.

              Concentrations of credit risk with respect to accounts receivable
              are mitigated in part due to the large number of customers to
              which the Company's retail products are sold, including over 3,000
              retail stores. Additionally, a significant percentage of the
              Company's retail and promotion sales are sold to Fortune 500
              companies. The Walt Disney Company accounted for approximately 20%
              and 25% of total sales in 2000 and 1999. No other customer
              accounted for more than 10% of the total


                                      F-6
<PAGE>
                               FOTOBALL USA, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)


              sales in either 2000 or 1999. Any increase to the allowance for
              doubtful accounts, which offsets accounts receivable, is charged
              to the statement of operations, net of actual accounts receivable
              write-offs.

              The Company does not engage in any future contracts or hedging
              activities and does not do any business in currency other than US
              currency.

              INVENTORIES - Inventories have been valued at the lower of cost
              (first-in, first-out) or market.

              PROPERTY AND EQUIPMENT - Property and equipment is stated at cost
              and is depreciated on the straight-line method over their
              estimated useful lives as follows:

              Office equipment and furniture          5 to 7 years
              Show exhibit                            7 years
              Machinery and equipment                 7 years
              Molds                                   5 years
              Leasehold improvements                  10 years (life of lease)

              The Company reviews, in accordance with SFAS 121, for impairment
              of long-lived assets, certain identifiable intangibles and
              goodwill related to those assets whenever events or changes in
              circumstances indicate that the carrying amount of an asset may
              not be recoverable. When reviewing for impairment, the Company
              takes into account the market value of the asset, the asset's
              current use, the physical appearance of the asset, changes in
              business climate, the accumulation of cost significantly in excess
              of the amount originally anticipated, as well as current or
              historic operating or cash flow losses associated with the asset.

              INCOME TAXES - Deferred income taxes are recorded for temporary
              differences in reporting income and expense for tax and financial
              statement purposes in accordance with Statement of Financial
              Accounting Standards No. 109, Account for Income Taxes (SFAS No.
              109).

              STOCK-BASED COMPENSATION - For employee stock options, the Company
              adopted only the disclosure requirements of SFAS No. 123 and
              continues to recognize the intrinsic value-based method in
              accordance with APB 25, providing pro forma footnote disclosures
              of net income and earnings per share as if the fair value
              accounting provisions of SFAS No. 123 statement had been adopted.
              The Company follows SFAS No. 123 for non-employee stock options,
              recognizing the fair market value of the options as an expense.

              ROYALTIES AND LICENSING ARRANGEMENTS - Royalties due to licensors
              are generally provided for based upon a negotiated percentage of
              related net sales, as defined contractually, frequently subject to
              a minimum guaranteed royalty over the term of the contract.
              Prepaid license costs are charged to operations over the term of
              the contractual agreement, or based upon a percentage of related
              net sales.

              REVENUE RECOGNITION - Sales of products domestically are
              recognized when the products are shipped from the Company's
              facility. Sales of imported products, which are drop shipped
              directly to the customer, are recognized at the time shipments are
              received at the customer's designated location. There are no
              significant rights of returns or customer acceptance provisions
              with respect to the Company's sales. Consignment sales, which are
              generally not significant, are recognized when the consignee sells
              the products.

              In December 1999, the SEC issued SAB No.101 "Revenue Recognition
              in Financial Statements"



                                      F-7
<PAGE>
                               FOTOBALL USA, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

              effective for calendar year end December 31, 2000 financial
              statements. SAB No. 101 provides the SEC's view in applying
              generally accepted accounting principles to selected revenue
              recognition issues. In general, SAB No. 101 provides that revenue
              is booked when: Persuasive evidence of an arrangement exists;
              Delivery has occurred or services have been rendered; The seller's
              price to the buyer is fixed or determinable; and collectibility is
              reasonably assured. The Company has adopted these requirements and
              has determined that there is no material impact to the financial
              statements for 1999 or 2000.

              NET INCOME PER COMMON SHARE - Basic net income per common share is
              calculated by dividing net income by the weighted average number
              of common shares outstanding during the period. Diluted net income
              per common share is calculated by dividing net income by the
              number of common shares outstanding increased by exercisable or
              convertible securities. The dilutive effect of rights to purchase
              preferred or common shares under the Company's Stockholder Rights
              Plan (Note 9) have not been included in the weighted average share
              amounts as the conditions necessary to cause these rights to be
              exercised were not met. However, all warrants exercised during the
              Company's warrant repricing in 1999 are included in the diluted
              share calculation. Any unexercised warrants expired in accordance
              with their terms, thereby not having a dilutive effect.

              RECLASSIFICATION - Certain 1999 balances have been reclassified to
              conform to the current year's presentation.

              SEGMENT INFORMATION - The Company has one operating segment, the
              sale of custom sports products to two economically similar
              customer bases - retail and promotion customers. These customers
              have similar characteristics in the nature of products sold,
              production processes and methods of distribution. As such, the
              Company's financial statements reflect this one operating segment
              and no additional segment information has been provided.

     2.       DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES

              SIGNIFICANT 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 the disclosure of
              contingent assets and liabilities as of the date of the financial
              statements, as well as the reported amounts of revenue and
              expenses during the period. Significant estimates have been made
              by management with respect to the realization of the Company's
               deferred tax assets, allowance for doubtful accounts and the
              provision for discontinued inventories. Actual results could
              differ from these estimates making it reasonably possible that a
              change in these estimates could occur in the near term.

              DEPENDENCE UPON LICENSING ARRANGEMENTS - The Company's business is
              based primarily upon its use of the insignia, logos, names,
              colors, likeness and other identifying marks and images borne by
              many of its products pursuant to license arrangements with Major
              League Baseball, National Football League, various colleges and
              universities and, to a lesser extent, other licensors include the
              National Hockey League, the XFL, The Coca-Cola Company, Warner
              Bros. Looney Tunes(R) and Scooby-Doo, MTV Networks' (Nickelodeon)
              "Rugrats" and "Blue's Clues" characters, Saban Merchandising,
              Inc.'s "Digimon: Digital MonstersTM" and the United States
              Professional Softball League. The Company's new license with
              Rawlings Sporting Goods Company will be the Company's first
              venture into the golf products business. The Company may acquire
              additional licenses for new product lines; however, there can be
              no assurance that the Company will be successful in obtaining new
              licenses. The non-renewal or termination of one or more of the
              Company's current material licenses, particularly with MLB, the
              NFL or collectively the various


                                      F-8
<PAGE>
                               FOTOBALL USA, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

              colleges and universities, could have a material adverse effect on
              the Company's business as a whole.

              On December 6, 2000, the Company entered into a five-year license
              agreement, beginning January 1, 2001, with two five-year renewal
              terms, with Rawlings for the exclusive global rights to sell golf
              clubs and golf related merchandise under the Rawlings brand name.
              The agreement provides for, among other things, the payment of a
              licensing fee, annual minimum royalties and termination of the
              license agreement by the Company for any reason upon 12 months'
              notice.

              VARIABILITY OF GROSS MARGINS - The Company realized gross margins
              of 36% for the year ended December 31, 2000, a decrease from 41%
              during the prior year period. The Company's gross margins may
              fluctuate, based in part on the concentration of promotion, retail
              sales, sales direct to licensors and product mix during the
              reporting period. The types of products sold, the size of the
              promotion and the extent of competition also may create
              variability in realized gross margins. The Company currently
              relies on the retail sales channel for most of its revenue. The
              retail channel is very competitive and price sensitive for certain
              of the Company's products and there is no guarantee that the
              Company will not be required to reduce prices or change its
              product mix to replace higher margin products with lower margin
              products in the future to remain competitive in the marketplace.
              Such price reductions and product changes could lead to overall
              lower gross margins. Under the Company's new Rawlings Golf
              license, the Company will be entering the golf product marketplace
              for the first time. Without a history in the golf business, the
              Company cannot be certain of the gross margins it will realize on
              its golf product sales. Golf product margins will vary depending
              on customer acceptance of the Company's initial pricing and
              changes in manufacturing costs as the Company ramps up production.
              The overall Company gross margins may vary based on the volume of
              golf product sales.

              VARIABILITY OF OPERATING RESULTS; SEASONALITY - The Company has
              historically experienced significant quarter-to-quarter
              variability in its sales and net income resulting primarily from
              two factors. The first factor was the seasonality of the sporting
              industry and the effect this has had on the Company's licensed
              sports product business. The continued introduction of quality
              product lines involving a diverse group of sports and
              entertainment-related products has helped to mitigate this
              seasonality. The second factor, which significantly contributed to
              prior years' variability of the Company's operations, was its
              dependence on the promotion business. However, the Company has
              successfully grown the retail distribution channel of the business
              to help mitigate this variability. The Company's retail and
              promotion business for the year ended December 31, 2000 accounted
              for approximately 92% and 8%, respectively, of total sales. Under
              the Company's new Rawlings Golf license, the Company will be
              entering the golf marketplace for the first time. The golf club
              and golf ball markets are generally seasonal due to lower demand
              in the cold weather months which fall during the Company's first
              and fourth quarters. Once the Company has fully ramped up its
              production capabilities, it anticipates that its golf product
              sales will follow the seasonality of the market.

              CONCENTRATION ON RETAIL SALES - Retail sales were 92% of total
              sales for the year ended December 31, 2000, as compared to 87% of
              total sales for the year ended December 31, 1999. One large
              customer, The Walt Disney Company accounted for approximately 20%
              and 25% of total sales for the years ended December 31, 2000 and
              1999, respectively; no other customer accounted for 10% or more of
              total sales in 2000 or 1999.

              DEPENDENCE UPON KEY PERSONNEL - The success of the Company is
              largely dependent on the personal efforts of Michael Favish, its
              President and Chief Executive Officer. Mr. Favish has entered into
              a three-year employment agreement with the Company, commencing on
              August 10,


                                      F-9
<PAGE>
                               FOTOBALL USA, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

              1999, which, among other things, precludes Mr. Favish from
              competing with the Company for a period of two years following
              termination of his employment with the Company. The loss of the
              services of Mr. Favish could have a material adverse effect on the
              Company's business and prospects. The Company maintains "key man"
              life insurance on the life of Michael Favish.

              DEPENDENCE ON SUPPLIERS - In 2000, the Company purchased
              approximately 88% of its raw material and finished goods,
              consisting primarily of synthetic baseballs, footballs,
              basketballs, hockey pucks and playground balls, from six companies
              located in China, with two manufacturers accounting for 78% of
              total raw materials and finished goods purchased. China currently
              holds most favored nation ("MFN") trading status with the United
              States. Any conditions imposed by the President of the United
              States and any legislation in the United States revoking or
              placing further conditions on China's MFN trading status could
              have a material adverse effect on the cost of the Company's
              products primarily because products originating from China could
              be subjected to substantially higher rates of duty.

3.  ACCOUNTS RECEIVABLE

              Accounts receivable consisted of the following at December 31,
              2000 and 1999:

<TABLE>
<CAPTION>
                                                                               2000                 1999
                                                                          ----------------     ----------------
<S>                                                                           <C>                  <C>
                    Accounts receivable                                       $ 3,440,888          $ 3,963,015
                    Less: allowance for uncollectible accounts                  (163,188)            (250,000)
                                                                          ----------------     ----------------

                       Net accounts receivable                                $ 3,277,700          $ 3,713,015
                                                                          ================     ================
</TABLE>

              In order to determine the value of the Company's account
              receivable, the Company divides its receivable between amounts due
              from Fortune 500 companies (see Description of Business) and
              smaller companies. The reserve for doubtful accounts is estimated
              on the smaller non-Fortune 500 accounts based on the age of the
              receivable. For the year ended December 31, 2000 this balance was
              40% of the total accounts receivable balance.

4.       INVENTORIES

              Inventories consisted of the following at December 31, 2000 and
              1999:

<TABLE>
<CAPTION>
                                                                               2000                 1999
                                                                          ----------------     ----------------
<S>                                                                           <C>                  <C>
                    Finished goods                                            $ 2,673,041          $ 2,631,168
                    Raw material                                                1,845,118            1,751,237
                    Less allowance for discontinued inventory                   (485,065)            (276,730)
                                                                          ----------------     ----------------

                       Total                                                  $ 4,033,094          $ 4,105,675
                                                                          ================     ================
</TABLE>

              The Company periodically reviews its inventory to evaluate it for
              discontinued products. The value of products marked as
              discontinued is included in the allowance. The valuation is
              removed for the reserve when the product is either destroyed or
              liquidated. These products usually include products that are dated
              and produced for special promotional events, such as Super Bowls,
              Final Four college tournaments and World Series, products that are
              produced under licenses that have been terminated or old products.


                                      F-10
<PAGE>
                               FOTOBALL USA, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5.       PROPERTY AND EQUIPMENT

              Property and equipment, inclusive of machinery and equipment under
              capital leases (see Note 7), less accumulated depreciation
              consisted of the following at December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                                      2000                 1999
                                                                                -----------------    -----------------
<S>                                                                              <C>                  <C>
                     Office equipment                                            $     518,884        $     322,678
                     Computer equipment & software                                   1,065,472              891,079
                     Show exhibits                                                     298,657              254,669
                     Molds                                                             240,261              223,120
                     Machinery and equipment                                         1,001,972              991,519
                     Leasehold improvements                                            964,994              406,373
                                                                                -----------------    -----------------
                                                                                     4,090,240            3,089,438
                     Less: accumulated depreciation  and amortization               (1,861,107)          (1,825,812)
                                                                                -----------------    -----------------
                                                                                  $  2,229,133         $  1,263,626
                                                                                =================    =================
</TABLE>

6.      LINES OF CREDIT

              In January 2001, the Company expanded and extended its one-year
              credit line with U.S. Bank National Association (formerly Scripps
              Bank) ("US Bank") including an increase in the credit line from $4
              million to $6 million and an extension of the expiration date from
              April 15, 2001 to July 15, 2001. The assets of the Company
              collateralize this credit line and actual borrowings are limited
              to available collateral, as defined in the agreement. Borrowings
              under the credit line bear interest at the "Wall Street Journal"
              prime rate. The credit line contains financial covenants requiring
              the Company to maintain minimum net worth levels, minimum working
              capital and debt to equity ratios. The Company is in compliance
              with the covenants as of December 31, 2000. There were no
              outstanding borrowings under the credit line at December 31, 2000
              or December 31, 1999. The Company has entered into a letter of
              credit for $158,911 with US Bank and the Company has a $150,000
              ACH (Automatic Clearing House) hold on its credit line related to
              meeting its payroll on a semi-monthly basis. Both the letter of
              credit and the ACH hold reduce the Company's ability to borrow
              against its credit line. The Company is presently reviewing its
              options relating to its credit line for the period after July 15,
              2001.

              The Company has a $3,000,000 line of credit facility (the
              "facility") with Merrill Lynch International Bank Limited at an
              interest rate of 1.75% above the London Interbank Offering Rate
              term that the Company chooses to select. Any borrowing under the
              facility, which is used solely to collateralize the issuance of
              stand-by letters of credit to manufacturers, are required to be
              secured by cash collateral deposited with Merrill Lynch equal to
              the credit outstanding. The facility extends until December 10,
              2001. There was no borrowing under the facility as of December 31,
              1999 and 2000.


                                      F-11
<PAGE>

7.       ACCOUNTS PAYABLE AND ACCRUED EXPENSES

              Accounts payable and accrued expenses consisted of the following
              at December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                    2000                 1999
                                                               ----------------     ----------------
<S>                                                             <C>                   <C>
                   Accounts payable                             $     738,464         $    893,646
                   Accrued payroll and related                         87,284              116,680
                   Accrued commissions and bonuses                    106,500              275,500
                   Royalties payable                                   25,250              103,424
                   Customer deposits                                  143,995              138,253
                   Accrued Rawlings licensing fee                     300,000                   --
                   Accrued joint advertising costs                    170,368                   --
                   Other                                               75,967              143,532
                                                               ----------------     ----------------
                                                                  $ 1,647,828          $ 1,671,035
                                                               ================     ================
</TABLE>


     8.       COMMITMENTS AND CONTINGENCIES

              ROYALTIES - At December 31, 2000, the Company has commitments for
              minimum guaranteed royalties under licensing agreements, including
              with Rawlings, through 2005 as follows:

<TABLE>
<CAPTION>
                            Years ending December 31,
                   --------------------------------------------
<S>                                   <C>                         <C>
                                      2001                        $  1,039,296
                                      2002                             685,000
                                      2003                             595,000
                                      2004                             600,000
                                      2005                             700,000
                                                                -----------------
                                                                  $  3,619,296
                                                                =================
</TABLE>

              CAPITAL LEASES - The Company is obligated under various capital
              leases that expire at various dates through December 2005. Minimum
              annual payments including imputed interest under capital lease
              agreements are as follows at December 31, 2000:


<TABLE>
<CAPTION>
                                  Years ending December 31,
                   --------------------------------------------------------
                                           <S>                              <C>
                                            2001                             $    129,167
                                            2002                                  103,635
                                            2003                                   73,174
                                            2004                                   52,640
                                            2005                                   22,990
                                                                            -----------------
                   Total minimum lease payments                                   381,606
                   Less interest component                                        (55,614)
                                                                            -----------------
                   Present value of net minimum lease payments                    325,992
                   Less current portion of capital leases                        (103,494)
                                                                            -----------------
                   Capital leases, net of current portion                     $   222,498
                                                                            =================

</TABLE>


                                      F-12
<PAGE>
                               FOTOBALL USA, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

              The following property and equipment acquired under capital leases
              categorized below is included in the property and equipment listed
              above at December 31, 2000 and 1999 (see Note 4):

<TABLE>
<CAPTION>
                                                                      2000                1999
                                                                -----------------    ----------------
<S>                                                               <C>                <C>
                   Office equipment                               $   109,761        $      28,567
                   Computer equipment & software                      138,424              153,467
                   Machinery and equipment                            310,437              482,473
                   Less accumulated amortization                     (225,129)            (220,085)
                                                                -----------------    ----------------
                                                                  $   333,493          $   444,422
                                                                =================    ================
</TABLE>

              Amortization of capitalized leases is included in depreciation
              and amortization expense.

              OPERATING LEASES AND RENTAL EXPENSE - The Company leases certain
              machinery, equipment and office and warehouse facilities under
              operating leases, which expire on various dates through 2010. The
              lease for the facilities includes a cost escalation clause, which
              allows for fixed rent increases at certain times during the
              leasing period, as well as three month rent free period at the
              beginning of the lease. In accordance with SFAS No. 13, Accounting
              for Leases, the rent expense for the office and warehouse is
              recognized on a straight-line basis over the life of the lease.
              This has resulted in a deferred rent liability of $234,884 at
              December 31, 2000. Total rental expense charged to operations was
              $856,138 in 2000 and $628,369 in 1999. At December 31, 2000, the
              minimum future rental commitments under noncancellable leases
              payable over the remaining lives of the leases are:

<TABLE>
<CAPTION>
                                                                Minimum
                                                                 Future
                                                                 Rental
                     Years ending December 31,                 Commitments
                     -----------------------------------     -----------------
<S>                                 <C>                       <C>
                                    2001                       $    965,169
                                    2002                            980,166
                                    2003                          1,001,671
                                    2004                          1,022,539
                                    2005                          1,030,886
                                   Beyond                         5,466,581
                                                             -----------------
                                                               $ 10,467,012
                                                             =================
</TABLE>

              DEBT - In June 2000, the Company signed a term loan agreement with
              US Bank with a loan advance period effective June 13, 2000 through
              September 20, 2000. The Company was allowed to submit capital
              expenditures for property and equipment up to $250,000 to finance
              under the agreement at an interest rate of 9.5% per annum. The
              Company received, in accordance with the loan, $250,000 on
              September 1, 2000. After the money was received, a 48-month term
              loan originated with one (1) monthly interest payment on September
              20, 2000, followed by 48 equal monthly payments of $6,281
              beginning October 20, 2000 and ending on September 20, 2004. The
              assets purchased under the agreement collateralize the loan.

              In August 2000, the Company signed a term loan agreement with US
              Bank with a loan advance period effective August 9, 2000 through
              October 20, 2000. During the advance period, the Company was
              allowed to submit capital expenditures for tenant improvements up
              to $400,000 to finance under the agreement at an interest rate of
              9.5% per annum. The Company received, in accordance with the loan,
              $400,000 on October 12, 2000. After the money was received, a
              36-month term loan originated with 36 equal monthly payments of
              $12,813 beginning November 20, 2000 and ending on October 20,
              2003. The loan is collaterized by the Company's receivables,
              inventory, equipment and furniture.



                                      F-13
<PAGE>
                               FOTOBALL USA, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

              In December 2000, the Company signed a term loan agreement with US
              Bank with a loan advance period effective December 19, 2000
              through March 30, 2001. During this period the Company may submit
              any expenses related to the Rawlings Golf division up to
              $1,500,000 to finance under the agreement. On March 30, 2001, the
              amount advanced will be converted to a term loan. The loan
              provides for a variable interest rate equal to the "Wall Street
              Journal" prime rate. Interest only payments are due on January 30,
              2001, February 28, 2001 and March 30, 2001 followed by 36
              consecutive monthly payments necessary to fully amortize the loan
              balance outstanding as of March 30, 2001. The Company's
              receivables, inventory, equipment and furniture collaterialize the
              loan. The Company received no money under this loan as of December
              31, 2000.

     9.       STOCKHOLDERS' EQUITY

              WARRANT CONVERSION - In connection with the Company's initial
              public offering in 1994, the Company issued to public investors
              and the underwriter 1,411,673 warrants, which entitled the holder
              to purchase one share of the Company's common stock for $6.50. On
              June 24, 1999, the Company announced that it reduced the exercise
              price of its publicly traded redeemable common stock purchase
              warrants from $6.50 to $4.00 and extended the term of the warrants
              to August 27, 1999. During the special exercise price period of
              June 24, 1999 through August 27, 1999, warrant holders who
              exercised each warrant for $4.00 received one share of Fotoball
              common stock. When the special exercise period expired at the
              close of business on August 27, 1999, the unexercised warrants
              expired in accordance with their terms.

              A total of 686,167 warrants, or 49% of the total warrants
              originally issued and outstanding, were exercised on or before
              August 27, 1999. Gross proceeds received by the Company in the
              offering were $2,744,668 (solicitation fees and other costs
              associated with the offering were $98,453). Net proceeds received
              by the Company were retained for working capital. Separately,
              22,000 shares of common stock were issued to the underwriter in a
              cash-free, negotiated transaction.

              EMPLOYEE STOCK OPTION PLAN - In 1998, the Board of Directors of
              the Company adopted and the Company's stockholders subsequently
              approved the 1998 Stock Option Plan (the "1998 Plan"). The 1998
              Plan provides for awards of common stock to employees and
              non-employee directors of the Company up to an aggregate of
              700,000 shares of common stock.

              The 1998 Plan authorizes the issuance of incentive stock options
              ("ISOs") and non-qualified stock options ("NQSOs"). Under the 1998
              Plan, officers, directors and key employees may be granted options
              to purchase the Company's common stock at no less than 100% of the
              market price on the date the option is granted. Options become
              100% vested during a three-year period and options are exercisable
              in installments of 33% per year on each of the first through the
              third anniversaries of the grant date and have a maximum term of
              ten years. The 1998 Plan also provided for the termination of the
              Company's 1994 Plan and the re-issuance of an identical number of
              options under the 1998 Plan, at the then current market price, to
              the holders of options under the 1994 Plan.

              A total of 66,000 and 145,000 options were granted in 2000 and
              1999, respectively, under the 1998 Plan.

              The Company applies Accounting Principles Board Opinion No. 25,
              Accounting for Stock Issued to Employees and related
              interpretations in accounting for its stock options. Accordingly,
              no compensation expense has been recognized for the options
              granted under the 1999 Plan. Compensation cost is based upon the
              fair value at the grant date consistent with the methodology
              prescribed under SFAS No. 123, "Accounting for Stock-Based
              Compensation". The Company's


                                      F-14
<PAGE>
                               FOTOBALL USA, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

              net income and earnings per share would have been reduced by
              approximately $164,000 and $134,000, or $.04 per share and $.04
              per share, for 2000 and 1999, respectively, had compensation
              expense been recognized. The fair value of the options granted
              during 2000 is estimated to range from $1.83 to $3.34 on the date
              of grant using the Black-Scholes option-pricing model with the
              following assumptions: dividend yield 0%, volatility of 79%,
              risk-free interest rate of 5.66%, assumed forfeiture rate of 4%
              and an expected life of 3 years.

              The following table summarizes information concerning all
              currently outstanding and exercisable options as of December 31,
              2000:

<TABLE>
<CAPTION>
                                       Options outstanding                                     Options exercisable
              ----------------------------------------------------------------------    ----------------------------------
                                                      Weighted
                                                       Average          Weighted                             Weighted
                  Range of                            Remaining         average                               average
                  exercise           Number          Contractual        exercise             Number          exercise
                   prices         outstanding       life (years)         price            exercisable          price
              ----------------- ----------------- ------------------ ---------------    ----------------- ----------------
<S>                <C>                 <C>              <C>              <C>                  <C>              <C>
                   $1-$2               227,722          6.73             $1.69                203,148          $1.69
                   $2-$3                41,501          7.82             $2.58                 31,001          $2.56
                   $3-$5               125,000          8.53             $4.14                 71,458          $4.29
                   $5-$7                91,700          8.91             $5.92                 10,167          $6.63
                                -----------------                                       -----------------
                                       485,923                                                315,774
                                =================                                       =================
</TABLE>

              The following table summarizes the Company's Employee Stock Option
              Plan activity for the years ended December 31, 1999 and 2000:

<TABLE>
<CAPTION>
                                                                                              Weighted average
                                                    Number              Price per                   price
                                                  of shares               Share                   per share
                                               -----------------    -------------------    ------------------------
<S>                                                  <C>              <C>      <C>                  <C>
              January 1, 1999                        459,550          $1.69 to $2.69                $1.81
                  Granted                            145,000          $3.38 to $6.63                $5.34
                  Exercised                         (117,827)         $1.69 to $2.50                $1.72
                  Canceled                           (52,334)         $1.69 to $2.69                $1.96
                                               -----------------
              December 31, 1999                      434,389
                                               -----------------
                  Granted                             66,000          $3.25 to $4.25                $3.96
                  Exercised                          (12,496)         $1.69 to $2.69                $1.82
                  Canceled                           (88,170)         $1.69 to $6.23                $4.62
                                               -----------------
              December 31, 2000                      399,723
                                               =================
</TABLE>

              OTHER STOCK OPTIONS - On August 1, 1995, the Company entered into
              an agreement with ADR Management Group Ltd. ("ADR" and "ADR
              Agreement") for the purpose of providing the Company independent
              financial relations management services. Pursuant to the ADR
              Agreement, the Company agreed to pay ADR over the term of the
              agreement a monthly fee plus reasonable out-of-pocket expenses
              through July 1997. As further compensation, the Company granted to
              ADR options to purchase an aggregate of 75,000 shares of common
              stock of the Company at $5.25 per share. The options vested in
              amounts of 9,375 at the end of each three-month period following
              August 1, 1995. As of December 31, 1997, 75,000 options issued
              under the stock option agreement were vested. In August 1997, the
              Company entered into a new agreement with ADR whereby ADR agreed
              to provide independent financial relations management services to
              the Company through July 31, 1998. In consideration of the
              services rendered by ADR, the Company granted ADR options to
              purchase an aggregate of 15,000 shares of common stock of the
              Company at $2.6875 per share. The options vested in amounts of
              1,250 each month commencing September


                                      F-15
<PAGE>
                               FOTOBALL USA, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

              1997 until and including August 1998, all of which are exercisable
              from the date of their vesting until August 2000. The Company
              terminated the ADR Agreement in 1999. In accordance with FAS 123,
              the Company valued the options at $16,200 using the Black-Scholes
              option-pricing model and no compensation expense was recognized
              during 1999 and 2000. During 1999, ADR exercised 38,800 shares
              and, as of December 31, 2000, 51,200 ADR stock options remained
              unexercised.

              On April 1, 1999, the Company entered into an agreement with
              Integrated Corporate Relations, Inc., ("ICR" and "ICR Agreement")
              for the purpose of providing the Company independent financial
              relations management services. Pursuant to the ICR Agreement, the
              Company agreed to pay ICR over the term of the agreement a monthly
              fee plus reasonable out-of-pocket expenses through March 31, 2001.
              As further compensation, the Company granted to ICR options to
              purchase an aggregate of 25,000 shares of common stock of the
              Company at $4.20 per share, 20% above of the market closing price
              of the Company's common stock on March 31, 1999. The options
              vested in amounts of 3,125 at the end of each three-month period
              commencing June 30, 1999 until and including March 31, 2001 and
              were to be exercisable until March 31, 2004. The Company
              terminated the ICR Agreement effective March 3, 2001. Under the
              termination provisions of the ICR stock option agreement, all
              stock options granted and vested under this agreement shall cease
              to be exercisable after April 2, 2001. As of December 31, 2000,
              21,875 options issued pursuant to the ICR Agreement were vested,
              of which no options had been exercised. In accordance with FAS
              123, the Company valued the options at $30,250 using the
              Black-Scholes option-pricing model, of which $15,120 and $11,340
              was recognized as compensation expense during 2000 and 1999,
              respectively.

              On April 16, 1999, the Company entered into an agreement with
              W.A.B. Growth Equity Research, ("WAB" and "WAB Agreement") for the
              purpose of providing the Company independent financial relations
              management services. Pursuant to the WAB Agreement, the Company
              granted to WAB options to purchase an aggregate of 10,000 shares
              of common stock of the Company at $4.00 per share, 15% above the
              market closing price of the Company's common stock on April 16,
              1999. The options vest in amounts of 2,500 on the 16th of each
              three-month period commencing April 16, 1999 until and including
              January 16, 2000 and may be exercised until April 16, 2004. As of
              December 31, 2000, 10,000 shares issued under the WAB Agreement
              were vested, of which no options had been exercised. In accordance
              with FAS 123, the Company valued the options at $9,800 using the
              Black-Scholes option-pricing model, of which $652 and $9,148 was
              recognized as compensation expense during 2000 and 1999,
              respectively.

              STOCKHOLDER RIGHTS PLAN - In August 1996, the Company implemented
              a stockholder rights plan to protect stockholders' rights in the
              event of a proposed takeover of the Company. Under the stockholder
              rights plan, each share of the Company's outstanding Common Stock
              carries one right to purchase one one-thousandth (1/1000) of
              Series A preferred stock (a "Right") at an exercise price of $30,
              subject to certain anti-dilution adjustments. Each Right entitles
              the holder, under certain circumstances, to purchase Common Stock
              of the Company or the acquiring company at a substantially
              discounted price ten days after a person or group publicly
              announces it has acquired or has tendered an offer for 15% or more
              of the Company's outstanding Common Stock. The Rights are
              redeemable by the Company at $.01 per Right and expire in 2006.
              The Company has 1,000,000 shares of preferred stock authorized, of
              which 75,000 shares of Series A preferred stock have been reserved
              for issuance upon exercise of the Rights.

     10.      TRANSACTIONS WITH RELATED PARTIES

              EMPLOYMENT AGREEMENTS - The Company is party to an employment
              agreement with Michael Favish, which provides that Mr. Favish will
              serve as President and Chief Executive Officer for a


                                      F-16
<PAGE>
                               FOTOBALL USA, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

              term of three years beginning August 10, 1999. His base salary
              during 1999 was $165,000 and was $210,000 during 2000. In December
              1999, Mr. Favish was granted 7,000 stock options, vesting over a
              three-year period, with an exercise price of $6.63 per share. All
              options have a ten-year life from the date of grant. No options
              were granted to Mr. Favish in 2000.

     11.      DEFINED CONTRIBUTION PLAN

              The Company has a defined contribution plan pursuant to Section
              401(k) of the Internal Revenue Code that is available to
              substantially all employees. In 1999 and 2000, the Company matched
              $.50 of each $1.00 of employee contributions up to three and two
              percent, respectively, of covered payroll. Employees are
              automatically fully vested in their personal contribution amounts
              and vest in the Company's contribution ratably over a five-year
              period. The Company's contribution expense for the year ended
              December 31, 2000 and December 31, 1999 was $46,829 and $39,476,
              respectively.

     12.      INCOME TAXES

              The components of income tax expense (benefits) were as follows
for the years ended December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                              Federal               State                Total
                                          -----------------    ----------------     ----------------
                 2000:
<S>                                        <C>                  <C>                  <C>
                         Current           $    (31,000)        $     10,000         $    (21,000)
                         Deferred                89,000               18,000              107,000
                                          -----------------    ----------------     ----------------
                                           $     58,000        $      28,000         $     86,000
                                          =================    ================     ================

                 1999:
                         Current            $   439,000         $    245,000          $   684,000
                         Deferred              (445,000)            (126,000)            (571,000)
                                          -----------------    ----------------     ----------------
                                          $      (6,000)         $   119,000          $   113,000
                                          =================    ================     ================
</TABLE>

              Income tax benefits recognized during 1999 relate primarily to the
              elimination of a deferred tax valuation allowance established in a
              prior year for uncertainty relating to the utilization of a net
              operating loss carryforward. As of December 31, 1999, the Company
              had utilized all of its available net operating loss carryforward
              from prior years. The Company incurred a net operating loss in
              2000 of $170,000 which was primarily due to the excess of the tax
              loss over the book loss on the disposition of fixed assets related
              to the Company's facility move in 2000.



                                      F-17
<PAGE>

              The components of net deferred tax assets were as follows at
December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                              2000                 1999
                                                                         ----------------     ----------------
                 Deferred tax assets:

<S>                                                                      <C>                  <C>
                   Net operating loss                                    $       58,000      $            --
                   Employee benefit plans                                        39,000               31,000
                   Uniform capitalization of inventory cost                     162,000              126,000
                   Bad debt reserves                                            222,000              278,000
                   Inventory reserves                                           165,000              119,000
                   Impairment loss                                               46,000               46,000
                   State income taxes                                            83,000               47,000
                   Other                                                             --               30,000
                                                                         ----------------     ----------------
                     Total gross deferred tax assets                            775,000              677,000
                 Deferred tax liabilities:
                   Depreciation                                                 112,000               16,000
                   State income taxes                                           109,000                   --
                                                                         ----------------     ----------------
                     Total deferred tax liability                               221,000               16,000
                                                                         ----------------     ----------------
                         Net deferred tax asset                          $      554,000       $      661,000
                                                                         ================     ================

                 Net current deferred tax assets                         $      729,000       $      592,000
                 Net non-current deferred tax assets/(liabilities)             (175,000)              69,000
                                                                         ----------------     ----------------
                     Net deferred tax asset                               $     554,000       $      661,000
                                                                         ================     ================
</TABLE>

              Net non-current deferred tax assets of $69,000 are included in
              Deposits and other on the Company's balance sheet for the year
              ended December 31, 1999.

              The Company evaluates a variety of factors in determining the
              amount of the deferred income tax assets to be recognized
              including the Company's earnings history and its near-term
              earnings expectations. The net operating loss incurred in 2000 was
              due to a one-time disposition of assets in 2000 and is unrelated
              to the future ongoing operations of the Company. Based upon the
              book net income realized in 1999 and 2000 and the expectation of
              continuing increases in its promotional business and the new
              Rawlings Golf division, it is probable that future taxable income
              will be sufficient to realize all of the Company's existing
              deferred tax assets on future tax returns.

              The actual tax expense differs from the expected tax expense,
              computed by applying the Federal corporate tax rate of 34% to
              income before income taxes, as follows:

<TABLE>
<CAPTION>
                                                                               2000                  1999
                                                                          ----------------     ----------------
<S>                                                                        <C>                  <C>
                 Expected statutory tax expense                            $     90,000         $    938,000
                 Net tax effect of permanent differences                          9,000               12,000
                 State income taxes, net of Federal tax effect                   18,000               79,000
                 Valuation allowance                                                 --             (916,000)
                 Adjustment for prior year over accrual                         (31,000)                  --
                                                                          ----------------     ----------------
                 Actual tax expense                                         $    86,000          $   113,000
                                                                          ================     ================
</TABLE>


                                      F-18