TOYMAX INTERNATIONAL INC, 10-K, 1998-06-29

TOYMAX INTERNATIONAL INC
10-K, 1998-06-29
MISC DURABLE GOODS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM 10-K

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<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934

FOR THE FISCAL YEAR ENDED MARCH 31, 1998

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934

COMMISSION FILE NUMBER: 0-23215
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TOYMAX INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

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<S> <C>
DELAWARE 11-3391335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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125 EAST BETHPAGE ROAD
PLAINVIEW, NY 11803

(Address, including zip code, of principal executive offices)

(516) 391-9898

(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

COMMON STOCK, PAR VALUE $.01 PER SHARE

(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

(1) Yes /X/ No / / (2) Yes /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. / /

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 16, 1998 was $22,532,731. The calculation does not reflect
a determination that persons are affiliates for any other purposes.

Number of shares of common stock outstanding as of June 16, 1998:
10,605,000.

DOCUMENTS INCORPORATED BY REFERENCE:

1. Portions of the Toymax International, Inc. Annual Report to Shareholders for
the year ended March 31, 1998.

2. Portions of the Toymax International, Inc. 1998 Notice of Annual Meeting of
Stockholders and Proxy Statement, to be filed with the Securities and
Exchange Commission within 120 days after the close of the registrant's
fiscal year.
<PAGE>
PART I

ITEM 1. BUSINESS

Certain statements contained in this Annual Report on Form 10-K, including,
without limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or the industry to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors, include, without limitation, the
demand for Laser Challenge-TM- and other products of the Company; the Company's
dependence on timely development, introduction and customer acceptance of new
products; possible weakness of the Company's markets; dependence on a limited
number of major customers; the impact of competition on revenues, margins and
pricing; the effect of currency fluctuations; other risks and uncertainties as
may be disclosed from time to time in the Company's public announcements; the
general state of the economy in the United States and other major markets;
customer inventory levels; the cost and availability of raw materials; and
changes in trade relations regarding China. The risks highlighted herein should
not be assumed to be the only things that could affect the future performance of
the Company. Additional explanation of these factors and other factors affecting
the Company's performance are set forth from time to time in the Company's
filings with the U.S. Securities and Exchange Commission.

GENERAL

Toymax International, Inc. ("TOYMAX" and the "COMPANY") creates, designs and
develops innovative toys, which it markets and sells in the U.S. and throughout
the world. The Company has focused on developing and marketing children's
activity toys, including Creepy Crawlers-Registered Trademark-, Metal Molder-TM-
and Magic Maker-Registered Trademark-, girls' toys, such as Talking
Tina-Registered Trademark-, and action toys, such as Laser Challenge-TM-.
Management believes that the major strengths of the Company include creativity
in the development of new toys, such as Metal Molder, and the redevelopment and
reintroduction of successful toy lines from the past, such as Creepy Crawlers.

The Company has generated net profits in four out of its last five fiscal
years. For the fiscal year ended March 31, 1998, Toymax had net sales of $99.3
million and a net income of $11.3 million compared to net sales of $54.7 million
and net income of $3.3 million in fiscal 1997, increases of 81.6% and 238.8%,
respectively. This was primarily due to the increased sales of the Laser
Challenge line as well as the introduction of new products.

The Company believes it is well positioned for future growth. The key
elements of the Company's growth strategy are to: (i) extend product lines of
existing core brands, such as Laser Challenge; (ii) expand into new core product
categories; (iii) expand into traditional spring toys, particularly in the
categories of action toys and water toys; (iv) develop and penetrate new
markets; and (v) continue to license recognized brand names such as Disney's "A
Bug's Life," Chevrolet, and Mercedes.

THE TOY INDUSTRY AND COMPETITION

The majority of the toys sold in the U.S. are manufactured, either in whole
or in part, overseas where labor rates are comparatively lower than in the U.S.
The largest foreign manufacturing market is the People's Republic of China
("PRC"), followed by Japan and Taiwan. Such operations require greater lead
times than domestic manufacturing operations and also result in greater shipping
costs, particularly for larger toys. The design, production and sales of toy
products in the U.S. are subject to various regulations.

Toy manufacturers sell their products either directly to retailers or to
wholesalers who carry the product lines of many manufacturers. There are
thousands of retail outlets in the United States which sell

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toys and games. These outlets include: mass merchandisers, small independent toy
stores, gift and novelty shops, warehouse clubs and mail order catalogs. Despite
the broad number of toy outlets, retail toy sales have been increasingly
generated by a small number of large chains, such as Toys "R" Us, Wal-Mart, Kay-
Bee, Kmart and Target. Despite this consolidation in recent years, both at the
retail and manufacturing level, many small and mid-size companies continue to
compete in the design and development of new toys, the procurement of licenses,
the improvement and expansion of previously introduced products and product
lines and the marketing and distribution of toy products. This has resulted in
an increased reliance among retailers on the large toy companies because of
their financial stability and ability to support products through advertising
and promotion and to distribute products on a national basis. Such consolidation
may have a negative impact on small and mid-sized toy companies, such as the
Company, to compete.

The toy industry is highly competitive. Competition within the industry is
based on consumer preferences, order fulfillment, pricing and new product
development. In recent years, the toy industry has experienced rapid
consolidation. The Company competes with many toy companies that have greater
financial resources, greater name recognition, larger sales, marketing and
product development departments and greater economies of scale. Due to the low
barriers to entry into the toy industry, the Company also competes with smaller
domestic and foreign toy manufacturers, importers and marketers.

SEASONALITY AND BACKLOG

Sales of toy products are seasonal, with the majority of retail sales
occurring in the third and fourth calendar quarters. This pattern is expected to
continue for the foreseeable future.

The result of these seasonal patterns is that operating results and demand
for working capital vary significantly by quarter and net losses may be expected
in the first quarter of the fiscal year for the foreseeable future. Orders
placed with the Company for shipment are cancelable until the date of shipment.
The combination of seasonal demand and the potential for order cancellation
makes accurate forecasting of future sales difficult and causes the Company to
believe that backlog may not be an accurate indicator of the Company's future
sales. Similarly, financial results for a particular quarter may not be
indicative of results for the entire year.

The Company seeks to expand into product categories which are traditionally
popular in the first and second calendar quarters in order to reduce its
dependence on third and fourth quarter sales. The Company markets water toys and
Laser Challenge accessories in an effort to boost sales in these quarters.

PRODUCTS

The Company's existing product lines and 1998 product introductions and
extensions fall into five categories: Action Toys, Children's Activity Toys,
Girls' Toys, Vehicles and Electronic Games and Toys.

ACTION TOYS

The Laser Challenge brand was introduced in 1996, and continues to be the
top-selling laser game. The Laser Challenge system uses an advanced infra-red
light technology which is effective at longer firing distances. Based upon the
continued success of the brand, a number of line extensions were introduced. The
Laser Challenge Cybersplash system, which incorporates the same technology as
other Laser Challenge products, includes a vest filled with water that soaks the
player when hit by a laser blast. Micro Max Blasters, the compact version in the
Laser Challenge family, contains all the power of the original equipment, fires
over 150 feet and includes a holster that doubles as a sensor for portability.
The Laser Challenge V2 ELS (Extreme Laser System) segment includes blasters with
longer firing distances and more features built into the blasters and sensor
vests; and the ELS Game System, which enables players to track and record their
game statistics just as they do in commercial laser arenas. The V2 Ultrawide
Laser Blaster fires a light beam up to 50 feet wide and at distances up to 400
feet. The V2 Firestorm Blaster fires a light beam over 1,000 feet, includes a
built in scope for firing accuracy and a recoil feature.

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CHILDREN'S ACTIVITY TOYS

The Company continues to build on its success in Children's Activity Toys
through the extension of the existing Creepy Crawlers, Metal Molder and Precious
Metals product lines as well as with the introduction of new lines. In 1998, the
Company secured an exclusive license with Disney Consumer Products to produce a
Creepy Crawlers "A Bug's Life" Bug Creator and mold pak accessories, based upon
the Disney/ Pixar movie expected to be released in November 1998. Line
extensions in 1998 for the Metal Molder Die Cast Factory include deluxe molding
kits to make larger vehicles with real moving parts, which can be decorated,
played with and displayed. The Precious Metals product line extensions include
Deluxe Enchanted Jewelry Kits to make stylish earrings, pendants and bracelets.
With the new Super Injector Molding Machine, children can create toy soldiers.
Using the Super Injector and various color molding sticks, they can create an
endless variety of figures, including aliens, by mixing and matching upper and
lower body parts. Themed Super Injector Mold 'N Play kits include molds for
additional figures as well as play environments. In fiscal 1998, the Company
added 3-D Art, Make Your Own Windchimes and Woodshop activity toys, along with
additional styles of Bean Bag Pets, to the Magic Maker brand.

GIRLS' TOYS

The Company's Girls' Toys product lines include dolls that incorporate
lights and sounds in various forms and are sold in "try-me" packaging or with
packaging visuals that demonstrate the features at the store level. These
include Talking Tina, Tiny Twinkles, Brush 'N Magic and Bubble Tots.

VEHICLES

The Company introduced the Mighty Mo's brand of innovative vehicles late in
fiscal 1998. The first product introduced in the line utilizes a "key chain
controller" to activate these light, sound and motion vehicles. The Company
currently has license arrangements to produce Corvette, Chevy S-10 Pick-up and
Mercedes styles. Also new for fiscal 1999, under the Mighty Mo's brand name are
Monster Trucks, flywheel powered endurance vehicles; Drop Shifter Racers, rev
and go vehicles; and Lightening Rodz, motorized retro styled vehicles with
lights, sounds and rumbling action.

ELECTRONIC GAMES AND TOYS

Expanding on the success of the Laser Challenge and the brand equity at both
the retail and the consumer level, the Fall 1999 line will include Laser
Challenge Light Warriors, a tabletop electronic game in which players control
robots who battle each other with light. In 1998, the Company signed an
exclusive agreement to distribute hand-held Nintendo Mini Classics games in the
United States. Four games are available, each of which includes a key ring and a
built in alarm clock. At the 1998 Toy Fair in New York, the Company introduced
Arcadia Electronic Skeet Shoot, a tabletop home arcade game that lets players
shoot at a moving light target that is projected on a wall. The unit has
different games, modes and speeds, which result in numerous gameplay
combinations. The Company also introduced R.A.D., the technologically advanced
high performance all terrain radio-controlled articulated robot.

PRODUCT DESIGN AND DEVELOPMENT

The Company has built a knowledgeable in-house product development team and
a network of independent designers to create new products. Employees in the
Marketing and Research and Development departments coordinate efforts to design
and develop the majority of the Company's toy concepts and products. Current
technologies have been utilized to redesign and redevelop major brands and toy
products from the past, E.G. Creepy Crawlers. The Company's Research and
Development department is comprised of sixteen employees. Total
Company-sponsored research and development expenses for fiscal 1996, 1997 and
1998 were $2.0 million, $1.8 million and $2.9 million, respectively.

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The Company continually evaluates new product ideas generated by a number of
outside designers to maintain access to a wide range of development talent. When
a product is developed based on the idea presented by an independent designer,
the Company enters into a license agreement with the designer.

LICENSING

Licensing is a major influence on the toy industry affecting virtually all
product categories. Although the Company has not significantly relied on
entertainment-related licenses, the Company has marketed and continues to market
versions of its core product lines based on licensed popular children's
characters and trademarks from major entertainment companies and other
widely-known corporate trademarks. Currently, the Company has license agreements
with Disney Enterprises Inc., for the use of the "A BUG'S LIFE" name, the
Chevrolet Motor Division of General Motors, for the use of the CHEVROLET and
CORVETTE brand names, and Daimler-Benz for use of the MERCEDES brand name. The
Company has also granted licenses based upon its Creepy Crawlers brand for which
it receives royalties.

In return for the use of the licensed character or brand name, the Company
typically pays licensing fees of up to 18% of net sales from products marketed
under the subject license. Furthermore, the acquisition of a license generally
involves the payment of non-refundable minimum royalty payments.

In 1998 the Company entered into an agreement for the distribution of
Nintendo Mini Classic hand-held games.

SALES AND DISTRIBUTION

Toymax conducts its sales activities through its wholly owned subsidiaries,
Toymax Inc. ("TOYMAX NY") and Toymax (H.K.) Limited ("TOYMAX HK"). Following the
closing of the Company's initial public offering, the Company had anticipated
that it would conduct the business previously conducted through Toymax HK
through Toymax (Bermuda) Limited. However, since political circumstances in Hong
Kong appear to be stable following the takeover by the PRC, the Company has
decided to at least delay any such transition that it may make and further
consider whether there are any economic benefits from making this change.

Sales conducted by Toymax NY ("U.S. DOMESTIC SALES") consist of sales of the
Company's promotional product lines to U.S. customers pursuant to customer
purchase orders. Customers purchasing products on this basis include Toys "R"
Us, Kay-Bee Toys, F.A.O. Schwarz, Wal-Mart Stores, Inc., Kmart Corporation and
Target Stores, Inc. Sales conducted by Toymax HK ("TOYMAX HK SALES") consist of
sales on a free on board ("FOB") Hong Kong basis which are generally based on
letters of credit, and include sales of lower priced basic products to U.S. and
international retailers; including Toys "R" Us International, Index (U.K.),
Blokker (Holland); and sales of the Company's promotional product lines to
approximately 40 international distributors. The Company's products are sold in
over 50 countries around the world. The following table depicts the Company's
net sales in these two categories for the last three fiscal years:

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FISCAL YEAR
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SALES 1996 1997 1998
- ------------------------------------------------------------- --------- --------- ---------

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(IN THOUSANDS)
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U.S. Domestic Sales.......................................... $ 26,951 $ 38,793 $ 76,264
Toymax HK Sales.............................................. 16,671 15,890 23,065
--------- --------- ---------
Net Sales.............................................. $ 43,622 $ 54,683 $ 99,329
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U.S. DOMESTIC SALES. The Company's U.S. sales activities are conducted
through its nationwide network of independent sales representatives, an in-house
sales staff and, with respect to certain major accounts, by senior management.
Comprised of more than 34 sales executives and five sales organizations at March
31, 1998, this sales network maintains close customer relationships, develops
new accounts and presents new products to its established customers. The
Company's leading U.S. customers (not including FOB Hong Kong sales to the U.S.)
include major toy retailers, mass merchandisers, department stores and catalog
companies. The Company's top three U.S. Domestic accounts for fiscal 1998, Toys
"R" Us, Wal-Mart and Kay-Bee, accounted for 71.0% of domestic sales for fiscal
1998. U.S. Domestic Sales constituted 61.8%, 70.9% and 76.8% of consolidated net
sales in fiscal 1996, 1997 and 1998, respectively.

TOYMAX HK SALES. Toymax HK Sales are comprised of sales to international
retailers and distributors and to certain U.S. retailers. Such sales are
conducted on a FOB Hong Kong basis and generally require the opening of a letter
of credit. Since its inception in 1990, Toymax has emphasized international
sales, and today Toymax's products are sold in over 50 countries worldwide. The
Company's international sales network consists of 40 international distributors
and nine international sales representative organizations. In fiscal 1996, 1997
and 1998, Toymax HK sales accounted for 38.2%, 29.1% and 23.2% of net sales,
respectively.

The Company also maintains "house accounts" which involve direct sales by
the Company to certain major international retailers. Such "house accounts" are
not covered by the Company's distribution agreements or sales representative
agreements. Major international retailers to whom the Company sells directly
include Toys "R" Us International, Blokker (Holland) and Woolworth (U.K.).

CUSTOMERS

The Company's top five customers accounted for approximately 69.2% of the
Company's invoiced sales in fiscal 1998. Only Toys "R" Us and Wal-Mart accounted
for more than 10% of invoiced sales during the period.

MARKETING

The Company employs a variety of methods to market its new and existing
products. New toys, existing toys and line extensions are marketed primarily by
members of the Company's executive and sales management at the Company's
showrooms in Hong Kong and New York during major international toy shows. The
Company is also represented at additional toy shows both domestically and
internationally.

Product packaging and placement is a large part of the Company's overall
marketing strategy. The Company's products are sold in brightly colored,
eye-catching packages with strong brand identity. All packaging must meet strict
guidelines for communication effectiveness and for its ability to stand out from
the competitive clutter. Furthermore, the Company seeks prime shelf space
(including end caps and "power walls") in the stores of its major retail
customers.

The Company currently allocates a significant portion of its marketing
resources to television advertising, which it believes is the most
cost-effective way to reach its primary target audience of children. The
commercials are run on national television and in local spot television markets
to support the promotional efforts and distribution patterns of its key
retailers.

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The Company also relies on public relations and promotional programs to
generate excitement about its key brands. The Company is currently participating
in Laser Challenge sampling programs with selected summer camps, providing
Cybersplash sets to selected Police Athletic League Chapters and has introduced
a Laser Challenge Points Program. In addition, the Company has recently
established the Laser Challenge League, a fan club devoted to encouraging
interest in the Laser Challenge system.

The Company has a worldwide web site (http://www.laserchallenge.com) on the
Internet, which features its Laser Challenge system and provides information
about certain new products including release dates and current promotions.

The Company also employs traditional marketing methods such as couponing and
in-store demonstrations adjacent to its products.

PURCHASING AND MANUFACTURING

The Company currently contracts for all of its manufacturing requirements.
Management believes that this practice provides the Company with the most
efficient use of its capital at this time. Tai Nam Industrial Company Limited
("TAI NAM"), which is based in Hong Kong, serves as the Company's purchasing
agent pursuant to an agency agreement (the "AGENCY AGREEMENT") dated April 1,
1997, as amended, between Tai Nam and Toymax NY. Since the Company's founding,
Tai Nam or its affiliate, Concentric Toys Limited ("CONCENTRIC"), has served as
the Company's purchasing agent. Tai Nam and Concentric are owned by David Chu,
the Chairman and a principal stockholder of the Company. As the Company's
purchasing agent, Tai Nam arranges for the manufacturing of the Company's
products based on purchase orders placed with Tai Nam by the Company. In
addition, Tai Nam handles all shipping documents, letters of credit, bills and
payments, serves as liaison with other vendors and performs quality control
functions. For these services, Tai Nam receives an agency fee of 7% of the gross
invoiced value of products purchased by the Company. Pursuant to the Agency
Agreement, Toymax purchases products from Tai Nam at Yantian (PRC) FOB prices.
The Company pays all expenses associated with the making of molds for new
products. Pursuant to the Agency Agreement, the Company owns the tooling and
molds for its products. The term of the Agency Agreement ends on March 31, 1999.

The Company believes that it has a favorable marketer-supplier relationship
with Tai Nam. Prior to the formation of Toymax in 1990, Steven Lebensfeld,
President of the Company, and Harvey Goldberg, Executive Vice President of the
Company, each had a marketer-supplier relationship with Tai Nam. The Company
believes that the price, quality of merchandise, reliability, and the ability of
Tai Nam to meet the Company's timing requirements for delivery have been
comparable to, if not better than, those available from unaffiliated third
parties and those which are customary in the industry.

As purchasing agent, Tai Nam arranges for the manufacturing of the Company's
products based on purchase orders placed with Tai Nam by the Company. The
majority of such products have been and are currently manufactured by Jauntiway
Investment Limited ("JAUNTIWAY"). Jauntiway is an OEM toy manufacturer with two
manufacturing facilities in the southern portion of the PRC, including an ISO
9002 factory. Jauntiway is also owned by Mr. Chu. Since the Company's inception,
Jauntiway has been the Company's most important manufacturer and the Company has
been Jauntiway's leading customer. In fiscal 1997 and 1998, approximately 85%
and 95%, respectively, of the Company's products were manufactured by Jauntiway
(some utilizing subcontractors). The Company entered into a manufacturing
agreement with Tai Nam and Jauntiway dated September 22, 1997. This agreement
contains standard manufacturing terms as well as providing that the Company
shall not be required to provide a letter of credit or other security to Tai Nam
or Jauntiway in connection with its purchase orders.

The Company considers the terms it receives from Jauntiway (through Tai Nam)
to be at least as favorable to the Company as those available from unaffiliated
third parties and those which are customary in the industry. All of the
Company's affiliated transactions, including those with Tai Nam and Jauntiway,
are subject to the approval of the independent directors of the Company's Board
of Directors.

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Manufacturing commitments are made on a purchase order basis. The Company
bases its production schedules on customer estimates and orders, historical
trends, the results of market research and current market information. The
Company closely monitors market activity and adjusts production schedules
accordingly. The Company utilizes Electronic Data Interchange ("EDI") programs
maintained by certain of its largest customers, which allows the Company to
monitor actual store sales and inventories, and thereby to schedule its
production to meet anticipated re-orders.

Tai Nam and Jauntiway also obtain products or components from other
independent manufacturers located principally in the southern portion of the
PRC, particularly during peak production periods. These suppliers are selected
based on the quality of their products, prices and service. Tai Nam closely
monitors its suppliers' manufacturing operations, including quality control,
production scheduling and order fulfillment.

The basic raw materials used by Jauntiway in manufacturing the Company's
products are petrochemical resin derivatives. Costs of petrochemical derivatives
are affected by demand and supply as well as the value of the U. S. dollar in
relation to foreign currencies, and have been subject to volatility in recent
years. There can be no assurance as to the timing or extent to which the Company
will be able to pass on any raw material price increases to its customers.

In addition, a large portion of Jauntiway's petrochemical derivates is
imported from Taiwan via Hong Kong. Any disruption of trade between Taiwan and
the PRC may have a significant adverse impact on Jauntiway's operations and
therefore could have a significant adverse impact on the Company's results of
operations.

GOVERNMENT AND INDUSTRY REGULATION

The Company is subject to the provisions of the Federal Hazardous Substances
Act, the Federal Consumer Product Safety Act, the Flammable Fabrics Act and the
regulations promulgated under each such act. Such acts empower the Consumer
Product Safety Commission ("CPSC") to protect the public from hazardous goods.
The CPSC has the authority to exclude from the market goods that are found to be
hazardous and requires a manufacturer to repurchase such goods under certain
circumstances. The Company sends samples of all of its marketed products to
independent laboratories to test for compliance with the CPSC's rules and
regulations, as well as with the product standards of the Toy Manufacturers of
America, Inc. ("TMA"). The Company is not required to comply with the product
standards of the TMA, but does so voluntarily. Similar consumer protection laws
exist in state and local jurisdictions within the United States as well as
certain foreign countries. The Company designs its products to exceed the
highest safety standards imposed or recommended either by government or industry
regulatory authorities. To date, the Company has not been found to be in
material violation of any governmental product standard with respect to the
Company's products.

The Company is not required by the U.S. government to obtain any quality or
safety approvals prior to sales in the U.S. However, prior to shipment, the
Company's products are tested by independent laboratories on behalf of the
Company and major retailers. The Company, however, is required to have and has
obtained European Community (CE) approval, European's toy safety Standard, for
its products sold in Europe. In addition, the Company, together with Tai Nam,
has obtained the Chinese quality license for export commodities from the Chinese
Import and Export Commodity Inspection Bureau. Such license will expire on June
28, 1999.

TARIFFS AND DUTIES

In December 1994, the United States approved a trade agreement pursuant to
which import duties on toys, games, dolls and other specified items were
eliminated, effective January 1, 1995, from products manufactured in all Most
Favored Nation ("MFN") countries (including the PRC). In June 1997, the United
States extended the PRC's MFN status through July 3, 1998 which allows products
imported into

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the United States from the PRC to be accorded normal import duties. Increases in
quotas, duties, tariffs or other changes or trade restrictions, which may be
imposed in the future, would have a material adverse effect on the Company's
financial condition, operating results or ability to import products. In
particular, the Company's costs would be increased if the PRC's MFN status were
revoked. The loss of MFN status for the PRC would result in substantial duties
on the cost of toy products manufactured in the PRC and imported into the United
States. However, the Clinton Administration has stated its intent to renew MFN
trading status for the PRC for the coming year.

In addition, Toymax HK is based in Hong Kong. On July 1, 1997, sovereignty
of Hong Kong reverted back to the PRC. To date, this change has not impacted the
Company's business.

PATENTS, TRADEMARKS AND PROPRIETARY TECHNOLOGY

The Company owns or controls numerous patents and trademarks, which limit
the ability of third parties to directly compete with the Company in its major
brands. Key patents cover the Creepy Crawlers Workshop and the Creature Creator
ovens, as well as aspects of the Laser Challenge system. Key trademarks include
Creepy Crawlers-Registered Trademark-, Plasti-Goop-Registered Trademark-,
Talking Tina-Registered Trademark-, Laser Challenge-TM-, Metal Molder-TM-,
Tattoo Graphix-Registered Trademark- and Magic Maker-Registered Trademark-. The
Company has patents pending with regard to the Metal Molder and Laser Challenge
product lines.

Certain of the Company's product lines also incorporate concepts or
technologies created by outside designers, some of which are patented by
licenses. In addition, many of the Company's products incorporate intellectual
property rights, such as characters or brand names, that are proprietary to
third parties. The Company typically enters into a license agreement to acquire
the rights to the concepts, technologies or other rights for use with the
Company's products. These license agreements typically provide for the retention
of ownership of the technology, concepts or other intellectual property by the
licensor and the payment of a royalty to the licensor. Such royalty payments
generally are based on the net sales of the licensed product for the duration of
the license and, depending on the revenues generated from the sale of the
licensed product, may be substantial. In addition, such agreements often provide
for an advance payment of royalties and may require the Company to guarantee
payment of a minimum level of royalties that may exceed the actual royalties
generated from net sales of the licensed product. Some of these agreements have
fixed terms and may need to be renewed or renegotiated prior to their expiration
in order for the Company to continue to sell the licensed product.

INFLATION

The Company does not believe that the relatively moderate rates of inflation
in the United States in recent years have had a significant effect on its
operations. Although rates of inflation in Asia have periodically resulted in an
increase in the cost of manufacturing the Company's products and such increased
costs have had a modest impact on margins, the Company does not believe that
inflation in Asia has had a materially adverse effect on its results of
operations.

EMPLOYEES

At March 31, 1998, the Company had 63 full time employees based at its
corporate offices in Plainview, New York; one full time employee located in San
Francisco, California; and one full time employee based in Green Bay, Wisconsin.
The Company is not subject to any collective bargaining agreements. Management
believes that the Company's relationship with its employees is satisfactory.

ITEM 2. PROPERTIES

The Company leases approximately 27,000 square feet of space in Plainview,
New York for its corporate offices. The lease has an annual rental obligation,
which ranges from $438,592 in the second year

9
<PAGE>
to $493,638 in the sixth year, followed by a decrease to $445,941 in the seventh
year. This lease expires on April 30, 2004.

In addition, the Company leases approximately 3,270 square feet of space at
the Toy Center, 200 Fifth Avenue, New York, New York, to house its New York City
showroom facility. This lease has an annual rental obligation of $115,020 and
expires on April 30, 2003. The Company also leases approximately 260 square feet
of space at the Toy Center, which has a monthly rent of $2,200 and expires
November 30, 1998.

The Company rents approximately 1,628 square feet of space in Kowloon, Hong
Kong from David Chu, Chairman of the Company, which it uses as a showroom
facility. The monthly rent under this lease is $5,900. The lease expires on
August 1, 1998.

The Company leases, on a month to month basis, approximately 48,943 square
feet of space in Westbury, New York for warehousing purposes. The lease has a
monthly rental obligation of $5,000.

The Company utilizes public warehousing facilities in Tacoma, Washington and
Plainview, New York and is charged based upon its usage of the facilities.

ITEM 3. LEGAL PROCEEDINGS

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

In April 1997, Link Group International, a developer of toy games, filed a
complaint against the Company in the United States District Court for the
District of Connecticut, alleging breach of express and implied contracts,
unjust enrichment, misappropriation, conversion and tortious interference with
contract. The current complaint (Third Amended Complaint) alleges claims against
the Company for breach of an express contract, breach of an implied contract,
unjust enrichment, fraud, promissory estoppel, misappropriation and conversion,
violation of the Connecticut Unfair Trade Practices Act and violation of the
Uniform Trade Secrets Act. The plaintiff seeks monetary damages representing the
greater of disgorgement of profit or royalties on past Laser Challenge sales,
royalties on additional Laser Challenge sales, the lost goodwill and punitive
damages. The Company has made a motion to dismiss the fraud claim. The Company
intends to continue to defend the action vigorously and does not believe that it
will have a material adverse effect on the Company's financial position or
results of operations; however, there can be no assurance of the outcome.

In October 1997, the Company entered into a Settlement Agreement with 4Kids
Entertainment, Inc. resolving all disputes between the Companies. While the
terms of the agreement are confidential, they did not have a material effect on
the financial condition of the Company or the Company's results of operations.

In April 1998, the Company entered into a Settlement Agreement with Saban
Entertainment, Inc. and Saban International resolving all disputes between the
Companies. While the terms of the agreement are confidential, in management's
opinion, the terms of the agreement will not have a material effect on the
financial condition of the Company or the Company's results of operations.

The Company has been notified by the Internal Revenue Service concerning a
pending examination covering tax years 1993, 1994 and 1995. As of the date of
this Form 10-K, no issues have been raised by the Internal Revenue Service. The
Company cannot predict at this time what the outcome of the examination will be
or the impact, if any, on the Company's results of operations.

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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 1998.

10
<PAGE>
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

(a) Since October 20, 1997, the Company's Common Stock has been trading on
the NASDAQ National Market System under the symbol "TMAX." The following table
sets forth the high and low closing sales prices of the Company's Common Stock
in each of the following quarters as reported by NASDAQ:

<TABLE>
<CAPTION>
FISCAL 1998 HIGH LOW
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Third Quarter (from October 20, 1997)...................................... 9 13/16 7 1/4
Fourth Quarter............................................................. 10 1/8 6 3/4
</TABLE>

As of June 16, 1998, the number of holders of record of Common Stock was
approximately 1,856.

DIVIDEND POLICY

Prior to its initial public offering, the Company declared dividends to its
stockholders in 1993, 1994 and 1995. The Company currently intends to retain
earnings, if any, to finance the development and expansion of its business and
does not anticipate declaring or paying any cash dividends in the foreseeable
future. In deciding whether or not to declare or pay dividends in the future,
the Board of Directors will consider all relevant factors, including the
Company's ability to generate earnings, need for capital, overall financial
condition and any restrictions contained in any then existing financing or other
agreements.

(b) The Company's Registration Statement on Form S-1 (Registration No.
333-33409) with respect to its initial public offering of securities was
declared effective and commenced on October 20, 1997 by the Securities and
Exchange Commission. The managing underwriters of the offering were Fahnestock &
Co. Inc. and Wedbush Morgan Securities Inc. The Company registered and sold
3,105,000 shares of its Common Stock for an aggregate public offering price of
$26,392,500. The offering has since been completed.

The total amount of expenses incurred by the Company in connection with the
offering is estimated at approximately $3,470,000, which is comprised of
$1,925,000 for underwriting discounts, $75,000 of underwriter's non-accountable
expenses, and approximately $1,470,000 of other expenses (including legal
counsel, accounting, printing, transfer agent, SEC, NASDAQ and miscellaneous
fees and expenses). No expenses were paid to directors, officers and persons
owning more than ten percent of any class of the Company's equity securities.
However, legal expenses of approximately $390,000 were paid to Baer Marks &
Upham LLP, counsel to the Company, of which Joel M. Handel, a director of the
Company, is a partner. The resultant net offering proceeds to the Company was
approximately $22,921,000.

The Company has applied approximately $13.0 million of the net proceeds to
the repayment of its credit facility agreement (the "Agreement") with State
Street Bank and Trust Company, Hong Kong Branch (the "Bank") and approximately
$7.0 million to the partial repayment of outstanding trade payables to Tai Nam
and Concentric, each of which are affiliates of David Chu, the Chairman and a
principal stockholder of the Company. The remaining net proceeds will be used by
the Company for general working capital purposes.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The Selected Consolidated Financial Data of the Company has been derived
from the audited consolidated financial statements of Toymax International, Inc.
The Selected Consolidated Financial Data

11
<PAGE>
should be read in conjunction with the Consolidated Financial Statements of the
Company and the Notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------

<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................ $ 72,431 $ 70,623 $ 43,622 $ 54,683 $ 99,329
Cost of goods sold............................... 37,518 42,640 30,601 33,837 54,971
---------- ---------- ---------- ---------- ----------
Gross profit..................................... 34,913 27,983 13,021 20,846 44,358
Selling and administrative expenses.............. 21,525 27,121 24,641 18,026 28,166
---------- ---------- ---------- ---------- ----------
Operating income (loss).......................... 13,388 862 (11,620) 2,820 16,192
Other income (expense), net...................... (225) (332) 300 228 (549)
Interest expense, net............................ (483) (460) (738) (394) (212)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and minority
interest....................................... 12,680 70 (12,058) 2,654 15,431
Income tax expense (benefit)..................... 4,818 (198) (2,254) (681) 4,133
---------- ---------- ---------- ---------- ----------
Income (loss) before minority interest in net
loss of subsidiary............................. 7,862 268 (9,804) 3,335 11,298
Minority interest in net loss of subsidiary...... 0 0 0 12 42
---------- ---------- ---------- ---------- ----------
Net income (loss)................................ $ 7,862 $ 268 $ (9,804) $ 3,347 $ 11,340
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic and diluted earnings (loss) per share...... $ 1.05 $ .04 $ (1.31) $ .45 $ 1.28
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Cash dividends declared per common share......... $ .18 $ .09 $ -- $ -- $ --
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Basic and diluted average common shares
outstanding.................................... 7,500,000 7,500,000 7,500,000 7,500,000 8,847,781
</TABLE>

<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
--------- --------- ---------- ---------- ---------
BALANCE SHEET DATA:
Working capital (deficit)................................ $ 3,532 $ 1,479 $ (6,123) $ (2,135) $ 31,755
Total assets............................................. 27,659 25,542 22,127 26,278 53,831
Short-term debt.......................................... 3,448 2,487 4,013 8,447 --
Long-term obligations (including current portion)........ 182 206 119 46 77
Total stockholders' equity (deficit)..................... 7,144 6,712 (3,092) 255 34,703
</TABLE>

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

The Company creates, designs and develops innovative toys, which it markets
and sells in the U. S. and throughout the world. The Company has focused on
developing and marketing children's activity toys, including Creepy
Crawlers-Registered Trademark-, Metal Molder-TM- and Magic
Maker-Registered Trademark-, girls' toys, such as Talking
Tina-Registered Trademark-, and action toys, such as Laser Challenge-TM-.
Management believes that the major strengths of the Company include creativity
in the development of new toys, such as Metal Molder, and the redevelopment and
reintroduction of successful toy lines from the past, such as Creepy Crawlers.

On October 20, 1997, the Company sold 2,700,000 shares of common stock for
$8.50 per share pursuant to an initial public offering. In November 1997, the
underwriters exercised their over-allotment option in full and, as a result, the
Company sold an additional 405,000 shares at $8.50 per share. The total net
proceeds from the initial public offering were approximately $22.9 million.

12
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth the percentages of net sales of certain
income and expense items of the Company for the last three fiscal years:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-------------------------------
<S> <C> <C> <C>
YEARS ENDED MARCH 31,
-------------------------------

<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales......................................................... 100.0% 100.0% 100.0%
Cost of goods sold................................................ 70.2 61.9 55.3
--------- --------- ---------
Gross profit...................................................... 29.8 38.1 44.7
Selling and administrative expenses............................... 56.5 33.0 28.4
--------- --------- ---------
Operating income (loss)........................................... (26.7) 5.1 16.3
Other income (expense), net....................................... 0.7 0.4 (0.5)
Interest expense, net............................................. (1.7) (0.7) (0.2)
Income tax expense (benefit)...................................... (5.2) (1.3) 4.2
--------- --------- ---------
Net income (loss)................................................. (22.5)% 6.1% 11.4%
--------- --------- ---------
--------- --------- ---------
</TABLE>

FOR PURPOSES OF THE FISCAL YEAR COMPARISONS WHICH FOLLOWS, FIGURES REFERRING
TO THE FINANCIAL PERFORMANCE OF TOYMAX NY (WHICH HAS CONDUCTED THE COMPANY'S
U.S. DOMESTIC SALES) ARE REFERRED TO AS THE "U.S. DOMESTIC OPERATION" AND THOSE
REFERRING TO THE PERFORMANCE OF TOYMAX HK (WHICH HAS CONDUCTED THE COMPANY'S FOB
HONG KONG SALES) ARE REFERRED TO AS THE "FOB HONG KONG OPERATION."

13
<PAGE>
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 1997

NET SALES. Net sales for fiscal 1998 increased to $99.3 million from $54.7
million in fiscal 1997, an increase of $44.6 million, or 81.6%.

Net sales of the U.S. Domestic Operation increased 96.6% to $76.3 million,
or 76.8% of total net sales, in fiscal 1998, from $38.8 million, or 70.9% of
total net sales, for fiscal 1997. Net sales of the FOB Hong Kong Operation
increased 45.2% to $23.1 million, or 23.2% of total net sales, in fiscal 1998
from $15.9 million, or 29.1% of total net sales, in fiscal 1997. The increase in
net sales, in both operations, was mainly attributable to the inclusion of the
Laser Challenge and Metal Molder product lines for the full fiscal year 1998
compared to only a portion of fiscal 1997 when they were first introduced. These
lines were initially shipped to customers in the latter part of the quarter
ended September 30, 1996. In fiscal 1998 Laser Challenge represented 78.6% of
total net sales. In addition, the Precious Metals product line, introduced in
fiscal 1998, contributed to the increase in net sales. These increases were
partially offset by decreases in net sales of the Dollymaker line of Girls' Toys
and the discontinuance of the Goosebumps product line.

GROSS PROFIT. Gross profit for fiscal 1998 increased by $23.6 million, or
112.8%, to $44.4 million, or 44.7% of net sales, from $20.8 million, or 38.1% of
net sales, for fiscal 1997.

The increase in gross profit as a percentage of net sales was primarily due
to an improvement in the U.S. Domestic Operation, which achieved a gross profit
of 47.8% in fiscal 1998 as compared to 39.7% in fiscal 1997. The increase in the
U.S. Domestic Operation's gross profit percentage was mainly attributable to
higher product margins on invoiced sales partially offset by an increase in
customer discounts and allowances. In addition, the U.S. Domestic Operation,
which generally produces a higher gross profit margin than the FOB Hong Kong
Operation, represented 76.8% of total net sales in fiscal 1998 compared to 70.9%
in fiscal 1997.

SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
for fiscal 1998 increased by $10.2 million, or 56.3%, to $28.2 million, or 28.4%
of net sales, from $18.0 million, or 33.0% of net sales, for fiscal 1997. The
increase was mainly attributable to; (i) an increase in advertising expenses of
$3.9 million primarily to support the sales of Laser Challenge, although,
advertising expense decreased as a percentage of net sales to 8.9% in fiscal
1998 from 9.0% in fiscal 1997; (ii) an increase in payroll expenses of $2.6
million primarily reflecting increased staffing and a provision for the
Executive Bonus Plan, however, payroll expense decreased as a percentage of net
sales to 6.1% in fiscal 1998 from 6.3% in fiscal 1997; (iii) an increase in
sales commissions of $1.3 million as a direct result of the increase in net
sales; and (iv) an increase in professional fees of $1.4 million primarily due
to increased litigation and trademark related expenses.

OPERATING INCOME. As a result of the foregoing, operating income for fiscal
1998 increased by $13.4 million, or 474.2%, to $16.2 million from $2.8 million
for fiscal 1997.

OTHER INCOME (EXPENSE), NET. Other income (expense), net for fiscal 1998
decreased by $0.8 million or 340.9%, to an expense of $0.6 million from income
of $0.2 million for fiscal 1997. The decrease in other income (expense), net is
primarily the result of the termination of an agency agreement between Toymax HK
and another unaffiliated international toy distributor on December 31, 1996. In
addition, there was an increase in finance charges as a direct result of the
increase in sales for fiscal 1998.

INTEREST EXPENSE, NET. Net interest expense for fiscal 1998 was $0.2
million, compared to $0.4 million in fiscal 1997, a 46.3% decrease. The decrease
in net interest expense was primarily due to an increase in interest income
resulting from the investment of funds received from the Company's initial
public offering.

INCOME BEFORE TAXES. Income before taxes for fiscal 1998 increased by $12.7
million to $15.4 million, compared to income before taxes of $2.7 million for
fiscal 1997.

14
<PAGE>
INCOME TAX EXPENSE (BENEFIT). Income taxes for fiscal 1998 increased by
approximately $4.8 million to a provision of approximately $4.1 million from a
benefit of approximately $0.7 million for fiscal 1997, primarily due to
increased taxable earnings in fiscal 1998 offset by a reduction in the deferred
tax valuation allowance.

During the fiscal year ended March 31, 1998, the balance of the Company's
valuation allowance was reversed to reflect a net deferred tax asset equal to
the anticipated tax benefit of the temporary differences between the tax bases
of assets and liabilities and their reported amounts in the financial
statements, which are expected to be realized. As a result of this and certain
other tax adjustments, the Company reflected a gain of approximately $0.6
million or $0.07 per share.

NET INCOME. As a result of the foregoing, net income for fiscal 1998
increased to $11.3 million ($1.28 per share) from $3.3 million ($0.45 per share)
for fiscal 1997, an increase of $8.0 million or 238.8% from fiscal 1997.
Excluding the tax adjustment described above, net income would have been
approximately $10.7 million ($1.21 per share), an increase of approximately
220.8% from fiscal 1997.

FISCAL YEAR ENDED MARCH 31, 1997 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 1996

NET SALES. Net sales for fiscal 1997 increased by $11.1 million, or 25.4%,
to $54.7 million from $43.6 million for fiscal 1996. This increase in sales was
mainly attributable to the introduction of the Laser Challenge, Metal Molder and
the licensed Goosebumps product lines which accounted for approximately 62% of
net sales in fiscal 1997, partially offset by a decrease in net sales of the
Creepy Crawlers and Dollymaker product lines.

Net sales of the U.S. Domestic operation increased 43.9% to $38.8 million,
or 70.9% of total net sales, in fiscal 1997, from $27.0 million, or 61.8% of
total net sales, in fiscal 1996. Net sales of the FOB Hong Kong Operation
decreased 4.7% to $15.9 million, or 29.1%, of total net sales in fiscal 1997
from $16.7 million, or 38.2% of total net sales, in fiscal 1996. The relatively
late introduction of the new products in the FOB Hong Kong Operation resulted in
their having less impact on FOB Hong Kong Operation net sales which are
generally ordered and shipped earlier than in the U.S. Domestic Operation.

GROSS PROFIT. Gross profit for fiscal 1997 increased by $7.8 million, or
60.1%, to $20.8 million, or 38.1% of net sales, from $13.0 million, or 29.8%, of
net sales for fiscal 1996. The increase in gross profit was mainly due to the
increased net sales and an increase in gross profit as a percentage of net
sales. The increase in gross profit as a percentage of net sales was mainly
attributable to an increase of approximately 14.1% as a percentage of net sales
in the U.S. Domestic Operation partially offset by a decrease of 2.5% as a
percentage of net sales in the FOB Hong Kong Operation. The increase in the U.S.
Domestic Operation was due to improved product margins related to lower
manufacturing costs and customer allowances as percentages of net sales. The
reduction in manufacturing costs resulted mainly from the Company's decision to
close its remaining U.S. manufacturing operations and shift production to a
lower cost manufacturer with a factory in China. The decrease in customer
allowances was mainly due to better inventory controls, an improved retail
environment and a stronger product line which resulted in the Company having to
discount fewer of its products and to provide lower sales allowances to
retailers.

The decline for the FOB Hong Kong Operation was primarily due to the
lowering of prices on products sold to the United Kingdom and France which had
been increased in fiscal 1996 to compensate for an increase in promotional
programs in those countries. These programs were discontinued for fiscal 1997 on
new product lines.

SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
for fiscal 1997 decreased by $6.6 million, or 26.8%, to $18.0 million, or 33.0%
of net sales, from $24.6 million, or 56.5% of net sales, for fiscal 1996. The
decrease in selling and administrative expenses was mainly attributable to
decreases in advertising and public relations expenses of $5.2 million due to
improved expense controls, a decrease of $0.9 million in the FOB Hong Kong
Operation and bad debt expense of $0.9 million due to a provision

15
<PAGE>
that was set up in fiscal 1996 for goods delivered and later returned by an
international customer, partially offset by an increase in royalty expenses of
$0.5 million. The increase in royalty expenses resulted from increased sales of
licensed products including the new Goosebumps product line.

OPERATING INCOME (LOSS). As a result of the foregoing, operating income for
fiscal 1997 increased by $14.4 million to $2.8 million from a loss of $11.6
million for fiscal 1996.

NET INTEREST EXPENSE. Net interest expense for fiscal 1997 decreased by
$0.3 million, or 46.6%, to $0.4 million from $0.7 million for fiscal 1996. The
decrease in net interest expense was mainly due to lower interest costs
reflecting a decrease in average borrowings under the Company's credit facility
and a decrease in average borrowing rates of approximately 0.6%.

INCOME (LOSS) BEFORE TAXES. Income (loss) before taxes for fiscal 1997,
increased by $14.7 million to income of $2.7 million from a loss of $12.1
million for fiscal 1996.

INCOME TAX BENEFIT. Income tax benefit for fiscal 1997 decreased by
approximately $1.6 million, or 69.8%, to a benefit of approximately $0.7 million
from a benefit of approximately $2.3 million for fiscal 1996. The benefit in
fiscal 1996 was mainly due to the utilization of a net operating loss carryback,
which was available to partially offset the pre-tax loss on the U.S. Domestic
Operation. The benefit in fiscal 1997 was mainly due to the reduction in a
valuation allowance that was established in fiscal 1996.

Because of the Company's losses in fiscal 1995 and 1996 from U.S. Domestic
Operations, a valuation allowance for the deferred income tax assets was
provided due to the uncertainty as to future realization. During the year ended
March 31, 1997, the valuation allowance was reduced to reflect a net deferred
tax asset equal to the anticipated tax benefit of the temporary differences
between tax bases of assets and liabilities and their reported amounts in the
financial statements which are expected to be realized within one year. The
temporary differences result from costs required to be capitalized for tax
purposes by the U.S. Internal Revenue Code, and certain items accrued for
financial reporting purposes in the year incurred but not deductible for tax
purposes until paid.

NET INCOME (LOSS). As a result of the foregoing, net income for fiscal 1997
increased by $13.2 million, or 134.1%, to net income of $3.3 million from a net
loss of $9.8 million for fiscal 1996.

LIQUIDITY AND CAPITAL RESOURCES

The Company historically has funded its operations and capital requirements
from cash generated from operations and from financing activities. During fiscal
1998, cash and cash equivalents increased $20.9 million to $21.5 million. The
Company received $8.1 million from operating activities and $13.9 million from
financing activities, including $22.9 million from the Company's initial public
offering, which included the exercise of the underwriters' over-allotment option
in full. The Company used cash of $1.1 million for investing activities, mainly
for the acquisition of property and equipment. The Company expects approximately
$2.5 million in capital expenditures in fiscal 1999.

Approximately $13.0 million of the proceeds from the initial public offering
were used by the Company to repay its existing Agreement with the Bank. As a
result, the Company's outstanding indebtedness under the Agreement, which was
$8.4 million at March 31, 1997, was eliminated. Approximately $7.0 million of
the proceeds were used by the Company to make partial repayment on outstanding
trade payables to the Company's current and former purchasing agents Tai Nam and
Concentric, respectively. Tai Nam and Concentric are owned by David Chu,
Chairman and a principal stockholder of Toymax. Outstanding payables to these
companies was reduced to $3.8 million at March 31, 1998 from $10.8 million at
March 31, 1997.

The remaining initial public offering proceeds will be used by the Company
and its operating subsidiaries for general working capital purposes, which may
include strategic acquisitions. The Company intends to pursue acquisitions of
toy companies and product lines which either complement or enhance the

16
<PAGE>
Company's current products or allow the Company to expand into new market
segments. While the Company engages from time to time in discussions with
respect to potential investments or acquisitions, the Company presently has no
plans, commitments or agreements with respect to any such acquisitions. Pending
application of the balance of the net proceeds described herein, such amounts
have been invested in short-term, investment-grade, interest-bearing securities.

During fiscal 1998, of the Company's $8.1 million provided by operating
activities, net income contributed $11.3 million partially offset by net changes
in operating assets and liabilities of $3.2 million. This amount includes an
increase in accounts receivable and amounts due from factor of $3.4 million,
primarily due to higher sales levels and a decrease in amounts due to affiliates
of $7.0 million from the utilization of a portion of the initial public offering
proceeds. These uses of the Company's cash were in large part offset by an $8.0
million increase in accounts payable and accruals primarily due to an increase
in accrued rebates and allowances resulting from increases in the percentage of
discounts and allowances given to the Company's largest customers as well as
higher sales levels. Non-cash items, which included $1.2 million in depreciation
and amortization more than offset by changes in deferred income taxes of $2.1
million and $0.8 million in other non-cash items decreased cash provided by
operating activities by approximately $0.1 million.

The Agreement with the Bank is subdivided into three sub-facilities: (i) a
$25.0 million Factoring-Cum-Financing Facility ("FINANCING FACILITY") for Toymax
NY utilizing a borrowing base formula of 70% of the factored accounts
receivable; (ii) a $5.0 million Inventory Financing Facility ("SEASONAL
FACILITY") for Toymax NY utilizing a base of 50% of current inventory; and (iii)
a $1.0 million Trade Facility ("TRADE FACILITY") for Toymax HK and its
affiliate, Tai Nam. At March 31, 1998, the outstanding balance under the
Agreement was $0 as compared to $8.4 million at March 31, 1997. The Company's
indebtedness under the Agreement was paid down using proceeds from the initial
public offering. The maximum borrowing limit under the Agreement is $26.0
million. The Agreement is terminable by the Bank at any time at its sole
discretion, at which time the Company's obligations to the Bank would become due
and payable. Borrowings under the Financing and Seasonal facilities bear
interest at U.S. prime rate plus 1/2% per annum.

The Company expects to fund its near-term cash requirements from a
combination of existing cash balances, cash flows from operations and borrowings
under its Agreement with the Bank. The Company expects to finance its
longer-term growth primarily with cash flows from operations and with externally
generated funds which will likely include borrowings under its existing or
future credit facilities. There can be no assurance that sufficient cash flows
from operations will materialize or that financing under a credit facility will
be available in amounts, or at rates, or on terms and conditions acceptable to
the Company. In such event, additional funding would be required.

In connection with any future cash needs or acquisition opportunities, the
Company may incur additional debt or issue additional equity or debt securities
depending on market conditions and other factors.

EXCHANGE RATES

While the Company's product purchases are transacted in U.S. dollars, most
transactions among the suppliers and subcontractors of Jauntiway are effected in
Hong Kong dollars. Accordingly, fluctuations in Hong Kong monetary rates may
have an impact on the Company's cost of goods. However, since 1983, the value of
the Hong Kong dollar has been tied to the value of the United States dollar,
eliminating fluctuations between the two currencies. Despite the announcements
by the Hong Kong Government that it is determined to maintain such fixed
exchange rate, there can be no assurance that the Hong Kong dollar will continue
to be tied to the United States dollar in the near future or longer term.
Furthermore, appreciation of Chinese currency values relative to the Hong Kong
dollar could increase the cost to the Company of the products manufactured in
China, and thereby have a negative impact on the Company.

17
<PAGE>
YEAR 2000 COMPLIANCE

The Company is in the process of evaluating and updating its internal
Management Information Systems to ensure that it will have the capability to
manage and manipulate data in the year 2000 and beyond. The Company has
completed an initial review of its computer systems and has developed a plan to
achieve proper processing of transactions in the year 2000 and beyond by the end
of the first quarter of fiscal 2000. The Company's costs incurred to date to
implement the plan have not been material and are not expected to be material to
operating results in the future. However, other participants in the Company's
industry, including customers and suppliers, may also experience functional or
data abnormalities. Any significant disruption of the Company's ability to
communicate electronically with its customers and suppliers could negatively
impact the Company's business, financial condition and results of operations. To
that end, steps have been taken to communicate with manufacturers, lending
institutions, trading partners, vendors and key customers to ensure that their
respective software complies with year 2000 requirements.

NEW ACCOUNTING STANDARDS

NEW ACCOUNTING STANDARDS NOT YET ADOPTED

In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. Results of operations and financial position will be
unaffected by implementation of these new standards.

Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING
COMPREHENSIVE INCOME, establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.

SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, which supersedes SFAS No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A
BUSINESS ENTERPRISE, establishes standards for the way that public enterprises
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.

Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. These standards are not expected to materially
impact the Company's disclosures when they are adopted.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements and Financial Statement Exhibits are
listed in Item 14 and are included herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

18
<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required under this Item is incorporated by reference herein
from the Company's 1998 Notice of Annual Meeting of Stockholders and Proxy
Statement to be filed with the Securities and Exchange Commission within 120
days after March 31, 1998.

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

19
<PAGE>
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

INDEX TO FINANCIAL STATEMENTS

1. FINANCIAL STATEMENTS

Report of independent certified public accountants F-1

Consolidated financial statements:

Balance sheets as of March 31, 1997 and 1998 F-2

Statements of operations for the three years in the period ended March 31, 1998 F-3

Statements of stockholders' equity (deficit) for the three years in the period ended March F-4
31, 1998

Statements of cash flows for the three years in the period ended March 31, 1998 F-5

Notes to consolidated financial statements F-6 to F-22

2. FINANCIAL STATEMENT SCHEDULES

Report of independent certified public accountants on the Financial Statement Schedule S-1

Schedule II -- Valuation and Qualifying Accounts for the three years in the period ended S-2
March 31, 1998
</TABLE>

All other schedules have been omitted because the information to be set
forth therein is not applicable or is shown in the financial statements or the
notes thereto.

20
<PAGE>
3. EXHIBITS

The following Exhibits are filed herewith and made a part hereof:

<TABLE>
<C> <S>
*3.1(a) Certificate of Incorporation of the Registrant.

*3.1(b) Form of Amended and Restated Certificate of Incorporation of the Registrant.

*3.2 By-Laws of the Registrant.

*4.1 Specimen Stock Certificate for shares of Common Stock.

*4.2 Form of Representative's Warrant Agreement including Form of Redeemable Warrant
Certificate.

*10.1 Form of 1997 Stock Option Plan.

*10.2 Form of Executive Bonus Plan.

*10.3(a) Agreement of lease of the Company's offices at 125 E. Bethpage Road, Plainview,
New York.

10.3(b) Amendment to Lease of the Company's offices at 125 E. Bethpage Road, Plainview,
New York.

*10.4 Lease of the Company's showroom at 200 Fifth Avenue, New York, New York, as
amended.

*10.5 Tenancy Agreement between David Chu Ki Kwan, Frances Leung Shuk Kuen and Toymax
(H.K.) Limited for the Company's showroom at Concordia Plaza, No. 1 Science Museum
Road, Tsimshatsui East, Kowloon.

*10.6 Agency Agreement dated April 1, 1997, between the Company and Tai Nam.

*10.7 Credit Facility Agreement dated June 12, 1997 between the Company and State
Street.

*10.8 Security Agreement with State Street dated June 17, 1997.

*10.9 Factoring Agreement dated June 4, 1991 between the Company and Congress Talcott
Corporation, as amended.

*10.11 Form of Employment Agreement with Steven Lebensfeld.

*10.12 Form of Employment Agreement with Harvey Goldberg.

*10.13 Form of Employment Agreement with Kenneth Price.

*10.14 Form of Employment Agreement with Carmine Russo.

10.15 Form of Employment Agreement with Andrew Stein.

10.16 Form of Employment Agreement with William A. Johnson, Jr.

*10.17 Form of Manufacturing Agreement between the Company, Tai Nam and Jauntiway.

*10.18 Form of Amendment to Agency Agreement between the Company and Tai Nam.

*21.1 List of Subsidiaries of the Registrant.

27 Financial Data Schedule
</TABLE>

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

* Incorporated by reference to the Registrant's Registration Statement on Form
S-1 (No. 333-33409).

21
<PAGE>
SIGNATURES

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

TOYMAX INTERNATIONAL, INC.
(REGISTRANT)

BY: /S/ STEVEN A. LEBENSFELD
-----------------------------------------
Steven A. Lebensfeld
PRESIDENT

Dated: June 26, 1998

Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.

SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------

/s/ DAVID KI KWAN CHU Chairman
- ------------------------------ June 26, 1998
David Ki Kwan Chu

/s/ STEVEN A. LEBENSFELD President (Principal
- ------------------------------ Executive Officer) and June 26, 1998
Steven A. Lebensfeld Director

/s/ HARVEY GOLDBERG Executive Vice President
- ------------------------------ and Director June 26, 1998
Harvey Goldberg

Chief Financial Officer and
/s/ WILLIAM A. JOHNSON, JR. Treasurer (Principal
- ------------------------------ Financial and Accounting June 26, 1998
William A. Johnson, Jr. Officer)

/s/ OREN ASHER Director
- ------------------------------ June 26, 1998
Oren Asher

/s/ JOEL M. HANDEL Director
- ------------------------------ June 26, 1998
Joel M. Handel

22
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors and Stockholders of
Toymax International, Inc.

We have audited the accompanying consolidated balance sheets of Toymax
International, Inc. and Subsidiaries as of March 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended March 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Toymax
International, Inc. and Subsidiaries at March 31, 1997 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 1998, in conformity with generally accepted accounting
principles.

BDO Seidman, LLP
New York, New York
June 3, 1998

F-1
<PAGE>
TOYMAX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 31,
----------------------------
<S> <C> <C>
1997 1998
------------- -------------
ASSETS
CURRENT:
Cash, includes restricted cash of $110,000 and $320,809.......................... $ 564,659 $ 21,500,588
Due from Factor.................................................................. 14,311,369 19,251,619
Accounts receivable, less allowance for possible losses of $739,219 and
$152,116....................................................................... 2,226,845 523,340
Due from affiliates.............................................................. 4,367 --
Due from officers................................................................ 171,689 --
Inventories...................................................................... 4,797,452 5,474,301
Prepaid expenses and other current assets........................................ 795,869 1,620,124
Income tax refunds receivable.................................................... -- 226,389
Deferred income taxes............................................................ 1,007,350 2,240,098
------------- -------------
TOTAL CURRENT ASSETS......................................................... 23,879,600 50,836,459
PROPERTY AND EQUIPMENT, NET........................................................ 2,190,861 1,811,731
DEFERRED INCOME TAXES.............................................................. 57,228 886,461
OTHER ASSETS....................................................................... 150,153 296,940
------------- -------------
$ 26,277,842 $ 53,831,591
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Bank credit facility............................................................. $ 8,447,087 $ --
Accounts payable................................................................. 1,648,405 2,016,548
Accrued expenses................................................................. 2,919,735 6,223,513
Accrued rebates and allowances................................................... 1,425,759 5,792,085
Due to affiliates................................................................ 10,756,471 3,781,974
Due to officer................................................................... 504,032 --
Current portion of long-term obligations......................................... 37,714 30,084
Income taxes payable............................................................. 275,145 1,237,332
------------- -------------
TOTAL CURRENT LIABILITIES.................................................... 26,014,348 19,081,536
LONG-TERM OBLIGATIONS.............................................................. 8,300 47,162
------------- -------------
TOTAL LIABILITIES............................................................ 26,022,648 19,128,698
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; 5,000,000 shares authorized; none
outstanding.................................................................... -- --
Common stock, par value $.01 per share; 50,000,000 shares authorized; 7,500,000
and 10,605,000 shares issued and outstanding................................... 57,692 106,050
Additional paid-in capital....................................................... -- 23,059,355
Retained earnings................................................................ 212,654 11,552,640
Cumulative foreign currency translation adjustment............................... (15,152) (15,152)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY................................................... 255,194 34,702,893
------------- -------------
$ 26,277,842 $ 53,831,591
------------- -------------
------------- -------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-2
<PAGE>
TOYMAX INTERNATIONAL, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
-------------- ------------- -------------
NET SALES.......................................................... $ 43,621,599 $ 54,682,635 $ 99,329,134
-------------- ------------- -------------
COST AND EXPENSES:
Cost of goods sold............................................... 30,600,599 33,836,513 54,970,782
Selling and administrative....................................... 24,640,633 18,026,004 28,166,366
-------------- ------------- -------------
55,241,232 51,862,517 83,137,148
-------------- ------------- -------------
OPERATING INCOME (LOSS)...................................... (11,619,633) 2,820,118 16,191,986
-------------- ------------- -------------
OTHER INCOME (EXPENSES):
Other income, net................................................ 685,427 726,037 283,089
Interest income.................................................. 31,577 89,556 449,978
Interest expense................................................. (769,465) (483,380) (661,524)
Finance charges.................................................. (385,721) (498,137) (832,093)
-------------- ------------- -------------
(438,182) (165,924) (760,550)
-------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) AND MINORITY
INTEREST IN NET LOSS OF SUBSIDIARY............................... (12,057,815) 2,654,194 15,431,436
Income tax expense (benefit)....................................... (2,253,732) (681,200) 4,133,225
-------------- ------------- -------------
INCOME (LOSS) BEFORE MINORITY INTEREST IN NET LOSS OF SUBSIDIARY... (9,804,083) 3,335,394 11,298,211
Minority interest in net loss of subsidiary........................ -- 12,136 41,775
-------------- ------------- -------------
NET INCOME (LOSS).................................................. $ (9,804,083) $ 3,347,530 $ 11,339,986
-------------- ------------- -------------
-------------- ------------- -------------
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE........................ $ (1.31) $ 0.45 $ 1.28
-------------- ------------- -------------
-------------- ------------- -------------
SHARES USED IN COMPUTING BASIC AND DILUTED EARNINGS PER SHARE...... 7,500,000 7,500,000 8,847,781
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>
TOYMAX INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON STOCK ADDITIONAL EARNINGS CUMULATIVE STOCKHOLDERS'
THREE YEARS ENDED ------------------------ PAID-IN (ACCUMULATED TRANSLATION EQUITY
MARCH 31, 1998 SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT (DEFICIT)
- ----------------------------------- ------------ ---------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
April 1, 1995.................... 7,500,000 $ 57,692 $ -- $ 6,669,207 $ (15,152) $ 6,711,747
Net loss......................... -- -- -- (9,804,083) -- (9,804,083)
------------ ---------- ------------- ------------- ------------- -------------
BALANCE,
March 31, 1996................... 7,500,000 57,692 -- (3,134,876) (15,152) (3,092,336)
Net income....................... -- -- -- 3,347,530 -- 3,347,530
------------ ---------- ------------- ------------- ------------- -------------
BALANCE,
March 31, 1997................... 7,500,000 57,692 -- 212,654 (15,152) 255,194
Sale of common stock in an
initial public offering........ 3,105,000 48,358 22,872,355 -- -- 22,920,713
Net income....................... -- -- -- 11,339,986 -- 11,339,986
Compensation for shares sold to
employees below fair value..... -- -- 187,000 -- -- 187,000
------------ ---------- ------------- ------------- ------------- -------------
BALANCE,
March 31, 1998................... 10,605,000 $ 106,050 $ 23,059,355 $ 11,552,640 $ (15,152) $ 34,702,893
------------ ---------- ------------- ------------- ------------- -------------
------------ ---------- ------------- ------------- ------------- -------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
TOYMAX INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................ $(9,804,083) $ 3,347,530 $11,339,986
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization.......................................... 1,825,502 1,462,531 1,244,806
Bad debts.............................................................. 880,409 16,312 132,292
Non-cash compensation.................................................. -- -- 187,000
Loss on disposal and write-off of property and equipment............... 2,685 63,200 485,210
Changes in deferred income taxes....................................... 1,650,303 (1,224,350) (2,061,981)
Minority interest in net loss of subsidiary............................ -- (12,136) (41,775)
Changes in operating assets and liabilities:
Due from Factor and accounts receivable.............................. 79,005 (10,420,732) (3,369,037)
Due from affiliates.................................................. 1,056,117 (803) 4,367
Inventories.......................................................... 2,182,705 1,038,353 (676,849)
Prepaid expenses and other assets.................................... 1,048,635 562,162 (929,267)
Income tax refunds receivable........................................ (3,807,350) 4,199,999 (226,389)
Accounts payable and accruals........................................ 1,473,396 (3,334,494) 8,038,247
Due to affiliates.................................................... 4,021,808 27,976 (6,974,497)
Income taxes payable................................................. 99,049 (458,276) 962,187
---------- ----------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................ 708,181 (4,732,728) 8,114,300
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment.................................... (1,055,182) (703,697) (1,274,763)
Proceeds from disposals of property and equipment........................ 367,838 10,318 34,608
Advances to officers..................................................... (22,828) (114,919) (38,901)
Repayment from officers.................................................. 957 19,061 210,590
---------- ----------- ----------
NET CASH USED IN INVESTING ACTIVITIES.............................. (709,215) (789,237) (1,068,466)
---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in bank credit facility.............................. 1,525,772 4,434,292 (8,447,087)
Repayments of long-term obligations...................................... (87,614) (72,668) (79,499)
Payment of dividends payable............................................. (700,000) -- --
Proceeds from issuance of common stock................................... -- -- 22,920,713
Repayments of loan from officers......................................... (962,997) (387,401) (504,032)
Loans from officers...................................................... 925,453 842,967 --
---------- ----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......................... 700,614 4,817,190 13,890,095
---------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... 699,580 (704,775) 20,935,929
CASH AND CASH EQUIVALENTS, beginning of year............................... 569,854 1,269,434 564,659
---------- ----------- ----------
CASH AND CASH EQUIVALENTS, end of year..................................... $1,269,434 $ 564,659 $21,500,588
---------- ----------- ----------
---------- ----------- ----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................................ $ 723,869 $ 440,267 $ 656,469
---------- ----------- ----------
---------- ----------- ----------
Income taxes paid........................................................ $ 853,389 $ 552,057 $5,482,844
---------- ----------- ----------
---------- ----------- ----------
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
Capital lease obligation incurred........................................ $ -- $ -- $ 95,240
---------- ----------- ----------
---------- ----------- ----------
Offset of accrued officer's salary net of taxes, applied against advances
to officers............................................................ $ -- $ 89,000 $ --
---------- ----------- ----------
---------- ----------- ----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
TOYMAX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 1996, 1997 AND 1998

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REORGANIZATION

Toymax International, Inc., a Delaware corporation ("TOYMAX" and the
"COMPANY") was organized in Delaware on August 6, 1997 to acquire and continue
the various businesses conducted by Toymax Inc., a New York corporation ("TOYMAX
NY"), Toymax (H.K.) Limited, a private limited company organized under the laws
of Hong Kong ("TOYMAX HK"), Toymax (Bermuda) Limited, a company organized under
the laws of Bermuda ("TOYMAX BERMUDA"), Toymax (Canada) Limited, a corporation
organized under the laws of the Province of Ontario ("TOYMAX CANADA") and Toymax
(U.K.) Limited, a company organized under the laws of England and Wales ("TOYMAX
UK") (collectively, the "TOYMAX GROUP"). Toymax HK and Toymax NY, historically
the Company's principal operating entities, were each formed in 1990. Toymax
Canada was formed in August 1997 and Toymax Bermuda was formed in September
1997. Toymax NY owns a 75% interest in Craft Expressions, Inc. ("CRAFT"), a New
York corporation formed in November 1996.

In conjunction with its initial public offering on October 20, 1997, the
Company completed the reorganization whereby Toymax HK contributed all of the
outstanding capital stock of its wholly-owned subsidiaries, Toymax NY and Toymax
UK, to the Company, and the stockholders of Toymax HK exchanged ordinary shares
and Preferred Stock for Common Stock of the Company (the "REORGANIZATION"). (See
Note 8)

Following the close of the initial public offering, the Company had
anticipated that Toymax Bermuda would conduct the business previously conducted
through Toymax HK. However, since political circumstances in Hong Kong appear to
be stable following the takeover by the People's Republic of China (the "PRC"),
the Company has decided to delay any such transition that it may make and
further consider whether there are any economic benefits from making this
change.

The Reorganization has been accounted for as a reorganization of entities
under common control in a manner similar to a pooling of interests. The
financial statements present the results of the Company and its subsidiaries as
if the Company had been combined for all periods presented. (See Note 8)

The equity accounts of the Company have been retroactively adjusted for the
Reorganization and the 16.67 to 1 stock split by the Company. (See Note 8)

BUSINESS

Toymax HK and Toymax NY are involved in the designing, marketing and
distributing of toy products. Craft is involved in the designing, producing,
marketing and distributing of arts and craft products. Craft was substantially
inactive during the years ended March 31, 1997 and 1998. Toymax UK, Toymax
Canada and Toymax Bermuda have been inactive since they were established.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its subsidiaries after elimination of intercompany accounts and
transactions. The consolidated financial statements are presented in U.S.
dollars.

F-6
<PAGE>
TOYMAX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1996, 1997 AND 1998

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS

Cash and cash equivalents includes investments with original maturities of
three months or less at the date of acquisition. Such investments consisting
primarily of investments in commercial paper are stated at cost, which
approximates market value, and amounted to $0 and $3,000,000 at March 31, 1997
and 1998, respectively. In addition, at March 31, 1998 approximately $18 million
was invested in high interest bearing savings and money market funds.

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Inventories consist principally of purchased finished goods. Prior to
1997, the Company maintained a small quantity of raw material inventory which
was used by a subcontractor to manufacture some of the Company's finished goods.

PROPERTY AND EQUIPMENT

Property and equipment are stated at original cost. Depreciation of
machinery, equipment, molds and furniture and fixtures is computed by the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized by the straight-line method over the shorter of their
economic lives or the terms of the leases.

TRANSLATION OF FOREIGN CURRENCY FINANCIAL STATEMENTS

Assets and liabilities of foreign subsidiaries are translated at year end
rates of exchange and revenues and expenses are translated at the average rates
of exchange for the year. Gains and losses resulting from translation are
accumulated in a separate component of stockholders' equity. Gains and losses
resulting from foreign currency transactions (transactions denominated in a
currency other than the functional currency) are included in net income or loss.

INCOME TAXES

Deferred income taxes are recognized based on the differences between the
tax bases of assets and liabilities and their reported amounts in the financial
statements which will result in taxable or deductible amounts in future years.
Further, the effects of enacted tax law or rate changes are included in income
as part of deferred tax expenses or benefits in the period that includes the
enactment date. A valuation allowance is recognized if it is more likely than
not that some portion of, or all of, a deferred tax asset will not be realized.

REVENUE RECOGNITION

Sales are recorded upon shipment, free on board from the point of shipment.
The Company provides, as a reduction of sales, for anticipated returns and
allowances on defective merchandise based on known claims and an estimate of
additional returns.

F-7
<PAGE>
TOYMAX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1996, 1997 AND 1998

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING

Advertising costs are charged to operations as incurred. Advertising
expenses for the years ended March 31, 1996, 1997 and 1998 were $10,837,349,
$6,341,591 and $10,742,989, respectively.

ROYALTIES

Minimum guaranteed royalties, as well as royalties in excess of minimum
guarantees, are expensed based on the sales of related products. The
realizability of minimum guaranteed royalties paid is evaluated by the Company
based on the projected sales of the related products.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses are charged to operations as incurred.
Research and development expenses for the years ended March 31, 1996, 1997 and
1998 were $2,029,095, $1,845,468 and $2,850,318, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of certain financial instruments, including cash, due
from Factor, accounts receivable and accounts payable, approximate fair value as
of March 31, 1997 and March 31, 1998 because of the relatively short-term
maturity of these instruments. The carrying value of the bank credit facility
and long-term debt, including the current portion, approximates fair value as of
March 31, 1997 based upon the borrowing rates currently available to the Company
for bank loans with similar terms and average maturities. Fair value of the
amounts due to or from affiliates cannot be readily determined because of the
nature of the terms.

ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets, such as intangible assets and property and equipment, are
evaluated for impairment when events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to fair value.

EARNINGS (LOSS) PER SHARE

During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS NO. 128"), "EARNINGS PER SHARE,"
which provides for the calculation of "BASIC" and "DILUTED" earnings per share.
The statement is effective for financial statements issued for periods ending
after December 15, 1997. Basic earnings per share includes no dilution and is
computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects, in periods in which they have a dilutive effect, the effect of
common shares issuable upon exercise of stock options and warrants. As required
by this statement, all periods presented have been restated to comply with the
provisions of SFAS No. 128.

F-8
<PAGE>
TOYMAX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1996, 1997 AND 1998

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Options and warrants to purchase an aggregate of 727,250 shares of common
stock at exercise prices ranging from $8.50 to $10.20 per share were outstanding
during 1998, but are not included in the computation of diluted earnings per
share because they are anti-dilutive. (See Note 9)

ACCOUNTING FOR STOCK BASED COMPENSATION

The Company accounts for its stock option awards under the intrinsic value
based method of accounting prescribed by Accounting Principles Board Opinion No.
25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES." Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted market price of
the stock at the grant date or other measurement date over the amount an
employee must pay to acquire the stock. The Company makes pro forma disclosures
of the net income and earnings per share as if the fair value based method of
accounting had been applied as required by statement of Financial Accounting
Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION."

USE OF ESTIMATES

The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Among the more significant estimates included in these
consolidated financial statements are the estimated allowance for doubtful
accounts receivable, allowance for returns, and the deferred tax asset valuation
allowance. Actual results could differ from those and other estimates.

CONCENTRATION OF CREDIT RISKS

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash balances deposited in
financial institutions which exceed FDIC insurance limits, due from Factor and
accounts receivable not sold to a factor.

The Company established an allowance for accounts receivable based upon
factors surrounding the credit risk of specific customers' historical trends and
other information. See Note 11 for information relating to the concentration of
sales to major customers.

NEW ACCOUNTING STANDARDS NOT YET ADOPTED

In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. Results of operations and financial position will be
unaffected by implementation of these new standards.

SFAS No. 130, "REPORTING COMPREHENSIVE INCOME," establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.

F-9
<PAGE>
TOYMAX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1996, 1997 AND 1998

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION," which supersedes SFAS No. 14, "FINANCIAL REPORTING FOR SEGMENTS OF
A BUSINESS ENTERPRISE," establishes standards for the way that public
enterprises report information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas and major customers. SFAS No.
131 defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.

2. DUE FROM FACTOR AND ACCOUNTS RECEIVABLE

In the normal course of business, Toymax NY sells substantially all of its
accounts receivable, without recourse, to Congress Talcott Corporation, (the
"FACTOR"), which is a subsidiary of a major financial institution, and receives
payment from the Factor when the accounts are collected.

The amount due from Factor is pledged as security to State Street Bank and
Trust Company, Hong Kong Branch (the "BANK") (see Note 4). Pursuant to an
agreement among Toymax NY, the Bank and the Factor, Toymax NY does not receive
any advances from the Factor.

Accounts receivable consist mainly of sales not factored and amounts charged
back by the Factor as a result of disputes primarily relating to unearned
discounts and damaged shipments, net of reserves for possible losses which
Toymax NY is attempting to collect.

3. PROPERTY AND EQUIPMENT

Property and equipment consists of:

<TABLE>
<CAPTION>
MARCH 31,
--------------------------
<S> <C> <C> <C>
LIFE IN
YEARS 1997 1998
------------ ------------ ------------
Machinery, equipment and molds.......................................... 2-5 $ 6,215,874 $ 6,966,091
Furniture and fixtures.................................................. 5-10 310,480 327,920
Leasehold improvements.................................................. 2-8 493,211 311,103
------------ ------------
7,019,565 7,605,114
Less: Accumulated depreciation and amortization......................... 4,828,704 5,793,383
------------ ------------
$ 2,190,861 $ 1,811,731
------------ ------------
------------ ------------
</TABLE>

Depreciation and amortization charged to operations were $1,825,502,
$1,462,531 and $1,244,806 in 1996, 1997 and 1998, respectively.

The Company changed the estimated useful life of certain molds to conform to
anticipated usage as of April 1, 1996. The change in estimate resulted in
additional operating income of $121,801 for the year ended March 31, 1997. In
addition, the Company wrote off molds, which had no continuing value, with a

F-10
<PAGE>
TOYMAX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1996, 1997 AND 1998

3. PROPERTY AND EQUIPMENT (CONTINUED)
net book value of approximately $48,000 and $481,000 in the years ended March
31, 1997 and 1998, respectively.

4. BANK CREDIT FACILITY

Toymax HK, Toymax NY and Tai Nam Industrial Company Limited (see Note 5) are
parties to a credit facility agreement (the "AGREEMENT") with the Bank. The
Agreement, as amended in July 1997, provides for a credit facility not to exceed
$26 million at any one time.

The amounts available within this total include:

a. A revolving credit facility (the "FINANCING FACILITY") for use by Toymax NY
in the amount of the lesser of 70% of factored accounts receivable or $25
million. The amount due from Factor is pledged as security to the Bank (see
Note 2).

b. A seasonal inventory credit facility (the "SEASONAL FACILITY") of $5
million, whereby Toymax NY can borrow up to 50% of the current season's
inventory. Toymax NY's inventory is pledged as security to the Bank and the
Factor. The total borrowings under the Financing Facility and the Seasonal
Facility cannot exceed $25 million.

c. A trade facility (the "TRADE FACILITY") for use by Tai Nam Industrial
Company Limited, and/or Toymax HK in the amount of $1 million for letters of
credit and export bills.

The Financing Facility is jointly and severally guaranteed by the Company,
and is also guaranteed by Tai Nam Industrial Company Limited, Jauntiway
Investment Limited, Concentric Toys Limited, and Toymax HK (see Note 5) and
requires a cash reserve of 12% of collection proceeds net of chargebacks, which
is not to exceed $6 million. As of March 31, 1998, there was no cash reserve
requirement. The Trade Facility is guaranteed by Toymax HK, Tai Nam Industrial
Company Limited and by a stockholder of the Company and of Tai Nam Industrial
Company Limited. No fees are charged to the Company for the guarantees.

Borrowings under the Agreement are due on demand and bear interest at the
Bank's United States prime rate (8.5% at March 31, 1998) plus 1/2% for the
Financing Facility and the Seasonal Facility and at the Bank's United States
prime rate plus 3/4% for the Trade Facility. At March 31, 1997 and 1998, the
Company had borrowings of $8,447,087 and $0, respectively. At March 31, 1998
additional borrowing availability was approximately $13.5 million.

5. DUE TO/FROM AFFILIATES

The majority stockholder of the Company owns significant interests in
several other companies, including Tai Nam Industrial Company Limited ("TAI
NAM"), Concentric Toys Limited ("CONCENTRIC"), DHS Holdings, Sportmax Ltd. and
Jauntiway Investment Limited ("JAUNTIWAY"). A portion of Toymax NY's products
were assembled by Hot Items Specialties Inc. ("HOT ITEMS"), a company owned by a
family member of one of the Company's stockholders. Factory space was shared
with Hot Items by Toymax NY. In July 1996, this arrangement was terminated.
Since that time, Toymax NY has purchased the majority of its merchandise
directly from either Concentric or Tai Nam. The majority of the merchandise is
manufactured in China by Jauntiway.

F-11
<PAGE>
TOYMAX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1996, 1997 AND 1998

5. DUE TO/FROM AFFILIATES (CONTINUED)
The Company has significant transactions with Tai Nam. These transactions
include purchases of the majority of the Company's and its subsidiary's
merchandise and certain sales of the subsidiary's products. This affiliate has
occasionally provided extended payment terms for these purchases.

In January 1996, Toymax NY entered into an agency agreement with Concentric.
Concentric acted as a purchasing agent of Toymax NY and received an agency fee
of 7% on the products purchased by them. In April 1997, Toymax HK and Toymax NY
entered into a new agency agreement with Tai Nam. The new agreement provides for
an agency fee of 7% on products purchased. The agency agreement also requires
Tai Nam to provide all administrative services to Toymax HK. As a result of the
new agreement, Tai Nam ceased charging Toymax HK for reimbursement of certain
administrative and office expenses.

On June 1, 1996, Toymax HK entered into an agency agreement with Tai Nam
under which Toymax HK provided certain administrative services to Tai Nam in
exchange for a fee equal to 7% of the gross invoice value of purchases from Tai
Nam by a distributor. On January 1, 1997, this agreement was terminated. During
the year ended March 31, 1997, Toymax HK received fees from Tai Nam of
approximately $136,534 in connection with this agreement.

In April 1997, Toymax NY entered into an agency agreement with Tai Nam under
which Toymax NY would act as Purchasing Agent for Tai Nam in the United States
in exchange for a fee equal to 5% of such purchases in 1997 and 1998.

In September 1997, the Company entered into a manufacturing agreement with
Tai Nam and Jauntiway. This agreement contains, among other things, that the
Company shall not be required to provide a letter of credit or other security to
Tai Nam or Jauntiway in connection with its purchase orders.

Due from officers at March 31, 1997 represented cash advances to two of the
Company's Officers.

Due to officer at March 31, 1997 represented amounts advanced to the Company
by the Company's majority stockholder. The advances bore no interest and were
due on demand.

The following is a summary of balances and transactions with affiliated
companies:

<TABLE>
<CAPTION>
BALANCES
MARCH 31,
---------------------------
<S> <C> <C>
1997 1998
------------- ------------
Due from affiliates:
Sportmax Limited--primarily for expenses paid on behalf of Sportmax Limited........ $ 4,367 $ --
------------- ------------
------------- ------------
Due to affiliates:
Concentric--primarily from merchandise purchases................................... $ 7,297,183 $ --
DHS Holdings--royalties collected on behalf of DHS Holdings........................ 766,736 --
Tai Nam--primarily from merchandise purchases...................................... 2,676,262 3,781,974
Officer of Craft--loan............................................................. 16,290 --
------------- ------------
$ 10,756,471 $ 3,781,974
------------- ------------
------------- ------------
</TABLE>

F-12
<PAGE>
TOYMAX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1996, 1997 AND 1998

5. DUE TO/FROM AFFILIATES (CONTINUED)
<TABLE>
<CAPTION>
TRANSACTIONS
-------------------------------------------
<S> <C> <C> <C>
YEAR ENDED MARCH 31,
-------------------------------------------

<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Purchases from:
Tai Nam........................................................... $ 15,383,684 $ 13,573,369 $ 51,244,212
Concentric........................................................ 9,055,339 20,632,367 --
Hot Items......................................................... 1,483,844 -- --
------------- ------------- -------------
$ 25,922,867 $ 34,205,736 $ 51,244,212
------------- ------------- -------------
------------- ------------- -------------
Sales to:
Tai Nam........................................................... $ 915,032 $ 679,645 $ 1,922,569
------------- ------------- -------------
------------- ------------- -------------
Mold Purchases:
Tai Nam........................................................... $ 616,250 $ 438,435 $ 753,183
Jauntiway Toys Enterprise (Shenzhen) Company Limited.............. -- -- 8,279
------------- ------------- -------------
$ 616,250 $ 438,435 $ 761,462
------------- ------------- -------------
------------- ------------- -------------
Mold Sales:
DHS Holdings...................................................... $ 349,296 $ -- $ --
------------- ------------- -------------
------------- ------------- -------------
Agency fees earned by:
Tai Nam........................................................... $ -- $ -- $ 3,352,425
Concentric........................................................ 898,384 1,420,768 --
------------- ------------- -------------
$ 898,384 $ 1,420,768 $ 3,352,425
------------- ------------- -------------
------------- ------------- -------------
Reimbursed expenses charged by:
Tai Nam........................................................... $ 545,579 $ 799,750 $ 462
------------- ------------- -------------
------------- ------------- -------------
Agency fees earned from:
Tai Nam........................................................... $ -- $ -- $ 51,741
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

Included in Sales to Tai Nam, the Company sold part of its raw material
inventory at cost, for a total of $664,141, in fiscal 1998.

The Company also had outstanding purchase commitments to Tai Nam of
approximately $4 million at March 31, 1998.

6. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
BALANCES
MARCH 31,
--------------------------
<S> <C> <C>
1997 1998
------------ ------------
Payroll and related costs............................................................. $ 176,140 $ 1,975,526
Other................................................................................. 2,743,595 4,247,987
------------ ------------
$ 2,919,735 $ 6,223,513
------------ ------------
------------ ------------
</TABLE>

F-13
<PAGE>
TOYMAX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1996, 1997 AND 1998

7. INCOME TAXES

The income tax expense (benefit) consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------- ------------- -------------
Current:
Hong Kong.......................................................... $ 356,533 $ 437,257 $ 968,178
U.S. Federal....................................................... (4,156,228) 53,000 5,062,314
U.S. State and City................................................ (104,340) 52,893 164,714
------------- ------------- -------------
(3,904,035) 543,150 6,195,206
------------- ------------- -------------
Deferred:
Hong Kong.......................................................... $ -- $ -- $ (43,210)
U.S. Federal....................................................... 1,402,757 (1,040,350) (1,490,250)
U.S. State and City................................................ 247,546 (184,000) (528,521)
------------- ------------- -------------
1,650,303 (1,224,350) (2,061,981)
------------- ------------- -------------
Income tax expense (benefit)......................................... $ (2,253,732) $ (681,200) $ 4,133,225
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

The income tax expense (benefit) varies from the U.S. federal statutory
rate. The following reconciliation shows the significant differences in the tax
at statutory and effective rates:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------- ------------ -------------
Federal income tax expense (benefit), at statutory rate of 34%........ $ (4,100,000) $ 903,000 $ 5,260,892
State income tax expense (benefit), net of federal tax expense
(benefit)........................................................... (587,000) 47,000 (91,117)
Changes in deferred tax valuation allowance........................... 2,668,500 (1,277,500) (1,591,000)
Provision for non-deductible expenses................................. 28,980 57,657 112,452
Non-taxable income.................................................... -- (5,987) --
Prior year (over) under accrual....................................... (13,745) 57,373 --
Tax effect of differences in U.S. and Hong Kong statutory rates....... (250,467) (462,743) (893,032)
Provision related to reorganization................................... -- -- 950,000
Other................................................................. -- -- 385,030
------------- ------------ -------------
Income tax expense (benefit).......................................... $ (2,253,732) $ (681,200) $ 4,133,225
------------- ------------ -------------
------------- ------------ -------------
</TABLE>

F-14
<PAGE>
TOYMAX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1996, 1997 AND 1998

7. INCOME TAXES (CONTINUED)
The components of deferred tax assets/(liabilities) are as follows:

<TABLE>
<CAPTION>
MARCH 31,
---------------------------
<S> <C> <C>
1997 1998
------------- ------------
Deferred tax assets:
Current:
Reserve for sales allowances and possible losses................................. $ 362,850 $ 785,015
Inventory........................................................................ 573,000 755,190
Accrued expenses................................................................. 105,500 678,193
Other............................................................................ 16,000 21,700
------------- ------------
1,057,350 2,240,098
------------- ------------
Long term:
Design costs..................................................................... 616,000 558,082
Property and equipment........................................................... 203,000 151,187
Accrued expenses................................................................. 29,000 --
Legal fees-trademarks............................................................ 190,000 249,449
State net operating loss carryforwards........................................... 684,000 --
Federal net operating loss carryforwards......................................... 36,000 44,305
------------- ------------
1,758,000 1,003,023
------------- ------------
Total deferred tax assets............................................................ 2,815,350 3,243,121
Deferred tax liabilities:
Property and equipment............................................................. (159,772) (116,562)
Less: Valuation allowance............................................................ (1,591,000) --
------------- ------------
Net deferred tax assets.............................................................. $ 1,064,578 $ 3,126,559
------------- ------------
------------- ------------
</TABLE>

Deferred taxes result from temporary differences between tax bases of assets
and liabilities and their reported amounts in the financial statements. The
temporary differences result from costs required to be capitalized for tax
purposes by the U.S. Internal Revenue Code, and certain items accrued for
financial reporting purposes in the year incurred but not deductible for tax
purposes until paid.

Because of the Company's U.S. losses in 1996, a valuation allowance for the
deferred tax assets was provided due to the uncertainty as to future
realization. During the years ended March 31, 1997 and 1998, the valuation
allowance was reduced and thus reduced income tax expense by $1,277,500 and
$1,591,000, respectively, to reflect a net deferred tax asset equal to the
anticipated tax benefit of the temporary differences which are expected to be
realized within one year based on the Company's projected U.S. income.

8. CAPITAL STOCK

SALE OF STOCK

In December 1996, the principal shareholder sold 103,084 shares to certain
officers, employees and business associates and 150,000 shares to other persons
for an aggregate amount of approximately

F-15
<PAGE>
TOYMAX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1996, 1997 AND 1998

8. CAPITAL STOCK (CONTINUED)
$709,000 based upon management's estimate of fair value; accordingly, no
compensation costs were recognized.

In June 1997, the principal shareholder sold 66,833 shares to certain
officers, employees and business associates for an aggregate amount of
approximately $187,000 ($2.80 per share) and recorded non-cash compensation of
an additional $187,000 representing management's estimate of the discount from
fair value.

REORGANIZATION

On October 20, 1997 the Company completed its initial public offering of
3,105,000 shares of common stock. The proceeds from the offering were used to
repay bank indebtedness, to pay trade payables to certain affiliates and for
working capital and general corporate purposes.

In conjunction with its initial public offering, the Company completed the
Reorganization pursuant to which:

(i) Toymax HK contributed all of the outstanding capital stock of its
wholly-owned subsidiaries, Toymax NY and Toymax UK, to the Company, and

(ii) The stockholders of Toymax HK exchanged their 100,000 ordinary shares
of Toymax HK stock for 425,686 shares of Common Stock of the Company, and
4,500,000 shares of Preferred Stock of Toymax HK for 24,224 shares of Common
Stock of the Company.

Following the Reorganization, Toymax NY, Toymax HK, Toymax Bermuda, Toymax
Canada and Toymax UK are direct or indirect wholly-owned subsidiaries of Toymax.
The Company also effected a 16.67 to one stock split.

PREFERRED STOCK

In October 1997, the Company authorized 5,000,000 shares of Preferred Stock,
$.01 par value per share. The rights, preferences and limitations of the
Preferred Stock may be designated by the Company's Board of Directors at any
time.

9. STOCK OPTIONS AND WARRANTS

The Stock Option Plan (the "PLAN"), which was initiated in fiscal 1998, is
administered under the direction of the Compensation Committee of the Board of
Directors, which has complete discretion to select the optionee and to establish
terms and conditions of each option, subject to the provisions of the Plan. A
total of 750,000 shares of Common Stock were reserved by the Company for
issuance upon exercise of stock options granted or which may be granted under
the Plan.

Stock options outstanding have a life of 10 years for non-qualified options
and 5 years if the grant is an Incentive Stock Option (the "INCENTIVE OPTIONS"),
as defined in Section 422 of the Internal Revenue Code. These options may not be
exercised more than 10 years after the grant or 5 years if the grant is an
Incentive Option to any employee who owns more than 10% of the outstanding
voting power of the Company.

F-16
<PAGE>
TOYMAX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1996, 1997 AND 1998

9. STOCK OPTIONS AND WARRANTS (CONTINUED)
Incentive Options granted may not be less than 100% of the fair market value
of the Common Stock as of the date of the grant or 110% of the fair market value
if the grant is to an employee who owns more than 10% of the outstanding voting
power of the Company.

The following table summarizes information about stock option activity for
the year ended March 31, 1998:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE
OPTIONS PER SHARE
----------- -----------------
<S> <C> <C>
Outstanding at beginning of year.................................................... -- $ --
Granted............................................................................. 533,000 8.53
Exercised........................................................................... -- --
Forfeited........................................................................... 1,500 8.63
Expired............................................................................. -- --
Outstanding at end of year.......................................................... 531,500 8.53
Exercisable at end of year.......................................................... -- --
</TABLE>

In October 1997, the Company granted options to purchase an aggregate of
414,000 shares of Common Stock under the 1997 Stock Option Plan to certain
officers and directors of the Company. In December 1997, options to purchase an
aggregate of 119,000 shares of Common Stock were granted to certain other
employees of the Company. There was no charge to operations as a result of the
granting of these options.

Statement of Financial Accounting Standards No. 123 ("SFAS NO. 123"),
"ACCOUNTING FOR STOCK-BASED COMPENSATION," requires the Company to provide pro
forma information regarding net income and net income per common share as if
compensation costs for the Company's stock option plans had been determined in
accordance with the fair value method prescribed in SFAS No. 123. Had
compensation expense been recorded under the provisions of SFAS No. 123, the
impact on the Company's net earnings and earnings per share would have been:

<TABLE>
<CAPTION>
1998
-------------
<S> <C>
Reported net earnings.............................................................................. $ 11,339,986
Pro forma compensation expense, net of tax......................................................... (384,119)
-------------
Pro forma net earnings............................................................................. $ 10,955,867
-------------
-------------
Pro forma earnings per share:
Basic and diluted.................................................................................. $ 1.24
-------------
-------------
</TABLE>

The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for all grants in 1998: dividend yield of 0.00%; risk-free
interest rate ranges from 5.47% to 6.18%; an expected life of options of 4.92
years for 10-year options; and a volatility of 46.5% for all grants.

F-17
<PAGE>
TOYMAX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1996, 1997 AND 1998

9. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information about stock options outstanding
at March 31, 1998:

<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED
WEIGHTED AVERAGE
NUMBER OF AVERAGE EXERCISE NUMBER OF WEIGHTED AVERAGE
OPTION PRICE RANGE SHARES LIFE PRICE SHARES EXERCISE PRICE
- ------------------ ----------- ----------- ------------- --------------- -----------------
$8.500 to $8.625... 531,500 9.59 years $ 8.528 -- $ --
</TABLE>

In conjunction with its initial public offering, the Company issued warrants
to the underwriter to purchase 195,750 shares of Common Stock at an exercise
price of $10.20 per share. There was no charge to operations as a result of the
issuance of the warrants to the underwriter.

10. COMMITMENTS AND CONTINGENCIES

LONG-TERM OBLIGATIONS

The Company leases general and administrative, warehouse and showroom
facilities under non-cancelable leases which expire at various dates. Certain of
the leases on real estate include the payment of property taxes. Warehouse space
is leased on a monthly basis.

Toymax HK rents a showroom from one of its shareholders, who is also a
director of the Company, under a two-year lease commencing August 1, 1996 for a
monthly rent of $5,900. The lease provides for the Company to also pay all real
estate taxes and other charges and for a security deposit of $11,794.

Toymax NY leases certain equipment under capital leases. The gross amount of
assets recorded under capital leases is $181,477. Depreciation expense provided
on such assets is included in both cost of goods sold and selling and
administrative expenses in the statements of operations. Equipment with a net
book value of $115,622 was collateralized under capital leases.

Future minimum lease payments under all leases with non-cancelable lease
terms in excess of one year are as follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING MARCH 31, LEASES LEASES
- ----------------------------------------------------------------------------------------- ------------ ---------
<S> <C> <C>
1999..................................................................................... $ 576,135 $ 36,351
2000..................................................................................... 565,673 31,573
2001..................................................................................... 579,192 15,223
2002..................................................................................... 593,118 6,144
2003..................................................................................... 607,461 --
Thereafter............................................................................... 549,163 --
------------ ---------
$ 3,470,742 89,291
------------
------------
Less amounts representing interest....................................................... 12,045
---------
Present value of capital lease payments.................................................. 77,246
Less current portion..................................................................... 30,084
---------
Long-term obligation..................................................................... $ 47,162
---------
---------
</TABLE>

F-18
<PAGE>
TOYMAX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1996, 1997 AND 1998

10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense for the years ended March 31, 1996, 1997 and 1998 was $332,653,
$364,066 and $601,919, respectively.

ROYALTIES

The Company has certain licensing agreements which involve the payment of
royalties based on sales. Royalties for the years ended March 31, 1996, 1997 and
1998 amounts to $467,162, $1,213,859 and $1,044,030, respectively.

EMPLOYMENT AGREEMENTS

In October 1997, the Company entered into several employment agreements with
certain key officers and employees which expire at various dates through
September 2001. The total annual base salaries under these agreements amount to
approximately $1,840,000, $1,710,000 and $780,000 for the years ended March 31,
1999, 2000 and 2001, respectively. In addition, the employment agreements of
certain executive officers contain provisions entitling them to participate in
the Executive Bonus Plan and a stock appreciation bonus, as well as providing
for enhanced compensation in the event of a change of control. The stock
appreciation bonus is equal to 1% of the increase in the fair market value of
the Company's outstanding common stock over a stated measurement period. The
stock appreciation bonus applies to each of two of the Company's executives.

EXECUTIVE BONUS PLAN

The Company's Executive Bonus Plan (the "BONUS PLAN"), is administered by
the Compensation Committee of the Board of Directors (the "COMPENSATION
COMMITTEE"). The Compensation Committee determines the key management employees
of the Company who will be eligible to participate in the Bonus Plan and the
amount, if any, of each participant's award based on such participant's
performance. The aggregate amount of awards made under the Bonus Plan for a
fiscal year may not exceed an amount equal to (i) 15% percent of the profit of
the Company and its designated affiliates for such year (as defined), reduced by
(ii) 15% of the shareholders' equity of the Company and such affiliates during
such year.

LITIGATION

The Company is involved in various legal proceedings in the ordinary course
of its business activities. The Company believes that the resolution of such
legal proceedings and claims, individually and in aggregate, are not likely to
have a material adverse effect on its financial position or results of
operations.

In April 1997, a developer of toy games filed a complaint against the
Company alleging breach of express and implied contracts, unjust enrichment,
misappropriation, conversion and tortious interference with contract. The
current complaint (Third Amended Complaint) alleges claims against the Company
for breach of an express contract, breach of an implied contract, unjust
enrichment, fraud, promissory estoppel, misappropriation and conversion,
violation of the Connecticut Unfair Trade Practices Act and violation of the
Uniform Trade Secrets Act. The plaintiff seeks monetary damages representing the
greater of disgorgement of profit or royalties on past Laser Challenge sales,
royalties on additional Laser Challenge sales, the lost goodwill and punitive
damages. The Company has made a motion to dismiss the

F-19
<PAGE>
TOYMAX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1996, 1997 AND 1998

10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
fraud claim. The Company believes that there is no merit to the claim and
intends to vigorously defend the action.

In October 1997, the Company entered into a Settlement Agreement with 4 Kids
Entertainment, Inc. resolving all disputes between the Companies. While the
terms of the agreement are confidential, they did not have a material effect on
the financial condition of the Company or the Company's results of operations.

In April 1998, the Company entered into a Settlement Agreement with Saban
Entertainment Inc. and Saban International resolving all disputes between the
Companies. While the terms of the agreement are confidential, in management's
opinion, the terms of the agreement will not have a material effect on the
financial condition of the Company or the Company's results of operations.

11. MAJOR CUSTOMERS AND PRODUCTS

The Company's top five customers accounted for approximately 58%, 69% and
69% of the Company's invoiced sales in 1996, 1997 and 1998, respectively.
Invoiced sales to Toys "R" Us accounted for more than 10% of invoiced sales
during each of the above periods. Walmart's invoiced sales were also more than
10% for 1998.

The sales of the Company's product, Laser Challenge, accounted for 0.0%,
47.0% and 78.6% of net sales for the years ended March 31, 1996, 1997 and 1998.

12. EMPLOYEE BENEFIT PLAN

Toymax NY has a tax deferred retirement savings plan which is intended to
qualify under Section 401(k) of the Internal Revenue Code. Eligible participants
may contribute a percentage of their compensation, but not in excess of the
maximum allowed under the Internal Revenue Code. The plan provides for matching
contributions at Toymax NY's option. Toymax NY made no contributions for the
years ended March 31, 1996, 1997 and 1998.

F-20
<PAGE>
TOYMAX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1996, 1997 AND 1998

13. INFORMATION ABOUT THE COMPANY'S OPERATIONS IN DIFFERENT GEOGRAPHIC AREAS

The Company operates in one business segment--the importation and wholesale
distribution of toys. Operations in different geographic areas are summarized
below (net of consolidating eliminations):

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1996
---------------------------------------------
<S> <C> <C> <C>
UNITED STATES HONG KONG CONSOLIDATED
-------------- ------------- --------------
Revenues--Net sales............................................... $ 26,950,690 $ 16,670,909 $ 43,621,599
Income (loss) before income tax benefit........................... (13,845,268) 1,787,453 (12,057,815)
Identifiable assets............................................... 19,742,046 2,384,642 22,126,688
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1997
-------------------------------------------
<S> <C> <C> <C>
UNITED STATES HONG KONG CONSOLIDATED
------------- ------------- -------------
Revenues--Net sales................................................. $ 38,792,705 $ 15,889,930 $ 54,682,635
Income before income tax benefit and minority interest in net loss
of subsidiary..................................................... 7,796 2,646,398 2,654,194
Identifiable assets................................................. 24,376,328 1,901,514 26,277,842
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1998
-------------------------------------------
<S> <C> <C> <C>
UNITED STATES HONG KONG CONSOLIDATED
------------- ------------- -------------
Revenues--Net sales................................................. $ 76,264,055 $ 23,065,079 $ 99,329,134
Income before income tax expense and minority interest in net loss
of subsidiary..................................................... 10,083,971 5,347,465 15,431,436
Identifiable assets................................................. 45,692,825 8,138,766 53,831,591
</TABLE>

Operating income approximates income before income tax expense (benefit) and
minority interest in net loss of subsidiary. The net sales of Toymax HK are made
primarily to markets outside of Hong Kong, as described below:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
GEOGRAPHIC AREA 1996 1997 1998
- ---------------------------------------------------------------------------------- --------- --------- ---------
Europe............................................................................ 21.2% 35.1% 37.7%
United States of America.......................................................... 23.8 29.9 28.2
Canada............................................................................ 20.8 15.2 18.0
Other............................................................................. 34.2 19.8 16.1
--------- --------- ---------
100.0% 100.0% 100.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-21
<PAGE>
TOYMAX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MARCH 31, 1996, 1997 AND 1998

14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH YEAR END
--------- --------- --------- --------- ---------

<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1997
Net sales.................................................. $ 2,679 $ 14,921 $ 21,398 $ 15,685 $ 54,683
Gross profit............................................... 312 5,934 7,817 6,783 20,846
Operating income (loss).................................... (2,521) 2,198 784 2,359 2,820
Income (loss) before income taxes.......................... (2,340) 2,317 611 2,078 2,666
Net income (loss).......................................... (1,418) 1,987 342 2,436 3,347
Basic and diluted earnings (loss) per share................ $ (0.19) $ 0.26 $ 0.05 $ 0.33 $ 0.45
</TABLE>
<TABLE>
<CAPTION>
QUARTER
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH YEAR END
--------- --------- --------- --------- ---------

<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1998
Net sales................................................... $ 7,091 $ 37,176 $ 35,754 $ 19,308 $ 99,329
Gross profit................................................ 3,307 16,889 15,734 8,428 44,358
Operating income (loss)..................................... (357) 9,078 6,026 1,445 16,192
Income (loss) before income taxes........................... (521) 8,446 5,944 1,604 15,473
Net income (loss)........................................... (369) 6,071 4,502 1,136 11,340
Basic and diluted earnings (loss) per share................. $ (0.05) $ 0.81 $ 0.46 $ 0.11 $ 1.28
</TABLE>

F-22
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON THE FINANCIAL STATEMENT SCHEDULE

The Board of Directors and Stockholders of

Toymax International, Inc.

The audit referred to in our report dated June 3, 1998 relating to the
consolidated financial statements of Toymax International, Inc., which is
contained in Item 8 of this Form 10-K, included the audit of the financial
statement schedule. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based upon our audits.

In our opinion the financial statement schedule presents fairly, in all
material respects, the information set forth therein.

BDO Seidman, LLP

New York, New York
June 3, 1998

S-1
<PAGE>
TOYMAX INTERNATIONAL, INC.
AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II

THREE YEARS ENDED MARCH 31, 1998

<TABLE>
<CAPTION>
ADDITIONS
----------------------------------
(1) (2)
BALANCE AT ----------------------------------
BEGINNING CHARGED TO COSTS CHARGED TO OTHER BALANCE AT END
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ---------------------------------------- ---------- ---------------- ---------------- ----------- --------------

<S> <C> <C> <C> <C> <C>
CONSOLIDATED VALUATION RESERVES:

YEAR ENDED MARCH 31, 1996:

Allowance for possible losses......... $ 78,395 $ 880,409 $ -- $ 146,835 $ 811,969
---------- -------- -------- ----------- --------------
---------- -------- -------- ----------- --------------

YEAR ENDED MARCH 31, 1997:

Allowance for possible losses......... $ 811,969 $ 16,312 $ -- $ 89,062 $ 739,219
---------- -------- -------- ----------- --------------
---------- -------- -------- ----------- --------------

YEAR ENDED MARCH 31, 1998:

Allowance for possible losses......... $ 739,219 $ 132,114 $ -- $ 719,217 $ 152,116
---------- -------- -------- ----------- --------------
---------- -------- -------- ----------- --------------
</TABLE>

S-2

<PAGE>

EXHIBIT 10.3(b)

FIRST LEASE AMENDMENT

As of February 27th, 1998

Reference is made to the Agreement of Lease dated April 7, 1997 between 125
Bethpage Associates, as Landlord, and Toymax Inc., as Tenant, with respect to
Premises more particularly described therein within the real property known as
125 East Bethpage Road, Plainview, New York (the "Lease").

A. The words and terms used herein shall have the meaning ascribed to
them in the Lease, unless the context in which any such word or term is used
requires a different construction.

B. Effective on March 1, 1998 (the "Effective Date") the Lease is amended
as follows:

1. Section 2.01(C) of the Lease is amended so that the
Area of the Premises as defined in Section 2.01(C) of the Lease shall be
increased to 27,036 rentable square feet.

2. Section 2.01(n) of the Lease is amended so that the term
"Premises" shall mean the space depicted in Exhibit "A-1" attached hereto
and made a part hereof (the "Added Space") as well as the space depicted in
Exhibit "D" annexed to the Lease and made a part thereof (the "Original
Premises").

3. Proportionate Share as used in Section 2.01(p) of the Lease shall
be 67.6%.

4. Section 3.01 of the Lease is amended so that Tenant shall pay to
the Landlord Net Annual Rent at an annual rate as follows:

Lease Year Net Annual Rent
---------- ---------------
<S> <C>
1 $425,817.00
2 $438,591.51
3 $451,749.25
4 $465,301.72
5 $479,260.79
6 $493,638.59
7 $445,941.27

</TABLE>

C. Tenant shall accept the Added Space "as is" on the Effective Date, and
Landlord shall not be required to perform any work, render any service or
furnish or install any materials, fixtures or equipment to the Project, the
Original Premises or the Added Space.

<PAGE>

D. Upon execution of the Amendment, Tenant shall deposit with Landlord as
security for the faithful performance and observance by Tenant of the terms,
provisions, covenants, and conditions of the Lease as amended by this Amendment,
and any further modification, extension, or renewal thereof, the sum of $20,000
(such security deposit shall hereafter be called the "Security"). Landlord may,
at its sole option, retain use or apply the whole or any part of the Security to
the extent required for payment of any (i) Net Annual Rent, (ii) Additional
Rent, (iii) other sums as to which Tenant is obligated to pay under this Lease,
(iv) sums that Landlord may expend or may be required to expend by reason of a
default under the Lease, (v) loss or damage that Landlord may suffer by reason
of a default under the Lease, including, without limitation, any damages
incurred by Landlord or deficiency resulting from the reletting of the Premises,
whether such damages or deficiency accrues before or after summary proceedings
or other re-entry by Landlord, or (vi) costs incurred by Landlord in connection
with the cleaning or repair of the Premises upon expiration or earlier
termination of this Lease.

In no event shall Landlord be obligated to apply the Security; and
Landlord's right to bring an action or special proceeding to recover damages or
otherwise to obtain possession of the Premises before or after Landlord's
declaration of the termination of this Lease for nonpayment of rent or for any
other reason shall not be affected by reason of the fact that Landlord holds the
Security. The Security, except as specified in the preceding paragraph, will
not be a limitation of Landlord's damages or other rights and remedies available
under this Lease, or at law or equity; nor shall the Security be (a) a payment
of liquidated damages, or (b) an advance payment of any Rental. If Landlord
uses, applies, or retains all or any portion of the Security, Tenant will
restore the Security to its original amount within five (5) days after written
demand from Landlord. It will constitute an Event of Default if Tenant fails to
timely comply with this Paragraph.

Landlord shall keep the Security in an interest-bearing account. Landlord
shall pay to Tenant, if and when the Security is returned to Tenant, all
interest earned and payable on the Security less a one (1%) percent annual
administrative charge. If, upon expiration of the Term of the Lease, Tenant
shall not be in default under the terms of the Lease, and any modification,
extension, or renewal thereof, any part of the Security not used, applied, or
retained by Landlord shall be returned to Tenant within sixty (60) days after
Tenant has discharged all of its obligations under this Lease, and any
modification, extension, or renewal thereof, but no earlier than the end of the
Term (or the sooner termination of this Lease). However, if Landlord, in its
sole discretion, has sufficient evidence that the Security has been assigned to
an assignee of this Lease in accordance with the terms hereof, Landlord will
return the Security to the assignee and Landlord shall thereupon be released by
Tenant from all liability for the return of the Security to Tenant. In the
event of a sale of the Building or the Project or any part thereof, of which the
Premises forms a part (including to a mortgagee upon foreclosure of its
mortgage), or a lease of the Building or the Project, Landlord shall have the
right to transfer the Security to the purchaser or lessee, as the case may be,
and Landlord shall thereupon be released by Tenant from all liability for the
return of the Security; and Tenant agrees to look solely to the purchaser or
lessee for the return of the Security. The Security shall not be mortgaged,
assigned, or encumbered by Tenant, and neither Landlord nor its successors or
assigns shall be bound by any such mortgage, assignment, or encumbrance. The
acceptance by Landlord of the Security submitted by Tenant shall not render this
Lease effective unless and until Landlord shall have executed and delivered to
Tenant a fully executed copy of this Lease.

2
<PAGE>

E. Tenant covenants, represents and warrants that Tenant has had no
dealings or negotiations with any broker, finder or with respect to this
Amendment or the negotiation thereof. Based thereon, Landlord agrees to hold
harmless and indemnify Tenant from and against any and all cost, expense
(including reasonable attorneys' fees) or liability for any compensation,
commissions or charges claimed by any broker, finder or agent with respect to
this Amendment or the negotiation thereof except to the extent that the same
arises out of Tenant's acts or omissions. Tenant agrees to hold harmless and
indemnify Landlord from and against any and all cost, expense (including
reasonable attorneys' fees) or liability for any compensation, commissions or
charges claimed by any broker, finder or agent with respect to this Amendment or
the negotiation thereof, based in any part upon Tenant's breach of the
provisions contained in the first sentence of this Section.

F. Each of the Landlord and Tenant acknowledges and confirms to the other
that the Lease is in full force and effect in accordance with its terms and is
unmodified except as herein provided.

LANDLORD:

125 Bethpage Associates

By:
--------------------------------
Edward Blumenfeld,
Its General Partner

TENANT:

Toymax Inc.

By:
--------------------------------
Name:
Title: President

3
<PAGE>

STATE OF NEW YORK )
) ss.:
COUNTY OF NASSAU )

On the 4th day of March, 1998, before me personally came Edward Blumenfeld,
to me know, who, being by me duly sworn, did depose and say that he is the sole
General Partner of 125 Bethpage Associates, a New York limited partnership,
described in and which executed the foregoing instrument; which executed the
foregoing instrument; that he had authority to sign the same as the act and deed
of 125 Bethpage Associates.

S/
---------------------------
BARBARA A. LIOTTA
Notary Public, State of New York
No. 4850695
Qualified in Nassau County
Commission Expires January 20, 2000

STATE OF NEW YORK )
) ss.:
COUNTY OF NASSAU )

On the 2nd day of March, 1998, before me personally came Steven Lebensfeld,
to me know, who, being by me duly sworn, did depose and say that he resides at
Laurel Hollow, NY; that he is the President of Toymax Inc., the corporation
described in and which executed the foregoing document; and that he signed his
name thereto by authority of the Board of Directors of said corporation.

S/
---------------------------
SANFORD B. FRANK
Notary Public, State of New York
No. 4998530, Qual. Suffolk Co.
Qualified in Nassau County
Commission Expires June 29, 1998

<PAGE>

EXHIBIT 10.15

EMPLOYMENT AGREEMENT
--------------------

THIS AGREEMENT ("Agreement"), dated as of October 20, 1997, between TOYMAX
INTERNATIONAL, INC., a Delaware corporation (the "Company"), and ANDREW B. STEIN
(the "Executive").

WITNESSETH
----------

WHEREAS, the Company desires to employ the Executive, and the Executive
desires to accept such employment, on the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the mutual promises, representations
and warranties set forth herein, and for other good and valuable consideration,
it is hereby agreed as follows:

1. EMPLOYMENT. The Company hereby agrees to employ the Executive, and
the Executive hereby accepts such employment, upon the terms and conditions set
forth herein.

2. TERM. Subject to the provisions of Section 10 hereof, the period of
the Executive's employment under this Agreement shall be from October 1, 1997
through September 30, 2000, as may be extended as hereinafter provided (the
"Term"). As of September 30, 2000 and each subsequent September 30, (September
30, 2000 and each subsequent September 30 hereinafter called a "Renewal Date"),
the Term shall be automatically extended by one additional year (i.e. to include
a period of 12 months commencing on the day after each Renewal Date) unless, at
least 60 days prior to any such Renewal Date, the Company shall deliver to the
Executive or the Executive shall deliver to the Company written notice that the
Term will not be further extended.

3. POSITION AND DUTIES.

(a) During the Term, the Executive shall serve as Managing Director of
Toymax (H.K.) Limited ("Limited") and as Vice President, International Sales of
the Company and shall have such duties consistent with such offices as from time
to time may be prescribed by the Board of Directors of the Company (the
"Board").

(b) During the Term, the Executive shall perform and discharge the
duties that may be assigned to him by the Board from time to time in accordance
with this Agreement, and the Executive shall devote his best talents, efforts
and abilities to the performance of his duties hereunder. Executive shall be
required to spend such time traveling within the U.S., Europe, the Far East and
elsewhere as is necessary to carry out his duties and responsibilities hereunder
during the Term.

<PAGE>

(c) During the Term, the Executive shall perform such duties on a
full-time basis and the Executive shall have no other employment and no other
outside business activities whatsoever; provided, however, that the Executive
shall not be precluded from making passive investments which do not require the
devotion of any significant time or effort.

4. COMPENSATION.

(a) For the Executive's services hereunder, the Company shall pay the
Executive a minimum annual salary (as the same shall be increased from time to
time, the "Base Salary") of $185,000, payable in accordance with the customary
payroll practices of the Company.

(b) The Base Salary shall be increased by 5% (or such greater
percentage as the Board may determine) on January 1, 1999 and each subsequent
January 1 during the Term.

5. BONUSES.

(a) EXECUTIVE BONUS PLAN. During the Term, the Executive shall be
eligible to participate in the Company's Executive Bonus Plan (the "Bonus
Plan"), in accordance with the terms and conditions of such Plan, as they may
exist from time to time. Nothing herein shall preclude the Company from
amending the Bonus Plan from time to time or terminating the Bonus Plan, in
whole or in part, at any time.

6. OTHER BENEFITS. During the Term, the Company shall provide the
Executive with the following benefits:

(a) STOCK OPTION PLAN. The Executive shall be eligible to
participate in the Company's Stock Option Plan in accordance with the terms and
conditions thereof.

(b) MEDICAL, HEALTH, DENTAL AND LIFE INSURANCE BENEFITS. The Company
shall, at its own expense, provide the Executive and his eligible dependents
with the group medical, health, dental and life insurance coverage provided by
the Company generally to its employees. Nothing herein shall prevent the
Company from amending and/or terminating the coverages and/or plans described in
this Section 6(b), provided, however, that such amendment and/or termination is
applicable generally to the employees of the Company.

(c) 401(K) PLAN. The Executive shall be entitled to participate in
the Company's 401(k) Plan in accordance with the terms and conditions of such
plan.

(d) LIABILITY INSURANCE. The Executive shall be provided with the
directors and officers liability insurance coverage generally provided to
officers of the Company and Limited. Notwithstanding the foregoing, the Company
and Limited agree to indemnify the

-2-

<PAGE>

Executive against all costs, damages and expenses, including attorneys' fees,
incurred by the Executive as a result of claims by third parties arising out of
or from the Executive's lawful acts as an employee of the Company and Limited,
provided such acts are not grossly negligent and are performed in good faith and
in a manner reasonably believed by the Executive to be in the Company's and
Limited's best interests. Any counsel employed to defend the Executive in any
such action shall be reasonably acceptable to the Executive, the Company and
Limited. Any counsel appointed by any insurance carrier for the Company and/or
Limited shall be deemed acceptable. It is the intent of the parties that the
obligation imposed by this paragraph will survive the termination of this
Agreement.

(e) OTHER BENEFITS. The Company shall make available to the
Executive any and all other employee or fringe benefits (in accordance with
their terms and conditions) which the Company may make available generally to
its other employees.

7. AUTOMOBILE ALLOWANCE. During the Term, the Company shall reimburse the
Executive for expenses, such as automobile lease or loan payments, in an amount
up to $600 per month, plus such amount(s) as may be required to reimburse the
Executive for expenses such as registration, insurance, repairs, maintenance,
license fees, gasoline and oil incurred by the Executive incident to his use of
an automobile in connection with his duties hereunder.

8. REIMBURSEMENT OF EXPENSES. During the Term, the Company shall pay or
reimburse the Executive for all reasonable travel, entertainment and other
business expenses actually incurred or paid by the Executive in the performance
of his duties hereunder upon presentation of expense statements and/or such
other supporting information as the Company may reasonably require of the
Executive.

9. VACATIONS. The Executive shall be entitled to no less than four weeks
of paid vacation during each full calendar year of the Term (and a pro rata
portion thereof for any portion of the Term that is less than a full calendar
year); provided that no single vacation may exceed two consecutive weeks in
duration. Unused vacation may not be carried over to successive years.

10. TERMINATION. The employment hereunder of the Executive may be
terminated prior to the expiration of the Term in the manner described in this
Section 10.

(a) TERMINATION BY THE COMPANY FOR GOOD CAUSE. The Company shall
have the right to terminate the employment of the Executive for Good Cause (as
such term is defined herein) by written notice to the Executive specifying the
particulars of the circumstances forming the basis for such Good Cause.

(b) TERMINATION UPON DEATH. The employment of the Executive
hereunder shall terminate immediately upon his death.

-3-

<PAGE>

(c) VOLUNTARY RESIGNATION BY THE EXECUTIVE. The Executive shall have
the right to voluntarily resign his employment hereunder (as such term is
defined herein) by 30 days' advance written notice to the Company.

(d) TERMINATION BY THE COMPANY WITHOUT GOOD CAUSE. The Company shall
have the right to terminate the Executive's employment hereunder without Good
Cause by 30 days' advance written notice to the Executive.

(e) TERMINATION DATE. The "Termination Date" is the date as of which
the Executive's employment with the Company terminates. Any notice of
termination given pursuant to the provisions of this Agreement shall specify the
Termination Date.

(f) CERTAIN DEFINITIONS. For purposes of this Agreement, the
following terms shall have the following meanings:

(i) "Person" means any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization, joint
venture, court -or government (or political subdivision or agency thereof).

(ii) "Change of Control" with respect to the Company, means
the occurrence of any of the following, other than in connection with the
initial public offering of the Common Stock, (A) the acquisition directly or
indirectly (in one or more related transactions) by any Person (other than the
Executive), or two or more Persons (other than the Executive) acting as a group,
of beneficial ownership (as that term is defined in Rule 13d-3 under the
Securities Exchange Act of 1934) of more than 20% of the outstanding capital
stock of the Company entitled to vote for the election of directors ("Voting
Shares"); (B) the merger or consolidation of the Company with one or more other
corporations as a result of which the holders of the outstanding Voting Shares
of the Company immediately before the merger hold less than 80% of the Voting
Shares of the surviving or resulting corporation; (C) the sale of all or
substantially all of the assets of the Company.

(iii) "Good Cause" shall exist if, and only if, the Executive
(A) wilfully or repeatedly fails in any material respect to perform his
obligations hereunder as provided herein (unless performance of such obligations
violates foreign, federal, state or local law), provided that such Good Cause
shall not exist unless the Company shall first have provided the Executive with
written notice specifying in reasonable detail the factors constituting such
material failure and such material failure shall not have been cured by the
Executive within 30 days after such notice or such longer period as may
reasonably be necessary to accomplish the cure; or (B) has been convicted of a
crime which constitutes a felony under applicable law or has entered a plea of
guilty or nolo contendere with respect thereto.

11. OBLIGATIONS OF COMPANY ON TERMINATION. Notwithstanding anything in
this Agreement to the contrary, the Company's obligations on termination of the
Executive's employment shall be as described in this Section 11.

-4-

<PAGE>

(a) OBLIGATIONS OF THE COMPANY IN THE CASE OF TERMINATION WITHOUT
GOOD CAUSE. In the event that prior to the expiration of the Term, the Company
terminates the Executive's employment, pursuant to Section 10(d), without Good
Cause, the Company shall provide the Executive with the following:

(i) AMOUNT OF SEVERANCE PAYMENT. Except as provided in
Section 11(b) below the Company shall pay the Executive the " Severance Payments
" equal to the sum of the following:

(A) the continuation, for a period of twelve (12) months
following the Termination Date, of the Executive's Base Salary at the rate in
effect on the Termination Date, payable in accordance with the customary payroll
practices of the Company; and

(B) an immediate single lump sum cash payment of any Base
Salary, Bonus Plan bonuses, allowable vacation and unreirnbursed expenses
accrued but unpaid as of the Termination Date.

(b) OBLIGATIONS OF THE COMPANY IN THE CASE OF TERMINATION OF
EXECUTIVE'S EMPLOYMENT FOLLOWING A CHANGE IN CONTROL. In the event that at any
time during the Term and following a Change of Control, the Company terminates
the Executive's employment without Good Cause, in lieu of the Severance Payments
to which the Executive is entitled under Section 11(a)(i) above, the Company
shall pay the Executive as follows:

(i) CHANGE OF CONTROL SEVERANCE PAYMENT. The Company shall
continue to pay to the Executive for a period of twenty-four (24) months
following the Termination Date the Executive's Base Salary at the rate in effect
on the Termination Date, payable in accordance with the customary payroll
practices of the Company, plus an immediate single lump sum cash payment of any
Base Salary, Bonus Plan bonuses, allowable vacation and unreimbursed expenses
accrued but unpaid as of the Termination Date.

(c) OBLIGATIONS OF THE COMPANY IN CASE OF TERMINATION FOR DEATH,
VOLUNTARY RESIGNATION OR GOOD CAUSE. Upon termination of the Executive's
employment upon death (pursuant to Section 10(b)), as a result of the voluntary
resignation of the Executive (pursuant to Section 10(c)) or for Good Cause
(pursuant to Section 10(a)), the Company shall have no payment or other
obligations hereunder to the Executive, except for the payment of any Base
Salary, Bonus Plan bonuses, allowable vacation and unreimbursed expenses accrued
but unpaid as of the date of such termination.

12. SEVERABILITY. Should any provision of this Agreement be held, by a
court of competent jurisdiction, to be invalid or unenforceable, such invalidity
or unenforceability shall not render the entire Agreement invalid or
unenforceable, and this Agreement and each other provision hereof shall be
enforceable and valid to the fullest extent permitted by law.

-5-

<PAGE>

13. SUCCESSORS AND ASSIGNS.

(a) This Agreement and all rights under this Agreement are personal
to the Executive and shall not be assignable other than by will or the laws of
descent. All of the Executive's rights under the Agreement shall inure to the
benefit of his heirs, personal representatives, designees or other legal
representatives, as the case may be.

(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns. Any Person succeeding to the
business of the Company by merger, purchase, consolidation or otherwise shall
assume by contract or operation of law the obligations of the Company under this
Agreement.

14. GOVERNING LAW. This Agreement shall be construed in accordance with
and governed by the laws of the State of New York, without regard to the
conflicts of laws rules thereof.

15. NOTICES. All notices, requests and demands given to or made upon the
respective parties hereto shall be deemed to have been given or made three
business days after the date of mailing when mailed by registered or certified
mail, postage prepaid, or on the date of delivery if delivered by hand, or one
business day after the date of delivery by Federal Express or other reputable
overnight delivery service, addressed to the parties at their addresses set
forth below or to such other addresses furnished by notice given in accordance
with this Section 15: (a) if to the Company, to 125 E. Bethpage Road, Plainview,
New York 11803 and (b) if to the Executive, to 21 Andover Drive, Syosset, N.Y.
11791.

16. WITHHOLDING. All payments required to be made by the Company to the
Executive under this Agreement shall be subject to withholding taxes, social
security and other payroll deductions in accordance with applicable law and the
Company's policies applicable to executive employees of the Company.

17. COMPLETE UNDERSTANDING. Except as expressly provided below, this
Agreement supersedes any prior contracts, understandings, discussions and
agreements relating to employment between the Executive and the Company,
including but not limited to that certain Employment Agreement between the
Executive and the Company dated as of March 18, 1993, and constitutes the
complete understanding between the parties with respect to the subject matter
hereof. No statement, representation, warranty or covenant has been made by
either party with respect to the subject matter hereof except as expressly set
forth herein. Notwithstanding the foregoing or anything in this Agreement to
the contrary, (i) any Employee Patent and Confidential Information Agreement by
and between the Company and the Executive shall remain in full force and effect,
and (ii) during the Term and at all times thereafter, the Executive hereby
agrees not to disclose any confidential and/or proprietary information
concerning the Company, Limited and/or the business and/or operations of the
Company and/or Limited without the express written consent of the Company and
Limited.

-6-

<PAGE>

18. MODIFICATION; WAIVER.

(a) This Agreement may be amended or waived if, and only if, such
amendment or waiver is in writing and signed, in the case of an amendment, by
the Company and the Executive or in the case of a waiver, by the party against
whom the waiver is to be effective. Any such waiver shall be effective only to
the extent specifically set forth in such writing.

(b) No failure or delay by any party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise thereof preclude any other or further exercise thereof or
the exercise of any other right, power or privilege.

19. HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not control or affect the meaning or construction of
this Agreement.

20. COUNTERPARTS. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument. This Agreement
shall become effective when each party hereto shall have received counterparts
hereof signed by the other party hereto.

IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed in its corporate name by one of its officers duly authorized to enter
into and execute this Agreement, and the Executive has manually signed his name
hereto, all as of the day and year first above written.

TOYMAX INTERNATIONAL, INC.

By:
- ------------------------------ ------------------------------
Witness

- ------------------------------ ----------------------------------
Witness Andrew B. Stein

-7-

<PAGE>

EXHIBIT 10.16

EMPLOYMENT AGREEMENT

THIS AGREEMENT ("Agreement"), dated as of October 1, 1997,
between TOYMAX INTERNATIONAL, INC., a Delaware corporation (the "Company"),
and WILLIAM A. JOHNSON, JR. (the "Executive").

WITNESSETH

WHEREAS, the Company desires to employ the Executive, and the
Executive desires to accept such employment on the terms and conditions set
forth herein.

NOW, THEREFORE, in consideration of the mutual promises,
representations and warranties set forth herein, and for other good and
valuable consideration, it is hereby agreed as follows:

1. Employment. The Company hereby agrees to employ the
Executive, and the Executive hereby accepts such employment upon the terms
and conditions set forth herein.

2. Term. Subject to the provisions of Section 10 hereof, the
period of the Executives employment under this Agreement shall be from
October 1, 1997 through September 30, 1999, as may be extended as hereinafter
provided. (the 'Term"). As of September 30, 1999 and each subsequent
September 30, (September 30, 1999 and each subsequent September 30
hereinafter called a "Renewal Date"), the Term shall be automatically
extended by one additional year (i.e. to include a period of 12 months
commencing on the day after each Renewal Date) unless, at least 60 days prior
to any such Renewal Date, the Company shall deliver to the Executive or the
Executive shall deliver to the Company written notice that the Term will not
be further extended.

3. Position and Duties.

(a) During the Term, the Executive shall serve as Chief
Financial Officer of the Company and shall have such duties consistent with
such office as from time to time may be prescribed by the Board of Directors
of the Company (the "Board").

<PAGE>

(c) During the Term, the Executive shall perform such duties
on a full time basis and the Executive shall have no other employment and no
other outside business activities whatsoever, provided, however, that the
Executive shall not be precluded from making passive investments which do not
require the devotion of any significant time or effort.

4. Compensation.

(a) For the Executive's services hereunder, the Company shall
pay the Executive a minimum annual salary (as the same may be increased from
time to time, the "Base Salary" of $155,000, payable in accordance with the
customary payroll practices of the Company.

(b) The Base Salary shall be reviewed periodically by the
Board and Shall be subject to such increases as the Board, in its sole
discretion, from time to time may determine.

5. Bonuses.

(a) Executive Bonus Plan. During the Term, the Executive
shall be eligible to participate in the Company's Executive Bonus Plan (the
"Bonus Plan"), in accordance with the terms and conditions of such Plan, as
they may exist from time to time. Nothing herein shall preclude the Company
from amending the Bonus Plan from time to time or terminating the Bonus Plan,
in whole or in part at any time.

6. Other Benefits. During the Term, the Company shall provide
the Executive with the following benefits:

(a) Stock Option Plan. The Executive shall be eligible to
participate in the Company's Stock Option Plan in accordance with the terms
and conditions thereof.

(b) Medical Health, Dental and Life Insurance Benefits. The
Company shall at its own expense provide the Executive and his eligible
dependents with the group medical, health, dental and life insurance coverage
provided by the Company generally to its employees. Nothing herein shall
prevent the Company from amending and/or terminating the coverages and/or
plans described in this Section 6(b), provided, however, that such amendment
and/or termination is applicable generally to the employees of the Company

<PAGE>

(c) 401 (k) Plan. The Executive shall be entitled to
participate in the Company's 401 (k) Plan in accordance with the terms and
conditions of such plan.

(d) Other Benefits. The Company shall make available to the
Executive any and all other employee or fringe benefits (in accordance with
their terms and conditions) which the Company may make available to its other
employees.

7. Automobile Allowance. During the Term, the Company shall
reimburse the Executive for expenses, such as automobile lease or loan
payments, in an amount up to $600 per month, plus such amount(s) as may be
required to reimburse the Executive for expenses such as registration,
insurance, repairs, maintenance, license fees, gasoline and oil incurred by
the Executive incident to his use of an automobile in connection with his
duties hereunder.

-2-

8. Reimbursement of Expenses. During the Term, the Company shall
pay or reimburse the Executive for all reasonable travel, entertainment and
other business expenses actually incurred or paid by the Executive in the
performance of his duties hereunder upon presentation of expense statements
and/or such other supporting information as the Company may reasonably
require of the Executive.

9. Vacations. The Executive shall be entitled to no less than
four weeks of paid vacation during each full calendar year of the Term (and a
pro rata portion thereof for any portion of the Term that is less than a full
calendar year): provided that no single vacation may exceed two consecutive
weeks in duration. Unused vacation may not be carried over to successive
years only with the advance written consent of the Company. Executive shall
use his best efforts to use vacation each year.

10. Termination. The employment hereunder of the Executive may be
terminated prior to the expiration of the Term in the manner described in
this Section 10.

(a) Termination by the Company for Good Cause. The Company
shall have the right to terminate the employment of the Executive for Good
Cause (as such term is defined herein) by written notice to the Executive
specifying the particulars of the circumstances forming the basis for such
Good Cause.

<PAGE>

(b) Termination upon Death. The employment of the Executive
hereunder shall terminate immediately upon his death.

(c) Voluntary Resignation by the Executive. The Executive
shall have the right to voluntarily resign his employment hereunder by
written notice to the Company.

(d) Termination by the Company Without Good Cause. The
Company shall have the right to terminate the Executive's employment
hereunder without Good Cause by written notice to the Executive.

(e) Termination Date. The "Termination Date" is the date as
of which the Executive's employment with the Company terminates. Any notice
of termination given pursuant to the provisions of this Agreement shall
specify the Termination Date.

(f) Certain Definitions. For purposes of this Agreement, the
following terms shall have the following meanings:

(i) "Person" means any individual, corporation,
partnership, association, joint-stock company, trust, unincorporated
organization, joint venture, court or government (or political subdivision or
agency thereof).

(ii) "Change of Control with respect to the Company,
means the occurrence of any of the following, other than in connection with
the initial public offering of the Common Stock, (A) the acquisition directly
or indirectly (in one or more related transactions) by any Person (other than
the Executive), or two or more Persons (other than the Executive) acting as a
group, of beneficial ownership (as that term is defined in Rule 13d-3 under
the Securities Exchange Act of 1934) of more than 20% of the outstanding
capital stock of the Company entitled to vote for the election of directors
("Voting Shares"); (B) the merger or consolidation of the Company with one or
more other corporations as a result of which the holders of the outstanding
Voting Shares of the Company immediately before the merger hold less than 80%
of the Voting Shares of the surviving or resulting corporation; (C) the sale
of all or substantially all of the assets of the Company.

(iii) "Good Cause" shall exist if, and only if, the
Executive (A) willfully or repeatedly fails in any material respect to perform
his obligations hereunder as provided herein, provided that such Good Cause
shall not exist unless the Company shall first have provided the Executive
with written notice specifying in reasonable detail the factors constituting
such material failure and such material failure shall not have been cured by
the

<PAGE>

Executive within 30 days after such notice or such longer period as may
reasonably be necessary to accomplish the cure; or (B) has been convicted of
a crime which constitutes a felony under applicable law or has entered a plea
of guilty or nolo contendere with respect thereto; or (C) has committed any
act in connection with his employment hereunder which constitutes fraud or
gross negligence; or (D) violates any term or terms of the Employee Patent
and Confidential Information Agreement by and between Toymax Inc. and the
Executive.

11. Obligations of Company on Termination. Notwithstanding
anything in this Agreement to the contrary, the Company's obligations on
termination of the Executives employment shall be as described in this
Section 11.

(a) Obligations of the Company in the Case of Termination
Without Good Cause. In the event that prior to the expiration of the Term,
the Company terminates the Executive's employment pursuant to Section 10(d),
without Good Cause, the Company shall provide the Executive with the
following:

(i) Amount of Severance Payment. Except as provided in
Section 11(b) below the Company shall pay the Executive the "Severance
Payments" equal to the sum of the following:

(A) the continuation, for a period of twelve (12)
months following the Termination Date, of the Executive's Base Salary at the
rate in effect on the Termination Date, payable in accordance with the
customary payroll practices of the Company, and

(B) an immediate single lump sum cash payment of
any Base Salary, Bonus Plan bonuses, allowable vacation and unreimbursed
expenses accrued but unpaid as of the Termination Date.

(b) Obligations of the Company in the Case of Termination of
Executive's Employment Following a Change in Control. In the event that at
any time during the Term and following a Change of Control, the Company
terminates the Executive's employment without Good Cause, in lieu of the
Severance Payments to which the Executive is entitled under Section 11(a)(i)
above, the Company shall pay the Executive as follows:

(i) Change of Control Severance Payment. The Company
shall continue to pay to the Executive for a period of twenty-four (24)
months following the Termination Date the Executive's Base Salary at the rate
in effect on the Termination Date, payable in accordance with the customary
payroll practices of the Company, plus an immediate single lump sum cash
payment of any Base Salary, Bonus Plan bonuses, allowable vacation and
unreimbursed expenses accrued but unpaid as of the Termination Date.

(c) Obligations of the Company in case of Termination for
Death, Voluntary Resignation or Good Cause. Upon termination of the
Executive's

<PAGE>

employment upon death (pursuant to Section 10(b)), as a result of the
voluntary resignation of the Executive (pursuant to Section 10(c)) or for
Good Cause (pursuant to Section 10(a)), the Company shall have no payment or
other obligations hereunder to the Executive, except for the payment of any
Base Salary, Bonus Plan bonuses, allowable vacation, benefits or unreimbursed
expenses accrued but unpaid as of the date of such termination.

12. Severability. Should any provision of this Agreement be held,
by a court of competent jurisdiction, to be invalid or unenforceable, such
invalidity or unenforceability shall not render the entire Agreement invalid
or unenforceable, and this Agreement and each other provision hereof shall be
enforceable and valid to the fullest extent permitted by law.

13. Successors and Assigns.

(a) This Agreement and all rights under this Agreement are
personal to the Executive and shall not be assignable other than by will or
the laws of descent. All of the Executive's rights under the Agreement shall
inure to the benefit of his heirs, personal representatives, designees or
other legal representatives, as the case may be.

(b) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns. Any Person
succeeding to the business of the Company by merger, purchase consolidation
or otherwise shall assume by contract or operation of law the obligations of
the Company under this Agreement.

14. Governing Law. This Agreement shall be construed in accordance
with and governed by the law of the State of New York, without regard to the
conflicts of laws rules thereof.

15. Notices. All notices, requests and demands given to or made
upon the respective parties hereto shall be deemed to have been given or made
three business days after the date of mailing when mailed by registered or
certified mail, postage prepaid, or on the date of delivery if delivered by
hand, or one business day after the date of delivery by Federal Express or
other reputable overnight delivery service, addressed to the parties at their
addresses set forth below or to such other addresses furnished by notice
given in accordance with this Section 15: (a) if to the Company, to 125 E.
Bethpage Road, Plainview, New York 11803 and (b) if to the Executive, to 60
Melody Lane, Huntington, NY 11743.

16. Withholding. All payments required to be made by the Company
to the Executive under this Agreement shall be subject to withholding taxes,
social security and other payroll deductions in accordance with applicable
law and the Company's policies applicable to executive employees of the
Company.

17. Complete Understanding. Except as expressly provided below,
this Agreement supersedes any prior contracts, understandings, discussions
and agreements relating

<PAGE>

to employment between the Executive and the Company, and constitutes the
complete understanding between the parties with respect to the subject matter
hereof. No statement, representation, warranty or covenant has been made by
either party with respect to the subject matter hereof except as expressly
set forth herein. Notwithstanding the foregoing or anything in this
Agreement to the contrary, the Employee Patent and Confidential Information
Agreement by and between the Company and the Executive, shall remain in full
force and effect.

18. Modification; Waiver.

(a) This Agreement may be amended or waived if, and only if,
such amendment or waiver is in writing and signed, in the case of an
amendment, by the Company and the Executive or in the case of a waiver, by
the party against whom the waiver is to be effective. Any such waiver shall
be effective only to the extent specifically set forth in such writing.

(b) No failure or delay by any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege.

19. Headings. The headings in this Agreement are for convenience
of reference only and shall not control or affect the meaning or construction
of this Agreement.

20. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument. This
Agreement shall become effective when each party hereto shall have received
counterparts hereof signed by the other party hereto.

IN WITNESS WHEREOF, the Company has caused this Agreement to be
duly executed in its corporate name by one of its officers duly authorized to
enter into and execute this Agreement and the Executive has manually signed
his name hereto, all as of the day and year first above written.

TOYMAX INTERNATIONAL, INC.

By:
------------------------------------
William A. Johnson, Jr.

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TOYMAX
INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENT OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 21,501
<SECURITIES> 0
<RECEIVABLES> 675
<ALLOWANCES> 152
<INVENTORY> 5,474
<CURRENT-ASSETS> 50,836
<PP&E> 7,605
<DEPRECIATION> 5,793
<TOTAL-ASSETS> 53,832
<CURRENT-LIABILITIES> 19,082
<BONDS> 0
0
0
<COMMON> 106
<OTHER-SE> 34,597
<TOTAL-LIABILITY-AND-EQUITY> 53,832
<SALES> 99,329
<TOTAL-REVENUES> 99,329
<CGS> 54,971
<TOTAL-COSTS> 54,971
<OTHER-EXPENSES> 507
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 662
<INCOME-PRETAX> 15,473
<INCOME-TAX> 4,133
<INCOME-CONTINUING> 11,340
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<NET-INCOME> 11,340
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</TABLE>