JANEX INTERNATIONAL INC, 10KSB, 1997-04-15

JANEX INTERNATIONAL INC
10KSB, 1997-04-15
GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 10549

FORM 10-KSB
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)

For the fiscal year ended December 31, 1996

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______________ to ______________

Commission File No. 0-17927

JANEX INTERNATIONAL, INC.
(Name of small business issuer in its charter)

<TABLE>
<S> <C>
Colorado 84-1034251
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

21700 Oxnard Street, Suite 1610
Woodland Hills, California 91367
(Address of principal executive offices) (Zip Code)
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Issuer's telephone number, including area code: (818) 593-6777

Securities registered pursuant to Section 12(b) of the Act: None

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

Common Stock, no par value
--------------------------
(Title of Class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X
---
NO
----

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
----

The issuer's net revenue for its most recent fiscal year was $7,112,921.

The aggregate market value of the voting stock held by non-affiliates of the
issuer as of April 1, 1997 was $2,860,220

Number of registrant's shares of Common Stock outstanding as of April 1, 1997
was 5,296,721.

Documents incorporated by reference: None Page 1 of 69

Exhibit Index Page: 65
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.

Business Development
- --------------------

Janex International, Inc., formerly known as With Design in Mind
International, Inc., was incorporated in Colorado on July 28, 1986, and is the
parent corporation of With Design in Mind, a California corporation ("WDIM"), a
wholly owned subsidiary that it acquired on August 19, 1988, Janex Corporation,
a New Jersey corporation ("Janex"), a wholly owned subsidiary acquired on
October 6, 1993, and Malibu Fun Stuffed, Inc., a California corporation
("Malibu"), a wholly owned subsidiary acquired on August 4, 1995. Janex
International, Inc. is also the parent corporation of Pro Gains Company Limited,
a Hong Kong corporation ("Pro Gains"), owned 50% by Janex International, Inc.,
and 50% by Janex, and the parent corporation of Malibu Fun Stuffed International
Limited, a Hong Kong corporation ("MFSI"), owned 99% by Malibu and 1% by Janex
International, Inc. As used in herein, the term "the Company" refers to Janex
International, Inc. and its wholly owned subsidiaries, unless the context
indicates otherwise. From October 6, 1993, to August 4, 1995, the Company's
business was conducted primarily through its subsidiaries Janex and Pro Gains.
Prior to October 6, 1993, business was conducted primarily through WDIM.
Subsequent to August 4, 1995, business has been conducted primarily through
Janex, Pro Gains, Malibu and MFSI. The Company's principal place of business is
located at 21700 Oxnard Street, Suite 1610, Woodland Hills, California 91367.
The Company's telephone number is (818) 593-6777.

From inception (July 1986) to June 1992 the Company developed and
marketed a variety of consumer products that were sold by retailers of gift,
novelty and educational items throughout the United States ("Gift Products").
The Company's historic focus was to seek to market products that were unusual in
nature and that in some cases displayed interesting and engaging scientific
phenomena. In 1990, the Company expanded its product line with the introduction
of the MicroTheatre(TM) Display Unit ("MicroTheatre"), licensed from Dentsu
Prox, Inc. ("Dentsu").

On June 23, 1992, Mr. Steve Zuloff, then the Chief Executive Officer
and a Director of the Company, and Mr. Barry R. Benjamin, then the President,
Chief Financial Officer and a Director of the Company, resigned their positions
with the Company. Upon the former officers' resignations, Mr. Sheldon F. Morick
was appointed Chief Executive Officer, President and Director of the Company,
and Mr. Michael S. Manahan was appointed Chief Financial Officer, Vice
President, Treasurer and Secretary of the Company.

During the third quarter of fiscal 1992, the new executive officers of
the Company commenced an analysis of the Company, including an analysis of the
Company's products, overhead, and potential growth areas. As a result of that
analysis, the Company began a process of discontinuing the development and
marketing of Gift Products, and the Company's strategy was changed to emphasize
the development, manufacture and marketing of unique, functional children's
products that were intended to fulfill the needs of both parents and children.
The new line of products for children was to be sold to mass merchant retailers.

In early 1993, the Company introduced a new line of children's
products under the brand name "Great Stuff." Product development was completed
early in the year, and the Company began the process of manufacturing product
and selling to retailers. Also during the first six months of 1993, the Company
continued with a limited program to market the MicroTheatre.

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By June 1993, due to manufacturing delays and limited acceptance by
the major retailers of the Great Stuff product line, it was apparent that the
product line was not going to be successful, and thus the Company began a
process of seeking alternative sources of revenue. In June 1993 the Company
entered into an agreement with Deco Disc Industries, Inc. ("Deco Disc"), under
which Deco Disc licensed to the Company the rights to distribute to the Gift and
Specialty retail markets a line of patented greeting cards and ornaments with
"pop out" compact discs. In connection with the Deco Disc Agreement the Company
paid a license fee of $100,000, which was to be recouped by the Company, at a
rate of $1.00 for each ornament and $.50 for each greeting card, as the Company
purchased finished products from Deco Disc. Under the Deco Disc Agreement, Deco
Disc received warrants to purchase 500,000 shares of the Company's Common Stock
(restricted) with certain registration rights. The shares underlying the
warrants were registered with the Securities and Exchange Commission on February
13, 1995.

In July 1993 management made another review of the Company's product
lines and sales results, and based upon that review made the decision that the
existing product lines of the Company, Great Stuff, MicroTheatre and Deco Disc,
were not generating sufficient revenues to support the ongoing operations of the
Company. In particular, during fiscal 1991 and 1992, the Company received
revenues of approximately $3,580,000 in connection with the MicroTheatre
products, $3,000,000 of which was due to orders from Sega Enterprises Ltd.
("Sega"). However, in or about December, 1992, the Company was advised by Sega,
that it did not foresee purchasing any further MicroTheatre products.
Consequently, in fiscal 1993, sales of MicroTheatre products were only
approximately $147,000. Furthermore, orders for the Deco Disc products did not
materialize as expected, with total Deco Disc product orders totaling only about
$190,000. Therefore, the decision was made to continue to market the existing
product lines, with limited financial outlays, and at the same time, begin the
process of identifying and making an acquisition.

In September 1993 the Company entered into an agreement to purchase
all of the outstanding stock of MJL Marketing Inc. ("MJL"), a New Jersey
corporation. The acquisition was completed on October 6, 1993. In November 1993
the Company changed the name of MJL to Janex Corporation so that the corporate
name would match the brand name under which most of the Janex products are
marketed. Under the agreement to purchase MJL, the shareholders of MJL received
1,200,000 shares of the Company's Common Stock (restricted), with certain
registration rights, and $600,000 at the closing. An additional $150,000 was to
be paid in January 1994 and $1,000,000 was payable on an installment basis over
a period of three years. Subsequently the $150,000 note was paid in three equal
payments of $50,000 on April 30, June 30 and September 30, 1994. Further,
through several extensions, the holders of the $1,000,000 (at December 31, 1996
the amount payable was $500,000) of notes have agreed to extend payments of the
notes to February 1, 1998, subject to certain interest payments and the granting
of certain warrants. See "Certain Relationships and Related Transactions" and
Description of Securities--Friedland Warrants and --Lesnick Warrants."

The business of Janex has historically focused on the manufacturing
and marketing of children's toys, coin and gumball banks, flashlights and
battery operated toothbrushes marketed under the brand name Janex. Janex
incorporates licensed characters into most of its products, and sells its
products to United States mass merchant retailers, toy specialty stores and
department stores. Sales and manufacturing were historically facilitated through
Janex's sister company in Hong Kong, Pro Gains. Effective with the acquisition,
Pro Gains became a subsidiary of the Company, 50% of the stock of which is owned
by Janex, and the other 50% by Janex International, Inc.

With the acquisition of Janex in October 1993, the Company made the
decision to cease marketing the Great Stuff, Deco Disc, and MicroTheatre product
lines. The California subsidiary, WDIM, which prior

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to this time was the main operating arm of the Company, began a process of
winding down operations. As part of that winding down process, the Company
entered into negotiations with Dentsu, from whom the Company licensed the
MicroTheatre technology, to terminate the agreement under which that technology
was licensed. On October 17, 1994, the Company entered into a Settlement
Agreement and General Mutual Release with Dentsu, paying the sum of $75,000 in
cash and issuing 50,000 shares of restricted Common Stock to Dentsu, with
certain registration rights, in full settlement of the Company's obligations
owing to Dentsu. The 50,000 shares were registered with the Commission on
February 13, 1995.

The Company also entered into negotiations with Allen Design Group,
Inc. ("ADG"), its joint venture partner in Hologram Ventures, the joint venture
established to market the MicroTheatre technology to the arcade game industry,
to terminate the joint venture. The negotiations with ADG were concluded in
February 1994 at which time the parties entered into a settlement agreement and
mutual release.

On March 31, 1994, the Company advised Deco Disc of its intention not
to proceed with the further marketing of Deco Disc products and under the
provisions of the Deco Disc Agreement gave Deco Disc ninety days notice of the
termination of the distribution agreement.

From October 1993 through to July 1995 the operations of the Company
were primarily through Janex and the Hong Kong subsidiary, Pro Gains. By May of
1995 it became apparent that the order flow for 1995 was significantly behind
that of 1994, and management became increasingly concerned about the Company's
reliance on licensed products, given the volatility of the licensing business
and the cost of acquiring licenses. See "Business of Issuer--Competition".
Therefore the decision was made to investigate the possibility of adding other
product lines, and to evaluate various acquisition opportunities that were
presented to the Company for its consideration. As a result, in July 1995, the
Company entered into an agreement to acquire all of the outstanding stock of
Malibu and its affiliate MFSI ("Malibu Agreement"). The acquisition was
completed on August 4, 1995. Under the Malibu Agreement, the shareholders of
Malibu and MFSI received 125,000 shares of the Company's Common Stock
(restricted) and $50,000 at the closing. In addition, the former shareholders of
Malibu were entitled to an earn-out based on the future performance of Malibu
and MFSI. However, the former shareholders of Malibu and the Company entered
into an agreement, dated June 28, 1996, eliminating the earn-out provisions in
return for the issuance of 150,000 shares of Janex International Common Stock
(restricted).

Malibu and MFSI (collectively referred to as the "Malibu Division")
operate in tandem similar to Janex and Pro Gains (collectively referred to as
the "Janex Division"). Together they develop, manufacture and market toys and
novelty gift items, selling to mass merchant retailers, chains stores, and
specialty stores primarily in the United States. Effective with the acquisition
MFSI became a subsidiary of the Company, 99% of the stock of which is owned by
Malibu, and 1% of which is owned by Janex International, Inc.

The product line of the Malibu Division differs from that of the Janex
Division in that most of the Malibu Division products ("Malibu Products") do not
incorporate licensed characters. Further the Company considers the Janex
Division products ("Janex Products") to be of a functional nature and not
necessarily toys, while the Malibu Products fall more clearly into the toy
category. Therefore, the Company operates Malibu and MFSI, and Janex and Pro
Gains, as two distinct divisions. Nevertheless, their methods of operation and
procedures are almost identical, and therefore will not be separately discussed
herein, unless there are significant differences.

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The Company merged the operations of Janex and Malibu, and the
operations of Pro Gains and MFSI, during 1996. Subsequent to effecting those
mergers, the Company will continue to maintain the Janex Product line and the
Malibu Product line as two separate product lines.

Business of Issuer
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Products

The Company's products are either created by the Company or licensed
from independent inventors. The Company is constantly seeking new ideas from
many sources and is frequently approached by inventors who propose that the
Company manufacture and market a product based on their designs or concepts. If
a design or concept is licensed by the Company, the Company will, in some cases,
make significant modifications for the purpose of enhancing the product's
features or eliminating unnecessary or costly aspects. Royalties are payable by
the Company with respect to products manufactured from designs or technologies
licensed by the Company from inventors or other third parties.

Most of the Janex Products incorporate licensed fantasy characters.
Once the decision has been made to include a specific product in the line, the
Janex Division will endeavor to obtain licenses to incorporate fantasy
characters into the product. Presently, the Janex Division has licenses to
utilize one or more trademarks and/or copyrights owned or controlled by The Walt
Disney Company, Marvel Entertainment, Inc., Warner Bros. Corporation, and Turner
Home Entertainment, Inc. Although the basic underlying product may stay the
same, generally the product goes through a stage of customization to tailor that
product design to the license which is to be incorporated into it.

The Janex Products are targeted for sale by mass merchant retailers
for prices ranging from $3 to $30. Generally, the commercial life expectancy of
any given Janex Product is virtually unlimited in its generic state (i.e.,
without a licensed character). For example, the predecessors of Janex marketed
battery operated toothbrushes for over twenty years. However, the commercial
life span of any particular version of one of the Janex Products is directly
tied into the length of the license agreement for the fantasy character
incorporated into that product, and the popularity of that fantasy character
with consumers. Since most of the Janex Division license agreements are written
for a term of two years, and given that the popularity of most fantasy
characters is short lived, the Company estimates that the useful life of any
given version of the Janex Products will be no more than two years. Although the
Company intends to continue to market some version of every one of the Janex
Products it now sells for at least the next three years, the Company
nevertheless is actively developing new products which could incorporate fantasy
characters.

The Janex Product line currently includes the following: battery
operated Power Toothbrush and Stand, battery operated Power Toothbrush (without
stand), battery operated Power Flashlight, battery operated hand held Fun Fan,
Chalk Board, Book Light, Squeeze Light Figures, Action/Talking Alarm Clock,
Action/Talking Bank, Light Pals, Table Fan, Fun Hook, Doll or Action Figure
Carrying Case, Gumball Bank, Vinyl Coin Bank, Deluxe Doll Carrier, Deluxe Doll
Diaper Bag, Budget Doll Bedding Assortment, Doll Comforter and Pillow Set, and
Lil' Miss Executive Play Set.

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The Malibu Products do not normally incorporate licensed fantasy
characters. As a result, this division is not limited by licensor approval of
the products it develops and sells. Therefore, the product line reflects a more
opportunistic and diverse approach than the Janex Product line. The Malibu
Products are targeted for sale by mass merchant retailers, specialty retailers
and gift stores at prices ranging from $3 to $40. The commercial life span of
the Malibu Products could be long-lived, as is the case with many toys that are
not tied into a fashion or fad, but the Company expects the life span of any of
the Malibu Product to be no more than five years. Consequently, the Company is
constantly seeking new product concepts for the Malibu Product line, and
further, is continually redesigning and repacking existing products to improve
consumer appeal.

The Malibu Products include the following: Wee Wet Pets, Tub-a-Ducky,
Wee Wet Pet Kid-a-Rounds, Slide-O-Bunny, Slide-O-Monkey, Cookie Muncher, Kid-a-
Round Horses, Fire Engines and Police Cars, Card Pals, Wide-A-Wake Ups, Hat Box
Dolls, Shoe Box Dolls, Sweet Angel Dolls, Pez Watches, Pez Fashion Accessories,
Nutcracker Puppet & Video Set, Peter Cottontail Puppet & Video Set, Peter and
the Wolf Puppet & Video Set, Train Adventure Video Set, Kids Music Video Set and
Mr. Baby Proofer.

The Company intends to add at least six new products in 1997, and at
least another six products in 1998, subject to the availability of working
capital. See "Management's Discussion and Analysis or Plan of Operations--
Liquidity and Capital Resources." The concentration of new product introductions
will be on products of similar characteristics to those already in the Company's
product lines, i.e., similar retail price levels, the capability of
incorporating a fanciful licensed character (for Janex Products), similar target
age groups, functional or toys, suitable for manufacture through existing or
similar factories, and suitable for distribution through existing distribution
channels. The Company intends to continue to include in its strategy for product
line growth the possibility of acquiring other companies, particularly where
potential acquisition candidates offer product line, manufacturing or marketing
synergies.

The Company's products carry a 90-day limited warranty.

Government Regulations

The Company is subject to the provision of, among other laws, the
Federal Hazardous Substances Act and the Federal Consumer Products Safety Act.
Those laws empower the Consumer Products Safety Commission (the "CPSC") to
protect children from hazardous products. The CPSC has the authority to exclude
from the market articles which are found to be hazardous and can require a
manufacturer to repurchase such products under certain circumstances. Any such
determination by the CPSC is subject to court review. Similar laws exist in some
states and cities in the United States and in many jurisdictions throughout the
world. The Company endeavors to comply with all applicable regulations through a
program of quality inspections and product testing. The Company maintains
product liability insurance in the amount of $3,000,000.

Marketing, Distribution and Customers

The Company sells its products nationwide to retailers primarily
through a network of independent sales representative firms. One of those
independent sales representative firms is owned by a shareholder of

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the Company. That firm represents the Company's products to three of its largest
customers. See "Certain Relationships and Related Transactions." The Company's
products are displayed at two major consumer product shows in January and
February of each year, and at a number of smaller specialty market shows
throughout the year. Marketing activities for the Company's product lines
primarily target mass merchant retailers in the United States and Canada, such
as Kmart, Wal-Mart, Target, and Toys R Us, as well as smaller regional
merchants, drug chains, department stores and gift stores. In 1996 Wal-Mart and
Toys R Us represented 10% and 21% of the Company's revenues, respectively.

The product marketing strategy for the Janex Product line is to market
the line as a selection of products for children that are primarily functional
in nature, may in certain circumstances be used as toys, incorporate licensed
characters where possible, are marketed under one brand name, Janex, and that
retail for prices between $3 and $30. The brand name provides an umbrella for
all products which helps both the sell-in of the product line to retailers, and
the sell-through to customers.

The product marketing strategy for the Malibu Product line is to
market a line of reasonably priced toys and novelty gift items that are
different from other products on the market, either through unique product
design or innovative packaging. The marketing strategy is opportunistic, meaning
that the Malibu Division will include in its product line almost any product for
reasons of advantageous entry costs and/or significant consumer demand, if the
Company believes the product can make a material contribution to corporate
profitability. Further, if profitable, the Malibu Products will be customized,
either in design or in packaging, to meet the needs of specific customers.

The Company currently offers to customers two primary methods of
purchasing product: on customary industry credit terms, FOB the Company's
primary warehouse facility in Baltimore, Maryland; or on a letter of credit
basis, through the Hong Kong subsidiaries Pro Gains and MFSI, FOB Hong Kong.
Under these terms, title to the goods passes to the buyer at the point of
origin, and in most cases the buyer is responsible for the costs of
transportation.

Domestic inventories are kept in a third party contract warehouse
facility located in Baltimore, Maryland. See "Certain Relationships and Related
Transactions." Orders from domestic customers are processed at the Company's
offices in California. Shipping documents are forwarded to the Baltimore
warehouse, which fills the orders and ensures shipment of product to customers
in accordance with customer specified shipping instructions. The warehouse
confirms shipment to the customer, and the Company then invoices the customer
from California. Occasionally the Company utilizes the services of a similar
contract warehouse facility in the Los Angeles area.

Letter of credit orders are processed through the Company's Hong Kong
subsidiaries, Pro Gains and MFSI. The Company has no employees in Hong Kong, but
instead has entered into a service agreement with Li & Fung (Trading) Limited
("Li & Fung"), a Hong Kong based services company (also referred to in the
industry as an agent), that provides the personnel and facilities to accomplish
accepting orders primarily from United States and Canadian based retailers,
arranging for the manufacture of products to fill those orders, delivering the
products to the customer or the customer's representative in Hong Kong, and then
processing the necessary documentation to negotiate payment for the goods by way
of letters of credit or, in some instances, by direct wire transfer from the
customer. Previously the Company used the services of the Hong Kong services
provider Oriental World Trading. That relationship was terminated in September,
1995.

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Historically, Janex sold to customers primarily on a letter of credit
basis, FOB Hong Kong. Although Janex maintained a domestic warehouse in
Baltimore, Maryland, and did ship to customers FOB Baltimore, this type of
business was not emphasized, because to do so required continued investment in
inventory and accounts receivable. Management now believes that shipping to
customers on normal credit terms from domestic inventories may provide access to
a base of potential new customers that do not purchase on a letter of credit
basis. This group of customers would include smaller retailers that do not
purchase enough to make letter of credit purchasing advantageous, and certain
larger multi-location retailers that rely on their suppliers to provide
inventory and logistics services along with product. Malibu traditionally
emphasized sales both on a domestic basis, and on a letter of credit basis, FOB
Hong Kong, with their business in recent years being equally divided. The
Company believes that the acquisition of Malibu will strengthen its ability to
meet the objective of increasing domestic business.

Manufacturing

Most of the Company's products are manufactured to the Company's
specifications by manufacturers based in Macau and China. The Company does have
one product manufactured in the United States, and further has eight products
assembled in the United States from components acquired from companies located
in the United States, China and Brazil. The Company believes that teaming
contract manufacturers with Company employees yields cost savings, maximizes the
design resources of the Company and shortens the new product introduction cycle.
During the design stage, Company employees work closely with employees of the
manufacturers, and also travel to the manufacturers' facilities, in order to
accomplish the Company's design goals. Company employees also travel to the
manufacturing facilities for the purpose of inspecting the manufacturing process
and verifying the effectiveness of quality control and assurance programs.
Manufactured products may be shipped to the Company's warehouse in Baltimore,
Maryland, for inspection and distribution. Alternatively, products may be
shipped directly from the manufacturer to the customer.

Molds and tooling for those products manufactured in the Orient are
procured and owned by Pro Gains or MFSI. Regardless of whether the goods are
destined for delivery to the Company's warehouse facility in Baltimore, or
destined for delivery direct to a customer, Pro Gains or MFSI, through Li &
Fung, initiates all orders for product with the manufacturer, and pays the
manufacturer, through Li & Fung, subsequent to the delivery of the product in
accordance with payment terms agreed to between the Company and the
manufacturer. The Company does not inventory product in the Orient. All products
manufactured in the Orient are manufactured specifically for a customer order,
or specifically for shipment to the Baltimore warehouse. From time to time, the
Company may have on hand a supply of specific components for incorporation into
finished products, if those components are difficult to procure, have long lead
times on delivery, or have minimum order quantities associated therewith.

Product Design and Selection

For the Janex Product line, the Company seeks to identify functional
products for children that will provide a benefit for both the parent and the
child, which are suited to the incorporation of a licensed fantasy character,
and which are not already being manufactured and marketed effectively by other
companies.

Traditionally, mothers purchase the majority of all children's
products. Therefore, the primary target audience for the product line is
mothers of boys and girls between the ages of three and ten. The Company

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believes that one of the greatest needs of any parent is help in "managing"
their children. This would include such activities as help in keeping dolls and
other playthings organized, brushing teeth, teaching children about money, and
getting children to do their chores. The Janex Products are designed to be
functional fun products which would help a parent "manage" their children and at
the same time make routine activities and chores fun and/or easier for the child
to perform.

For the Malibu Product line, the Company seeks to identify toys for
which a demand exists, and that can be made more attractive or fun by
incorporating a unique design or by packaging the product in a manner that is
different from other similar products on the market. Since the Company does not
have the financial strength to support the Malibu Products with television
advertising, the product design and unique packaging are designed to capture the
attention of consumers at the shelf level.

New products are initially selected based upon what management
believes, in its experience, will be successful. However, in order to seek to
reduce the expense of producing a product that may not sell, the Company may
utilize the services of professional market research companies to perform
product testings and to determine product viability. In the product selection
and design process input is also solicited from buyers at certain retailers,
and from sales representatives. Feedback from these market research techniques
is also used in the development of product packaging and in the establishment of
product price levels. In addition, for the Janex Products, since most
incorporate licensed characters, the licensor's input into product and packaging
design is always solicited, and in some cases may even be required by the terms
and conditions of the license agreement.

While the Company has been the sole originator of several of its
products, it actively seeks innovative and unusual product concepts from third
parties. Management attempts to be open and accessible to inventors who may
have new product ideas. The Company receives many unsolicited proposals from
inventors seeking to interest the Company in licensing their product. Company
management frequently meets with inventors to review the various proposed
products. If and when the Company determines that it is willing to license a
product, it seeks to obtain the exclusive marketing and manufacturing rights for
the duration of the patent, if the product is patentable, or other suitably
lengthy period if not patentable.

Historically the Company has not incurred any significant costs in
connection with research and development and does not expect to do so in the
foreseeable future. The Company keeps the direct investment in research and
development on new products to a minimum by entering into agreements with
product researchers/inventors providing for ongoing royalty participation should
a given product be brought to market. Once the decision has been made to include
a product in one of the Company's product lines, the Company typically incurs
start-up costs in the range of $5,000 to $20,000 for each version of that
product introduced. Such costs include producing one or more prototypes of a
product, obtaining licensor approval (if it is licensed) on concept, artwork and
sculpting, and acquiring any required molds and tooling for production. Subject
to the availability of funds, the Company expects to spend approximately
$500,000 in 1997 for start-up costs pertaining to new products.

For the Janex Product line, the Company continually searches for new
characters to license. A new fantasy character can be used on new products as
well as extend the life of an existing product. The Company attends trade shows,
subscribes to industry publications, and utilizes the services of licensing
consultants to ensure that, when new licenses become available, the Company
receives due consideration from the licensor as a potential licensing candidate.
When new licenses are acquired, the licensors generally specify exactly what
products the licensed characters can be incorporated into, the territory in
which products incorporating those

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licenses can be sold, the royalty rate payable on sales of products, the royalty
advance (if any), and the royalty guarantee (if any). The amount of the royalty
rate, advance and guarantee required under any given license agreement is
generally a function of the credibility of the owner of the licensed property,
and the popularity of the licensed character with the target market.

For the Janex Products, the Company seeks licenses which may open up
additional target market groups. As an example, the Pocahontas character on a
battery operated toothbrush is a suitable product for a four year old girl. That
same battery operated toothbrush with a Batman character on it would be a
suitable product for a seven year old boy. As a result, the Company endeavors as
part of its product development program to ensure that it has spread its
available license acquisition funds across a range of licenses, rather than
investing heavily in only one or two licenses. Subject to the availability of
funds, the Company expects to spend approximately $200,000 in 1997 on the
acquisition of new licenses, exclusive of ongoing royalties.

Competition

The market for both toys and functional children's products is served
by many manufacturers, both foreign and domestic. Many products are available
over a broad price range, and the market is competitive, includes numerous small
manufacturers, and is dominated by three industry giants. The Company classifies
the competition for its product lines three categories, as follows: (1) toy and
novelty gift manufacturers, (2) functional product manufacturers, and (3) direct
functional children's product competitors.

Toy and novelty gift manufacturers are companies which are primarily
in the business of manufacturing and marketing toys. Functional product
manufacturers are companies which are primarily in the business of manufacturing
and marketing a specific type, or group, of functional products, such as
furniture, lighting, or clocks, but which may include in their product line
certain functional children's products. Direct functional children's product
competitors are companies which manufacture and market functional children's
products as their company's primary business. All companies that fall into these
three categories compete with the Company's product lines.

There is considerable competition for the consumer's dollar in the
Company's target markets. However, the Janex Products are differentiated from
those of the competition by relying heavily on the use of licensed characters.
The Malibu Products are differentiated from those of the competition by relying
on unique product designs and unique packaging. Although the Company attempts to
protect its products with patents and/or trademarks when available, successful
products in any product classification are always susceptible to imitation or
"knock-off." The Company seeks to maintain a competitive advantage by continuing
the introduction of new products and/or product enhancements over time, by
producing high quality products, and by pursuing licenses for a broad range of
children's characters.

For the Janex Products, given the reliance on licensed characters to
differentiate products and to drive sales, competition must also be viewed from
the perspective of the competition between companies for licenses. Most license
agreements are non-exclusive, and limited in duration. Within the industry, two
years is the standard term for most license agreements. When licenses become
available, or when they are up for renewal, the licensor may give the license to
the company which is willing to offer the highest royalty rate, advance royalty
amount, or royalty guarantee. The Company ranks as a very small player in the
industry, and is extremely vulnerable in the competition for licenses, should
financial strength become a primary decision making criterion of the licensor.

10
<PAGE>

Licensors do not normally license multiple manufacturers for the same
product in the same territory, although technically under the terms of many
license agreements they could. This option is generally reserved by the licensor
as a method of dealing with licensees that do not perform. In addition,
licensors tend not to auction licenses, where the license would go to the
highest bidder. Instead most licensors, particularly those concerned with the
longevity of their characters, base the license granting decision more on the
ability of the manufacturer to make the products, to sell the products, to
manufacture quality products that enhance the value of the license and the
licensor's reputation, to account accurately for the sales of products, and to
pay royalties due on a timely basis. Also, most reputable licensors recognize
the value of the relationship between the licensee and their customers, and
realize the potential disruption that could occur by precipitously replacing
licensees.

The Company believes its relationship with its major licensors to be
excellent, and believes that it will continue to be able to obtain from its
existing licensors, and new licensors, the necessary licenses to maintain a
competitive advantage in the marketplace. However, there is no guarantee that
the Company will be able to obtain the licenses necessary to maintain a
competitive advantage, and failure to obtain those licenses would adversely
effect the sales of Janex Products.

Since the Janex Division relies upon licensed characters as the
primary method of differentiating its products from those of other companies,
revenues tend to be a function of the general popularity of the characters
licensed by the Company vis-a-via those characters licensed to competing
companies. Further, the Janex Products account for the majority of the sales of
the Company. (See "--Management's Discussion and Analysis or Plan of
Operations"). As a result, more traditional indicators of revenue stability such
as the state of the economy, market share, financial strength and/or weakness of
the company and historical growth rate offer limited insight as tools to predict
future performance. Thus, the strength, or weakness, of the licenses held by the
Company can be expected to a have a major influence on revenues and
profitability, and over time it would not be unexpected for the Company to
experience both significant upward and downward fluctuations in sales. These
upward and downward swings in revenue associated with "fad" or "hit" licenses
that generate tremendous sales volumes for short periods make the business of
selling products that incorporate licensed fantasy characters extremely
volatile, in comparison to businesses that do not sell products that incorporate
licensed fantasy characters, and that do not sell products that are considered
fads.

The volatility of revenues and profits created as a result of the
significant reliance on licensed characters by Janex Products is expected over
time to reduce as Malibu Products increasingly contribute to the operations of
the Company.

Patents, Trademarks and Licenses

For those products that can be patented, the Company normally takes
the steps necessary to do so. However, the Company recognizes that patents are
not totally effective in prohibiting competitors from producing similar products
that could compete with those of the Company. Therefore, the Company does not
rely heavily upon patent protection to maintain its competitive position. The
Company believes that its growth, competitive position and success are dependent
upon its right to use specific licensed characters and trademarks, its ability
to develop and design unique products and packaging, its relationships with
customers, and its relationship with contract manufacturers.

- --------------------------------------------------------------------------------
1. The respective licensors in each instance have registered, own and/or
control the trademark, registered trademarks and/or copyright rights to the
characters licensed and the characters, likenesses thereof, names, pictures,
drawings and any other associations with those characters are used by the
Company strictly under license from the respective licensor.

11
<PAGE>

The Company has entered into a number of license agreements for the
use of licensed fantasy characters on its products. These license agreements
typically run for two years, require a payment of royalties on sales of up to
16%, require royalty advances of up to $50,000, and in some instances have
guaranteed royalties of up to $200,000. The following is a list of the current
licensors to the Company and the characters licensed:

- The Walt Disney Company for Mickey's Stuff for Kids, Pocahontas, The
Hunchback of Notre Dame, Gargoyles, Hercules and 101 Dalmatians/1/

- Warner Bros. Corporation for Batman, Animaniacs, Looney Tunes and
Free Willy/1/

- Marvel Entertainment Group Inc. for Spiderman and X-Men/1/

- Nelvana Marketing for Wild C.A.T.S./1/

- New Line Cinema Corporation for The Mask/1/

- Turner Home Entertainment, Inc. for Johnny Quest/1/

- Bluebird Toys (UK) Limited for Polly Pockets/1/

- UPA Productions of America for Godzilla/1/

- Australian Broadcasting Corporation for Bananas in Pajamas/1/.

In addition, the Company has entered into a number of license
agreements for the use of product designs and for the rights to use certain
trademarks. These license agreements typically run two to five years, require
payment of royalties on sales of up to 6%, and require royalty advances of up to
$15,000. See "Certain Relationships and Related Transactions".

Backlog

Shipment of the Company's products is anticipated to peak during the
summer months period and, consequently it is expected that the Company's backlog
will be at a maximum during June, July and August. If items are not in stock,
delivery typically takes between one and three months. When items are in stock,
items are normally shipped on the date upon which the customer has requested
shipment.

- --------------------
/1/ The respective licensors in each instance have registered, own and/or
control the trademark, registered trademarks and/or copyright rights to the
characters licensed and the characters, likenesses thereof, names, pictures,
drawings and any other associations with those characters are used by the
Company strictly under license from the respective licensor.

12
<PAGE>

At December 31, 1995, the backlog of orders was approximately $1.0
million, and at December 31, 1996, the backlog of orders was approximately $1.25
million.

Employees

As of April 1, 1997, the Company had seven full-time employees. The
full-time employees were engaged as follows: one in accounting, one in
administration and sales support, three in marketing and product development and
two in general and sales management. The Company has never experienced a work
stoppage and the Company believes that relations with its employees are good.
None of the Company's employees are covered by collective bargaining agreements.

ITEM 2. DESCRIPTION OF PROPERTY.

The Company entered into a lease, effective April 1, 1994, for 2,202
square feet of office space in a multi-tenant high rise building located at
21700 Oxnard Street, Woodland Hills, California (the "Office"). The Company and
the Landlord amended the lease, effective January 1, 1996, providing the Company
with an additional 2,460 square feet of space adjacent to its current offices,
and extended the expiration date of the lease to December 31, 2000. The lease
allows for its early termination anytime after March 1997, provided that the
Company enters into another lease with the landlord in the same complex.
Effective April 1, 1997, the Company entered into an agreement to sublease a
portion of the facility to a third party for the balance of the lease.

With the acquisition of Malibu, the Company acquired the lease on
4,432 square feet of industrial warehouse space in a multi-tenant industrial
complex located at 5312 Derry Avenue, Suites Q & R, Agoura Hills, California
(the "Warehouse"). The lease expires on March 31, 1998. In December, 1995, the
Company sublet the Warehouse for the remaining term of the lease. The rental
income under the sublease is approximately equal to the rent the Company is
obligated to pay.

ITEM 3. LEGAL PROCEEDINGS.

Shareholder Litigation

On February 17, 1993, a class action complaint was filed on behalf of
shareholders of the Company against the Company, Mr. Steven C. Zuloff, former
Chairman and Chief Executive Officer of the Company, Mr. Barry R. Benjamin,
former President and Chief Financial Officer of the Company, David S. Benjamin,
former Vice President of the Company, Deloitte and Touche, former auditors of
the Company, and the underwriters of the Company's 1991 stock offering, by Kevin
J. O'Rourke and Patricia Ann O'Rourke in the United States District Court,
Central District of California ("O'Rourke Suit"). On August 31, 1993, the
Company moved to dismiss the original action. Prior to the Court ruling on the
motion, on October 29, 1993, Plaintiffs amended and filed their First Amended
Complaint.

13
<PAGE>

The Company filed a motion to dismiss the First Amended Complaint on
December 3, 1993 and on May 24, 1994, the Court dismissed the suit. The
Plaintiffs were ordered to submit, if they so choose, any amended complaint
within 45 days. Plaintiffs filed their Second Amended Complaint, which is
similar to the First Amended Complaint, but includes certain additional
allegations in an effort to correct the defects in the First Amended Complaint.

The Second Amended Complaint, like the First Amended Complaint,
alleges violation of federal securities laws by the Defendants, in connection
with the May 1991 public offering. As relief, the Plaintiffs are seeking to have
the Court declare the action to be a proper class action, to have the
Plaintiffs' certified as class representatives, to have the Plaintiffs' granted
the right to tender or rescind their purchases of the Company's securities, and
to have the Plaintiffs awarded unspecified damages.

On May 6, 1996, the Plaintiffs filed a voluntary request for Dismissal
of Lawsuit which the court entered without prejudice on May 7, 1996.

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

There were no matters submitted to a vote of the Company's security
holders during the fourth quarter of the fiscal year ended December 31, 1996.

14
<PAGE>

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.

Price Range of Outstanding Common Stock

On October 16, 1989, the Common Stock began trading on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") and has
been quoted on NASDAQ since that date except for the period from June 7, 1990,
to June 18, 1990. The following table sets forth the high and low bid prices for
each fiscal quarter from January 1, 1995, through December 31, 1996, as reported
by the National Association of Securities Dealers. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and do not
necessarily represent actual transaction.
<TABLE>
<CAPTION>

<S> <C> <C>
Year Ended December 31, 1996 High(1) Low(1)
- ------------------------------ ------ ------

First Quarter $2.25 $1.00
Second Quarter $2.06 $1.25
Third Quarter $2.13 $1.00
Fourth Quarter $2.13 $1.06

Year Ended December 31, 1995 High Low
- ------------------------------ ---- ---

First Quarter $4.50 $2.00
Second Quarter $3.38 $1.75
Third Quarter $2.75 $1.50
Fourth Quarter $2.38 $1.13
</TABLE>

(1) The closing price on NASDAQ on April 1, 1997 was $0.56 per share of Common
Stock. As of April 1, 1997, the Company had approximately 830 shareholders of
record.

Dividend Policy

The Company has not paid dividends on its Common Stock and does not
anticipate paying dividends in the foreseeable future. The Company anticipates
that all earnings, if any, in the foreseeable future, will be retained for
development of the Company's business.

15
<PAGE>

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

The following discussion should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto appearing elsewhere
in this Form 10-KSB.

Overview

From inception (July 1986) to June 1992, the Company developed and
marketed a variety of consumer products that were sold by retailers of gift,
novelty and educational items throughout the United States ("Gift Products"). In
1990, the Company expanded its product line with the introduction of the
MicroTheatre Display Unit, which was intended for commercial markets. During
1991 and 1992, the Company had revenues from MicroTheatre related products of
$3,580,000, primarily as a result of a contract with Sega Enterprises Ltd.,
which produced revenues of $3,000,000 from the licensing of a video game (the
"Game") and the sale of certain optical system kits ("Kits"). However, the Game
was not a commercial success, Sega did not purchase any Kits after the initial
order, and advised the Company in December 1992, that it did not intend to
purchase any additional Kits. At or about the same time, management had serious
concerns regarding the market for the Company's products, since revenues from
the Gift Products went from a high of $8,204,697 for the year ended September
30, 1989, to $2,636,411 for the year ended September 30, 1992, due to what
management believed was the continuation of a downward trend in the demand for
high-end novelty gift items. Accordingly, management changed the Company's
product philosophy and focus, to that of producing functional children's
products.

In early 1993, the Company introduced a new line of functional children's
products, under the brand name "Great Stuff." But, by June 1993, management
realized that the Great Stuff product line was not gaining acceptance, and the
Company began looking for other sources of revenue. In June 1993, the Company
sought to obtain sales revenue by entering into a license and distribution
agreement with Deco Disc Industries, Inc. ("Deco Disc"), which gave the Company
the right to distribute to the Gift and Specialty retail markets a line of
patented greeting cards and ornaments with "pop out" compact discs. However,
when orders for the Deco Disc products did not materialize as expected, with
total Deco Disc product orders totaling only about $190,000, management began
searching for an acquisition and in October 1993, MJL Marketing, Inc. (now known
as Janex Corporation) and its affiliate Pro Gains, a successful manufacturer and
distributor of children's products which utilized fanciful licensed characters
on their products, was acquired.

The operating results of Pro Gains and Janex for the fiscal years 1992 and
1993 (prior to their acquisition by the Company) indicate that independently Pro
Gains was profitable while Janex incurred losses. However, the two companies
operated in tandem, with considerable interdependencies and combined they
generated a profit. While subsequent to the acquisition, the Company's
operations were restructured, Pro Gains and Janex continue to operate in tandem
to achieve consolidated objectives, and by design, significant interdependencies
continue to exist. Management measures their performance on a combined rather
than an individual basis. Both companies sell their products primarily to
customers in the United States. However, Pro Gains sells free on board (FOB)
Hong Kong, on a letter of credit basis, while Janex sells FOB the Company's
warehouse, in Baltimore, Maryland, on customary industry credit terms. It is
normally the customer that determines the form of the transaction. Accordingly,
consideration and comparison of those measurable standards of performance such
as sales, operating profits and identifiable assets for these entities as if
they were operating independently may not be meaningful.

16
<PAGE>

With the acquisition of Janex in October 1993, the Company ceased
marketing the Great Stuff, Deco Disc and MicroTheatre product lines and focused
entirely on marketing the Janex products. See "Business of Issuer--Products."

By May of 1995 it became apparent that the order flow for 1995 was
significantly behind that of 1994, and management became increasingly concerned
about the Company's reliance on licensed product, given the volatility of the
licensing business and the cost of acquiring licenses. See "Business of Issuer -
Competition". Therefore the decision was made to investigate the possibility of
adding other product lines, and to evaluate various acquisition opportunities
that were presented to the Company for its consideration. As a result, on August
4, 1995, the Company acquired Malibu and its Hong Kong affiliate MFSI. See
"Liquidity and Capital Resources". The two acquired companies operate in tandem
similar to Janex and Pro Gains. Together they develop, manufacture (through
subcontractors) and market toys and novelty gift items, selling primarily in the
United States to mass merchant retailers, chain stores, and specialty stores,
both FOB the Company's warehouse in Baltimore, Maryland, and FOB Hong Kong.

Results of Operations of the Company

The following table sets forth, for the periods indicated, the relative
percentage that certain income and expense items bear to net sales.
<TABLE>
<CAPTION>

Year Ended Year Ended
December 31, December 31,
1996 1995
------------- -------------
<S> <C> <C>

Net sales 100.0% 100.0%
Cost of sales 61.1 56.8
------ ------
38.9 43.2

Royalties 14.0 13.3
Selling, general
& administrative expenses 49.3 31.9
------ ------
Operating loss (24.6) (2.0)

Other expense (15.5) (9.8)
------ ------
Loss before taxes (41.1) (11.8)

Income tax expense (0.2) (0.4)
------ ------

Net loss (40.3)% (12.2)%
====== ======

</TABLE>

17
<PAGE>

Material Changes in Results of Operations
Fiscal Years Ended December 31, 1996 and December 31, 1995

Sales for the year ended December 31, 1996, were $7,112,921, as compared
to $9,355,021 for the year ended December 31, 1995, a decrease of $2,242,100 or
24%. The net loss for the year ended December 31, 1996, was $2,865,439, or $0.56
per share, compared to net loss of $1,137,82 2 for the year ended December 31,
1995, or net loss of $0.23 per share.

Sales during the year ended December 31, 1996, were primarily from
shipment of products incorporating characters licensed from The Walt Disney
Company, which generated sales of $2,735,273, or 38% of total sales, and the
shipment of products incorporating characters licensed from Warner Bros., which
generated sales of $2,467,849, or 35% of total sales. This compares to sales
during the year ended December 31, 1995, when licenses from The Walt Disney
Company generated sales of $3,774,000, or 40% of total sales, and licenses from
Warner Bros. generated $2,822,000, or 30% of total sales.

Sales for Janex and Malibu ("Domestic Sales") for the year ended December
31, 1996, were $1,789,985, or 25% of sales, and sales for Pro Gains and MFSI
("FOB Hong Kong") for the year ended December 31, 1996, were $5,322,936, or 75%
of sales. This compares to Domestic Sales for the year ended December 31, 1995,
of $1,792,577, or 19% of total sales, and FOB Hong Kong sales for the year of
$7,562,444 or 81% of total sales. Since Janex and Pro Gains, and Malibu and
MFSI, operate in tandem as two profit centers, the net profit of each entity
viewed alone would not be meaningful. In general, products sold by Janex and
Malibu generate a slightly greater gross profit than those sold by Pro Gains and
MFSI to compensate for the higher costs of servicing domestic business,
including the costs of carrying inventory, and the costs of carrying trade
receivables. While management does not anticipate any major change in the
percentages of total sales generated from Domestic Sales and FOB Hong Kong
shipments, it is the customer that ultimately decides whether the goods are
shipped FOB a United States warehouse, or FOB Hong Kong.

Sales for the year ended December 31, 1995, included $493,406 of sales, or
5.3% of total sales, generated by the recently acquired Malibu and MFSI.

Gross profit was 38.9% for the year ended December 31, 1996, as compared
to 43.2% for the year ended December 31, 1995. Management sets prices on most
products to achieve a gross profit of between 45% and 50%. The 1996 gross profit
was negatively affected by the write down of inventories of approximately
$100,000 during the year, and by the sales of product during the year of
approximately $92,000 at or below cost. In addition, gross profit generated on
sales of Malibu Products was 35%, well below the target rate set for the Company
overall. Management believes that the gross profit on the Malibu Products will
improve as a result of changes being made in the design of the products, and the
factories that produce those products. Gross profits are expected to be in the
45% to 50% range in 1997.

Royalty expense was $1,002,429 for the year ended December 31, 1996, or
14.0% of sales, as compared to royalties of $1,239,656 for the year ended
December 31, 1995, which was 13.3% of sales. The increase in royalties as a
percentage of sales is a result of including a reserve of $240,000 against
royalty guarantees made on contracts under which management expects to generate
insufficient product sales to meet the guarantees. This increase is offset
somewhat by an increase in sales of products that do not incorporate licensed
characters. Royalty expense for the year ended December 31, 1995, included a
reserve of $122,500 against royalty advances made on contracts under which
management expects to generate insufficient product

18
<PAGE>

sales to recoup those advances. Most of the Company's products, when sold, will
require payment of royalties ranging from 12% to 20% of the selling price.

Selling, general and administrative ("SG&A") expenses were $3,509,706, or
49.3% of sales, for the year ended December 31, 1996, as compared to $2,980,006,
or 31.9% of sales, for the year ended December 31, 1995. SG&A expenses increased
as a percentage of sales due to the significant decrease in sales volume in 1996
over that of 1995, with no corresponding decrease in SG&A. SG&A expenses are
comprised of fixed overhead costs and variable selling expenses. The fixed
overhead portion of SG&A for the year ended December 31, 1996, was $2,497,212,
$509,751 or 26%, greater than in 1995. SG&A increased during 1996 primarily as
a result of increases in payroll costs of 33.3%, or $347,863, increases in
travel and accommodation costs of 7.0%, or $12,490, increases in sales and
marketing costs of 20.0%, or $43,025, increases in product development costs of
16.0%, or $3,528, increases in communication costs of 37.4%, or $47,167,
increases in office expense of 5.9% or $1,868, increases in occupancy costs of
11.2% or $8,230, increases in insurance costs of 19.2% or $5,387 and increases
in financial costs of 60.4% or $60,635. These increases were offset by
decreases in professional fees & investor relations of 11.8%, or $20,442.
Product development costs for 1995 included a reserve of $105,000 against
product development costs associated with licenses under which management
expects to generate insufficient sales to recover the cost of those product
development costs.

The variable selling cost component of SG&A was $1,012,494 for the year
ended December 31, 1996, or 14.2% of sales, compared to $992,545 for the year
ended December 31, 1995, which was 10.6% of sales. Variable selling costs
include sales representative's commission, agent's commission, freight, product
liability insurance, testing fees and other charges that vary directly with
sales volume. Management expects variable selling costs to be between 10% and
12% of sales. Variable selling costs were slightly higher in 1996 as compared to
1995 as a result of an increase in the cost of local transportation charges in
Hong Kong for moving customer orders from the factory to the delivery point, and
as a result of an increase in the fee being charged by the Company's Hong Kong
agent.

Interest expense for the year ended December 31, 1996, was $353,516, as
compared to $89,429 for the year ended December 31, 1995, an increase of
$264,087 or 29.5%. The increase was primarily attributable to an increase in the
use of the Company's credit facilities to finance operations during peak
business periods as a result of the overall decrease in sales during the year.
Also, due to loan restructures and issuance of stock options, $180,477 was
charged to imputed interest for the year ended December 31, 1996 in relation to
common stock options and warrants issued during the year.

During 1995, the Company recorded income tax expense of $12,485, compared
to income tax expense in 1995 of $36,909. The Company does not expect there to
be any federal income tax liability for 1996, as the Company suffered a net
loss. The income tax expense relates to income tax paid primarily on state tax
returns and Hong Kong income tax on profits of MFSI.

19
<PAGE>

Seasonality and Quarterly Fluctuations

The Company's business follows closely that of other companies with
children oriented product lines, which tend to generate the greater part of both
sales and profits during the Christmas selling season. The Company expects that
sales will be higher in the third and fourth quarters of the year, as compared
to the first and second quarters of the year, with over 75% of shipping expected
to take place between April and September.

Liquidity and Capital Resources

The Company had negative cash flow from operating activities of $712,787
for the year ended December 31, 1996, compared to a negative cash flow in 1995
of $690,506. The difference between the 1996 cash flow and the 1995 cash flow
from operating activities resulted primarily from an increase in net loss of
$1,727,617. Accounts receivable decreased by $187,221 and accounts payable and
accrued expenses increased by $790,274, as a consequence of the drop in revenues
between 1995 and 1996. Inventories decreased by $35,986. Prepaid and other
assets increased by $76,541 and amortization and depreciation increased by
$84,051.

The Company used $734,420 in investing activities for the year ended
December 31, 1996, compared to using $857,418 in 1995. The decrease in cash used
in investing activities relates primarily to a slight decrease in expenditures
to build tools and molds and to develop new products. During the year ended
December 31, 1995, the Company invested $453,118 in additions to property, plant
and equipment, of which approximately $424,000 was for tooling for new products,
and the Company invested $349,403 in product development costs. Additionally,
the Company used cash of $54,897 in the purchase of Malibu and MFSI, net of cash
acquired. During 1996 the Company made comparable investments of $430,007 in
property, plant and equipment, of which approximately $333,000 was for tooling
for new products, and the Company invested $304,413 in product development
costs.

The Company generated $850,259 from financing activities during the year
ended December 31, 1996, compared to generating $1,259,467 during 1995. The cash
generated from financing activities came primarily from an decrease in bank debt
of $351,425, a private loan transaction of $31,356, proceeds from the exercise
of warrants of $64,000 and proceeds of stockholder notes payable of $656,240 and
proceeds of loans payable-agent of $450,088.

The Company believes that its existing cash balance together with its
existing lines of credit and projected cash flow from operations will not be
sufficient to fund projected order flow, overhead and debt repayment for the
fiscal year ending December 31, 1997. Accordingly, the Company must obtain
additional financing in order to maintain its current level of operations. If
financing is not obtained in the immediate future, then the company wil have to
reduce operations to a level consistent with available working capital. The
Company is actively seeking additional sources of fiancing, including but not
limited to a merger with or acquistion by another company. There can be no
assurances that any such additional financing will be available on a timely
basis and/or under acceptable terms. The Company has experienced recurring
losses from operations, negative cash flows and decereases in working captial.
The Company's independent certified public accountants have included an
explanatory paragraph in their report indicating there is substantial doubt with
respect to the Company's ability to continue as a going concern.

20
<PAGE>

The Company had a $1,000,000 line of credit with a bank with interest at
9.5%, pursuant to a loan agreement which expired on May 3, 1996. The outstanding
balance on the line of credit was $751,425 at December 31, 1995. On March 20,
1996, the Company and bank agreed to reduce the amount available under the line
of credit to $500,000 (including the ability of the Company to utilize the line
of credit to issue up to $100,000 of stand-by letters of credit), and the bank
waived certain covenant violations under the original loan agreement. The line
of credit is secured by a $500,000 certificate of deposit purchased from the
bank and a first priority security interest in all of the assets of the Company.
Accordingly, at December 31, 1996, the outstanding balance under the line of
credit had been reduced by $351,425 to $400,000. The Company negotiated with the
bank to extend the maturity date to May 7, 1997, with all other terms of the
loan remaining the same.

The Company, through a Hong Kong bank, has a line of credit for the
Company's subsidiary, Pro Gains, which allows Pro Gains to discount with the
bank letters of credit issued to Pro Gains by its customers. The credit is
tailored to match the Company's selling season. From May to November the credit
line is HK$7,000,000 (US$900,000) and from December to April the line is
HK$1,500,000 (US$200,000). Janex International, Inc. has issued a guarantee to
the Hong Kong bank in the full amount of the line. At December 31, 1996, the
Company had advances under this line for discounted letters of credit of $9,235.
The cash advances under the line are treated as reductions in accounts
receivable.

Effective as of April 19, 1996, pursuant to a Revolving Credit Agreement
with an individual lender (who is also a significant shareholder of the Company)
(the "Lender") that expires on October 19, 1999 (the "Agreement"), Janex
Corporation arranged to borrow up to $900,000, with interest at 9.5% payable
quarterly. The Agreement is secured by all of the assets of Janex Corporation,
and the guaranty of Janex International, Inc. As additional consideration, the
Company granted the Lender warrants to purchase up to 900,000 shares of the
Company's common stock (restricted), with certain "piggy-back" registration
rights, exercisable at a price of $1.45 per share through April 19, 2000. The
warrants vest in equal increments of 180,000 on the first day of consecutive
six-month periods commencing April 19, 1996. However, to the extent that amounts
borrowed under the Agreement are paid off and the Agreement is canceled during
its term, any unvested warrants shall be void. The Company recorded imputed
interest of $111,786 from the issuance of these warrants. As of December 31,
1996, the Company had borrowed $500,000 pursuant to this Agreement. In addition,
the Company has used an additional $100,000 as security to issue the stand-by
letter of credit in connection with a loan payable to the Company's Hong Kong
agent . The unamortized loan charge at December 31, 1996, was $210,158.

Under the terms of the stock purchase agreement for the acquisition of
Janex, the Company issued two promissory notes totalling $1,000,000, payable in
semi-annual installments over a three year period (at December 31, 1995, the
amount payable was $458,760, representing the present value of the future
payments under the obligation discount at 9%, not including imputed interest
accrued but not paid). The first three payments of $166,667 each under the
$1,000,000 note were made on June 30, 1994, December 31, 1994, and June 30,
1995. On December 29, 1995, the holders of the $1,000,000 of notes agreed to a
deferral of the payment due on December 31, 1995, to June 30, 1996. As a
condition of the deferral, the Company agreed to pay the note holders interest
on the deferred payments at the rate of 9% per annum from December 31, 1995 to
the date of payment. On June 28, 1996, the note holders agreed to further extend
the payment date for all remaining payments to February 1, 1998, subject to
payment of interest at the rate of 9.5% per annum, retroactive to January 1,
1996. Quarterly interest payments commenced on September 1, 1996. The

21
<PAGE>

Company also agreed to provide the note holders with security for the notes.
Further, in connection with the extension of the notes, the Company entered into
a warrant agreement with each of the note holders, providing for the issuance of
up to 282,994 warrants to one of them and up to 167,994 warrants to the other,
to acquire a total of 450,998 shares of the Janex International Common Stock
(restricted), exercisable at a price of $1.45 per share through June 28, 2000,
with certain "piggy-back" registration rights. The warrants vest in six-month
increments over the term of the loan, and if the loan is paid off early, certain
of the warrants will be void. The Company recorded imputed interest of $55,668
from the issuance of these warrants and another $13,023 from the extension of
the notes. The outstanding loan balance and unamortized loan charge as of
December 31, 1996, was $500,000 and $120,997.

In addition, as part of the June 28, 1996 Agreement, the payment of
commissions owing one of the stockholders was extended to February 1, 1998.
Furthermore, the unpaid commission balance bears interest at 9.5% per annum
beginning January 1, 1996, until paid with interest paid quarterly beginning
September 1, 1996. The outstanding principal balance as of December 31, 1996,
was $115,000.

On December 22, 1995, the Company borrowed $500,000 in a private unsecured
loan transaction. Under the terms of the loan agreement, payments are to be made
on a periodic basis based upon the level of certain sales. The loan accrues
interest monthly on the unpaid portion at the rate of two percent (2%) above the
prime rate (8.5% at December 31, 1996) per annum. In addition, an agreement was
reached whereby an additional $340,000 was added to the outstanding balance. If
the loan is not fully paid off by December 31, 1997, the remaining balance and
accrued interest will be paid off no later than January 31, 1998. The balance of
this note payable at December 31, 1996 is $531,356.

Pursuant to an Agency Agreement dated October 23, 1995, the Company,
through its Hong subsidiaries, Pro Gains and MFSI, may borrow up to $300,000
from its Hong Kong agent for the payment of product development and tooling
costs, provided that the company issues to the agent an irrevocable stand-by
letter of credit for $100,000. The loan is to be repaid from collections of
certain customer invoices at the rate of 5% of the invoice amount, with interest
at 2% above the Hong Kong prime rate, and any balance remaining unpaid at
December 31, 1997, will be due and payable on January 15, 1998. The Agent will
retain ownership of all tooling paid for with the credit facility until the
credit facility is repaid. The credit facility is available in each year that
the Agency Agreement is in effect, which was for an initial term of two years.
In March 1996, the Company opened the stand-by letter of credit to the agent. As
of December 31, 1996, the Company had borrowed $271,789 under this credit
facility.

Pursuant to a supplementary agency agreement dated September 24, 1996, the
Company may borrow up to another $200,000 from its agent provided that the
Company issues to the Agent an irrevocable stand-by letter of credit for
$100,000. Any advance under this facility is to be repaid within 60 days from
the date of advance with interest at 2% above the Hong Kong prime rate, and any
balance remaining unpaid at December 31, 1997, will be due and payable on
January 15, 1998. As of December 31, 1996, the Company had borrowed $178,299
under this credit facility.

22
<PAGE>

out based on future performance off Malibu and MFSI. In October 1996, the
Company revised this agreement and issued the former owners of Malibu 150,000
shares of restricted common stock in exchange for cancellation of the earn-out
provisions of the agreement. The common stock was valued at $1.00 per share,
which was management's estimate of the fair value at the time. Accordingly,
$150,000 was recorded as compensation expense.

Under the terms of the warrant agreement granting Deco Disc warrants to
purchase 500,000 shares of the Company's common stock (the "Warrant Agreement"),
the Company was obligated to register the stock underlying the warrants, and to
use its best efforts to maintain the registration statement effective during the
period the warrants are excisable. Deco Disc threatened to sue the Company,
claiming that the Company did not file the registration statement on a timely
basis, and that the registration statement was not kept effective by the
Company, resulting in Deco Disc being damaged. In order to avoid any potential
litigation, on March 26, 1996, the Company and Deco Disc entered into a
Settlement Agreement and Specific Release under which the Company issued to Deco
Disc additional warrants to purchase 100,000 shares of the Company's common
stock (restricted), with certain "piggy-back" registration rights, at a price of
$0.64 per share in exchange for Deco Disc releasing the Company from any and all
prior claims relating to violations of the Warrant Agreement, and failure to
update the registration statement. As a result of the foregoing transaction,
during the year ended December 31, 1996, the Company recorded a charge to
operations of $84,125 as management's estimate of the fair value of the 100,000
common stock purchase warrants.

During the year ended December 31, 1995, the Company received $147,200
from a warrant holder pursuant to the warrant holder exercising warrants to
purchase 230,000 shares of the Company's Common Stock.

During the year ended December 31, 1996, the Company received $64,000 from
a warrant holder pursuant to the warrant holder exercising warrants to purchase
100,000 shares of the Company's common stock.

As of December 31, 1996, the Company had cash and certificates of deposit
of $686,616, working capital deficit of ($1,192,746) and a current ratio of
.61-to-1. This compares to cash of $1,283,564, working capital of $71,610 and a
current ratio of 1.03-to-1 as of December 31, 1995. The Company had, at December
31, 1996, consolidated stockholders' equity of $775,725, as compared to
consolidated stockholders' equity at December 31, 1995, of $2,872,647.

As of December 31, 1996, the Company has a deferred tax asset of $3,843,268
resulting from net operating loss carry forwards and other temporary
differences. It is not possible at this time to determine that the realization
of the deferred tax assets is more likely than not; accordingly, a valuation
reserve has been established for the full amount.

23
<PAGE>

New Accounting Standards

Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
(SFAS No. 121) establishes guidelines regarding when impairment losses on long-
lived assets, which include plant and equipment, and certain identifiable
intangible assets, should be recognized and how impairment losses should be
measured. The adoption did not have a material effect on the Company's financial
position or results of operations.

Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) establishes a fair value method
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services from non-employees in exchange for equity
instruments. The Company adopted this accounting standard on January 1, 1996.
SFAS 123 also encourages, but does not require companies to record compensation
cost for stock-based employee compensation. The Company has chosen to continue
to account for stock-based compensation utilizing the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, compensation cost for stock options and
warrants is measured as the excess, if any, of the fair market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock.

Inflation

Management believes that inflation has not had a significant impact on the
Company's costs and profits during the past two years.

24
<PAGE>

ITEM 7. FINANCIAL STATEMENTS.

<TABLE>
<CAPTION>
Page
Number
------

<S> <C>
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORTS 26

CONSOLIDATED FINANCIAL STATEMENTS:

Balance Sheet as of December 31, 1996 27

Statements of Operations for the years ended
December 31, 1996 and December 31, 1995 28

Statement of Changes in Stockholders' Equity for the
years ended December 31, 1996 and December 31, 1995 29

Statements of Cash Flows for the years ended
December 31, 1996 and December 31, 1995 30

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 32-51

</TABLE>

25
<PAGE>

Report of Independent Certified Public Accountants

Board of Directors and Stockholders
Janex International, Inc.
Woodland Hills, California

We have audited the accompanying consolidated balance sheet of Janex
International, Inc. as of December 31, 1996, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the two years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the ac counting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Janex
International, Inc. as of December 31, 1996, and the consolidated results of
their operations and their cash flows for the each of the two years then ended,
in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, including a net loss of $2,865,439 for the year ended December
31, 1996, negative cash flows of $596,948 for the year ended December 31, 1996,
and negative working capital of $1,192,746 at December 31, 1996. The Company has
also been slow and delinquent in paying its accounts payables and other
obligations. These factors raise substantial doubt about the Company's ability
to continue as a going concern. There is no assurance that the Company will be
able to realize its recorded assets and liquidate its liabilities in the normal
course of business. Management's plans in regard to these matters are also
described in Note 3. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

BDO SEIDMAN, LLP

Los Angeles, California
March 21, 1997

26
<PAGE>

JANEX INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>

December 31,
1996
-----------
<S> <C>
Assets (Notes 7 and 8)
Current assets
Cash and cash equivalents $ 186,616
Certificate of deposit (Note 7) 500,000
Accounts receivable, net of allowance of $202,634 230,479
Inventories (Note 2) 569,637
Prepaid royalties 182,465
Other current assets 179,108
------------

Total current assets 1,848,305

Property and equipment, net (Note 4) 476,355
Intangible assets, net (Note 6) 2,021,551
Product development costs, net (Note 5) 242,471
Deferred loan charges (Note 8) 331,155
Other assets 11,939
------------

$4,931,776
============

Liabilities and Stockholders' Equity
Current liabilities
Loan payable - bank (Note 7) $ 400,000
Loans payable - agent (Note 11) 450,088
Note payable (Note 10) 531,356
Accounts payable 809,308
Accrued expenses (Note 9) 848,359
Income taxes payable (Note 12) 1,940
------------

Total current liabilities 3,041,051

Notes payable - stockholders (Note 8) 1,115,000
------------

Total liabilities 4,156,051

Commitments and contingencies (Note 14)

Stockholders' equity (Note 13):
Class A convertible preferred stock, no par value,
5,000,000 shares authorized; none issued and outstanding -
Common stock, no par value; 20,000,000 shares authorized;
5,296,721 shares issued and outstanding 11,268,816
Additional paid-in capital 554,517
Accumulated deficit (11,047,608)
------------

Total stockholders' equity 775,725
------------
$4,931,776
============
</TABLE>

See accompanying notes to consolidated financial statements.

27
<PAGE>

JANEX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
1996 1995
-------------------------
<S> <C> <C>

Net sales $ 7,112,921 $ 9,355,021
----------- -----------

Costs and expenses
Cost of sales 4,348,280 5,315,659
Selling, general and administrative (Note 16) 3,509,706 2,980,006
Royalty expense (Note 14) 1,002,429 1,239,656
----------- -----------

Total cost and expenses 8,860,415 9,535,321
----------- -----------

Operating loss (1,747,494) (180,000)
----------- -----------

Other income (expense)
Interest income 38,995 53,300
Interest expense (353,516) (89,429)
Foreign exchange loss (Notes 2 and 15) (7,844) (4,963)
Depreciation (313,326) (270,947)
Amortization (469,769) (608,574)
----------- -----------

Total other income (expense) (1,105,460) (920,613)
----------- -----------

Loss before income taxes (2,852,954) (1,100,913)

Income tax provision (Note 11) 12,485 36,909
----------- -----------

Net loss $(2,865,439) $(1,137,822)
=========== ===========

Loss per common share $ (0.56) $ (0.23)
=========== ===========

Weighted average number of shares outstanding 5,161,242 4,860,447
=========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

28
<PAGE>

JANEX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
Common Stock Additional Total
----------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
---------- ----------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance
at January 1, 1995 4,691,721 $10,579,116 $ - $(7,044,347) $3,534,769

Issuance of common stock
due to exercise of warrants
(Note 13) 230,000 147,200 - - 147,200

Acquisition of Malibu
and MFSI (Note 13) 125,000 328,500 - - 328,500

Net loss - - - (1,137,822) (1,137,822)

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

Balance
at December 31, 1995 5,046,721 11,054,816 - (8,182,169) 2,872,647

Issuance of common stock
warrants due to
settlement agreement (Note 13) - - 84,125 - 84,125

Issuance of common stock
due to exercise of warrants
(Note 13) 100,000 64,000 - - 64,000

Issuance of common stock in
lieu of Malibu Fun Stuffed
earn-out (Note 13) 150,000 150,000 - - 150,000

Issuance of common stock
warrants (Note 8) - - 470,392 - 470,392

Net loss - (2,865,439) (2,865,439)
---------- ----------- -------- ----------- ----------

Balance
at December 31, 1996 5,296,721 $11,268,816 $554,517 $(11,047,608) $ 775,725
========== =========== ======== =========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

29
<PAGE>

JANEX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
Increase (Decrease) in Cash and Cash Equivalents 1996 1995
-------------------------------
<S> <C> <C>
Cash flows from operating activities
Net loss $(2,865,439) $(1,137,822)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Provision for losses on accounts receivable 76,787 61,903
Amortization of licensing relationships,
trademarks and goodwill (Note 6) 223,885 193,367
Amortization of product development costs 245,884 415,207
Amortization of loan charges (Note 8) 180,477 -
Depreciation 313,326 270,947
Unrealized foreign exchange losses 7,844 4,963
Issuance of common stock in lieu of earn-out (Note 13) 150,000 -
Issuance of stock warrants (Note 13) 84,125 -
Changes in assets and liabilities, net of effects from
purchase of Malibu and MFSI (Note 1):
Increase (decrease) from changes in:
Accounts receivable 187,721 405,671
Inventories 35,986 (201,134)
Prepaid royalty (62,470) 17,910
Prepaids and other assets (76,541) (49,612)
Accounts payable 445,630 (330,395)
Accrued expenses 344,644 (318,954)
Income tax payable (4,646) (22,557)
----------- --------

Net cash used in operating activities (712,787) (690,506)
----------- --------

Cash flows from investing activities
Additions to property and equipment (430,007) (453,118)
Additions to product development costs (304,413) (349,403)
Payment for purchase of Malibu and MFSI,
net of cash acquired (Note 1) - (54,897)
----------- --------

Net cash used in investing activities (734,420) (857,418)
----------- --------
</TABLE>

30
<PAGE>

JANEX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

Years ended December 31,
-----------------------
Increase (Decrease) in Cash and Cash Equivalents 1996 1995
---------- -----------
<S> <C> <C>
Cash flows from financing activities
Proceeds/(payments) from/to bank loan (351,425) 751,425
Proceeds from note payable 31,356 500,000
Proceeds from loans payable - agent 450,088 --
Issuance of stockholder notes payable 656,240 --
Proceeds from stockholder note payable -- (139,158)
Proceeds from exercise of warrants and
common stock options 64,000 147,200
--------- ----------

Net cash provided by financing activities 850,259 1,259,467
--------- ----------

Net decrease in cash and cash equivalents (596,948) (288,457)

Cash and cash equivalents, at beginning of year 783,564 1,072,021
--------- ----------

Cash and cash equivalents, at end of year $ 186,616 $ 783,564
========= ==========

Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 128,515 $ 68,216
Income taxes $ 17,131 $ 59,466
========= ==========
</TABLE>
Supplemental schedule of noncash investing and financing activities

In 1996, the Company issued warrants of $470,392 pertaining to a loan extension
and opening of line of credit. Deferred loan charges pertaining to the loan
extension and line of credit was $331,155 at December 31, 1996; $180,477 was
amortized during the year (see Note 8).

In August 1995, the Company issued 125,000 shares of common stock of $328,500 to
acquire all of the outstanding stock of Malibu Fun Stuffed and its related
company Malibu Fun Stuffed International Limited ("MFSI"). The Company
allocated the excess of the purchase price over the net assets of the acquired
companies of $422,220 to goodwill.

See accompanying notes to consolidated financial statements.

31
<PAGE>

JANEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - GENERAL

Janex International, Inc. (the "Company") was incorporated in Colorado on July
28, 1986 and is the parent corporation of With Design in Mind ("WDIM"), a
California corporation, Janex Corporation ("Janex"), a New Jersey corporation,
and Malibu Fun Stuffed ("Malibu"), a California corporation, all wholly-owned
subsidiaries. Janex International, Inc. is also the parent corporation of Pro
Gains Company Limited ("Pro Gains"), a Hong Kong corporation, owned 50% by Janex
International, Inc., and 50% by Janex. Malibu Fun Stuffed International Limited
("MFSI"), a Hong Kong corporation, is owned 99% by Malibu and 1% by Janex
International, Inc. As used in the report, the term "the Company" refers to
Janex International, Inc. and its subsidiaries, unless the context indicates
otherwise.

On August 4, 1995, the Company acquired all of the outstanding stock of Malibu,
a California corporation, and its then affiliated Hong Kong company, MFSI.
Under the terms of the purchase agreement, the Company issued 125,000 shares of
the Company's restricted common stock to the former stockholder of the acquired
companies, and paid $50,000 cash. The Company recorded the acquisition using
the purchase method of accounting. Under this method, the allocation of the
purchase price to Malibu's and MFSI's assets and liabilities is required to
reflect fair value. The Company allocated the excess of purchase price over net
assets acquired to goodwill (see Note 6). In addition, the former stockholders
of Malibu and MFSI were entitled to an earn-out based on future performance of
Malibu and MFSI. In 1996, in lieu of this arrangement, the Company issued
150,000 shares of common stock to the former stockholders of Malibu and MFSI and
the earn-out was cancelled (Note 13). The Company recorded $150,000 as
compensation expense in connection with the issuance of these shares, which was
the fair value at the date of the grant.

The Company's business is conducted primarily through its subsidiaries, Janex,
Pro Gains, Malibu and MFSI. The Company's business consists mainly of
developing, manufacturing (through subcontractors), marketing and selling toys
and functional children's products ("Children's Products"). These products
include 1) coin and gumball banks, flashlights and battery operated toothbrushes
marketed under the brand name "Janex" and 2) plush, dolls, video sets and
children's watches marketed under the brand name "Malibu Fun Stuffed!", all of
which retail for prices between $3 and $40. The Children's Products are
manufactured to the Company's specifications by manufacturers based in Macau,
China and the United States and are sold nationwide to mass merchant retailers,
toy specialty stores, department stores and gift shops, through a network of
independent sales representative firms.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the operations of the
Company, its wholly owned subsidiaries, WDIM, Janex, Pro Gains, Malibu and MFSI.

The results of operations for Malibu and MFSI have been included in the
accompanying statements of operations for the year ended December 31, 1996, and
for the period from the acquisition date of August 4, 1995 through December 31,
1995. All significant intercompany accounts and balances have been eliminated
in consolidation.

32
<PAGE>

JANEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cash Equivalents

The Company considers all highly liquid investments purchased with an initial
maturity of three months or less to be cash equivalents.

Revenue Recognition

Revenue is recognized upon shipment of the product, with appropriate allowance
made for estimated returns and uncollectible accounts.

Inventories

Inventories, which consist principally of finished goods, are stated at the
lower of cost or market. Cost is determined on various methods which
approximate the first-in, first-out method.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are
computed on the straight-line and accelerated methods over the estimated useful
lives of the related assets, principally 2 to 5 years for molds, machinery and
equipment and furniture and fixtures. Leasehold improvements are amortized over
the shorter of their estimated useful lives or the lease term.

Intangible Assets

Intangible assets resulting from business acquisitions, consist of cost in
excess of net assets of subsidiaries acquired (goodwill), licensing
relationships and trademarks. Goodwill is being amortized on a straight-line
basis over the period of expected benefit of 10 to 20 years. Licensing
relationships and trademarks are being amortized over 9 to 15 years using the
straight-line method. Management has a policy to review goodwill and other
productive assets at each quarterly balance sheet date for possible impairment.
This policy includes recognizing write-downs if it is probable that measurable
undiscounted future cash flows and/or the aggregate net cash flows of an asset,
as measured by current revenues and costs (exclusive of depreciation) over the
asset's remaining depreciable life, are not sufficient to recover the net book
value of an asset.

33
<PAGE>

JANEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Product Development Costs

Product development costs consist of product design and development (through
subcontractors) for the various toys and children's products the Company sells.
The designs are stated at the lower of cost or net realizable value and
amortized on a straight-line basis over a 1 to 2 year period. Such costs are
periodically reviewed each year based on management's estimates of sales of
related products. Product development costs are written off when management
believes they provide no future benefit.

Deferred Loan Charges

Deferred loan charges are amortized over the expected terms of the related loans
or notes payable.

Concentration of Credit Risk and Major Customers

Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash investments and trade receivables.

The Company maintains cash and cash equivalents in short-term investments with
various financial institutions. These financial institutions are located in the
United States and Hong Kong. The Company performs periodic evaluations of the
financial situation of these institutions, as part of the Company's investment
strategy.

The Company's two largest customers totaled approximately 31% and 50% of net
sales in 1996 and 1995 and 11% and 18% of accounts receivable at December 31,
1996 and 1995 (see Note 15). The loss of either of these major customers could
have a material adverse effect on the results of the Company's operations. The
Company routinely assesses the financial strength of its customers and, as a
consequence, believes that its trade accounts receivable credit risk exposure is
limited. The Company does not require collateral to support customer
receivables.

Royalties

Royalties due to licensors are generally provided for based upon a negotiated
percentage of underlying net sales and are frequently subject to a minimum
guaranteed royalty obligation. Prepaid royalties are recouped against royalties
accrued on the sale of licensed products.

Product Warranty

Estimated warranty costs are provided for at the time of sale of the warranted
products.

34
<PAGE>

JANEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Foreign Currencies

All balance sheet accounts of Pro Gains and MFSI are translated at the current
exchange rate at balance sheet date, while income statement items are translated
at the average currency exchange rates for each period presented. The resulting
translation adjustments, if significant, are recorded as a separate component of
stockholders' equity.

Fair Value of Financial Instruments

The carrying amounts of financial instruments including cash, accounts
receivable, loans payable, notes payable, accounts payable and accrued expenses
approximate fair value because of their short maturity.

It is not practicable to estimate the fair value of the notes payable -
stockholders due to their related party nature.

Income Taxes

Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) 109 "Accounting for Income Taxes." The statement
employs an asset and liability approach for financial accounting and reporting
of deferred income taxes. Generally, SFAS 109 allows for recognition of
deferred tax assets in the current period for the future benefit of net
operating loss carryforward and items for which expenses have been recognized
for financial statement purposes but will be deductible in future periods. A
valuation allowance is recognized, if on the weight of available evidence it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.

Loss per Common Share

Loss per common share is based upon the weighted average number of shares of
common stock outstanding and common stock equivalents (common stock options and
warrants), when dilutive. For 1996 and 1995, common stock equivalents were
anti-dilutive.

Accounting Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Reclassifications

Certain items previously reported in specific financial statements captions have
been reclassified to conform with the 1996 presentation.

35
<PAGE>

JANEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

New Accounting Standards

Statements of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS No. 123) establishes a fair value method accounting
for stock-based compensation plans and for transactions in which an entity
acquires goods or services from non-employees in exchange for equity
instruments. The Company adopted this accounting standard on January 1, 1996.
In accordance with SFAS No. 123, the Company has chosen to continue to account
for stock-based compensation utilizing the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation cost for stock options and warrants is
measured as the excess, if any, of the fair market price of the Company's stock
at the date of the grant over the amount an employee must pay to acquire the
stock.

Also, in accordance with SFAS 123, the Company has provided footnote disclosure
with respect to stock-based employee compensation. The cost of stock-based
employee compensation is measured at the grant date based on the value of the
award and recognizes this cost over the service period. The value of the stock
based award is determined using a pricing model whereby compensation cost is the
excess of the fair value of the stock as determined by the model at grant date
or other measurement date over the amount an employee must pay to acquire the
stock.

NOTE 3 - GOING CONCERN

The Company has suffered recurring losses from operations, has a net loss of
$2,865,439 and negative cash flow of $596,948 for the year ended December 31,
1996. At December 31, 1996, the Company's working capital position had
decreased to a negative $1,192,746. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. There is no
assurance that the Company will be able to realize its recorded assets and
liquidate its liabilities in the normal course of business. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

36
<PAGE>

JANEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

NOTE 3 - GOING CONCERN (Continued)

The Company has been able to continue in operation through the financial support
provided by a combination of both debt and equity financing. Continued
operations depend upon the Company continuing to obtain financing for its
activities. Management's plan for the Company includes raising additional
working capital through debt and/or equity financing acquisition or merger until
profitable operations and positive cash flow are achieved and maintained.
However, no assurances can be given that the Company will be successful in
raising additional capital. Further, should the Company be successful in raising
additional capital, there is no assurance that the Company will achieve
profitability or positive cash flow. If the Company is unable to obtain adequate
additional financing, management will be required to curtail the operations of
the Company.

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31, 1996:
<TABLE>
<CAPTION>

Amount
------------
<S> <C>

Leasehold improvements $ 2,506
Equipment and furniture 139,419
Molds 1,573,865
-----------

1,715,790
Accumulated depreciation (1,239,435)
-----------

$ 476,355
===========

</TABLE>
NOTE 5 - PRODUCT DEVELOPMENT COSTS

Product development costs consisted of the following at December 31, 1996:
<TABLE>
<CAPTION>

Amount
----------
<S> <C>
Product development costs $ 903,081
Accumulated amortization (660,610)
--------

$ 242,471
========

</TABLE>

37
<PAGE>

JANEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

NOTE 6 - INTANGIBLE ASSETS

Intangible assets consisted of the following at December 31, 1996:
<TABLE>
<CAPTION>

Amount
-----------
<S> <C>

Licensing relationships $ 795,014
Trademarks 385,129
Goodwill 1,459,724
----------

2,639,867
Accumulated amortization (618,316)
----------

$2,021,551
==========
</TABLE>
NOTE 7 - LOAN PAYABLE - BANK

The Company had a $1,000,000 line of credit with a bank with interest at 9.5%,
pursuant to a loan agreement which expired on May 3, 1996. The outstanding
balance on the line of credit was $751,425 at December 31, 1995. On March 20,
1996, the Company and the bank agreed to reduce the amount available under the
line of credit to $500,000 (including the ability of the Company to utilize the
line of credit to issue up to $100,000 of stand-by letters of credit), and the
bank waived certain covenant violations under the original loan agreement. The
line of credit is secured by a $500,000 certificate of deposit purchased from
the bank and a first priority security interest in all of the assets of the
Company. Accordingly, at December 31, 1996, the outstanding balance under the
line of credit had been reduced by $351,425 to $400,000. The Company negotiated
with the bank to extend the maturity date to May 7, 1997, with all other terms
of the loan remaining the same.

The Company, through a Hong Kong bank, has a line of credit for the Company's
subsidiary, Pro Gains, which allows Pro Gains to discount with the bank letters
of credit issued to Pro Gains by its customers. The credit is tailored to match
the Company's selling season. From May to November the credit line is
HK$7,000,000 (US$900,000) and from December to April the line is HK$1,500,000
(US$200,000). Janex International, Inc. has issued a guarantee to the Hong Kong
bank in the full amount of the line. At December 31, 1996, the Company had
advances under this line for discounted letters of credit of $9,235. The cash
advances under the line are treated as reductions in accounts receivable.

38
<PAGE>

JANEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

NOTE 8 - NOTES PAYABLE - STOCKHOLDERS

Effective as of April 19, 1996, pursuant to a Revolving Credit Agreement (the
"Agreement") with an individual lender (who is also a significant shareholder of
the Company) (the "Lender") that expires on October 19, 1999, Janex Corporation
arranged to borrow up to $900,000, with interest at 9.5% payable quarterly. The
Agreement is secured by all of the assets of Janex Corporation, and the guaranty
of Janex International, Inc. As additional consideration, the Company granted
the Lender warrants to purchase up to 900,000 shares of the Company's common
stock (restricted), with certain "piggy-back" registration rights, exercisable
at a price of $1.45 per share through April 19, 2000. The warrants vest in
equal increments of 180,000 on the first day of consecutive six-month periods
commencing April 19, 1996. However, to the extent that amounts borrowed under
the Agreement are paid off and the Agreement is canceled during its term, any
unvested warrants shall be void. As of December 31, 1996, the Company had
borrowed $500,000 pursuant to this Agreement. In addition, the Company has used
an additional $100,000 as security to issue a stand-by letter of credit in
connection with the loan payable to the Company's Hong Kong agent (See Note 11).

Under the terms of the stock purchase agreement for the acquisition of Janex,
the Company issued two promissory notes to two stockholders totalling
$1,000,000, payable in semi-annual installments over a three year period (at
December 31, 1995, the amount payable was $458,760, representing the present
value of the future payments under the obligation discount at 9%, not including
imputed interest accrued but not paid). The first three payments of $166,667
each under the $1,000,000 note were made on June 30, 1994, December 31, 1994,
and June 30, 1995. On December 29, 1995, the holders of the $1,000,000 of notes
agreed to a deferral of the payment due on December 31, 1995, to June 30, 1996.
As a condition of the deferral, the Company agreed to pay the note holders
interest on the deferred payments at the rate of 9% per annum from December 31,
1995 to the date of payment. On June 28, 1996, the note holders agreed to
further extend the payment date for all remaining payments to February 1, 1998,
subject to payment of interest at the rate of 9.5% per annum, retroactive to
January 1, 1996. Quarterly interest payments commenced on September 1, 1996.
Further, in connection with the extension of the notes, the Company entered into
a warrant agreement with each of the note holders, providing for the issuance of
up to 282,994 warrants to one of them and up to 167,994 warrants to the other,
to acquire a total of 450,998 shares of the Janex International Common Stock
(restricted), exercisable at a price of $1.45 per share through June 28, 2000,
with certain "piggy-back" registration rights. The warrants vest in a six-month
increments over the term of the loan, and if the loan is paid off early, certain
of the warrants will be void. The outstanding loan balance as of December 31,
1996, was $500,000.

The Company recorded $470,392 of imputed interest from the issuance of stock
warrants noted in the above two paragraphs.

In addition, as part of the June 28, 1996 Agreement with the stockholders, the
payment of commissions owing one of the stockholders was extended to February 1,
1998. Furthermore, the unpaid commission balance bears interest at 9.5% per
annum beginning January 1, 1996, until paid with interest paid quarterly
beginning September 1, 1996. The outstanding commission loan balance as of
December 31, 1996 was $115,000.

39
<PAGE>

JANEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 9 - ACCRUED EXPENSES

Accrued expenses consisted of the following at December 31, 1996:

Amount
--------
<S> <C>

Accrued royalties $464,671
Accrued commissions 189,164
Accrued interest 28,643
Other accrued expenses 165,881
--------
$848,359
========
</TABLE>

NOTE 10 - NOTE PAYABLE

In addition, an agreement was reached whereby an additional $340,000 was added
to the outstanding balance as of December 31, 1996. If the loan is not fully
paid off by December 31, 1997, the remaining balance and accrued interest will
be paid off no later than January 31, 1998. The balance of this note payable at
December 31, 1996 is $531,356.

NOTE 11 - LOAN PAYABLE - AGENT

Pursuant to an agency agreement dated October 23, 1995, the Company, through its
Hong Kong subsidiaries, Pro Gains and MFSI, may borrow up to $300,000 from its
Hong Kong agent for the payment of product development and tooling costs,
provided that the Company issues to the agent an irrevocable stand-by letter of
credit for $100,000. The loan is to be repaid from collections of certain
customer invoices at the rate of 5% of the invoice amount, with interest at 2%
above the Hong Kong prime rate, and any balance remaining unpaid at December 31,
1997 will be due and payable on January 15, 1998. The Agent will retain
ownership of all tooling paid for with the credit facility until the credit
facility is repaid. The credit facility is available in each year that the
agency agreement is in effect, which was for an initial term of two years. In
March 1996, the Company opened the stand-by letter of credit to the Agent. As
of December 31, 1996, the Company had borrowed $271,789 under this credit
facility.

40
<PAGE>

JANAX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11 - LOAN PAYABLE - AGENT (Continued)

Pursuant to a supplementary agency agreement dated September 24, 1996, the
Company may borrow up to another $200,000 from its Agent provided that the
Company issues to the Agent an irrevocable stand-by letter of credit for
$100,000. Any advance under this facility is to be repaid within 60 days from
the date of advance with interest at 2% above the Hong Kong prime rate, and any
balance remaining unpaid at December 31, 1997, will be due and payable on
January 15, 1998.

In November 1996, the Company opened the stand-by letter of credit to the Agent.
As of December 31, 1996, the Company had borrowed $178,299 under this credit
facility.

NOTE 12 - INCOME TAXES

The income tax provision, all of which is current, consists of the following for
the years ended December 31, 1996 and 1995:

Years ended December 31,
--------------------------
1996 1995
---------- ----------
<S> <C> <C>

Current
Federal -- --
State 5,167 33,790
Foreign 7,318 3,119
--------- ---------
Income tax provision $ 12,485 $ 36,909
========= =========
</TABLE>

41
<PAGE>

JANEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 12 - INCOME TAXES (Continued)

The Company's total deferred tax assets and deferred tax asset valuation
allowance at December 31, 1996 are as follows:

Amount
-----------
<S> <C>
Deferred tax assets:
Provision for losses on accounts receivable $ 67,363
Inventory reserve 19,485
Product development costs 8,660
Inventory capitalization 38,848
State income taxes 669
Net operating loss carryforward 3,714,775
----------

Total deferred tax assets 3,849,800

Deferred tax liability:

Accumulated depreciation and amortization (6,532)
----------

Net deferred tax assets 3,843,268

Less: Valuation allowance 3,843,268
----------

$ -
==========
</TABLE>

The net deferred tax assets have a 100% valuation allowance as the Company
cannot determine if it is more likely than not that the deferred tax assets will
be realized.

42
<PAGE>

JANEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 12 - INCOME TAXES (Continued)

The income tax provision and the applicable income taxes from the extraordinary
item differs from the amount computed by applying the U.S. Federal income tax
rate (34%) because of the effect of the following items:

<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1996 1995
---------- ----------
<S> <C> <C>

U.S. Federal statutory rate applied to pretax income $(970,004) $(374,310)
Permanent differences 2,861 4,608
State income taxes, net of Federal benefit 5,167 33,790
Tax effect of unrecognized net operating loss carryforward 967,143 369,702
Income tax for foreign subsidiaries 7,318 3,119
--------- ---------

Income tax provision $ 12,485 $ 36,909
========= =========
</TABLE>

At December 31, 1996, the Company had federal and state net operating loss (NOL)
carry forwards of approximately $8,444,000 and $2,324,000, respectively. NOL
carry forwards can be used to offset future taxable income. If not used, the
federal and State NOL carryforwards will expire through 2011 and 2001,
respectively. Federal tax rules impose limitations on the use of NOL
carryforwards from a change in ownership. The loss before taxes related to the
foreign subsidiaries for the years ended December 31, 1996 and 1995 were
$1,098,974 and $235,000, respectively.

NOTE 13 - STOCKHOLDERS' EQUITY

Common Stock

On August 4, 1995, the Company acquired all of the outstanding stock of Malibu,
a California corporation, and its affiliated Hong Kong company, MFSI. Under the
terms of the purchase agreement, the Company issued 125,000 shares of the
Company's restricted common stock to the former owners of the acquired
companies, and paid $50,000 at the closing. In addition, the former
shareholders of Malibu were entitled to an earn-out based on the future
performance of Malibu and MFSI. In October 1996, the Company revised this
agreement and issued the former owners of Malibu 150,000 shares of restricted
common stock in exchange for cancellation of the earn-out provisions of the
agreement. The common stock was valued at $1.00 per share, which was
management's estimate of the fair value at the time. Accordingly, $150,000 was
recorded as compensation expense.

During 1996 the Company received $64,000 from the warrant holders pursuant to
their exercising 100,000 warrants to purchase 100,000 shares of the Company's
stock.

During the year ended December 31, 1995, the Company received $147,200 from a
warrant holder pursuant to the warrant holder exercising warrants to purchase
230,000 shares of the Company's common stock.

43
<PAGE>

JANEX INTERNATIONAL,INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 13 - STOCKHOLDERS' EQUITY (Continued)

Common Stock (Continued)

During the year ended December 31, 1996, under the terms of a warrant agreement
granting Deco Disc warrants to purchase 500,000 shares of the Company's common
stock, the Company was obligated to register the stock underlying the warrants,
and to use its best efforts to maintain the registration statement effective
during the period the warrants are exercisable. Deco Disc threatened to sue the
Company, claiming that the Company did not file the registration statement on a
timely basis, and that the registration statement was not kept effective by the
Company, resulting in Deco Disc being damaged. In order to avoid any potential
litigation, on March 26, 1996, the Company and Deco Disc entered into a
Settlement Agreement and Specific Release under which the Company issued to Deco
Disc additional warrants to purchase 100,000 shares of the Company's common
stock (restricted), with certain "piggy-back" registration rights, at a price of
$.64 per share, in exchange for Deco Disc releasing the Company from any and all
prior claims relating to violations of the Warrant Agreement and failure to
update the registration statement. As a result of the foregoing transaction,
during the year ended December 31, 1996, the Company recorded a charge to
operations of $84,125 as management's estimate of the fair value of the 100,000
common stock purchase warrants.

Stock Options and Warrants

The Company has used stock options and warrants in connection with compensation
to employees, certain other agreements, and private placements. Options and
warrants granted, exercised and forfeited were as follows:

44
<PAGE>

JANEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 13 - STOCKHOLDERS' EQUITY (Continued)

Stock Options and Warrants (Continued)

Weighted
Average
Exercise
Options Price
---------- --------
<S> <C> <C>

Balance at January 1, 1995 787,000 $ 1.34

Granted 216,000 2.13
---------- -------

Balance at December 31, 1995 1,003,000 1.51

Granted 1,493,986 1.39
Exercised (100,000) .64
Forfeited (51,750) 1.57
---------- -------

Balance at December 31, 1996 2,345,236 $ 1.47
========== =======
</TABLE>

The weighted average at the date of grant for options and warrants granted
during the years ended December 31, 1996 and 1995 were $0.41 and $0.74,
respectively.

Options and warrants as of December 31, 1996 are as follows:

Outstanding Exercisable
- ------------------------------------------------------------------- --------------------------------------
Weighted Average Weighted Average
----------------------- -----------------------
Warrants Warrants
Price and Exercise Exercise and Exercise Exercise
Per Share Options Price Life in Years Options Price Life in Years
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>

$ 0.840 270,000 $ 0.640 5.0 270,000 $ 0.640 5.0
0.850 131,250 0.850 5.0 131,280 0.850 5.0
1.180 100,000 1.180 5.0 100,000 1.180 5.0
1.250 25,000 1.250 4.0 0 0.000 0.0
1.450 1,364,986 1.450 3.9 617,496 1.450 3.8
1.500 127,000 1.500 5.0 127,000 1.500 5.0
1.625 4,000 1.625 5.0 2,000 1.625 5.0
2.125 188,000 2.125 5.0 104,000 2.125 5.0
3.250 135,000 3.250 6.0 134,700 3.250 6.0
- ---------------------------------------------------------------------------------------------------------------

Total 2,345,236 $ 1.47 4.6 1,486,446 $ 1.45 4.6
========= ======= ======= ========= ====== ====

</TABLE>

45
<PAGE>

JANEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 13 - STOCKHOLDERS' EQUITY (Continued)

Stock Options and Warrants (Continued)

All stock options issued to employees have an exercise price not less than the
fair market value of the Company's common stock on the date of grant, and in
accordance with accounting for such options utilizing the intrinsic value method
there is no related compensation expense recorded in the Company's financial
statements. Had compensation cost for stock-based compensation been determined
based on the fair value at the grant dates consistent with the method of SFAS
123, the Company's net loss and loss per share for the years ended December 31,
1996 and 1995 would have been reduced to the pro forma amounts presented below:

1996 1995
------------ ------------
<S> <C> <C>
Net loss
As reported $(2,865,439) $(1,137,822)
Pro forma $(2,938,392) $(1,215,845)

Net loss per share
As reported $ (.56) $ (.23)
Pro forma $ (.57) $ (.25)

</TABLE>

The fair value of options and warrants is estimated on the date of grants
utilizing the Black-Scholes option pricing with the following weighted average
assumptions for years ended December 31, 1996 and 1995: expected life of 4.4 and
5.1 years, expected volatility of 22.5%, risk-free interest rate of 6%, and a 0%
dividend yield.

Due to the fact that the Company's options and warrants vest over several years
and additional awards are made each year, the above proforma numbers are not
indicative of the financial impact had the disclosure provisions of FASB 123
been applicable to all years of previous options and warrant grants. The above
numbers do not include the effect of options and warrants granted prior to 1995
that vested in 1995 and 1996.

46
<PAGE>

JANEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 14 - COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases its current facility under a noncancelable operating lease.
The Company and the landlord amended the lease, effective January 1, 1996,
providing the Company with additional space, and extended the expiration of the
lease to December 31, 2000. The lease allows for its early termination anytime
after March 1997, provided that the Company enters into another lease with the
landlord in the same complex. Effective April 1, 1997, the Company entered into
an agreement to sublease a portion of the facility to a third party for the
balance of the lease. The Company also leases the facilities previously
occupied by Malibu under a noncancelable operating lease which expires March 31,
1998. The Company is currently subleasing these facilities to a third party.
The monthly rental income derived from the sublease is approximately the same as
the rent expense. At December 31, 1996, the total minimum lease rental payments
are as follows:

December 31, Amount
------------ --------
<S> <C>

1997 $129,700
1998 108,800
1999 101,800
2000 101,800
--------

$442,100
========
</TABLE>

Total rental expense was $77,313 and $72,950 for the years ended December 31,
1996 and 1995, respectively.

Royalties

At December 31, 1996, the Company has commitments for minimum guaranteed
royalties under licensing agreements as follows:

December 31, Amount
------------ --------
<S> <C>

1997 $460,900
1998 200,000
Thereafter 53,500
--------

$714,400
========
</TABLE>

Total royalty expense was $1,002,429 and $1,239,656 for the years ended December
31, 1996 and 1995, respectively.

47
<PAGE>

JANEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Legal Proceedings

On May 27, 1993 a class action suit was filed against the Company, among others.
The Company and the Plaintiffs agreed upon the principal terms of a settlement.
However, due to regulatory complications, no formal settlement had been reached.
Thereafter, settlement negotiations ensured without success. On May 6, 1996,
the Plaintiffs filed a voluntary Request for Dismissal of the Lawsuit, which the
Court entered without prejudice on May 7, 1996.

NOTE 15 - SEGMENT INFORMATION

The Company had sales to certain customers comprising 10% or more of total
sales. The following table sets forth the percentage of sales of these
customers to total domestic sales and total foreign sales.

<TABLE>
<CAPTION>
1996 1995
------------- -------------
United Hong United Hong
States Kong States Kong
-------------- -------------
<S> <C> <C> <C> <C>

Customer A 9% 26% 10% 31%
Customer B 0 14 35 22
------ ----- ------ -----

9% 40% 45% 53%
======= ===== ====== =====
</TABLE>

In 1996, customer A and customer B represented 21% and 10% of the Company's
sales. In 1995, customer A and customer B represented 26% and 24% of the
Company's sales.

48
<PAGE>

JANEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 15 - SEGMENT INFORMATION (Continued)

A summary of the Company's operations by geographical area for the years ended
December 31, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>
Adjustments
United Hong and
States Kong Eliminations Consolidated
----------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
1996
Net sales:
Customers $ 1,789,985 $ 5,322,936 $ - $ 7,112,921
Intercompany 2,068,200 707,945 (2,776,145) -
----------- ----------- ------------ ------------

Total revenue $ 3,858,185 $ 6,030,881 $(2,776,145) $ 7,112,921
=========== =========== ============ ============
Operating loss $(1,031,424) $ (716,070) $ - $(1,747,494)
Interest income 38,995
Interest expense (353,516)
Foreign exchange loss (7,844)
Depreciation and amortization (783,095)
------------

Loss before income taxes (2,852,954)
Income tax provision 12,485
------------

Net loss $ (2,865,439)
============

Identifiable assets $ 7,448,172 $ 1,543,550 $(4,602,980) $ 4,388,742
Corporate assets 543,034
=========== =========== ============ ------------

Total assets $ 4,931,776
============

Total liabilities $ 4,156,051
============

1995
Net sales:
Customers $ 1,792,577 $ 7,562,444 $ - $ 9,355,021
Intercompany 2,768,202 627,174 (3,395,376) -
----------- ----------- ------------ ------------

Total revenue $ 4,560,779 $ 8,189,618 $(3,395,376) $ 9,355,021
=========== =========== ============ ============
Operating loss $ (280,083) $ (99,783) $ (180,300)
Interest income 53,300
Interest expense (89,429)
Foreign exchange loss (4,963)
Depreciation and amortization (879,521)
------------

Loss before income taxes (1,100,913)
Income tax provision 36,909
------------

Net loss $ (1,137,822)
============
Identifiable assets $ 5,290,291 $ 1,299,823 $(1,766,290) $ 4,823,824
Corporate assets 625,143
=========== =========== ============ ============

Total assets $ 5,448,967
============

Total liabilities $ 2,576,320
============
</TABLE>

49
<PAGE>

JANEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 15 - SEGMENT INFORMATION (Continued)

The Company's operations are structured to achieve consolidated objectives. As
a result, significant interdependencies and overlaps exist among the Company's
operating units. Accordingly, the net sales, operating loss and identifiable
assets shown for each geographic area may not be indicative of the amounts which
would have been reported if the operating units were independent of one another.
Intercompany sales are at cost. Operating income or loss is net sales less
related costs and operating expenses, excluding interest. Corporate assets are
those assets maintained for general purposes, principally cash, short-term
investments and administration facilities.

NOTE 16 - RELATED PARTY TRANSACTIONS

The Company pays commissions at the rate of 4% of net sales generated by a
company owned by a major stockholder, relating to customers located in New York,
New Jersey, Connecticut and Pennsylvania. Commissions on such sales of
approximately $3,025,000 and $4,750,000 amounted to $113,675 and $189,953 for
the years ended December 31, 1996 and 1995, respectively, which are included in
selling, general and administrative expenses. Accrued commissions included in
accrued expenses and accounts payable, on such sales amounted to $68,007 as of
December 31, 1996. The Company also rented showroom space from this major
stockholder for which the Company paid $27,400 during 1996. In addition, the
Company utilizes the services of a public warehouse facility in Baltimore,
Maryland that is owned by the father of the major stockholder for a fee based on
the amount of goods received and shipped. Fees amounted to $62,852 and $78,108
for the years ended December 31, 1996 and 1995.

The former father-in-law of the major stockholder has an informal oral
arrangement with the Company whereby he guarantees a $255,000 letter of credit
from the Company to one of its licensors. The letter of credit expires on
November 30, 1998. Howard Moore Associates, Inc. ("HMA"), of which the former
father-in-law of the major stockholder is the sole shareholder and President,
has a Royalty Agreement with the Company whereby HMA receives a commission of 1%
of the net revenue received by the Company from sales of products using a
certain company's trademark and certain licensed characters. Under the Royalty
Agreement, HMA was paid, or will be paid, $19,499 for the year ended December
31, 1996, and was paid $33,060 for the year ended December 31, 1995.

NOTE 17 - DISCLOSURE OF CERTAIN RISKS AND UNCERTAINTIES

Competition; Dependence on Licenses

The Company competes with numerous other companies, most of which have
substantially greater financial and other resources than those of the Company.
The Company's success depends in great part upon the Company's ability to
continue licensing fantasy characters for use with the Company's products. Most
licensing agreements are non-exclusive and limited in duration, with two years
being typical. Competition for licenses is intense, thus there can be no
assurance that the Company will be successful in renewing its present licenses
or in obtaining new licenses.

50
<PAGE>

JANEX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 17 - DISCLOSURE OF CERTAIN RISKS AND UNCERTAINTIES (Continued)

Product Obsolescence

Because consumer preferences can change rapidly, the Company's success will
ultimately depend on its ability to successfully introduce new products. The
success of new products depends on a variety of factors including product
selection, timely and efficient completion of product design, timely and
efficient implementation of manufacturing and assembly processes and effective
sales and marketing. Because new product commitments must be made well in
advance of sales, new product decisions must anticipate future market demand.
There is no assurance that the Company will be successful in introducing new
products. The Company has and is continuing to review and conduct
investigations into new products to evaluate them for commercial viability.

Seasonality

The Company expects its highest level of net sales and income before taxes
during the quarter ending September 30, due to the Christmas season. If, for
any reason, the Company's sales were to be substantially below those normally
expected during such quarter, the Company's annual results would be adversely
affected.

Dependence on Foreign Manufacturing

The Company does not have manufacturing facilities. Most of the Company's
products are manufactured by contract manufacturers in the Far East. The
Company's operations are subject to the customary risks of doing business
abroad, including insufficient Company supervision of quality control,
fluctuations in the value of currencies, tariffs, export duties, quotas,
restrictions on the transfer of funds, work stoppages and, in certain parts of
the world, political instability. To date, these factors have not had a
material adverse impact on the Company's operations, but there is no assurance
that one or more of these factors will not adversely affect the Company in the
future.

Dependence on Significant Customers

The Company historically has had a concentration of significant customers.
Although the Company considers its commercial relationships with its significant
customers to be good, a loss of these customers, or a significant decrease in
purchases by these customers, could have an adverse effect on the Company's
operations. The Company does not have any long-term contracts with any of its
customers and none are expected to be signed. Long-term contracts are not
customary in the retail industry.

51
<PAGE>

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

None

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

The following table sets forth information regarding the Company's executive
officers and directors as of December 31, 1996:

Name Age Position
- ------------------------------------------------------------------------

<S> <C> <C>
Sheldon F. Morick 59 Chairman of the Board, President, Chief
Executive Officer, Treasurer and
Director

Renee White Fraser 44 Director

Daniel Lesnick 45 Janex Corporation, Executive Vice
President (1)

Lawrence Bernstein 56 Janex Corporation, Executive Vice
President (2)

Terence F. Davis 50 Janex Corporation, Vice President of
Sales

Michael D. Handelman 37 Janex Corporation, Vice President and
Chief Financial Officer
</TABLE>

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

(1) Resigned effective February 1, 1997. (2) Resigned effective March 15, 1997.

Sheldon F. Morick, has been President, Chief Executive Officer and a
Director of the Company since June 30, 1992. He has been Treasurer since April
15, 1996, when Michael Manahan resigned. He was previously Executive Vice
President and a Director of the Company from April 1, 1992, to June 29, 1992.
From July 1990 to April 1992, Mr. Morick was President and Chief Executive
Officer of Original Marketing Corp., Woodland Hills, California, a full service
sales and marketing consulting firm which he founded. From February 1987 to June
1990, Mr. Morick was President, Chief Executive Officer and a Director of

52
<PAGE>

International Tropic-Cal, Inc., Commerce, California, a distributor of
nationally branded sunglasses and fashion accessories. From June 1984 to August
1986, Mr. Morick was President, Chief Executive Officer and a Director of
Revell, Inc., Los Angeles, California, a domestic and international hobby kit
manufacturer. Prior to that, from April 1981 to February 1984, Mr. Morick was a
co-founder and Senior Vice President of General Consumer Electronics, Santa
Monica, California which was acquired by the Milton Bradley Company. Mr. Morick
was formerly Senior Vice President-Sales and Distribution of Mattel Toys,
Hawthorne, California. Mr. Morick received a bachelor of foreign trade degree at
the Thunderbird School of International Management, Phoenix, Arizona, and a B.S.
in Business Administration from Cornell University, Ithaca, New York.

Renee White Fraser, Ph.D., has been a Director of the Company since May
1993, and is President of Fraser & Young, a Santa Monica based advertising
agency, a position she has held since January 1995. Previously, Dr. Fraser was
Chief Executive Officer of Fraser & Associates Advertising, Inc., a full service
Los Angeles based advertising agency of which she was founder and principal,
from December 1991 to December 1995. From July 1988 to November 1991 Dr. Fraser
was Executive Vice President and General Manager of the Los Angeles office of
Bozell Advertising, Inc. Previously, from September 1984 to August 1988, Dr.
Fraser was Senior Vice President, Director of Strategic Planning and Research
for Bozell, also in Los Angeles. Dr. Fraser was formerly Vice President,
Director of Research and Strategic Planning for the Western Region, for the
advertising firm of Young Rubicam and Dentsu. Dr. Fraser holds a Doctorate in
Psychology from the University of Southern California.

Daniel Lesnick, has been Executive Vice President of Janex Corporation, a
wholly owned subsidiary of Janex International, Inc., since October 6, 1993.
From August 1988 to October 5, 1993, Mr. Lesnick was Vice President and co-owner
of MJL Marketing Inc. (now Janex). He was Director of Sales and Marketing for
Sunk Yong Company, a Korean corporation operating in a number of different
industries, from February 1986 to July 1988. Previously Mr. Lesnick held
positions as Merchandising Manager with Spencer Gifts, and as a Senior Buyer
with Lionel Leisure, both specialty retailers. Mr. Lesnick holds an associate
degree in marketing.

Lawrence Bernstein, has been an Executive Vice President of Janex since
April 1996. From February 1994 to February 1996, Mr. Bernstein was Executive
Vice President of Micro Games of America, North Hills, California, where he was
the head of research and development and marketing, involving electronic toys
and hand-held electronic games. From June 1993 to February 1994, Mr. Bernstein
was President of CLB Design, Los Angeles, California, involved in product
development consulting. From June 1991 to June 1993, Mr. Bernstein was Senior
Vice President of Mattel Toys, El Segundo, California, where he was the head of
sales, manufacturing and research and development for the game division.

Terence F. Davis, has been Vice President of Sales of Janex since May 1,
1996. From July 1992 to April 30, 1996, Mr. Davis was President of Malibu, the
company he founded, which is now a wholly owned subsidiary of Janex
International, Inc. From June 1991 to June 1992, he was Vice President of
Caltoy, Inc., a California toy manufacturer. From July 1990 to June 1991 he was
Executive Vice President and a Director of Art Guard, Inc., a California
security device manufacturer. Previously Mr. Davis held senior sales positions
with such major toy manufacturers as Hasbro, Inc. and Tomy Corporation.
Mr. Davis also provided consulting services to several major toy manufacturers.

53
<PAGE>

Michael D. Handelman, has been Vice President, Chief Financial Officer of
Janex since August 1996. From October 1993 to December 1995, Mr. Handelman was
Vice President, Chief Financial Officer of LAK Acquisition Corp which owned the
Los Angeles Kings hockey franchise. From April 1988 to October 1993 he was a
senior manager for the public accounting firm of Amsterdam & Dressler, CPA's.
Prior to that, Mr. Handelman spent 9 years with various public accounting firms.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who beneficially own more than 10% of
the Company's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission ("SEC"). Such
persons are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms filed by such persons.

Based solely on the Company's review of forms furnished to the Company, the
Company believes that all filing requirements applicable to the Company's
executive officers, directors, and more than 10% shareholders were complied
with, except that an Initial Statement of Beneficial Ownership of Securities for
Howard W. Moore, a more than 10% shareholder, was not timely filed when Mr.
Moore's beneficial ownership exceed 10% in May 1996. The filing was made on
January 27, 1997. Mr. Moore advised the Company that the failure to timely file
was inadvertent.

54
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION.

Compensation of Directors

Directors who are not employees of the Company receive $500 for each
directors meeting attended, and may be granted options to purchase stock in the
Company at the discretion of the Board. No fees for serving as directors of the
Company are payable to employees of the Company. Directors are reimbursed for
reasonable out-of-pocket expenses incurred in performing their functions as
directors of the Company.

Compensation of Officers and Key Employees

The following table sets forth the compensation paid or to be paid by the
Company with respect to the fiscal year ended December 31, 1996, to the
executive officers whose total annual salary and bonus exceeded $100,000 /(1)/:

<TABLE>
<CAPTION>
=============================================================

ANNUAL COMPENSATION(1) LONG TERM
COMPENSATION
========================================================================================================
NAME & PRINCIPAL YEAR SALARY BONUS OTHER ANNUAL AWARDS
POSITION COMPENSATION (2) ------
OPTIONS
(SHARES)
========================================================================================================

<S> <C> <C> <C> <C> <C>
Sheldon F. Morick 1996 $228,250 $ - $ 1,507 -
Chairman of the Board, 1995 241,250 - 13,017 100,000(4)
Chief Executive Officer, 1994 200,000 54,000 26,005 - (3)
President and Director

- --------------------------------------------------------------------------------------------------------
Michael S. Manahan 1996 $ $ - $ 2,400 -
Chief Financial Officer, 1995 108,000 - 7,200 40,000(4)
Vice President, Treasurer, 1994 104,400 16,000 7,200 - (3)
Secretary and Director
(Resigned April 1996)

- --------------------------------------------------------------------------------------------------------
Daniel Lesnick 1996 $152,440 $ - $13,267 -
Executive Vice President 1995 150,000 - 13,260 50,000(4)
- Janex Corporation 1994 150,000 22,000 13,050 - (3)

- --------------------------------------------------------------------------------------------------------
Lawrence Bernstein 1996 $159,375 $ - $ - 50,000
Executive Vice President -
Janex Corporation

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

(1)Compensation under Company employee benefit plans, to which all employees of
the Company are eligible, is not included in the table.
(2)Includes car allowances, Company paid vehicles and Company paid
health/life/disability insurance.
(3)The Company did not grant any stock options during 1994.
(4)These options were not issued under the Company's 1991 Non-Statutory Stock
Option Plan ("Plan") as that Plan was terminated on June 8, 1994.

55
<PAGE>

The following table provides certain information concerning grants of options to
purchase the Company's Common Stock made during the fiscal year ended
December 31, 1996, to persons named in the Summary Compensation Table:

=============================================================================================================

Option Grants in Last Fiscal Year
Individual Grants in Fiscal 1995
=============================================================================================================
Name Number of Securities % of Total Options Exercise or Expiration Date
Underlying Options Granted to Base
Granted (1) Employees in Price
Fiscal Year ($/sh)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sheldon Morick CEO -0- -0- -
- -------------------------------------------------------------------------------------------------------------
Michael Manahan -0- -0- -
- -------------------------------------------------------------------------------------------------------------
Daniel Lesnick 131,994 9.6% 1.45 06/28/00
- -------------------------------------------------------------------------------------------------------------
Lawrence Bernstein 50,000 3.3% 1.45 04/15/01
=============================================================================================================
</TABLE>

(1) The options granted in fiscal 1996 were not under the Company's 1991 Non-
Statutory Stock Option Plan, as that plan was terminated in June 1994.

The following table provides certain information concerning each exercise of
stock options during the fiscal year ended December 31, 1996, and the value of
unexercised options at December 31, 1996, to persons named in the Summary
Compensation Table:

======================================================================================================================

Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
======================================================================================================================
Name Shares Acquired Value Realized Number of Securities Value of Unexercisable
on Exercise Underlying Unexercised In-the-Money Options at
Options at FY-End FY-End
Exercisable/
Exercisable/Total Unexercisable
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sheldon Morick, CEO - - 300,000/350,000 $ 13,750/-
- ----------------------------------------------------------------------------------------------------------------------
Michael Manahan - - 101,250/101,250 $ 15,469/-
- ----------------------------------------------------------------------------------------------------------------------
Daniel Lesnick - - 90,998/181,994 $ -/-
- ----------------------------------------------------------------------------------------------------------------------
Lawrence Bernstein - - 50,000/50,000 $ -/-
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>

56
<PAGE>

Employment Arrangements

The Board of Directors has provided for compensation for Sheldon F. Morick,
Chief Executive Officer, at a salary of $16,666.66 per month plus $1,084.00 per
month of taxable benefits (a total of $213,008 on an annual basis), pursuant to
an employment agreement dated March 26, 1993. Effective April 1, 1995, in
accordance with the employment contract, Mr. Morick's compensation increased to
a salary of $21,250.00 per month plus $1,084.00 per month of taxable benefits (a
total of $268,008 on an annual basis). The employment agreement provides for,
among other things, stock options to acquire 100,000 shares of restricted common
stock, that the Company purchase $500,000 of insurance on the life of Mr.
Morick, payable to a beneficiary designated by him, and participation as a
member of the Board without additional compensation. Under the terms of this
agreement, the Company has established an annual bonus pool equal to 10% of the
fiscal year's operating profits. The bonus pool is allocated 50% to Mr. Morick,
and 50% to the other employees of the Company, as selected by Mr. Morick. The
employment agreement provides that Mr. Morick can be terminated: (a) for
"cause," as defined in the agreement, (b) if Mr. Morick becomes permanently
disabled for two months, or if the Company's operating profits for any fiscal
year are less than 50% of the forecasted operating profits, and the Company pays
Mr. Morick a severance benefit equal to six months salary. Additionally, if as a
consequence of a merger, or purchase or sale of stock, Mr. Morick is terminated
by the Board of Directors, or his duties or compensation are substantially and
adversely altered, and Mr. Morick resigns, such termination would require the
Company to continue Mr. Morick's salary and benefits for the lesser of 12 months
or until Mr. Morick commenced other employment. The employment agreement was
scheduled to terminate on March 31, 1996, but was extended by the Board of
Directors to March 31, 1997.

The Board of Directors has provided for compensation for Daniel Lesnick,
Executive Vice President of Janex, at a salary of $12,500 per month plus $1,105
per month of taxable benefits (a total of $163,260 on an annualized basis),
pursuant to an employment agreement dated October 6, 1993. On November 20, 1995,
the Board increased Mr. Lesnick's compensation to $14,000 per month plus $1,105
per month of taxable benefits (a total of $181,260 on an annualized basis). The
employment agreement provides for, among other things, participation in the
Company's annual bonus pool. The employment agreement provides that Mr. Lesnick
can be terminated: (a) for "cause," as defined in the agreement, or (b) if Mr.
Lesnick becomes permanently disabled for two months. Mr. Lesnick can terminate
the agreement upon 60 days notice to the Company. The Company can terminate the
agreement upon 60 days notice to Mr. Lesnick, however, in this case, the Company
would be required to continue Mr. Lesnick's salary and benefits for a period of
one year, not to exceed six months beyond the termination date of the agreement.
The employment agreement terminates on September 30, 1996.

The Board of Directors has provided for compensation for Lawrence Bernstein,
Executive Vice President of Janex, at a salary of $18,750 per month, pursuant to
an employment agreement dated April 15, 1996. The employment agreement provides
that Mr. Bernstein can be terminated: (a) for "cause," as defined in the
agreement or (b) if Mr. Bernstein becomes permanently disabled for two months.
Additionally, if as a consequence of a merger, or purchase or sale of stock, Mr.
Bernstein is terminated by the Board of Directors,

57
<PAGE>

or his duties or compensation are substantially and adversely altered, and
Mr. Bernstein resigns, such termination would require the Company to continue
Mr. Bernstein's salary and benefits for the greater of six months or until the
termination date of the employment agreement. Unless extended, the employment
agreement terminates on April 15, 1997. The contract has not been extended and
Mr. Bernstein has left the Company effective March 15, 1997.

The Board of Directors initially provided for compensation for Terence
Davis, Vice President of Sales of Janex and Malibu, at a salary of $6,250 per
month plus $500 per month of taxable benefits (a total of $81,000 on an
annualized basis), pursuant to an employment agreement dated August 4, 1995. On
April 1, 1996, Mr. Davis' salary was increased to $8,700 per month plus $500 per
month of taxable benefits (a total of $110,400 on an annualized basis). The
employment agreement provides that Mr. Davis can be terminated: (a) for "cause,"
as defined in the agreement, or (b) if Mr. Davis becomes permanently disabled
for three months. The employment agreement terminates on December 31, 1998.

The Board of Directors has provided for compensation for Michael D.
Handelman, Chief Financial Officer, at a salary of $9,583 per month.

Effective February 1, 1996, Mr. Morick, Mr. Lesnick and Mr. Manahan agreed
to a monthly reduction in compensation of $2,225, $1,480, and $960 per month,
respectively. The Company agreed to pay Mr. Morick, Mr. Lesnick and Mr. Manahan
back for this salary reduction if the Company generates profits in 1996
exceeding the total amount of the salary reductions taken by these three
individuals, which it did not. However, when Mr. Manahan resigned, as part of
his severance compensation, the Company paid Mr. Manahan $2,400 being the total
amount of the salary reduction. Additionally, a $10,000 loan to Mr. Manahan was
forgiven.

Effective February 1, 1997, Mr. Morick, Mr. Davis and Mr. Handelman agreed
to a monthly reduction in compensation of $2,083, $1,950 and $833 per month,
respectively. The Company has agreed to pay Mr. Morick, Mr. Davis and Mr.
Handelman back for this salary reduction if the Company generates profits in
1997 exceeding the total amount of the salary reductions taken by these three
individuals.

Effective February 1, 1997, Mr. Daniel Lesnick has resigned his position of
Executive Vice President of the Company and immediately began a five-month
consulting arrangement.

In August, 1995, the Company established a 401K Profit Sharing Plan ("401K")
for the benefit of the employees of the Company. Under the provisions of the
401K, employees may make contributions on a tax deferred basis to their 401K
account, up to the legal limits provided for by United States income tax
regulations. The Company, at its discretion, may contribute a portion of the
Company's profits to the 401K. Such contributions are allocated between members
of the 401K based on a pre-stated formula. Employer contributions vest with 401K
participants at the rate of 20% per year, beginning in year two and ending in
year six of employment. For the year ended December 31, 1996, the Company did
not make a contribution to the 401K.

The Company has a health insurance plan, which covers all employees in a
non-discriminatory manner. With the exception of the health insurance plan, the
401K and the annual bonus pool provided for under Mr. Morick's Employment
Agreement, the Company has no insurance or medical reimbursement plans covering
its officers or directors, nor do they contemplate implementing any such plans
at this time.

58
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.

The following table sets forth information, as of March 31, 1997, with
respect to the beneficial ownership of the Company's Common Stock by each person
known by the Company to be the beneficial owner of more than five percent of the
outstanding Common Stock, by each of the Company's directors, and by the
officers and directors of the Company as a group:

<TABLE>
<CAPTION>
Shares
Owned Percent
Beneficial Owners (1) Beneficially of Class (11)
- --------------------- ------------- -------------
<S> <C> <C>

Security ownership of certain beneficial owners:

Leslie Friedland 768,498 (2) 14.1%
615 Hope Road
Bldg 1, First Floor
Eatontown, NJ 07724

Deco Disc Industries, Inc. 370,000 (3) 6.6%
4530 Chermak Street
Burbank, CA 91505

Howard W. Moore 938,900 (4) 16.2%
15 Muir Beach Circle
Corona Del Mar, CA 92625

Daniel Lesnick 618,998 (6) 11.5%
21700 Oxnard Street, Suite 1610
Woodland Hills, CA 91367

Security ownership of management:

Terence Davis 165,000 (5) 3.1%
21700 Oxnard Street, Suite 1610
Woodland Hills, CA 91367

Renee White Fraser 60,900 (7) 1.0%
100 Wilshire Blvd Ste 440
Santa Monica, CA 90401
</TABLE>

59
<PAGE>

<TABLE>
<CAPTION>
Shares
Owned Percent
Beneficial Owners (1) Beneficially of Class (1)
- --------------------- -------------- ------------
<S> <C> <C>

Security ownership of certain beneficial owners:

Sheldon F. Morick 318,000 (8) 5.9%
21700 Oxnard Street, Suite 1610
Woodland Hills, CA 91367

All officers and directors
as a group (five persons) 1,212,898 (10) 22.9%
</TABLE>

- -------------------------------
(1) Unless otherwise indicated in the footnotes, and subject to community
property laws where applicable, each of the security holders has sole
voting and investment power with respect to the shares beneficially owned.
(2) Includes 141,498 shares issuable upon exercise of warrants granted to Mr.
Friedland under the Friedland Warrant Agreement, which warrants are
presently exercisable. See "Certain Relationships and Related
Transactions."
(3) Includes 270,000 shares issuable upon exercise of warrants, all of which
are presently exercisable.
(4) Includes shares owned by H&M Moore Investment Group, Inc., Howard Moore
Associates, Inc., and Howard Moore as Trustee of the Howard Moore
Associates, Inc. Retirement Trust. Includes 135,000 warrants currently
exercisable at $3.25 per share. Does not include 100,000 Public Warrants,
having an exercise price of $7.50, that are not currently exercisable.
Includes 360,000 shares issuable upon exercise of warrants granted to the
Moore Trust in connection with the Moore Revolving Loan, which are
presently exercisable. See "Certain Relationships and Related
Transactions."
(5) Vice President of Sales of Janex. Former owner of Malibu, stock issued in
partial payment of Malibu purchase price. Includes 90,000 shares issued to
Mr. Davis in connection with an amendment to the Malibu Agreement which
were issued as of October 31, 1996. See "Business--General Business
Development."
(6) Executive Vice President - Janex. Former owner of Janex, stock issued in
partial payment of Janex purchase price. Includes 25,000 shares issuable
pursuant to options which are presently exercisable. Includes 65,998 shares
issuable upon exercise of warrants granted to Mr. Lesnick under the Lesnick
Warrant Agreement, which warrants are presently exercisable. See "Certain
Relationships and Related Transactions."
(7) Director, Includes 30,000 shares issuable pursuant to options which are
presently exercisable.
(8) Chief Executive Officer, President and Director. Includes 300,000 shares
issuable pursuant to options which are presently exercisable.
(9) Includes 470,988 shares issuable pursuant to options which are presently
exercisable.
(10) Based upon 5,296,721 shares of Common Stock issued and outstanding on March
31, 1997.

The Company is not aware of any contract or other arrangement, including a
pledge of the Company's securities, that could result in a change in the control
of the Company. The Company is not aware of any voting trusts.

60
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The Company has engaged the services of a manufacturers representative firm,
Les Friedland Associates ("LFA"), to represent the Company to customers located
in the states of New York, New Jersey, Connecticut and Pennsylvania. LFA
represents the Company to three of its largest customers, Toys R Us, Wal-Mart
and Kmart. The principal owner and operator of LFA, Mr. Leslie Friedland, is one
of the former owners of Janex, and currently owns 672,000 shares of the
Company's stock. See "Security Ownership of Certain Beneficial Owners and
Management." Under the terms of the representative agreement ("LFA Agreement"),
LFA was to be paid a commission of 4.25% on all sales that it generates within
its territory. Effective April 1, 1995, LFA and the Company agreed to reduce the
commission rate under the LFA Agreement to 4%. The terms and conditions of the
representative agreement are standard in the industry, and the agreement is
cancelable at any time with 30 days notice. Pursuant to the LFA Agreement, LFA
was paid $189,953 for the year ended December 31, 1995 and was paid, or will be
paid, $113,675 for the year ended December 31, 1996. Further, the Company rented
showroom space from LFA during a major industry trade show in February 1996, for
which the Company paid $16,000. The rate charged by LFA for the showroom rental
is competitive with other showroom space rental rates during the show period.

On June 28, 1996, the Company and Leslie Friedland entered into an agreement
whereby the due date on the Company's note held by Mr. Friedland was extended to
February 1, 1998 Additionally the Company owed Mr. Friedland $115,000 for
commissions as of December 31, 1995, which Mr. Friedland also extended to
February 1, 1998. See "Certain Relationships and Related Transactions." In
connection with such extension agreement, the Company granted warrants to Mr.
Friedland to acquire up to 282,994 shares of the Company's Common Stock
(restricted), with certain "piggy-back" registration rights. These warrants
have an exercise price of $1.45 and expire on June 28, 2000. The warrants vest
in six-month increments over the term of the loan, commencing on June 28, 1996,
as follows:

61
<PAGE>

Period Warrants Vested
------ ---------------
<S> <C>

1st 6-month period 70,749
2nd 6-month period 70,749
3rd 6-month period 70,748
4th 6-month period 70,748
</TABLE>

The first 70,749 warrants vest upon the execution of the extension agreement.
The remaining warrants vest on the first day of each period indicated above,
provided, however, if the Friedland note is paid off by the Company during any
6-month period, other than the 4th 6-month period, the warrants that vest in the
remaining 6-month periods will be void.

On June 28, 1996, the Company and Daniel Lesnick, Executive Vice President of
Janex, entered into an agreement whereby the due date on Company's note held by
Mr. Lesnick was extended to February 1, 1998. See "Certain Relationships and
Related Transactions." In connection with such extension agreement, the Company
granted warrants to Mr. Lesnick to acquire up to 131,994 shares of the Company's
Common Stock (restricted), with certain "piggy-back" registration rights. These
warrants have an exercise price of $1.45 and expire on June 28, 2000. The
warrants vest in 6-month increments over the term of the loan, commencing on
June 28, 1996, as follows:

Period Warrants Vested
------ ---------------
<S> <C>

1st 6-month period 32,999
2nd 6-month period 32,999
3rd 6-month period 32,998
4th 6-month period 32,998
</TABLE>

The first 32,999 warrants vest upon the execution of the extension agreement.
The remaining warrants vest on the first day of each period indicated above,
provided, however, if the Lesnick note is paid off by the Company during any 6-
month period, other than the 4th 6-month period, the warrants that vest in the
remaining 6-month periods will be void.

The Company utilizes the services of a public warehouse facility, Hollins
Distributors, in Baltimore, Maryland. The warehouse facility charges the Company
a fee based on the amount of goods received, and the amount of goods shipped.
The rates charged by Hollins Distributors are competitive with those of other
public warehouses, and the relationship can be terminated annually upon 60 days
written notification. Hollins Distributors is owned by Mr. Howard Friedland, the
father of Mr. Leslie Friedland. Hollins Distributors was paid $78,108 for the
year ended December 31, 1995 and was paid, or will be paid, $62,652 for the year
ended December 31, 1996.

62
<PAGE>

Howard W. Moore, was formerly the father-in-law of Mr. Leslie Friedland. Mr.
Moore has an informal oral arrangement with Janex whereby Mr. Moore guarantees a
$255,000 letter of credit from Janex to one of its licensors. The letter of
credit expires on November 30, 1998. There is no provision requiring Mr. Moore
to continue his guarantee beyond the expiration date. Howard Moore Associates,
Inc. ("HMA"), of which Mr. Moore is the sole shareholder and President, has a
Royalty Agreement with Janex whereby HMA receives a commission of 1% of the net
revenue received by Janex from sales of products using a certain company's
trademark and certain licensed characters. Under the Royalty Agreement, HMA was
paid $33,060 for the year ended December 31, 1995, and was paid, or will be
paid, $19,499 for the year ended December 31, 1996.

Mr. Moore is also the Trustee of the Howard Moore Associates, Inc. Retirement
Trust ("Trust") and is the President and sole shareholder of H&M Moore
Investment Group, Inc. ("H&M"). Mr. Moore may be deemed to be the beneficial
owner of all the shares of Common Stock and warrants, owned by HMA, the Trust
and H&M. On or about May 17, 1994, the Company raised $494,100 in a private
placement. In connection with the private placement, the Company offered units
("Units") consisting of one share of Common Stock and a warrant to acquire one
share of Common Stock for every two Units purchased. Consequently, the following
shares of Common Stock and warrants were issued:

<TABLE>
<CAPTION>
Shares
Purchaser Common Stock Warrants
--------- ------------ --------
<S> <C> <C>

H&M Moore Investment Group, Inc. 206,600 103,300
Howard Moore, as Trustee of the Howard
Moore Associates, Inc. Retirement Trust 63,400 31,700
</TABLE>

The Units were sold at a purchase price of $1.83 each, which was the average
of the closing bid and ask prices for the shares of Common Stock as quoted on
NASDAQ for the ten trading days prior to the date of the sale. The warrants have
an exercise price of $3.25 per share and are not exercisable until May 17, 1996,
and expire on May 17, 2000.

On April 19, 1996, the Company entered into a Revolving Loan Agreement
("Revolving Loan Agreement") with the Moore Trust. See "Certain Relationships
and Related Transactions." Under the terms of the Revolving Loan Agreement, the
Moore Trust agreed to loan to the Company, on a revolving basis, up to $900,000,
at 9-1/2% per annum on the outstanding balance, during the period April 19, 1996
through September 19, 1998. The loan is secured by all of the assets of Janex
(subject to the prior lien of the

63
<PAGE>

Company's bank lender) and is guaranteed by Janex International. In connection
with the loan, the Company entered into a Warrant Agreement with the Lender,
providing for the issuance of up to 900,000 warrants to acquire 900,000 shares
of the Janex International Common Stock (restricted), with certain "piggy-back"
registration rights. These warrants have an exercise price of $1.45 and expire
on April 19, 2000. The warrants vest in 6-month increments over the term of the
loan, commencing on April 19, 1996, as follows:

Period Warrants Vested
------ ---------------
<S> <C>

1st 6-month period 180,000
2nd 6-month period 180,000
3rd 6-month period 180,000
4th 6-month period 180,000
5th 6-month period 180,000
</TABLE>

The first 180,000 warrants vest upon execution of the Revolving Loan
Agreement. The remaining warrants vest on the first day of each period
indicated above, provided, however, if the revolving credit line ("Credit Line")
is paid off and canceled by the Company during any 6-month period, other than
the 5th 6-month period, the warrants that vest in the remaining 6-month periods
will be void, and the Revolving Loan Agreement will be terminated.

Michael Moore is the son of Howard Moore. On March 29, 1995, the Company
entered into a license agreement with Michael Moore under which the Company
licensed two product concepts which have since been incorporated into the
Company's product line. The Company is obligated under the agreement to pay a
royalty of 3% of the gross sales of products incorporating these concepts. The
Company can terminate the agreement at any time with 60 days notice, otherwise
the agreement will terminate at such time as the Company ceases to sell and
market products incorporating the concepts for a period of twelve months. Under
the agreement, Michael Moore was paid royalties of $15,650 for the year ended
December 31, 1995, and was paid, or will be paid, royalties of $445 for the year
ended December 31, 1996.

64
<PAGE>

PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits. The following exhibits have been or are being filed
--------
herewith, and are numbered in accordance with Item 601 of Regulation S-B:

Exhibit
Number Description
- ------- -----------

2.1 Agreement of Purchase and Sale of Stock by and among With Design in
Mind International, Inc., Leslie Friedland, and Daniel Lesnick, dated
October 6, 1993, relating to the acquisition of MJL Marketing Inc., a
New Jersey corporation. (11)

2.2 Agreement of Purchase and Sale of Stock by and among Janex
International, Inc., Malibu Fun Stuffed, Malibu Fun Stuffed
International Limited, Terence Davis and Marie Boule (18)

3.1 Articles of Incorporation. (1)

3.2 Amendment No. 1 to Articles of Incorporation. (3)

3.3 Statement of Resolution Establishing Series for Shares. (3)

3.4 Amendment No. 2 to Articles of Incorporation. (3)

3.5 Bylaws of the Company. (2)

3.6 Articles of Amendment to Articles of Incorporation, dated August 11,
1994 and filed on August 16, 1994. (15)

4.1 Specimen Common Stock Certificate. (3)

4.2 Specimen Warrant Certificate. (6)

4.3 Form of Warrant Agreement. (6)

4.4 1991 Non-Statutory Stock Option Plan. (5)

4.5 Amendment No. 1 dated January 15, 1993, to 1991 Non-Statutory Stock
Option Plan. (10)

4.6 Amendment No. 2 dated September 13, 1993, to 1991 Non-Statutory Stock
Option Plan. (10)

65
<PAGE>

4.7 Warrant Agreement dated May 17, 1994, by and between the Company and
Howard Moore, Trustee of the Howard Moore Associates, Inc. Retirement
Trust, dated December 30, 1990. (13)

4.8 Warrant Agreement dated May 17, 1994, by and between the Company and
H&M Moore Investment Group, Inc. (13)

4.9 Settlement Warrant Agreement dated March 26, 1996, by and between the
Company and Deco Disc Industries, Inc. (19)

4.10 Warrant Agreement dated April 19, 1996, by and between the Company and
the Moore Trust. (21)

4.11 Warrant Agreement dated June 29, 1996, by and between the Company and
Leslie Friedland. (21)

4.12 Warrant Agreement dated June 28, 1996, by and between the Company and
Daniel Lesnick. (21)

5 Opinion of Tilles, Webb, Kulla & Grant, a Law Corporation, as to the
legality of the securities being registered. (16)

10.1. Lease Agreement between With Design in Mind International, Inc., a
Colorado corporation and Warner Center Business Park Properties III,
L.P. for premises located at 21700 Oxnard Street, Suite 1610, Woodland
Hills, CA 91367 dated January 6, 1994. (10)

10.2 Employment Contract with Sheldon F. Morick, dated February 26, 1993.
(10)

10.3 Employment Contract with Daniel Lesnick, dated October 6, 1993. (10)

10.4 Stock Option Agreement with Sheldon F. Morick, dated June 30, 1992.
(10)

10.5 Stock Option Agreement with Sheldon F. Morick, dated February 26,
1993. (10)

10.6 Stock Option Agreement with Sheldon F. Morick, dated November 17,
1993. (10)

10.7 Stock Option Agreement with Michael S. Manahan, dated June 30, 1992.
(10)

10.8 Stock Option Agreement with Michael S. Manahan, dated November 17,
1993. (10)

10.9 Stock Option Agreement with Renee White Fraser, dated June 25, 1993.
(10)

66
<PAGE>

10.10 Stock Option Agreement with Renee White Fraser, dated November 17,
1993. (10)

10.11 Stock Purchase Agreement dated May 17, 1994, by and between the
Company and Howard Moore, Trustee of the Howard Moore Associates, Inc.
Retirement Trust, dated December 30, 1990. (13)

10.12 Stock Purchase Agreement dated May 17, 1994, by and between the
Company and H&M Moore Investment Group, Inc. (13)

10.13 Settlement Agreement dated October 17, 1994, by and between the
Company and Dentsu Prox Inc. (14)

10.14 Stock Option Agreement with Sheldon F. Morick dated April 3, 1995 (17)

10.15 Stock Option Agreement with Daniel Lesnick dated April 3, 1995 (17)

10.16 Stock Option Agreement with Michael S. Manahan dated April 3, 1995
(17)

10.17 Stock Option Agreement with Renee W. Fraser dated April 3, 1995 (17)

10.18 Employment Contract with Terence Davis, dated August 4, 1995. (19)

10.19 Settlement Agreement and Specific Release by and between the Company,
Deco Disc Industries, Inc., and its shareholders, Donald Spector,
Michael Deutch, Barbara Carver, and James McGraw dated March 26, 1996
(19)

10.20 Employment Agreement, dated April 15, 1996, by and between the Company
and Lawrence Bernstein. (21)

10.21 Stock Option Agreement with Lawrence Bernstein, April 15, 1996. (21)

10.22 Extension Agreement, dated June 28, 1996, by and between the Company
and Leslie Friedland. (21)

10.23 Extension Agreement, dated June 28, 1996, by and between the Company
and Daniel Lesnick. (21)

10.24 Inter-Creditor Agreement, dated June 28, 1996, by and between the
Company, Leslie Friedland, Daniel Lesnick and the Moore Trust. (21)

10.25 Modification Agreement, dated June 28, 1996, by and between the
Company, Terence F. Davis and Marie Boule. (21)

16 Letter to Securities and Exchange Commission from Kellogg & Andelson,
dated October 31, 1995 (8)

67
<PAGE>

21 Subsidiaries of the registrant:
1) With Design in Mind, a California corporation, a wholly owned
subsidiary
2) Janex Corporation, a New Jersey corporation, a wholly owned
subsidiary
3) Pro Gain Company Limited, a Hong Kong corporation, a wholly
owned subsidiary
4) Malibu Fun Stuffed, Inc., a California corporation, a wholly
owned subsidiary
5) Malibu Fun Stuffed International Limited, a Hong Kong corporation,
a wholly owned subsidiary

27 Financial Data Schedule.

- ------------------------------
(1) Incorporated by reference to Exhibit 3(a) to the Company's Registration
Statement on Form 8-A, filed with the Commission on August 15, 1989 and
declared effective on September 1, 1989.
(2) Incorporated by reference to Exhibit 3(b) to the Company's Registration
Statement on Form 8-A, filed with the Commission on August 15, 1989 and
declared effective on September 1, 1989.
(3) Filed on August 8, 1990 as an exhibit to the Company's Registration
Statement on Form S-1.
(4) Filed as exhibit to the Company's Form 10-Q for the quarter ended
December 31, 1990.
(5) Filed on March 20, 1991 as an exhibit to Amendment No. 1 to the
Company's Registration Statement on Form S-1.
(6) Filed on May 7, 1991 as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form S-1.
(7) Filed as an exhibit to the Company's Form 10-K for the fiscal year
ended September 30, 1991.
(8) Filed as an exhibit to the Company's Form 10-KSB for the fiscal year
ended September 30, 1992.
(9) Filed as an exhibit to the Company's Form 8-K dated September 3, 1992.
(10) Filed as an exhibit to the Company's Form 10-KSB for the fiscal year
ended December 31, 1993.
(11) Filed as an exhibit to the Company's Form 8-K dated October 6, 1993.
(12) Filed as an exhibit to the Company's Form 8-K dated January 4, 1994.
(13) Filed as an exhibit to the Company's Form 8-K dated May 17, 1994.
(14) Filed as an exhibit to the Company's Form 8-K dated October 14, 1994.
(15) Filed on December 20, 1994 as an exhibit to the Company's Registration
Statement.
(16) Filed on February 9, 1995 as an exhibit to Pre-Effective Amendment
No. 1 to the Company's Registration Statement.
(17) Filed as an exhibit to the Company's Form 8-K dated April 3, 1995.
(18) Filed as an exhibit to the Company's Form 8-K dated August 4, 1995.
(19) Filed as an exhibit to the Company's Form 10-KSB, for the fiscal year
ended December 31, 1995.
(20) Filed as an exhibit to the Company's Form 8-K/A dated October 5, 1995.
(21) Filed as an exhibit to Post-Effective Amendment No. 1 to the Company's
Registration Statement dated August 9, 1996.

b) Reports on form 8-K. The Following reports were filed on form 8-K
--------------------
during the last quarter of the fiscal year:

Date of Report Item
-------------- -----------------------------

None

68
<PAGE>

SIGNATURES

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

Dated: April 15, 1997

JANEX INTERNATIONAL, INC.

By: /s/ Sheldon F. Morick
--------------------------------------
Sheldon F. Morick, Chairman of the Board,
President and Chief Executive Officer

In accordance with the Securities Exchange Act of 1934, this report has
been signed by the following persons on behalf of the registrant in the
capacities and on the dates indicated.

Signatures Title Date
- ---------- ----- ----

/s/ Sheldon F. Morick Chairman of the Board, President April 15, 1997
- ----------------------- Chief Executive Officer and Director
Sheldon F. Morick

/s/ Michael Handelman Vice President, April 15, 1997
- ----------------------- Chief Financial Officer
Michael Handelman (Principal Financial and Accounting
Officer)

/s/ Renee White Fraser Director April 15, 1997
- -----------------------
Renee White Fraser

<PAGE>

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 186,616
<SECURITIES> 500,000
<RECEIVABLES> 433,113
<ALLOWANCES> 202,634
<INVENTORY> 569,637
<CURRENT-ASSETS> 1,848,305
<PP&E> 1,715,790
<DEPRECIATION> 1,239,435
<TOTAL-ASSETS> 4,931,776
<CURRENT-LIABILITIES> 3,041,051
<BONDS> 0
0
0
<COMMON> 11,268,816
<OTHER-SE> 554,517
<TOTAL-LIABILITY-AND-EQUITY> 4,931,776
<SALES> 7,112,921
<TOTAL-REVENUES> 7,112,921
<CGS> 4,348,200
<TOTAL-COSTS> 8,860,415
<OTHER-EXPENSES> 1,105,460
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 353,516
<INCOME-PRETAX> (2,852,954)
<INCOME-TAX> 12,485
<INCOME-CONTINUING> (2,865,439)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,865,439)
<EPS-PRIMARY> (0.56)
<EPS-DILUTED> (0.56)

</TABLE>