TRUDY CORP, 10KSB, 2000-07-14

TRUDY CORP
10KSB, 2000-07-14
BOOKS: PUBLISHING OR PUBLISHING & PRINTING

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-KSB

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the year fiscal year ended March 31, 2000

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.

For transition period from _______________ to ______________

Commission file number: 0-16056

TRUDY CORPORATION
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(Exact name of registrant as specified in its charter)

DELAWARE 06-1007765
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)

353 MAIN AVENUE, NORWALK, CONNECTICUT 06851-1552
--------------------------------------- ----------
(Address of principal executive offices) (Zip Code)

(203) 846-2274
----------------------------------------------------
(Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE
------------------------------

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

Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained herein, and will not be contained, to the best of the
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]

The Registrant's revenues for the fiscal year ended March 31, 2000 were
$2,476,252.

As of July 12, 2000, the aggregate market value of the Common Stock of the
Registrant held by non-affiliates was approximately $2,626,000. As of July 12,
2000, 350,187,249 shares of Common Stock, $.0001 par value per share, were
outstanding.
<PAGE>

DOCUMENTS INCORPORATED BY REFERENCE

Certain exhibits filed with the Registration Statement on Form S-18
(File Number 33-14379B) are incorporated by reference into Item 13 of this
report.

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Annual Report contains
forward-looking statements that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The forward-looking
statements contained herein are subject to certain risks and uncertainties
including, without limitation, those indicated from time to time in our filings
with the SEC. Forward-looking statements include the information concerning
possible or assumed future results of operations. Also, when we use words such
as "believes," "expects," "anticipates," or similar expressions, we are making
forward-looking statements. Readers should understand that the following
important factors, in addition to those discussed in the referenced SEC filings,
could affect our future financial results, and could cause actual results to
differ materially from those expressed in our forward-looking statements:

o the implementation of our strategies;
o the availability of additional capital;
o variations in stock prices and interest rates;
o competition and fluctuations in quarterly operating results; and
o other risks and uncertainties described in our filings with the SEC.

We make no commitments to disclose any revisions to forward-looking statements,
or any facts, events, or circumstances after the date hereof that may bear upon
forward-looking statements.

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL DEVELOPMENT OF BUSINESS

Trudy Corporation, which does business under the name Soundprints,
publishes children's storybooks and audiocassettes that are sold in conjunction
with contract-manufactured educational toys to the retail, education, and mail
order markets.

In December 1998, the Company signed a letter of intent to merge with
Futech Interactive Products, Inc. On March 3, 1999, the Company entered into a
merger agreement with Futech. This merger agreement was subsequently
renegotiated and replaced with a new merger agreement ("The Global Merger
Agreement") dated June 4, 1999 providing for the mergers of the Company, Futech,
Fundex Games, Ltd., DaMert Company, and Janex International, Inc. into a newly
incorporated Delaware company ("New Futech"). The agreement covered the
acquisition of all of the Common Stock of the Company for a purchase price of
approximately $3,450,000, payable in a combination of New Futech Common Stock
(valued at $3,000,000) and cash of approximately $450,000. In addition, New
Futech was to repay certain loans to the Company by the President, William W.
Burnham, and certain of his family members, approximating $800,000. The
transaction was expected to close in the third quarter of 1999, but, due to the
complexity of the transaction and New Futech's inability to raise the necessary
capital, the merger did not occur.

On February 21, 2000, the Company announced that Janex agreed in
principle to purchase the Common Stock of the Company beneficially owned by the
Burnham Family and Directors and employees of the Company amounting to
approximately 228,730,000 shares or 64% of the issued and outstanding common
stock of the Company. Consideration for the purchase was to have been $319,400
in cash and 348,436 shares of Janex Common Stock, valued for purposes of the
transaction at $5.50 per share, representing an aggregate value of $1,916,400.
Notes in the amount of approximately $1,700,000 held by the Burnham Family were
to be paid at the closing or within twelve months of the closing. Janex also
agreed to fund the ongoing working capital needs of the Company and to purchase
the balance of the Company's Common Stock owned by the minority shareholders
should the share price of the Common Stock have fallen below the Janex offer
price to the majority shareholders for a 30 day period within 12 months of
closing. This transaction was to have replaced at closing the Company's
obligations under the merger agreement, dated June 4, 1999, among the Company,
Futech, Janex, and the other parties. On May 4, 2000, the Company announced that
Janex had entered into a definitive stock purchase and sale agreement to acquire
control of the Company through the purchase of Common Stock of the Company
beneficially owned by the Burnham Family, amounting to 182,412,000 shares or 52%
of the issued and outstanding Common Stock of the Corporation. Consideration for
the purchase would have been 920,000 shares of Janex Common Stock, valued for
purposes of the transaction at $2.00 per share, representing an aggregate value
of $1,840,000. Indebtedness owed by the Company to the Burnham Family in the
amount of approximately $1,500,000 was to be paid at the closing through the
issuance of additional Janex shares, also valued at $2.00 per share. Janex also
agreed to pay $650,000 in cash to two members of the Burnham Family in
liquidation of additional debt of the Corporation.

However, on May 23, 2000, the Company announced that the Burnham Family
and the Company had been informed by Janex that Janex wished to make substantial
changes to the agreement. In view of the changes, which were materially
unfavorable to the Company as well as the Burnham Family and the remaining
shareholders of the Company, the Burnham Family had no choice but to consider
the agreement terminated by Janex.

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The Company is reviewing various business alternatives in view of
Janex's actions. On May 24, 2000, the Company retained Financial Technology
Research Corporation ("FINTEK") to perform certain financial services, including
assisting with the development of a business plan, designing and implementing an
investor relations program, and improving the Company's access to capital
markets. The Company agreed to grant to FINTEK upon the signing of the agreement
5,252,809 shares, or 1.5%, of the Company's outstanding Common Stock. On each of
the next three three-month anniversaries of the agreement, the Company will
grant to FINTEK warrants to purchase a number of shares of Common Stock equal to
2.5% of the number then issued and outstanding at an exercise price of $.03 per
share for the first period, $.04 per share for the second period, and $.05 per
share for the third period. As an alternative to the issuance of warrants, by
mutual agreement between the parties, the Company may grant to FINTEK shares of
Common Stock equal to 1.5% of the number then issued and outstanding at each of
the three three-month anniversary dates.

PRODUCTS AND LICENSING

The Company holds an exclusive license from the Smithsonian Institution
to utilize the Smithsonian name through September 30, 2002, in connection with
the sale of realistic wildlife plush toys and educational kits, storybooks, and
audiocassettes. Since 1991, the Company has published a total of seventy-four
titles in four different series under the Smithsonian license. Royalties are
paid to the Smithsonian at the rate of 5.0% of net sales on all licensed
products.

The Company also held a license from The Nature Conservancy to develop
a series of habitat books, toys, and audiocassettes. The first four titles in
the habitat series were introduced in the spring of 1997. The orientation of the
habitat series has been toward both the education and trade markets. Through
December 1999, twelve Nature Conservancy titles have been published. The license
from the Nature Conservancy expired in January 2000. The company will continue
to publish in this series with companion plush toys under its own moniker,
titled Soundprints Wild Habitats. The backlist titles will be converted over to
this series indicia.

Market reception of the Smithsonian and Nature Conservancy series has
been extremely positive as a result of the perceived high value of the book and
plush animal sets. Each year the Company introduces ten to fourteen new titles.
In addition to titles in the Smithsonian and Nature Conservancy series, a
non-licensed international series, combining books and dolls, was launched in
the spring of 1999. Each storybook profiled a day in the life of children from a
specific country, authored and illustrated by artists from the highlighted
country. Each title is accompanied by a doll of the featured child sculpted in
her true ethnicity. In the fall of 1999, a new series of photographic board
books accompanied by soft cotton velour toys for toddlers was launched in
cooperation with the Smithsonian Institution National Zoological Park.

MARKETING AND SALES

The Company's products are sold to book, toy, and specialty store
resellers, warehouse clubs and book, gift and educational distributors by an
in-house sales staff and, except for the period up to May 2000 when Futech
handled sales and distribution, 85 independent commissioned sale
representatives. In addition, the Company mails a catalog directly to consumers,

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schools, and libraries and an in-house telemarketing staff receives and
processes phone, Internet, and mail orders from these mailings. In June 1999,
the Company transferred responsibility for trade sales and fulfillment to Futech
Interactive, Inc.'s distribution center in Wisconsin in return for assistance in
paying off the company's revolving credit facility with its bank and
underwriting the company's working capital needs up through the closing of the
Global Merger. Soundprints' inventory was sold to Futech at a deeper discount
than it would sell to its most favored customers. In January 2000, Futech became
unable to pay its open invoices to the Company and, consequently, the Company
put Futech on a cash basis. Futech shipped very little merchandise to its
customers for the five-month period through May 2000 and would not turn orders
back to the Company. Sales suffered as a result. On May 24, 2000, the oral
distribution arrangement with Futech was terminated and the Company regained
control of distribution of its products. Total sales to Futech during the year
were approximately $842,000 of which $269,000 remains unpaid. On June 26, 2000
the Company was notified that Futech has filed a voluntary petition under the
provisions of Chapter 11 of the Bankruptcy Code.

During the period over which Futech controlled retail sales,
Soundprints initiated development of a growth area for the Company's products,
the supplemental educational market. A house sales manager was retained to sell
to educational distributors who take the Company's products into the classroom
for use as supplemental teaching materials in reading and science. In addition,
certain titles are purchased as subrights for distribution into school book
clubs and book fairs.

MANUFACTURING AND PRODUCT DESIGN

Plush and toy product design is done in "design rooms" managed by the
Company's overseas contractors. Storybooks are created by free-lance authors and
illustrators working under the direction of the Company's editorial and graphic
design staff. Audio is produced by an award-winning sound designer overseen by
the Company's editorial department.

The Company produces the majority of its products by sub-contracting
with independent toy factories and printing plants located in Asia.
Approximately ninety percent of the toys are purchased from one vendor in China,
but the Company has other qualified sources of supply from which it has
purchased in the past. The Company owns the design of each toy product (except
for Smithsonian plush toys which are co-trademarked with Smithsonian
Institution) and actively manages the design of new products. The Company
believes that production could quickly be transferred to other companies in
China, Bangladesh, and Sri Lanka if production were not available from the
vendor in China or if more favorable pricing became available elsewhere. Books
are purchased from a U.S. company which subcontracts production to various
printers in Asia. These manufacturers can also perform certain other functions
such as the labeling and packaging of product for volume shipments directly to
large customers. Audiocassettes are duplicated locally. Delivery has been
satisfactory from all suppliers.

GOVERNMENTAL REGULATIONS

The Company is subject to the provisions 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 that are found to be hazardous and can require a
manufacturer to repurchase such products under certain circumstances. Any such

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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.

COMPETITION

Management believes the Company is the leading supplier of licensed,
realistic plush toys packaged with an educational book and audiocassette. The
Company is not aware of any direct competitors in this market, although there
are a few publishers who compete by combining plush toys with single titles of
children's classic books. The Company believes that its competitive advantages
are its unique editorial genre, its superior design, and the perceived high
quality of its products relative to the retail price, in addition to the license
with the Smithsonian Institution.

EMPLOYEES

As of March 31, 2000, the Company had eleven full-time and two
part-time employees, all in its Norwalk facility, consisting of seven persons in
sales and administration, three in shipping and handling, and three in editing
and graphic design. The Company utilizes the services of a chief financial
officer and a senior editor on a contractual basis. Seasonal personnel are hired
in the fall to assist with greater volumes in the assembly area and to handle
in-bound telemarketing for the direct response business.

The Company's ability to design, manufacture, market, and sell products
depends largely upon its ability to attract and retain highly skilled personnel,
particularly in the product design, publishing, and sales areas. The Company has
continued to upgrade positions in editorial and sales management to further
improve the quality and distribution of its products and their value to the
customer.

ITEM 2. DESCRIPTION OF PROPERTY

The Company leases warehouse and administrative facilities in a 27,000
square foot building at 353 Main Avenue in Norwalk, Connecticut. The building is
located approximately 50 miles east of New York City. This facility, first
occupied by the Company in July 1996, is owned by a partnership comprised of the
Company's President, a former Director and Officer, and a current Board Member.
The property was purchased and financed independently of the Company.

The lease, which runs to 2004, provides for annual rent which is
representative of the local market today and holds the Company responsible for
payment of taxes and utilities as well as rent. The Company believes that its
facilities are adequate for all of its foreseeable requirements.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

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

The Company did not submit any matters to a vote of its security
holders during the fourth quarter of the fiscal year ended March 31, 2000.

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PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock trades on the OTC Bulletin Board under the
symbol "TRDY."

The price of the Company's Common Stock as of July 12, 2000 was $.0205
per share. The prices presented are bid quotations, as reported by NASDAQ, that
reflect inter-dealer prices, without retail mark-up, mark-down, or commission
and may not represent actual transactions:

Common Stock Price
------------------
High Low
---- ---
YEAR ENDED MARCH 31, 2000
First Quarter $0.0012 $0.0002
Second Quarter 0.001 0.0005
Third Quarter 0.03 0.0005
Fourth Quarter 0.18 0.002

Trading activity in 1999 was limited and sporadic. The Company believes that the
share price was in the range of $.001 per share throughout the year.

As of March 31, 2000, there were approximately 1,473 stockholders of
record.

Since its organization, the Company has not paid any dividends on its
Common Stock and does not anticipate paying dividends in the foreseeable future.
Future dividend policy is subject to the discretion of the Board of Directors
and is dependent on a number of factors including future earnings, capital
requirements, and the financial condition of the Company.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the financial statements and notes thereto included
elsewhere herein.

FISCAL YEAR ENDED MARCH 31, 2000 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1999

Net Sales. Net sales for the year ended March 31, 2000 were $2,476,252
compared with $3,390,884 for the year ended March 31, 1999. In 1999, sales to
the warehouse clubs were $978,000; in 2000, sales to the warehouse clubs were
controlled and reported by Futech. Direct mail catalog sales decreased to
$625,000 in 2000 from $961,000 in 1999. In 2000, the direct mail catalog was
developed in conjunction with Futech which retained creative control. Futech
delayed the mailing of the catalog until the first week in November. As a
result, the catalog was not able to generate its full Christmas season sales
potential. Sales in all other distribution channels were $1,009,000 in 2000

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compared with $1,452,000 in 1999. However, sales and distribution
responsibilities were transferred to Futech during the year. Futech purchased
the Company's inventory at deep discounts. In January 2000, due to Futech's
inability to pay for the Company's inventory, customer trade orders were shipped
only sporadically through May 2000, when the Company regained distribution of
its products. Sales directly to Futech were $842,000 in 2000.

Cost of Sales. Cost of sales of $1,869,549 decreased from $2,168,685 in
the prior year, primarily because of the lower level of sales volume. In
percentage terms, cost of sales increased to 75.5% from 64.0%. Although the
Company took significant actions to reduce costs in 2000, the higher percentage
is the result of higher than average discounts on sales to Futech, the decline
in higher margin direct mail catalog sales, and certain fixed costs.
Amortization of product development costs decreased to 90,000 in 2000 from
$296,000 last year. A write-down of slow-moving inventory by an additional
$250,000 was taken in 2000 compared with $205,000 in 1999.

Selling, General, and Administrative Expense. Selling, general, and
administrative expenses decreased to $1,623,038 in 2000 from $2,355,787 in 1999.
The lower level of spending is the result of lower commission and royalty
expenses associated with lower sales volume, lower catalog expenses due to the
joint development of the catalog with Futech, and reductions in personnel and
other discretionary expenses made in face of lower volume levels.

Depreciation Expense. Depreciation expense increased to $24,097 in 2000
from $22,175 in the prior year. The increase reflects the full year effect of
depreciation on assets, primarily computer systems acquired in 1999. There were
no significant capital investments in 2000.

Income/(Loss) from Operations. Income/(loss) from operations was a loss
of $1,040,432 compared with a loss of $1,155,763 in the prior year.

Interest Expense. Interest expense increased to $138,056 in 2000 from
$111,604 last year as a result of higher borrowing needed to fund working
capital requirements and operating losses.

Other Income. Other income of $134,617 in 2000 increased from $34,134
in the prior year primarily because of higher royalty income.

Net Income/(Loss). A net loss of $1,043,871 for the year ended March
31, 2000 compares favorably to a loss of $1,611,233 in the prior year. In
addition to the changes discussed above, the increase is also the result of the
write-off of $378,000 of deferred tax assets in 1999.

FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998

Net Sales. Net sales for the year ended March 31, 1999 were $3,390,884
as compared with net sales of $4,977,599 for the year ended March 31, 1998.
Sales to warehouse clubs, the largest distribution channel, were down $775,443
or 44% to $977,961 due to the clubs' decision to purchase more conservatively
and minimize inventory carryover. Direct response sales of $961,624 were
$269,554, or 22%, lower than last year. Catalog marketers in general experienced
reduced buying early in the pre-holiday season (September) due to financial
market uncertainty. Sales of $671,946 to bookstores and specialty retailers were
down $492,101 or 42% from last year as the number of independent bookstores
continues to decline and specialty stores have become more selective in their
purchases. Sales to schools and education wholesalers continue to increase as a
result of the Company's decision to target its direct marketing toward this
growing market segment.

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Cost of Sales. Cost of sales of $2,168,685 decreased from $2,730,401 in
the prior year, primarily because of the lower level of sales volume. In
percentage terms, cost of sales increased to 64.0% from 54.9%. The higher
percentage is the result of the acceleration of amortization of product
development costs and increased reserves for inventory obsolescence in 1999.

Selling, General, and Administrative Expense. Selling, general, and
administrative expenses increased to $2,355,787 from $2,168,322. The increase is
the result of the accelerated write-off of royalty advances, the recording of
sub-right royalty expenses, and the write-off of a computer operating system
purchased in December 1997 because it was determined that the new system did not
meet the Company's requirements. Lower royalty and sales commission expenses
resulting from lower revenue were offset by the higher cost of a larger consumer
catalog mailing.

Depreciation Expense. Depreciation expense increased to $22,175 from
$17,449 in the prior year due to increased investment in computer systems.

Income/(Loss) from Operations. Income/(loss) from operations was a loss
of $1,155,763 compared with income of $61,427 in the prior year. The decline is
primarily the result of lower sales and the accelerated write-offs cited above.

Interest Expense. Interest expense increased to $111,604 from $102,099
last year as a result of higher borrowing needed to fund working capital
requirements and operating losses.

Other Income. Other income of $34,134 decreased from $35,904 in the
prior year.

Net Income/(Loss). A net loss of $1,611,233 for the year ended March
31, 1999 compares to a profit of $203,552 in the prior year. In addition to the
changes discussed above, the decline is also the result of the write-off of
$378,000 of deferred tax assets in 1999 and two non-recurring gains recorded
last year: an income tax benefit of $152,000 and an after tax gain of $56,320
from the forgiving of accrued interest on loans made to the Company by its
President.

LIQUIDITY AND CAPITAL RESOURCES

In March 1998, the Company renewed a revolving line of credit of
$1,200,000 and obtained a four-year term loan of $250,000, both from First Union
National Bank. In March 1999, the Company negotiated an extension of the line of
credit through June 15, 1999 in anticipation of Futech obtaining funding to pay
the First Union obligations by then. On May 13, 1999, First Union notified the
Company that it was in default of certain loan covenants. The balance on the two
loans at the time totaled $984,111. Through September 30, 1999, the Company made
payments on the loans from proceeds of the sale of product to Futech. The total
balance of the loans was reduced to $632,212. On September 30, 1999, William and
Alice Burnham borrowed $650,000 from Wilmington Trust Company. This loan is
secured by personal assets of the Burnhams. The proceeds of this loan were used
to pay the First Union loans.

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Principal payments totaling $90,000 in October and December reduced the balance
on the first loan of $140,000 to $50,000. As of June 30, 2000, the Company owes
Alice Burnham $241,301, which includes accrued interest. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."

In March of 2000, William W. Burnham loaned the Company $80,000 to meet
immediate cash needs. Two notes of $30,000 and $50,000 bear an interest rate of
8% and are due on October 1, 2000. Through June 30, 2000, Mr. Burnham has made
additional loans to the Company totaling $305,000 on the same terms. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."

Accounts receivable were $533,759 on March 31, 2000 compared with
$246,049 on March 31, 1999. Of the March 31, 2000 balance, $467,684 is owed by
Futech. The decrease in accounts receivable (excluding those of Futech) is due
to lower sales volume in the last quarter of the fiscal year compared with last
year. Inventory levels were $1,213,813 on March 31, 2000 compared to $1,501,204
on March 31, 1999. The reserve for inventory obsolescence was increased by
$250,000 to $505,000.

The Company continues to experience a severe working capital deficiency
and negative cash flow. The Company has had limited receipts from sale of its
product and is unable to fully meet its financial obligations as they become
due. As of June 30, 2000, the Company's indebtedness to its vendors was
approximately $610,000. The Company has been funded by a principal
shareholder-officer and another shareholder and had been funded in 2000 by
Futech Interactive Products, Inc.

The Company's ultimate ability to continue as a going concern is
dependent upon the market acceptance of its products, an increase in revenues
coupled with continuing license agreements and positive cash flow. The Company
will also require additional financial sources to provide near term operating
cash to move toward profitability. The Company believes that improvement in
sales, a future merger partner, and its ability to borrow money, albeit not at
past levels, from its shareholders will be sufficient to allow the Company to
continue in operation.

IMPACT OF YEAR 2000

In the past, the Company has discussed the nature and progress of its
plans to become Year 2000 ready. During the past fiscal year, the Company
completed its testing and remediation of its systems. The Company experienced no
significant disruptions in information technology and other systems and believes
that those systems successfully responded to the Year 2000 date change. Costs
associated with remediating the systems were immaterial. The Company is not
aware of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products or services of third parties.
The Company will continue to monitor its computer applications and those of its
suppliers to ensure that any latent Year 2000 matters that may arise are
promptly addressed.

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ITEM 7. FINANCIAL STATEMENTS

The following financial statements are included in this Annual Report
on Form 10-KSB beginning on Page F-1:

Independent Auditors' Reports
Balance Sheet, March 31, 2000
Statement of Operations, years ended March 31, 2000 and 1999 Statements
of Shareholders' Equity (Deficit) Statements of Cash Flows, years ended
March 31, 2000 and 1999 Notes to Financial Statements

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

As previously reported in the Company's Current Report on Form 8-K
dated March 31, 2000, the Company's Board of Directors approved the engagement
of Abrams and Company, P.C. as its independent auditor for the fiscal year
ending March 31, 2000 to replace the firm of Ernst & Young LLP, which was
dismissed as auditor of the Company effective March 29, 2000. Abrams and
Company, P.C. was the Company's auditor in the years prior to 1999.

The report of Ernst & Young LLP on the Company's financial statements
for the past fiscal year did not contain an adverse opinion or a disclaimer of
opinion and was not qualified or modified as to audit scope or accounting
principles. In connection with the audit of the Company's financial statements
for the fiscal year ended March 31, 1999, there were no disagreements with Ernst
& Young LLP on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope procedures which, if not resolved to the
satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to make
reference to these matters in their report. The Company requested Ernst & Young
LLP to furnish the Company with a letter addressed to the Securities Exchange
Commission stating whether it agrees with the above statements and such letter
was furnished.

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PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS

The directors and executive officers of the Company as of July 12, 2000
are as follows:

NAME AGE POSITION

William W. Burnham 58 Chairman of the Board of Directors,
President, and Chief Executive Officer
Alice B. Burnham 53 Director

Peter D. Nalle 52 Director

Fred M. Filoon 58 Director

William T. Carney 46 Chief Financial Officer and Secretary

William W. Burnham has been President, Chief Executive Officer, and
Chairman of the Board of Directors of the Company since 1979. He served as Group
Director of Marketing at Pepsico, Inc. from 1976 to 1979. From 1972 to 1976, Mr.
Burnham served as the Director of Advertising and Sales Promotion at Vlasic
Foods. Mr. Burnham graduated from Trinity College and received an M.B.A. degree
from Columbia University.

Alice B. Burnham has served as a director of the Company since 1994. As
a major shareholder and wife of Mr. Burnham, she had long been familiar with the
workings of the Company. Mrs. Burnham manages her own interior design business
in New Canaan, Connecticut and is active in civic and professional affairs. Mrs.
Burnham graduated from Briarcliff College.

Fred M. Filoon has served as a director of the Company since 1993. Mr.
Filoon has over thirty years of experience in the investment and financial
community having worked for Donaldson, Lufkin & Jenrette and Morgan Stanley. He
is presently a partner with Cramer, Rosenthal & McGlynn. Mr. Filoon graduated
from Bowdoin College.

Peter D. Nalle has served as a director of the Company since 1996. Mr.
Nalle has many years of experience in the publishing industry having worked for
McGraw-Hill, Lippincott, and Simon & Schuster. He was Chief Operating Officer of
Grolier, Inc. from 1994 to 1996. He is presently a private investor and business
adviser. Mr. Nalle graduated from Brown University.

William T. Carney was named Vice President and Chief Financial Officer
of the Company in March 1998. In September 1999, Mr. Carney resigned his
position with the Company, but returned in December 1999 as an independent
consultant to serve as Chief Financial Officer and Secretary. He previously held
financial management positions with Pechiney/American National Can and Ford
Motor Company. Mr. Carney graduated from Dartmouth College and received an
M.B.A. degree from the Wharton School of the University of Pennsylvania.

Page 12
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

In 1999 no employee of the Company received compensation exceeding
$100,000. William W. Burnham, the President and Chief Executive Officer,
received cash compensation totaling $85,171.

On September 15, 1999, the Board of Directors of the Company approved
the grant of shares of Common Stock to certain Directors, Officers, and
employees of the Company to fulfill the Company's compensation arrangements with
these individuals. On January 31, the Board approved grants of Common Stock to
two additional employees. In total, 18,800,000 shares of Common Stock was issued
as follows:

Name Number of Shares of Common Stock Granted
---- ----------------------------------------

William W. Burnham 4,000,000
Alice B. Burnham 1,750,000
Fred M. Filoon 1,750,000
Peter D. Nalle 1,750,000
William T. Carney 4,000,000
Other employees 5,550,000
----------
Total Shares Granted 18,800,000

STOCK OPTIONS

On March 3, 1987, both the Board of Directors and shareholders of the
Company adopted the 1987 Stock Option Plan (the "Plan"). The Plan provides that
options granted thereunder are intended to qualify either as "incentive stock
options" within the meaning of Section 422A of the Internal Revenue Code of 1986
(the "Code") or non-qualified options.

The Plan is administered by the Board of Directors. The Company has
reserved 22,500,000 shares of Common Stock for issuance to employees, officers,
directors, and outside consultants of the Company under the Plan. Under the
Plan, the Board of Directors determines which participants shall receive
options, the time period during which the option may be partially or fully
exercised, the number of shares of Common Stock that may be purchased under each
option, and the option price. The per share exercise price of the Common Stock
subject to the option may not be less than the fair market value of the Common
Stock on the date the option is granted. The aggregate fair market value
(determined as of the date the option is granted) of the Common Stock that any
person may purchase in any calendar year pursuant to the issuance of incentive
stock options in any calendar year may not exceed $100,000 plus any "unused
limit carryover," within the meaning of Section 442A(c)(4) of the Code,
available to such person in such year. Options under the Plan must be granted
within ten years from the effective date of the Plan. The exercise of options
granted under the Plan cannot exceed ten years from the date of grant. No person
who owns, directly or indirectly, at the time of the granting of an option to
him, more than 10% of the total combined voting power of all classes of stock of
the Company shall be eligible to receive any options under the Plan unless the
option price is at least 110% of the fair market value of the Common Stock
subject to the option, determined on the date of grant.

No option may be transferred by an optionee other than by will or the
laws of descent and distribution, and during the lifetime of an optionee the
option will be exercisable only by him. In the event of termination of
employment other than by death or disability, the optionee will have three
months after such termination within which to exercise the option to the extent

Page 13
<PAGE>

it was exercisable at the date of such termination. Upon termination of
employment of an optionee by reason of death or permanent total disability, his
option remains exercisable for one year thereafter to the extent it was
exercisable on the date of such termination.

As of March 31, 2000, 8,015,000 shares were subject to outstanding
options.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of July 12, 2000, with respect to (i)
each person known to the Company to own beneficially more than five percent of
the outstanding shares of the Company's Common Stock, (ii) each director of the
Company, (iii) each Officer of the Company, and (iv) all Directors and Officers
of the Company as a group.

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

Common Stock
Name Beneficially Owned(1) Percent of Class
--------------------------------------------------------------------------------

William W. Burnham(2)(3)(4) 110,242,000 30.8%
--------------------------------------------------------------------------------

Alice B. Burnham(2)(3)(5) 63,250,000 17.7%
--------------------------------------------------------------------------------

Peter B. Burnham
216 Hardwick Road
Petersham, MA 31,920,000 8.9%
--------------------------------------------------------------------------------

Fred M. Filoon (3)(6) 4,750,000 1.3%
--------------------------------------------------------------------------------

Peter D. Nalle (3) 2,250,000 0.6%
--------------------------------------------------------------------------------

William T. Carney (3) 4,000,000 1.1%
--------------------------------------------------------------------------------

All Directors and Officers
as a group (5 persons) 184,492,000 51.5%
(4)(5)(6)(7)
--------------------------------------------------------------------------------

1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("SEC") and generally includes voting or
investment power with respect to securities. In accordance with SEC rules,
shares which may be acquired upon exercise of stock options which are
currently exercisable or which become exercisable within 60 days of the date
of the table are deemed beneficially owned by the optionee. Except as
indicated by footnote, and subject to community property laws where
applicable, the persons or entities named in the table above have sole
voting and investment power with respect to all shares of the Company's
Common Stock shown as beneficially owned by them.

2) Husband and wife.

3) The address of each of these individuals is c/o Trudy Corporation, 353 Main
Avenue, Norwalk, Connecticut 06851-1552.

Page 14
<PAGE>

4) Includes 2,000,000 shares of Common Stock issuable upon exercise of
immediately exercisable options.

5) Includes 1,000,000 shares of Common Stock issuable upon exercise of
immediately exercisable options.

6) Includes 3,000,000 shares of Common Stock issuable upon exercise of
immediately exercisable options.

7) Includes 6,000,000 shares of Common Stock issuable upon exercise of
immediately exercisable options.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Main Avenue property leased by the Company is owned by a
Connecticut limited liability corporation, Noreast Management LLC, which is
owned jointly by William W. Burnham, the President and Chief Executive Officer
of the Company, Peter Ogilvie, a former Director and Officer of the Company, and
Fred M. Filoon, a Director of the Company.

In previous years, the Company had borrowed an aggregate of $454,729
from William W. Burnham, Peter B. Burnham, and members of their families. The
loans bear interest at the rate of 10% per annum. On March 31, 1987, the note
holders contributed to the Company's capital an aggregate of $374,205 of these
notes payable. The balance of $80,525 in demand loans was converted to five-year
term loans with an interest rate of 10%. Interest accruals have increased the
indebtedness to $186,200 as of June 30, 2000.

As of March 31, 1999, the Company had borrowed a total of $644,583
(including accrued interest) from William W. Burnham. This total is comprised of
promissory notes that bear interest at the rate of 8% or 12% per annum. The
notes are secured with a pledge of all of the Company's inventory, accounts
receivable, and equipment. The aggregate balance of these loans, as of June 30,
2000, was $682,103.

On May 28, 1999, Alice Burnham, a director of the Company and wife of
the President, loaned the Company $140,000 to meet immediate cash needs. The
note bears an interest rate of 8% and was to be repaid by July 2, 1999. On
October 12, 1999, Alice Burnham loaned the Company an additional $180,000 to
finance the fall consumer catalog. This loan also bears an interest rate of 8%.
Principal payments totaling $90,000 in October and December reduced the balance
on the first loan of $140,000 to $50,000. As of June 30, 2000, the Company owes
Alice Burnham $241,301, which includes accrued interest.

In March of 2000, William W. Burnham loaned the Company $80,000 to meet
immediate cash needs. Two notes of $50,000 and $30,000 bear an interest rate of
8% and are due on October 1, 2000. Through June 30, 2000, Mr. Burnham has made
additional loans to the Company, on the same terms. The total due, including
accrued interest, as of June 30, 2000 on all loans made by Mr. Burnham since
March 2000 is $390,748.

Page 15
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS

The following documents are incorporated by reference to the Company's
registration statement on Form S-18 (file number 33-14379B):

3a. Certificate of Incorporation

3b. Certificate of Amendment of Certificate of Incorporation

3c. By-laws of Company

3d. Certificate of Incorporation of Norwest Manufacturing Company

3e. Certificate Amending Certificate of Incorporation of Norwest Manufacturing
Company dated December 5, 1979

3f. Certificate Amending Certificate of Incorporation of Trudy Toys Company,
Inc. dated March 27, 1984

REPORTS ON FORM 8-K

Current Reports on Form 8-K dated February 25, 2000; March 6, 2000; March 31,
2000; May 5, 2000; and May 24, 2000.

Page 16
<PAGE>

Report of Abrams and Company, P.C., Independent Auditors

To The Stockholders
Trudy Corporation
Norwalk, Connecticut

We have audited the accompanying balance sheet of Trudy Corporation as of March
31, 2000, and the related statements of operations, shareholders' deficit, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Trudy Corporation at March 31,
2000, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has a deficiency in working capital, and a deficiency in net assets and has
continued to experience a significant decline in revenues. Such factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding those matters are described in Notes 1 and 13. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

/s/ ABRAMS AND COMPANY, P. C.
----------------------------------------
Abrams and Company, P.C.
Melville, NY
June 13, 2000, except as to Note 5c, the
date of which is June 22, 2000

F-1
<PAGE>

Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Shareholders
Trudy Corporation

We have audited the accompanying statements of operations, shareholders'
deficit, and cash flows of Trudy Corporation for the year ended March 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Trudy Corporation at March 31,
1999, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.

As discussed in Note 1 to the financial statements, the Company's operating
loss, and deficiency in net assets, raises substantial doubt about its ability
to continue as a going concern. Management's plans as to those matters are also
described in Note 1. The March 31, 1999 financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

/s/ ERNST & YOUNG LLP
--------------------------------
Ernst & Young LLP

Phoenix, Arizona
June 11, 1999

F-2
<PAGE>
<TABLE>
<CAPTION>

Trudy Corporation

Balance Sheet

March 31, 2000

ASSETS
Current assets:
<S> <C>
Cash and cash equivalents $ 20,638
Accounts receivable, net of allowance for doubtful accounts of $16,959 533,759
Inventories, net 1,213,813
Prepaid expenses and other current assets 10,920
-----------
Total current assets 1,779,130
-----------

Equipment, net 93,043
Pre-publication costs and royalty advances 204,530
-----------
Total assets $ 2,076,703
===========

LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 918,431
Advances from Futech Interactive Products, Inc. 541,143
Notes payable to shareholder - officer 1,356,322
Notes payable - related party 230,000
-----------
Total current liabilities 3,045,896

Notes payable to related parties 183,305

Shareholders' deficit:
Common stock: $.0001 par value:
Authorized shares - 850,000,000
Issued and outstanding shares - 350,187,249 35,019
Additional paid-in capital 4,073,772
Accumulated deficit (5,261,289)
-----------
Total shareholders' deficit (1,152,498)
-----------
Total liabilities and shareholders' deficit $ 2,076,703
===========
</TABLE>

See accompanying summary of accounting policies and notes to
financial statements

F-3
<PAGE>

Trudy Corporation

Statements of Operations

Year Ended March 31,
------------------------------
1999 2000
------------- -------------

Net sales $ 3,390,884 $ 2,476,252
Cost of sales 2,168,685 1,869,549
------------- -------------
Gross profit 1,222,199 606,703

Operating expenses:
Selling, general and administrative 2,355,787 1,623,038
Depreciation and amortization 22,175 24,097
------------- -------------
Income (loss) from operations (1,155,763) (1,040,432)
Other income (expense):
Interest expense (111,604) (138,056)
Other income 34,134 134,617
------------- -------------
Net loss before income taxes (1,233,233) (1,043,871)
Income tax provision (378,000) --
------------- -------------
Net loss $ (1,611,233) $ (1,043,871)
============= =============

Net loss per share:
Basic and diluted $ (0.00) $ ( 0.00)
============= =============

Weighted average shares used in computation:
Basic and diluted 331,222,249 340,583,082
============= =============

See accompanying summary of accounting policies and notes to
financial statements

F-4
<PAGE>

Trudy Corporation

Statement of Shareholders' Deficit

Common Stock Additional Total
---------------------------- Paid-in Accumulated Shareholders'
Shares Amount Capital Deficit Deficit
------------ ------------ ------------ ------------ ------------

<S> <C> <C> <C> <C> <C>
Balance at April 1, 1998 331,222,249 $ 33,123 $ 4,056,636 $ (2,606,185) $ 1,483,574
Net loss (1,611,233) (1,611,233)
------------ ------------ ------------ ------------ ------------
Balance at March 31, 1999 331,222,249 33,123 4,056,636 (4,217,418) (127,659)
------------ ------------ ------------ ------------ ------------

Common stock issued 18,965,000 1,896 17,136 19,032
Net loss (1,043,871) (1,043,871)
------------ ------------ ------------ ------------ ------------
Balance at March 31, 2000 350,187,249 $ 35,019 $ 4,073,772 $ (5,261,289) $ (1,152,498)
============ ============ ============ ============ ============
</TABLE>

See accompanying summary of accounting policies and notes to
financial statements

F-5
<PAGE>

Trudy Corporation

Statements of Cash Flows
<TABLE>
<CAPTION>

Year Ended March 31,
--------------------------
1999 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(1,611,233) $(1,043,869)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Provision (benefit) from sales returns 30,000 (25,000)
Depreciation 22,175 24,097
Amortization of pre-publication costs and royalty advances 140,121 155,892
Loss on disposal of property and equipment 53,080 --
Write down of pre-publication costs and royalty advances 199,901 3,686
Provision for losses on accounts receivable 33,596 4,697
Provision for slow moving inventory 205,000 250,000
Stock grants issued for services -- 18,800
Deferred income taxes 378,000 --
Changes in operating assets and liabilities:
Accounts receivable 42,253 (292,407)
Inventories (131,303) 37,391
Prepaid expenses and other current assets 54,888 39,922
Accounts payable and accrued expenses 152,520 465,735
----------- -----------
Net cash used in operating activities (431,002) (361,056)

INVESTING ACTIVITIES
Purchases of equipment (59,671) (2,955)
Pre-publication and royalty advances, net (165,688) (158,896)
----------- -----------
Net cash used in investing activities (225,359) (161,851)

FINANCING ACTIVITIES
Net proceeds (payments) on short-term borrowings 706,637 (240,349)
Increase in long-term debt -- 11,897
Repayment of loans - long-term (49,652) --
Proceeds from exercise of common stock grants -- 230
Proceeds from related party -- 230,000

Advances from Futech Interactive Products, Inc. -- 541,143
----------- -----------
Net cash provided by financing activities 656,985 542,921

Net increase in cash and cash equivalents 624 20,014

Cash and cash equivalents at beginning of year -- 624
----------- -----------
Cash and Cash Equivalents At End of Year $ 624 $ 20,638
=========== ===========

Cash paid for interest $ 78,027 $ 75,926
Cash paid for income taxes -- --
</TABLE>

See accompanying summary of accounting policies and notes to
financial statements

F-6
<PAGE>

Trudy Corporation

Notes to Financial Statements

1. ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Trudy Corporation (Company) designs, manufactures and markets plush stuffed
animals and publishes children's books and audiocassettes for sale to both
retail and wholesale customers, both domestically and internationally. All
Company product is sold under the trade name of Soundprints.

BASIS OF PRESENTATION

The Company has incurred significant operating losses in the past three years
and has a deficiency in working capital, and a deficiency in net assets, and has
continued to experience a significant decline in revenues from $4,977,599 in
1998 to $3,390,884 in 1999 and $2,476,252 in 2000. The Company has been funded
by a principal shareholder - officer and another shareholder and had been funded
in 2000 by Futech Interactive Products, Inc.

The Company's ultimate ability to continue as a going concern is dependent upon
the market acceptance of its products, an increase in revenues coupled with
continuing license agreements and positive cash flow. The Company will also
require additional financial sources to provide near term operating cash to move
toward profitability. The Company believes that improvement in sales and, or a
future merger partner and its ability to borrow money, albeit maybe not at the
past levels, from its shareholders will be sufficient to allow the Company to
continue in operation.

ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

CASH EQUIVALENTS

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

F-7
<PAGE>

Trudy Corporation

Notes to Financial Statements (continued)

1. ACCOUNTING POLICIES (CONTINUED)

ACCOUNTS RECEIVABLE

Accounts receivable consist of amounts due from customers and amounts due from
Futech Interactive Products, Inc. ("Futech").

The Company transacts business on a credit basis with its customers. 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 or other security to support
credit sales, but provides an allowance for bad debts based on historical
experience and specifically identified risks.

INVENTORIES

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

EQUIPMENT

Equipment is stated at cost. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the assets which range
from five to seven years for machinery and equipment, and furniture and
fixtures.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has the following financial instruments: cash and cash equivalents,
accounts receivable, accounts payable, and accrued expenses notes payable, and
long-term debt. The carrying value of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses and notes payable approximates
their fair value based on the liquidity of these financial instruments or based
on their short-term nature. The carrying value of long-term debt approximates
fair market value based on the market interest rates available to the Company
for debt of similar risk and maturities.

REVENUE

The Company recognizes revenue upon shipment of the product to the customer,
with appropriate allowances made for estimated returns and uncollectible
accounts.

F-8
<PAGE>

Trudy Corporation

Notes to Financial Statements (continued)

1. ACCOUNTING POLICIES (CONTINUED)

The Company sells certain goods under a license from the Smithsonian Institution
("Smithsonian"). Sales with the Smithsonian name approximated 80 percent and 57
percent of net sales in the years ended March 31, 1999 and 2000, respectively.

INCOME TAXES

Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 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 carryforwards 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 the available evidence it
is more likely than not that some portion or all of the deferred tax assets will
not be realized.

STOCK-BASED COMPENSATION

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options. Under APB 25, to the extent that
the exercise price of the Company's employee stock options equals management's
estimate of the fair value of the underlying stock on the date of grant, no
compensation expense is recognized.

Deferred expense on stock and options issued to officers and directors for
services or other consideration to be received in the future are offset against
equity and are amortized to expense over the period of benefit.

The Company periodically issues shares of its common stock to employees. Shares
issued for services are valued at the Company's estimate of fair value of the
common stock at the date of issuance.

LOSS PER SHARE COMPUTATION

Loss per share is computed in accordance with Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share," (Statement 128). Basic earnings
per share is computed using the weighted average number of common shares.
Diluted earnings per share is computed using the weighted average number of
common shares and common share equivalents during the period. Dilutive common
share equivalents consist of employee stock options using the treasury method
and dilutive convertible securities using the if-converted method.

F-9
<PAGE>

Trudy Corporation

Notes to Financial Statements (continued)

1. ACCOUNTING POLICIES (CONTINUED)

COMPREHENSIVE LOSS

As of April 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income" (Statement 130). Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components. Comprehensive loss for
the Company is the same as net loss for all periods presented.

SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

Effective April 1, 1998, the Company adopted the FASB's SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (Statement
131). Statement 131 established standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The Company has determined it has no reportable segments
under Statement 131.

ADVERTISING

Advertising costs are expensed as incurred, except for catalogs and brochures
which are all amortized over the period benefited not to exceed the publication
date of the new brochure or twelve months, whichever is less.

Advertising expense was approximately $58,000 and $1,900 for the years ended
March 31, 1999 and 2000, respectively.

2. INVENTORIES

Inventories consist of the following:

March 31,
2000
-----------
Raw materials $ 57,219
Finished goods 1,661,594
-----------
1,718,813
Reserve for slow-moving inventory 505,000
-----------
$ 1,213,813
===========

F-10
<PAGE>

Trudy Corporation

Notes to Financial Statements (continued)

2. INVENTORIES (CONTINUED)

The changes in the Company's reserve for slow-moving inventory is as follows:

Balance at April 1,1999 $ 255,000
Reduction in reserve (66,257)
Additions 316,257
-----------
Balance at March 31, 2000 $ 505,000
===========

3. EQUIPMENT

Equipment consists of the following:

March 31,
2000
-----------
Machinery and equipment $ 158,021
Furniture and fixtures 24,628
-----------
187,649
Accumulated depreciation (89,606)
-----------
$ 93,043
===========

4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

March 31,
2000
-----------

Accounts payable $ 557,904
Accrued royalties 242,424
Accrued interest 72,033
Other 46,070
-----------
$ 918,431
===========

F-11
<PAGE>

Trudy Corporation

Notes to Financial Statements (continued)

5. TRANSACTIONS AND BALANCES WITH FUTECH INTERACTIVE PRODUCTS INC.

(a) The Company was a party to a global merger agreement dated June 4, 1999
with Futech Interactive Products, Inc. ("Futech") and certain other
companies and shareholders thereof. In addition to other provisions
included in the terms of the merger, Futech agreed to provide working
capital advances to the Company, additional amounts necessary to assure
that the Company was not in default under any of its loan agreements, and
to reimburse the Company for certain of its legal and accounting fees.
However, management had no assurances that Futech had the financial
resources to honor this agreement. Futech also agreed to repay certain
loans and interest payable to the Company's president and his family. The
merger was subject to closing conditions, including shareholder approval.
The Company was depending upon additional financial resources that it
expected to receive from Futech.

In a letter agreement dated March 3, 1999 certain terms, detailed below,
subsequently became an integral part of the aforementioned Agreement and
Plan of Merger between Futech and the Company. These terms explained the
timetable for financing the merger and Futech's assistance with the
Company's working capital needs in the event of a delay in the closing of
the merger:

o The proxy solicitation materials and registration statement prepared
for use in connection with Trudy's meeting of shareholders will be
filed as promptly as practical with the SEC, which filing will not be
later than April 13, 1999. Futech would retain and compensate counsel
of its own choosing to prepare, these documents subject to the review
of the Company's (Trudy) counsel, compensation for which would be
pre-agreed.

o If the effective date of the merger had not occurred by June 1, 1999,
Futech would assist in providing the working capital needs of Trudy,
if needed, to maintain sales momentum until the closing and to assure
that it is not in default under any of its loan agreements including
its borrowings from First Union.

Subsequently, Trudy replaced the First Union loan with another bank. Such new
bank loan was replaced by the shareholder-officer on February 8, 2000.

The Global merger agreement was terminated, effective December 1, 1999. Such
termination agreement provided that:

o None of the parties shall have any further liability, or obligation
arising out of the merger agreement.

F-12
<PAGE>
Trudy Corporation

Notes to Financial Statements (continued)

5. TRANSACTIONS AND BALANCES WITH FUTECH INTERACTIVE PRODUCTS INC. (CONTINUED)

o The rights and obligations of the parties under such agreement were
hereby terminated and each party hereby forever releases and
discharges each other party from any and all obligations, claims,
liabilities, damages, expenses and costs relating to the merger
agreement and the transactions contemplated thereby, provided.
However, that Futech's release of Trudy and its stockholder and Trudy
and its stockholder's release of Futech shall not be effective until
Janex (see Janex International Inc. Acquisition) completes its
acquisition of a majority interest in Trudy.

(b) In connection with the above and other transactions with Futech, the
following balances are reflected as of March 31, 2000.

Included in accounts receivable:

Trade receivables from sales of inventory to
Futech at reduced prices $ 268,953
Reimbursable expenses related to merger 198,731
-----------
Total included in accounts receivable 467,684

Included in accounts payable for inventory
purchases from Futech 27,069
Advances from Futech Interactive Products, Inc. 541,143
-----------
Total obligations 568,212
-----------
Net $ 100,528
===========

The Company's sales to Futech approximated $842,000, or 34% of the Company's
sales for the year ended March 31, 2000.

F-13

<PAGE>
Trudy Corporation

Notes to Financial Statements (continued)

6. NOTES PAYABLE

Notes Payable to Shareholder - Officer

Notes payable to shareholder officer consist of the following:

March 31,
2000
------------

$365,387 in aggregated promissory notes at
interest rates varying between 8 to 12
percent. Note terms have passed and
payments are made as cash flows permit.
Notes are collateralized by cash, accounts
receivable, inventory, and furniture and
fixtures. $ 287,422

$28,900 promissory note to the president,
collateralized by cash, accounts
receivable, inventory, and furniture and
fixtures, payable in total including 8
percent interest (in default). 28,900

$310,000 promissory note collateralized by
cash, accounts receivable, inventory and
furniture and fixtures, payable in total
including 8 percent interest (in default). 310,000

$50,000 promissory note collateralized by
cash, accounts receivable, inventory and
furniture and fixtures, payable in total
including 8 percent interest on October
1, 2000. 50,000

$30,000 promissory note collateralized by
cash, accounts receivable, inventory and
furniture and fixtures, payable in total
including 8 percent interest on October 1,
2000. 30,000

$650,000 demand note payable in total
including 6.885 percent interest 650,000
-----------
$ 1,356,322
===========

F-14
<PAGE>

Trudy Corporation

Notes to Financial Statements (continued)

6. NOTES PAYABLE (CONTINUED)

Notes payable to Related Parties

Notes payable to related parties consist of the following:

(a) Notes payable to shareholder

March 31,
2000
------------

(1) $180,000 loan payable to shareholder
at 8 percent interest (in default) -
collateralized by assets of the Company. $ 180,000

(2) $50,000 loan payable to shareholder at
8 percent interest (in default). 50,000
-----------
$ 230,000
===========

(b) Family Loan

$101,326 family loan plus interest of
$81,979 at 10 percent interest, non-
compounding. There are no established
repayment terms. $ 183,305
===========

7. CONCENTRATIONS AND CREDIT RISK

(a) Sales

The Company's largest customer in 1999 approximately 28.8 percent of net
sales. No sales were made to such customer in 2000.

(b) Cost of Sales

The Company produces the majority of its products by sub-contracting with
independent toy factories and printing plants located in Asia.
Approximately 90% (approximating $483,000) of the toys are purchased from
one vendor in China in 1999. In 2000 the Company purchased 80%
(approximating $412,000) of its toys from the same vendor in China and
purchased an additional 20% (approximating $102,000) of its toys from a
vendor in Sri Lanka. Trudy has other qualified sources of supply from which
it has purchased in the past.

F-15
<PAGE>

Trudy Corporation

Notes to Financial Statements (continued)

7. CONCENTRATIONS AND CREDIT RISK (CONTINUED)

Trudy owns the design of each existing toy product (except for Smithsonian plush
toys which are co-trademarked with Smithsonian Institution) and actively manages
the design of new products. Trudy believes and demonstrated in 2000 that
production could quickly be transferred to other companies in China, Bangladesh,
and Sri Lanka if production were not available from the vendor in China, or if
more favorable pricing became available.

Books are purchased from a U.S. company which subcontracts production to various
printers in the Far East. These manufacturers can also perform certain other
functions such as the labeling and packaging of product for volume shipments
directly to specific customers. Audio cassettes are duplicated locally.

8. INCOME TAXES

The Company's provision for income taxes consists of the following:

March 31,
---------------------------
1999 2000
----------- -----------
Current - State $ -- $ 0
Deferred - Federal 378,000 0
----------- -----------
$ 378,000 $ 0
=========== ===========

The provision for income tax differs from the U.S. federal statutory rate as
follows:

March 31,
---------------------------
1999 2000
----------- -----------

Income tax provision (benefit) at
statutory rate (34.0)% (34.0)%
Net operating loss for which no
current benefit has been taken 34.0 34.0
Establishment of valuation reserve for
deferred tax assets 30.7 --
----------- -----------
Income tax provision 30.7% 0%
=========== ===========

F-16
<PAGE>

Trudy Corporation

Notes to Financial Statements (continued)

8. INCOME TAXES(CONTINUED)

The deferred tax assets consist of the following:

March 31,
2000
-----------

Reserves and accruals $ 21,000
Net operating loss carryforwards 1,434,000
-----------
Total gross deferred tax assets 1,455,000
Less valuation allowance (1,455,000)
-----------
$ --
===========

The Company has a net operating loss carryforwards approximating $4,600,000 and
expires as follows:

2004 $ 450,000
2005 157,000
2006 1,246,000
2007 324,000
2008 258,000
There after 2,165,000
----------
$4,600,000
==========

The realization of the Company's deferred tax assets is dependent on future
profits, which are not assured, accordingly, a valuation allowance equal to the
net deferred tax assets has been provided at March 31, 2000. The valuation
allowance for deferred tax assets increased by $142,000 and $565,000 during the
year ended March 31, 2000 and 1999, respectively, due to the establishment of
valuation reserves against all net deferred tax assets.

9. STOCK-BASED COMPENSATION

The Company has stock options outstanding under its 1987 Stock Option Plan ("the
Plan"). No further options may be granted under the Plan. Existing options
expire upon the earlier of employee termination or ten years from the date of
grant. Options outstanding have exercise prices from $0.001 to $0.002 and have a
weighted average remaining life of 65 months.

F-17
<PAGE>

Trudy Corporation

Notes to Financial Statements (continued)

9. STOCK-BASED COMPENSATION (CONTINUED)

A summary of the Company's stock option activity, and related information is as
follows:

Weighted-
Average
Exercise
Options Price
------------ ----------
Outstanding at April 1, 1998 $ 14,680,000 $ 0.001
Granted -- --
Exercised -- --
Forfeited -- --
------------ ----------
Outstanding at March 31, 1999 14,680,000 0.001
Exercised (165,000) 0.001
Forfeited (6,500,000) 0.001
------------ ----------
Outstanding at March 31, 2000 8,015,000 0.001
============ ==========

Exercisable at end of year 8,015,000
============

Pro forma information regarding net loss is required by SFAS No. 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that Statement. The fair value for these options
was estimated at the date of grant using the minimum value option-pricing model
assuming a risk-free interest rate of 5 percent; dividend yield of 0 percent;
and a weighted-average expected life of the option of 5 years for the year ended
March 31, 2000. Pro forma expense under SFAS No. 123 was not material in the
years ended March 31, 1999 and 2000.

Option valuation models require the input of highly subjective assumptions.
Because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.

10. BENEFIT PLAN

Effective January 1, 1999, the Company adopted a 401(k) Retirement Plan, which
covers substantially all employees of the Company that have completed one year
of service. The plan permits participants to contribute to the plan, subject to
Internal Revenue Code restrictions, and the plan directs the Company to make
matching contributions of 50 percent on the first 3 percent of employee
contributions. The Company made $2,260 and $5,597 in matching contributions to
the Plan and paid $830 and $2,449 in administrative expenses in 1999 and 2000,
respectively.

F-18
<PAGE>

Trudy Corporation

Notes to Financial Statements (continued)

11. COMMITMENTS

(a) Commitments

The Company leases its building and other items under non-cancelable operating
leases from the shareholder - officer, and another shareholder. Rent expense was
approximately $108,000 and $110,000 for the years ended March 31, 1999 and 2000,
respectively. Future minimum payments under noncancelable operating leases with
initial terms of one year or more consisted of the following at March 31, 2000:

2001 $ 111,681
2002 111,260
2003 110,000
2004 110,000
2005 27,500
-----------
Total minimum lease payments $ 470,441
===========

(b) Royalties

The Smithsonian has granted the Company a nontransferable license to utilize the
names "Smithsonian Institution" and "Smithsonian" for products and purposes as
defined in the license agreement. The agreement expires on September 30, 2002.
The agreement requires the Company to pay royalties of 5 percent on products
sold using the Smithsonian name. The Company has guaranteed the following
minimum royalty amounts:

Period Amount
----------------------------------------- -----------
October 1, 1998 - September 30, 1999 $ 95,000
October 1, 1999 - September 30, 2000 100,000
October 1, 2000 - September 30, 2001 105,000
October 1, 2001 - September 30, 2002 110,000
-----------
$ 410,000
===========

F-19
<PAGE>

Trudy Corporation

Notes to Financial Statements (continued)

12. JANEX INTERNATIONAL INC. ACQUISITION

On February 21, 2000, the Company announced that Janex agreed in principle to
purchase the Common Stock of the Company beneficially owned by the shareholder -
officer and family and Directors and employees of the Company amounting to
approximately 228,730,000 shares or 64% of the issued and outstanding common
stock of the Company. Consideration for the purchase was to have been $319,400
in cash and 348,436 shares of Janex Common Stock, valued for purposes of the
transaction at $5.50 per share, representing an aggregate value of $1,916,400.
Notes in the amount of approximately $1,700,000 held by the shareholder -
officer and family were to be paid at the closing or within twelve months of the
closing. Janex also agreed to fund the ongoing working capital needs of the
Company and to purchase the balance of the Company's Common Stock owned by the
minority shareholders should the share price of the Common Stock have fallen
below the Janex offer price to the majority shareholders for a 30 day period
within 12 months of closing. This transaction was to have replaced at closing
the Company's obligations under the merger agreement, dated June 4, 1999, among
the Company, Futech, Janex, and the other parties. On May 4, 2000, the Company
announced that Janex had entered into a definitive stock purchase and sale
agreement to acquire control of the Company through the purchase of Common Stock
of the Company beneficially owned by the shareholder - officer and family,
amounting to 182,412,000 shares or 52% of the issued and outstanding Common
Stock of the Corporation. Consideration for the purchase would have been 920,000
shares of Janex Common Stock, valued for purposes of the transaction at $2.00
per share, representing an aggregate value of $1,840,000. Indebtedness owed by
the Company to the shareholder - officer and family in the amount of
approximately $1,500,000 was to be paid at the closing through the issuance of
additional Janex shares, also valued at $2.00 per share. Janex also agreed to
pay $650,000 in cash to two members of the shareholder - officer and a family
shareholder in liquidation of additional debt of the Company.

However, on May 23, 2000, the Company announced that the shareholder - officer
and family and the Company had been informed by Janex that Janex wished to make
substantial changes to the agreement. In view of the changes, which were
materially unfavorable to the Company, the shareholder - officer and a family
shareholder, and the remaining shareholders of the Company, considered the
agreement terminated by Janex.

13. SUBSEQUENT EVENTS AND OTHER FINANCING ARRANGEMENTS:

(a) Corporate service agreement

On May 24, 2000, the Company retained a third party to perform certain financial
services, including assisting with the development of a business plan, designing
and implementing aninvestor relations program, and improving the Company's
access to capital markets. The Company agreed to grant to the third party upon
the signing of the agreement, 5,252,809 shares, or 1.5%, of the Company's
outstanding Common Stock. On each of the next three three-month anniversaries of
the agreement, the Company will grant to a third party warrants to purchase a
number of shares of Common Stock equal to 2.5% of the number then issued and
outstanding at an exercise price of $.03 per share for the first period, $.04
per share for the second period, and $.05 per share for the third period. As an
alternative to the issuance of warrants, by mutual agreement between the
parties, the Company may grant to a third party shares of Common Stock equal to
1.5% of the number then issued and outstanding at each of the three three-month
anniversary dates.

(b) Venture capital introductions

On June 19, 2000, the shareholder - officer paid $10,000 and agreed with a third
party to provide introductions to investment bankers, and other third party
professionals for the purpose of permitting Trudy to assess whether it wishes to
enter into a long-term relationship with the third party.

F-20
<PAGE>

SIGNATURES

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

TRUDY CORPORATION

By: /s/ WILLIAM W. BURNHAM
------------------------------------------
William W. Burnham, Chairman of the Board,
President, and Chief Executive Officer

Dated: JULY 12, 2000

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

SIGNATURE TITLE DATE

/s/ WILLIAM W. BURNHAM Chairman of the Board, July 12, 2000
---------------------- President and Chief Executive
William W. Burnham Officer

/s/ ALICE B. BURNHAM Director July 12, 2000
--------------------
Alice B. Burnham

/s/ FRED M. FILOON Director July 12, 2000
------------------
Fred M. Filoon

/s/ PETER D. NALLE Director July 12, 2000
------------------
Peter D. Nalle

/s/ WILLIAM T. CARNEY Chief Financial Officer and July 12, 2000
--------------------- Secretary (Chief Accounting Officer)
William T. Carney