Edgar Filing: JANEX INTERNATIONAL INC

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

[ ] 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)

COLORADO 84-1034251
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

615 HOPE ROAD 07724
EATONTOWN, NEW JERSEY (Zip Code)
(Address of principal executive offices)

Issuer's telephone number, including area code: (732) 935-0555

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 $3,337.

The aggregate market value of the voting stock held by non-affiliates of the
issuer as of April 5, 2001 was $309,540. (There are a substantial number of
additional shares committed for issuance. See Item 12, "Certain Relationships
and Related Transactions".)

Number of registrant's shares of Common Stock outstanding as of April 5, 2001
was 17,873,259.
(There are a substantial number of additional shares committed for issuance. See
Item 12, "Certain Relationships and Related Transactions".)

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PART I

ITEM 1. DESCRIPTION OF BUSINESS.

INTRODUCTION AND OVERVIEW

Janex International, Inc., formerly known as With Design in Mind
International, Inc. (the "Company"), was incorporated in Colorado on July 28,
1986. The Company is the parent corporation of With Design in Mind, a California
corporation ("WDIM") and wholly owned subsidiary that it acquired on August 19,
1988; Janex Corporation, a New Jersey corporation ("Janex") and wholly owned
subsidiary acquired on October 6, 1993; and Malibu Fun Stuffed, Inc., a
California corporation ("Malibu") and wholly owned subsidiary acquired on August
4, 1995. The Company is also the parent corporation of Pro Gains Company
Limited, a Hong Kong corporation ("Pro Gains") owned 50% by the Company and 50%
by Janex, and Malibu Fun Stuffed International Limited ("MFSI"), a Hong Kong
corporation owned 99% by Malibu and 1% by the Company. As used herein, the term
"the Company" refers to Janex International, Inc. and its wholly owned
subsidiaries, unless the context indicates otherwise.

Prior to October 6, 1993, the Company's business was conducted
primarily through WDIM. From October 6, 1993, to August 4, 1995, the Company's
business was conducted primarily through Janex and Pro Gains. Since August 4,
1995 until February 2001, the Company's business has been conducted primarily
through Janex, Pro Gains, Malibu and MFSI. In February 2001, the Company
completed the acquisition of the DaMert Company and the Company's business now
consists solely of the business of the DaMert Company.

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
incorporated licensed characters into most of its products, and sold its
products to mass merchant retailers, toy specialty stores and department stores
in the United States. Sales and manufacturing were historically facilitated
through Pro Gains, Janex's sister company in Hong Kong. Malibu and MFSI
(collectively referred to as the "Malibu Division") operated in tandem, similar
to Janex and Pro Gains (collectively referred to as the "Janex Division").
Together they developed, manufactured and marketed toys and novelty gift items,
selling to mass merchant retailers, chain stores, and specialty stores primarily
in the United States. The product line of the Malibu Division differed from that
of the Janex Division in that most of the Malibu Division products ("Malibu
Products") did not incorporate licensed characters.

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ACQUISITIONS

By 1999, it was apparent to Company management that the level of sales
were not sufficient to sustain the Company as a going concern without
significant growth in revenue and profitability, and that there would need to be
a substantial increase in the Company's business volume and product availability
to support future growth. Accordingly, during 1999 Company management began a
process of seeking significant acquisitions of, and new relationships with,
several companies with complementary products or functional services. The
Company entered into a global merger agreement that involved the Company
combining with several companies. The proposed merger transaction was not
consummated and the parties withdrew from the overall transaction. The Company
believes that the focus of the Company's management on the acquisitions had an
adverse impact upon the Company's financial condition and results of operations.

As a result, the Company experienced a severe shortage of capital
during 2000, which had the effect of substantially curtailing the Company's
operating activities, to the point that the Company had essentially become
inactive from an operating point of view. In order to restart the Company's
business operations, the Company has sought to acquire businesses that focus on
children's toys and educational products.

In February 2001, the Company completed the acquisition of the DaMert
Company, which is focused on the production, marketing and distribution of toys
and gifts. The DaMert Company was merged with and into DaMert Toys and Games,
Inc., an Arizona corporation and wholly-owned subsidiary of the Company. The
Company's business currently consists solely of the business of the DaMert
Company, which is now conducted through DaMert Toys and Games, Inc. See
"Business of Issuer - DaMert Company". As a result of consummating the DaMert
acquisition, the Company expects to generate substantially more revenue in
fiscal 2001, compared to fiscal 2000. The Company also expects to incur
substantially greater expenses in 2001, compared to the prior year. The Company
expects to incur negative cash flow for the foreseeable future.

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Chairman, in the principal amount of $1,300,000 was issued to Amresco (the
note is payable as follows: $180,000 by April 15, 2001 (paid); $400,000 by
May 15, 2001; and the remaining $720,000 is payable beginning August 15, 2001
in five equal quarterly installments of $116,667 and one final quarterly
installment of $136,666). The note is secured by certain assets of the
Company and DaMert. If the Company defaults on its obligations under the
note, the secured party (or any assignee) would be able to force a sale of
the assets constituting the collateral to satisfy the debt. In addition, we
issued options to purchase an aggregate of 1,000,000 shares of our common
stock, at a price of $.001 per share, to Fred and Gail DaMert (who are
employees of DaMert).

In October, 2000, the Company entered into an Agreement with Futech
Interactive Products, Inc. ("Futech"), an Arizona company, to acquire certain
of the assets and assume certain liabilities of Futech. This agreement
superceded all our prior agreements for the acquisition of Futech's assets.
In June 2000, Futech filed for bankruptcy protection under Chapter 11 of the
United States Bankruptcy Code. In January, 2001, the United States Bankruptcy
Court approved our proposed purchase of certain assets of Futech. Futech's
business consists of third-party publishing and proprietary publishing
products using the Futech interactive technology and patented products. This
technology relates primarily to printed audible signals, visual circuitry and
associated electrical components such as switches, batteries, speakers and
liquid crystal displays. The assets being acquired also include the website
www.okid.com, a "Virtual World" online destination that resembles an
entertaining cartoon world environment. The Company plans to apply the
technology to produce books and play boards that emit speech, music and sound
effects or other visual signals activated by switches in the surface of the
product. The Company plans continue to expand this proprietary product line
selection and to broaden the base of licenses for the use of Futech's
products and technology.

Under the terms of the Agreement with Futech, as approved by the
Bankruptcy Court, we have agreed to acquire certain assets of Futech in
exchange for the following consideration: (i) an aggregate of approximately
23 million shares of our common stock; (ii) the assumption of an aggregate of
approximately $3 million of indebtedness; and (iii) the payment of
approximately $150,000 in cash, of which approximately $61,000 has been paid.
Vincent Goett, our Chairman, has indicated he intends to personally guarantee
$2,000,000 of the indebtedness being assumed. In addition, approximately $1.6
million of indebtedness Futech claims we owe it would be discharged in
connection with the acquisition. The consummation of the transaction is
subject to numerous conditions, which may or may not be met, including an
amendment of our charter to increase the number of our authorized shares of
common stock to at least 125,000,000. There is no assurance that the Futech
acquisition will be completed. The Futech Agreement filed with this report is
the form of agreement submitted to the U.S. Bankruptcy Court. The terms and
conditions of the Futech asset purchase approved by the Bankruptcy Court, as
described above, are different than the terms

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and conditions set forth in the Futech Agreement. We expect that the Court
approved terms and conditions will be memorialized in a writing prior to the
closing.

BUSINESS OF ISSUER - DAMERT COMPANY

GENERAL

The Company acquired DaMert Company ("DaMert or DaMert Company") in
February 2001. Effective as of the date of the acquisition, the Company's
principal place of business is located at 1609 Fourth Street, Berkeley,
California 94710. The Company's telephone number is (800) 231-3722. DaMert
Company creates, produces, markets and distributes affordable, high quality
gifts and toys that entertain, educate and endure, incorporating themes that
capture the magic of imagination, the wonders of nature and science, and the
mysteries of space. Approximately 200 products are marketed to a nationwide
customer base of 4,000 accounts and internationally distributed to over 20
countries.

DaMert was founded by Fred DaMert on February 5, 1973 in San Rafael,
California. It was incorporated in the State of California on January 1, 1979.

PRODUCTS

DaMert Company focuses on five categories of about 200 affordable toy
and gift products designed for the specialty toy, museum and gift markets:
Puzzles/Brainteasers, Glow-In-The-Dark, Activity Kits, Gizmos, and Games. These
products are targeted primarily to children ages 5-12, however, many of these
items are designed to be enjoyed by adults and children together.

Approximately 51% of FY2000 sales were derived from Great Gizmos, such
as the Celestial Seeker, Rocket Radio, Hydroliner/Sea Star and Tub Tints(R) bath
products, the latter distributed under an exclusive marketing contract with
Equity Marketing. Also contributing to this category are the Activity Kits,
which includes the newly introduced CareerKids line as well as the popular "All
About..." series.

Approximately 30% of FY2000 sales were derived from
Puzzles/Brainteasers, including the cardboard Triazzle(R) Puzzle series.
Triazzle(R) Puzzles, a significant volume contributor since 1991, are
manufactured under a long-term exclusive license from inventor Dan Gilbert,
through December, 2002. Other significant brands in this category include
GoGetter puzzles, and 3-D Squares.

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During 2000, Glow-in-the Dark products represented 15% of sales, and
Games represented 5% of sales.

DaMert has a significant R&D staff but also works in conjunction with
outside inventors and product designers throughout the country. DaMert products
have been the recipient of numerous excellence awards including the National
Parenting Center Seal of Approval, Parent's Choice, Gold Seal of Excellence from
The Oppenheim Toy Portfolio, and Great American TV Toy Test. DaMert products
have been included in Dr. Toy's 100 Best Children's Products (1997-2000), Dr.
Toy's Best Vacation Products (1997-2000), Child Magazine Best Toys of the Year
(1998), and Parenting Magazine Toy of the Year (2000). Furthermore, its
proprietary game "Impact Zone" was the recipient of the prestigious Family Fun's
T.O.Y. (Toy of the Year) in 1998 and another game, "Detour," was the runner-up
in 1999.

SALES, MARKETING AND DISTRIBUTION

DaMert Company's marketing and overall business strategy is based on
creating excellence in its niche. Its reputation for products that blend fun
with education has also created significant demand for private label products
from retailers such as The Discovery Channel Stores, Natural Wonders,
Restoration Hardware FAO Schwarz and Cracker Barrel Old Stores.

However, DaMert Company's strategy goes beyond its products. Its prices
are kept within an affordable range of $5 - $25 for retail stores and catalogs.
This price-value relationship has enabled the company to prosper through
recessions because its products offer more value -- more hours of fun and
learning -- for the same price as competing products.

DaMert Company's products are sold to a broad range of accounts,
including museums, zoos, aquariums, specialty toy and gift retailers,
traditional and Internet catalogs, prominent national chains, plus an
international distribution network, which reaches over 20 countries. The company
currently distributes products to nearly 4,000 retailers nationwide, handling
many larger accounts directly. Other retailers are covered by a nationwide sales
network of approximately 100 representatives. The sales effort is managed by a
National Sales Manager for Specialty Accounts and a Director of Mass Market and
International Sales. The internal team is supported by a small customer service
staff responsible for order processing and telemarketing. DaMert Company also
attends major gift and toy trade shows, and uses public relations and trade
advertising to increase awareness and sales. At this time, the company promotes
its products through its own website but is not currently offering them for
direct consumer purchasing.

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Overall, science and learning toys continue to be popular in the
Domestic market, in a variety of retail environments, such as Zany Brainy,
Natural Wonders, World of Science, Discovery Channel Stores, Imaginarium and
Store of Knowledge. However, in the past 2 years, there has been significant
consolidation, and in some cases, closures and liquidation, among these largest
customers which adversely affected revenue growth in this category in 2000.
Internet commerce has also proven to be disappointing in 2000, after a dramatic
takeoff in 1998 and 1999.

DaMert is poised to move into the mass market sales channel in 2001. In
1998, for the first time in DaMert's 26-year history, the company allowed
selective testing of a few specialty toy products at Target Stores. The success
of this venture led to product placement in Target in 1999 and 2000. DaMert is
currently expanding into several national chains, including Kids R Us, Linens `N
Things, Bed Bath and Beyond, and Imaginarium/TRU.

DaMert Company began international distribution of its product line in
1992. Over the last several years, popularity of the product line has grown
throughout the international community. DaMert Company currently has
distribution in over 20 countries around the world.

International sales comprised 12% of total sales in 2000, predominantly
through key distribution agreements in the major industrial countries. Volume
purchases, significant discounts and factory-direct shipping are common for
major distributors in this business segment, with a common strategy to replicate
American retail price points in all foreign markets.

CUSTOMERS

DaMert had over 3200 active customers in 2000. The single largest
customer represented 10.44% of sales in 2000 as compared to 5.37% of sales in
1999. The next largest customer represented 3.87% of sales in 2000 and 4.40% of
sales in 1999. Approximately 80% of sales were represented by 667 customers in
2000, as compared to 798 customers in 1999.

MANUFACTURING

DaMert produces the majority of its products by subcontracting with a
number of independent factories located in China. Products and parts originating
in the US (including products purchased under the distribution agreement with
Equity Marketing) accounted for approximately 24% of manufacturing costs in
2000. In China, one independent broker is responsible for approximately 27% of
foreign manufacturing, which is spread out over many different factories. A
direct relationship between DaMert and one factory accounts for approximately
29% of manufacturing costs and a direct relationship with another factory
represents another 19%. Some

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customers require direct shipments from these factories. However,
approximately 95% of manufactured products are shipped directly to DaMert's
warehouse. Certain minimum order requirements necessitate holding inventory
in the Berkeley warehouse in advance of expected retail sales. Most payments
to factories are made by wire transfer upon confirmation of shipment;
however, extended terms (net 30 upon receipt of goods) may be extended by
some vendors under certain circumstances.

SEASONALITY

The demand for DaMert's retail product has a large seasonal component,
with a majority of sales to retailers during the 3rd and 4th fiscal quarters.
Typically, the Company experiences 32-40% of its sales in the first half of the
year and 60-68% in the second half of the year.

BACKLOG

Due to the high seasonal demand for DaMert's products, all December
orders in the system were shipped by December 21, 2000. As a matter of
accounting policy, all back orders with a value less than $40 were canceled.
There were no significant cancellations due to product unavailability (out of
stock merchandise). Future orders (due January 1, 2001 and beyond) in the system
as of December 31, 2000 were $534,944.

PRODUCT DESIGN AND SELECTION

DaMert has established a reputation for product innovation in the area
of nature, science and learning toys and gifts. Internally, the company has
created a team of capable and inventive concept and product developers. However,
over the years DaMert has built a reputation among independent inventors as a
company who can maximize their ideas in fair, mutually beneficial relationships.
This reputation, coupled with DaMert's location in the creatively acclaimed San
Francisco Bay Area, results in a continuous flow of ideas from external sources.
DaMert works with these "creative partners" in a variety of ways, including
licensing, purchase of the concept, or exclusive purchase of the manufactured
product.

DaMert is fundamentally "market-oriented and product driven." Fred and
Gail DaMert, as well as the three staff executives, participate fully in the
product development process. This process starts with creative ideas and
concepts and carries all the way into product manufacturing, marketing and
sales, and inventory management and quality control.

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COMPETITION

DaMert strives to be a leading innovator in each of its five major
product categories, introducing 40 to 50 new additions annually. Because of the
diversity of its five product categories, DaMert has competitors in each of
these areas. Competition in DaMert's market is defined primarily as competing
for the business of the same retailers. DaMert identifies its key competitors in
each product category as follows: Puzzles/Brainteasers--Binary Arts;
Glow-in-the-Dark--Great Explorations and Illuminations; Activity
Kits--Creativity for Kids and Curiosity Kits; Great Gizmos (science toys)--Wild
Planet and Action Products International, and Games--University Games and
Briarpatch.

DaMert believes that its unique mix of product categories provides
competitive strength in two key ways. First, DaMert offers cross-merchandising
opportunities among the categories, as well as strong thematic presentations
(e.g. space, ocean, insects), allowing retailers to offer a broad range of
merchandise. The second competitive advantage offered by DaMert is the
retailer's opportunity to "consolidate vendors" and order a wide variety of
merchandise from one place. This is further supported by DaMert's low minimum
order requirement and low minimum case quantity requirement on all items.

PATENTS, TRADEMARKS AND LICENSES

In the normal course of business, DaMert Company makes every effort to
patent or trademark internally developed concepts as well as the licensing of
patents and trademarks from submissions provided by outside developers. DaMert
currently has no "fantasy character" license. Although the procurement of
patents, trademarks and licenses does not eliminate the possibility of
infringement it has proven to be an effective deterrent to competitors.

Licenses for rights to use patents and trademarks from outside product
designers typically run for two to five years, are world wide in scope, have
automatic renewals and are transferable in the event of a change in ownership of
DaMert Company.

GOVERNMENT 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 specific circumstances. Any such
determination

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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.

EMPLOYEES OF DAMERT

As of December 31, 2000 DaMert had 19 full-time employees, all in its
Berkeley facility, consisting of 13 in marketing, sales, product development and
administration, and 6 in shipping. Seasonal warehouse personnel are hired in the
summer and fall to assist with the greater volume of orders being shipped.
Contract personnel are hired on an as-needed basis for certain product
development projects.

PROPERTIES OF DAMERT

On July 27, 1995, DaMert entered into a six-year lease commencing
December 1, 1995, for 32,000 square feet of office and warehouse space in a
building located at 1609 Fourth Street, Berkeley, California (the "Facility").
The Facility is located in a mixed industrial, retail and residential area 15
miles east of San Francisco. It is divided into a 24,000 square feet of
warehouse and 8,000 square feet of office. DaMert Company feels that the
facility will meet its foreseeable requirements.

The lease provides for one six-year extension option. The base monthly
rent for the initial six-year term is fixed at $23,295. Rent for the option
period shall be set at the then fair market rental rate for a similar industrial
gross lease. In addition to the base rent, DaMert is liable for its share of any
increase in operating cost over the base year operating expenses.

EMPLOYEES OF THE COMPANY

As of December 31, 2000, the Company had two employees, the Chairman
and the President and Chief Executive. As of March 31, 2000, including employees
of DaMert Company, the Company had 23 full-time employees and no part-time
employees. The Company anticipates that, subject to completion of the Futech
acquisition, the number of full-time employees will rise significantly to meet
the Company's increased operational demands.

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.

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ITEM 2. DESCRIPTION OF PROPERTY.

Until February 15, 2001, the Company's headquarters were located in
Eatontown, New Jersey, where it was sharing office space on a month-to-month
basis with Les Friedland and Associates, Inc., which is controlled by a former
President of the Company, Les Friedland.

Effective February 15, 2001, the Company relocated its headquarters to
the Facility.

ITEM 3. LEGAL PROCEEDINGS.

On May 16, 2000, Golden Books Family Entertainment, Inc., as plaintiff
("Golden Books"), served us with a Second Amended Complaint which names Futech,
Vincent W. Goett ("Goett"), and us as defendants. We were not named in the
original complaint or the first amended complaint. The case was pending in the
United States Bankruptcy court for the Southern District of New York (Bankruptcy
case No. 99-10030). In March, 2001, Golden Books and the Company entered into a
stipulation to suspend this litigation until the earliest to occur of: (1) the
closing of the transactions contemplated by the Agreement with Futech for the
Purchase and Sale of Assets, as amended (the "Agreement"); (2) rescission or
invalidation of the Agreement; or (3) July 2, 2001.

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to assist Goett and Futech in depleting Futech of assets and thereby
rendering it judgment-proof or, in the alternative, that Futech, on or about
January 2000, transferred to us Futech's Interactive Books division and all
of the assets and liabilities thereof. On the basis of the foregoing, the
Second Amended Complaint alleges that Futech, Goett and the Company (or in
the alternative Goett and the Company) are jointly and severally liable for
the $1 million under the Note, plus interest, costs and reasonable attorney's
fees.

The Second Amended Complaint also alleges (i) that Futech transferred
its assets to us with intent to hinder, delay or defraud Golden Books in pursuit
of its claim against Futech, (ii) that such transfer was made without receiving
a reasonably equivalent value for the transfer, (iii) that Futech was insolvent
at the time of transfer (or became insolvent as a result), (iv) that the
transfer included all or substantially all of Futech's assets to the Company,
(v) that the transfer of Futech assets to us was a "fraudulent conveyance" under
Arizona law, and (vi) that Goett conspired with Futech and Janex to effect the
asset transfer with the intent and for the purpose of hindering, delaying and
defrauding Futech's creditors, including rendering Futech judgment-proof, and
that such conduct was malicious and intended to injure Golden Books.

Based on the foregoing, Golden Books claims it is entitled to
garnishment, avoidance of the transfer, and attachment or other provisional
remedy and $1 million, plus interest and punitive damages.

As described above, we have not yet consummated the planned acquisition
of the specified Futech assets and, further, the U.S. Bankruptcy Court has
approved the planned acquisition of such assets. Consequently, we believe that
we have strong defenses against the foregoing claims and intend to vigorously
defend against them. Although we believe that we have strong defenses, no
assurance can be given as to the outcome of the litigation, which could have a
material adverse effect on us.

On June 20, 2000, Jon Weber, d/b/a Alma Designs, as plaintiff
("Weber"), served us with a Complaint which names Futech and us as defendants.
The case is pending in the United States District court for the Northern
District of California, San Jose Division (Case No. CA-00 20670). The Complaint
alleges, among other things, (i) that the defendants solicited the plaintiff to
ship goods valued in excess of $240,000, and failed to pay for the goods after
their sale, (ii) that Futech issued purchase orders to the plaintiff, (iii) that
we are the parent company of Futech, and that we caused Futech to transfer
substantially all of its liquid assets to us, and (iv) that the defendants
fraudulently induced the plaintiff to ship the merchandise knowing that it did
not have sufficient funds to pay the amount due and with the intent of not
paying the amounts due. On the basis of the

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foregoing, the Complaint demands judgment for $243,000, interest and costs
and punitive damages of $200,000. On August 2, 2000, the Court awarded a
Default Judgment against us and Futech in the amount of approximately
$237,000. We are not the parent company of Futech and, as described above, we
have not yet consummated the acquisition of Futech's assets. We intend to
attempt to have the Default Judgment vacated, as we believe that we have
strong defenses against the foregoing claims. We cannot assure you that we
will be able to have the Default Judgment vacated, and we have accrued the
full amount of the default judgment as of December 31, 2000. Even if we are
able to have the Default Judgment vacated, we cannot give you any assurance
as to the outcome of the litigation, which could have a material adverse
affect on us.

On January 26, 2000, Caterpillar, Inc., as plaintiff ("Caterpillar"),
served us with a Complaint which names us and Futech as defendants. The case was
pending in the Circuit Court of the Tenth Judicial Circuit of Illinois, Peoria
County (case No. 00 L26). The Complaint alleged that we are indebted to
Caterpillar in the amount of $45,000 in unpaid minimum royalty payments under a
Trademark Merchandise License Agreement dated April 15, 1997. On May 23, 2000,
the Court awarded a Default Judgment against us and Futech in the amount of
$60,621.80.

On May 16, 2000, A.H. Warner Properties. L.L.C., as plaintiff
("Warner"), served us with a Complaint which names us, Futech, and others as
defendants. The case was pending in the Superior Court of the State of
California for the County of Los Angeles (case No. 00B03229). The Complaint
alleges that we are indebted to Warner for unpaid rent pursuant to a lease for a
property located in Woodland Hills, California, and seeks judgment for the debt
and interest, legal fees and expenses. The lease on the subject property expired
on June 30, 2000. On July 17, 2000, the Court awarded a Default Judgment against
us in the amount of approximately $22,000.

On June 30, 2000, CarrAmerica Realty Corporation, L.P., as Plaintiff,
served us with a Complaint which names us and others as defendants. On July 7,
2000 we were served with a first amended Complaint which changed the Plaintiff
to CarrAmerica Realty, L.P. ("Carr"). The case is pending in the Superior Court
of the State of Arizona in and for the County of Maricopa (case No.
CV2000-012389). The Complaint alleges that, on or about June 1, 2000, we issued
a check for $61,812.78 which was returned to Carr for insufficiency of funds.
The Complaint further alleges that we intended to defraud Carr. We issued the
check to Carr in payment of a portion of the rent owed by Futech Interactive
Products, Inc. ("Futech") to Carr on a property located in Phoenix, Arizona.
Carr seeks judgment against us for twice the amount of the check (that is,
$123,635.56), in addition to interest, court costs and reasonable attorneys'
fees. On September 14, 2000 we answered the amended Complaint and asserted
several affirmative defenses. The outcome of this litigation is uncertain and
could materially adversely affect our financial condition.

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On October 24, 2000 Carr served us and Futech, among others, with a
Complaint for forcible entry and detainer. The case was filed in the Superior
Court of the State of Arizona, in and for the County of Maricopa (case no.
CU2000-019259). The Complaint alleges that Carr's lease with Futech was deemed
rejected by operation of law in connection with Futech's bankruptcy proceeding
and sought to have all the defendants vacate the leased premises. We have
stipulated to a judgment ordering the defendants (including us) to vacate the
premises leased by Futech at 2999 North 44th Street, Phoenix, Arizona, and we
have since vacated such premises.

On March 8, 2001, Carr filed a motion for summary judgment against us,
seeking judgment in the approximate amount of $75,000. The Company has not filed
a responsive pleading and the due date for such pleading has passed. The Company
anticipates that a judgment will be entered against it in the approximate amount
of $75,000.

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, 2000
through the solicitation of proxies or otherwise.

-14-

PART II

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

PRICE RANGE OF OUTSTANDING COMMON STOCK

The Company's common stock is quoted on the OTC Bulletin Board. The
following table sets forth the high and low bid prices for each fiscal quarter
from January 1, 1999, through December 31, 2000, as reported by the OTC Bulletin
Board and as recorded on WWW.CNBC.COM. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and do not necessarily
represent actual transactions.

YEAR ENDED DECEMBER 31, 2000 HIGH LOW
---------------------------- ---- ---

First Quarter $ 3.50 $ .06
Second Quarter $ 1.69 $ .13
Third Quarter $ .31 $ .08
Fourth Quarter $ .24 $ .07

YEAR ENDED DECEMBER 31, 1999 HIGH LOW
---------------------------- ---- ---

First Quarter $ .35 $ .17
Second Quarter $ .27 $ .16
Third Quarter $ .17 $ .08
Fourth Quarter $ .21 $ .06

The closing price on the OTC Bulletin Board on April 9, 2001 was $.09
per share of Common Stock. As of March 31, 2001, the Company had approximately
851 shareholders of record.

RECENT SALES OF UNREGISTERED SECURITIES

In November, 2000, we borrowed on an unsecured basis an aggregate of
$10,000 from an individual lender, our former president. The note bears interest
at the rate of 10% per annum. As additional consideration to the lender, we
agreed to issue 200,000 shares of our common stock. The

-15-

transaction was exempt from registration under Section 4(2) of the Securities
Act of 1933, as amended. The transaction was exempt based on the following
facts: there was no general solicitation, there was a single investor, who
was an "accredited investor" (within the meaning of Regulation D under the
Securities Act of 1933, as amended) and who was sophisticated about business
and financial matters, and such investor had the opportunity to ask questions
of our management.

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.

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 September 1992, the Company developed and
marketed a variety of consumer products for sale by retailers of gift, novelty
and educational items throughout the United States. In October 1993 the Company
acquired 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. 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." On August 4,
1995, the Company acquired Malibu and its Hong Kong affiliate MFSI. The two
acquired companies operated in tandem, similar to Janex and Pro Gains. Together
they developed, manufactured (through subcontractors) and marketed toys and
novelty gift items, which were sold primarily in the United States to mass
merchant retailers, chain stores, and specialty stores, FOB the Company's Hong
Kong agent.

-16-

process of seeking significant acquisitions of, and new relationships with,
several companies with complementary products or functional services. The
Company entered into a global merger agreement that involved the Company
combining with several companies. The proposed merger transaction was not
consummated and the parties withdrew from the overall transaction. The Company
believes that the focus of the Company's management on the acquisitions had an
adverse impact upon the Company's financial condition and results of operations.

As described above, in February 2001, the Company completed the
acquisition of the DaMert Company, which is focused on the production, marketing
and distribution of toys and gifts. See "Business of Issuer - DaMert Company".
As a result of consummating the DaMert acquisition, the Company expects to
generate substantially more revenue in fiscal 2001, compared to fiscal 2000. The
Company also expects to incur substantially greater expenses in 2001, compared
to the prior year. The Company expects to incur negative cash flow for the
foreseeable future.

In connection with the Acquisition of DaMert, the Company paid the
following consideration: (i) 2,000,000 shares of common stock; (ii) a
promissory note in the approximate amount of $129,000 to an officer of DaMert
(in replacement of a note in the same amount owed by DaMert to such officer);
(iii) the issuance of an aggregate of 3,000,000 shares of common stock to
Amresco Financial I, L.P. ("Amresco") (a creditor of DaMert), of which
1,500,000 shares were issued at the closing of the acquisition and the
remaining 1,500,000 shares are issuable by June 15, 2001; (iv) $220,000 in
cash was paid (at or before the closing) to Amresco in satisfaction of
certain indebtedness of DaMert; and (v) a promissory note, personally
guaranteed by Vincent Goett, our Chairman, in the principal amount of
$1,300,000 was issued to Amresco (the note is payable as follows: $180,000 by
April 15, 2001 (paid); $400,000 by May 15, 2001; and the remaining $720,000
is payable beginning August 15, 2001 in five equal quarterly installments of
$116,667 and one final quarterly installment of $136,666). The note is
secured by certain assets of the Company and DaMert. If the Company defaults
on its obligations under the note, the secured party (or any assignee) would
be able to force a sale of the assets constituting the collateral to satisfy
the debt. In addition, we issued options to purchase an aggregate of
1,000,000 shares of our common stock, at a price of $.001 per share, to Fred
and Gail DaMert (who are employees of DaMert).

-17-

In October, 2000, the Company entered into an Agreement with Futech
Interactive Products, Inc. ("Futech"), an Arizona company, to acquire certain
of the assets and assume certain liabilities of Futech. This agreement
superceded all our prior agreements for the acquisition of Futech's assets.
In June 2000, Futech filed for bankruptcy protection under Chapter 11 of the
United States Bankruptcy Code. In January , 2001, the United States
Bankruptcy Court approved our proposed purchase of certain assets of Futech.
Futech's business consists of third-party publishing and proprietary
publishing products using the Futech interactive technology and patented
products. This technology relates primarily to printed audible signals,
visual circuitry and associated electrical components such as switches,
batteries, speakers and liquid crystal displays. The assets being acquired
also include the website www.okid.com, a "Virtual World" online destination
that resembles an entertaining cartoon world environment. The Company plans
to apply the technology to produce books and play boards that emit speech,
music and sound effects or other visual signals activated by switches in the
surface of the product. The Company plans continue to expand this proprietary
product line selection and to broaden the base of licenses for the use of
Futech's products and technology.

MATERIAL CHANGES IN RESULTS OF OPERATIONS

FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999

Sales for the year ended December 31, 2000 were $3,337, as compared to
$283,995 for the year ended December 31, 1999, a decrease of $280,658. The net
loss for the year ended December

-18-

31, 2000 was $9,051,788, compared to a net loss of $1,470,317, for the year
ended December 31, 1999.

The primary reason for the substantial downturn in sales during the
year ended December 31, 2000, compared to the year ended December 31, 1999, was
that the Company lacked the operating capital needed to procure new product or
character licenses.

In addition, during much of the 2000 period, substantial Company
management resources were devoted to potential acquisitions of complementary
companies. The Company believes that the focus of the Company's management on
acquisitions had a material adverse impact upon the Company's results of
operations and financial condition.

Gross profit was $3,058 for the year ended December 31, 2000, as
compared to a negative gross profit of $257,346, for the year ended December 31,
1999. Gross profit is equal to revenues less the cost of goods sold and
royalties paid. The decline in gross profit was primarily due to the significant
decrease in sales.

Royalty expense was $89,245 for the year ended December 31, 2000, as
compared to royalties of $229,833, for the year ended December 31, 1999. The
reduction in royalties is directly related to the decline in sales during
2000, partially offset by a write off of prepaid royalty expense.

Selling, general and administrative ("SG&A") expenses were
$1,431,204 for the year ended December 31, 2000, as compared to $730,346 for
the year ended December 31, 1999. The increase in SG&A was attributable to an
approximate $400,000 increase in provisions for litigation, an approximate
$200,000 increase in legal and accounting fees, an approximate $75,000
increase in payroll related expenses, and increased travel expenses.

Stock-based compensation expense (non-cash) in the amount of
approximately $7.2 million was recognized during the year ended December 31,
2000. There was no stock based compensation expense during the prior year.
The increase was due to stock options and stock issuances to employees and
consultants for services rendered.

Depreciation and amortization expense for the year ended December 31,
2000 was $3,025, as compared to $327,096, for the year ended December 31, 1999,
a decrease of $324,071. Depreciation and amortization for the year ended
December 31, 1999 included a charge of $118,000 which related to asset
impairment as a result of the Company's declining revenue. The Company has now
fully depreciated its fixed assets, including its tools and dies held as part of
its overseas manufacturing operations. Due to the lack of operating capital, the
Company has not been able to undertake any new purchases of fixed assets.

-19-

Interest expense for the year ended December 31, 2000 was $28,512,
as compared to $25,230, for the year ended December 31, 1999. The increase
was attributable to an increase in the principal outstanding under the bank
note.

SEASONALITY AND QUARTERLY FLUCTUATIONS

The Company's business normally 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 50% of shipping
expected to take place between April and September. However, with the
significant shift of sales relating to the Wet Pet line, in fact approximately
50% of shipping takes place between January and March.

LIQUIDITY AND CAPITAL RESOURCES

We continue to experience a severe working capital deficiency and
negative cash flow. We currently have no cash reserves, and are unable to meet
our financial obligations as they become due. We have an immediate and urgent
need for cash.

Our working capital deficiency at December 31, 2000 was $4,578,601
including $1,606,199 which Futech, an affiliate, claims we owe it, compared
to a working capital deficiency of $3,322,757 at December 31, 1999. The
increase in working capital deficiency is due primarily to an $845,347
increase in accounts payable and accrued expenses and a $313,183 increase in
notes and loans payable. Although we completed the acquisition of the DaMert
Company in February, 2001 and are now generating revenue, we are continuing
to incur negative cash flow. We expect that our working capital deficiency
will increase significantly if we complete the Futech acquisition described
elsewhere in this Form 10-KSB. We also expect that the completion of such
acquisition will exacerbate our cash flow problems until we are able to
benefit from expected increases in sales.

Based on current cash on hand, we need to raise additional funds
immediately in order to continue as a going concern. We plan to reduce the
working capital deficiency by raising additional capital in the form of either
debt or equity financings. Further, we plan to carefully review operating
expenses, with a view to reducing them wherever possible. We cannot assure you
that we will raise sufficient funds to reduce the working capital deficiency or
to fund our costs and expenses. Currently, we do not have sufficient authorized
and unissued shares of common stock to execute our business and financial plans.
We expect that the absence of available shares of common stock will

-20-

make it substantially more difficult for us to raise capital, as any
transaction involving our common stock will have to be made subject to an
increase in the number of authorized shares of such stock. As soon as
practicable, we plan to seek stockholder approval of an increase in the
number of authorized shares of our common stock. If we are unable to raise
sufficient capital in a timely fashion to reduce the working capital
deficiency and to fund our costs and expenses, our business will be adversely
affected and we will not be able to continue as a going concern.

Our auditors' report as at December 31, 2000 indicates, and our
auditors continue to believe, that certain factors raise substantial doubt about
our ability to continue as a going concern. Our auditors issued a going concern
opinion because we:

- have no cash;
- have experienced a significant decline in revenues;
- have continuing negative net worth;
- have a severe working capital deficiency;
- do not have sufficient authorized and unissued shares of common stock
to execute our business and financing plans; and
- have recurring losses.

Our ultimate ability to continue as a going concern depends on: (1)
obtaining additional capital to provide near-term operating cash; and (2)
creation of a sustainable positive cash flow.

Based upon our current budget and business planning, we believe that we
will need approximately $2,000,000 of additional capital to fund our planned
operations over the next twelve months. We cannot be sure that we will be able
to internally generate or raise sufficient funds to continue our operations, or
that our auditors will not issue another going concern opinion.

We are involved in various legal proceedings, as described in Item
3: Legal Proceedings. In connection with such proceedings, default judgments
in the aggregate amount of approximately $480,000 have been entered against
us. We currently do not have the ability to pay these judgments. The
enforcement of these judgments will have a material adverse affect on our
business and financial condition and our ability to continue as a going
concern.

As described elsewhere in this Form 10-KSB, the United States
Bankruptcy Court has approved our proposed acquisition of certain of Futech's
assets. Futech claims that we owe it approximately $1.6 million. In
connection with the consummation of the Futech acquisition, Futech is
obligated to discharge us of such claimed indebtedness. We are currently
reviewing the amount Futech claims we owe it, with a view to determining the
amount that is properly chargeable to us. In the event the Futech acquisition
is not consummated, the trustee of the Futech bankruptcy estate could make a
claim against us for the $1.6 million. If we were required to pay all or even
a part of such $1.6 million, there would be a material adverse affect on our
business and financial condition and our ability to continue as a going
concern.

-21-

In connection with our acquisition of DaMert, we issued a promissory
note, personally guaranteed by Vincent Goett, our Chairman, in the principal
amount of $1,300,000 to Amresco Financial I, L.P. (a creditor of DaMert),
payable as follows: $180,000 by April 15, 2001 (paid); $400,000 by May 15,
2001; and the remaining $720,000 is payable beginning August 15, 2001 in five
equal quarterly installments of $116,667 and one final quarterly installment
of $136,666. This $1,300,000 promissory note is secured by certain assets of
the Company and DaMert. If the Company defaults on its obligations under the
note, the secured party (or any assignee) would be able to force a sale of
the assets constituting the collateral to satisfy the debt.

In the event that the quoted price of the Company's common stock
does not average at least $1.00 per share over a twenty-day trading period
during the 24 months following the closing, the Company will be obligated to
pay Fred and Gail DaMert in the aggregate (in cash or stock at their option)
an amount equal to the excess of $1 million over the product of 1 million and
the highest 20 day average quoted price of the common stock during the 24
months following the closing.

If we complete the Futech acquisition, we will be obligated to repay
approximately $3,000,000 of bank indebtedness as follows: (i) with respect to
$1,500,000 of such indebtedness, interest only will be payable monthly over
three years and the principal ($1,500,000) will be payable on the third
anniversary of the closing of the transaction; and (ii) with respect to the

-22-

remaining $1,500,000 of indebtedness, principal ($1,500,000) and interest
will be payable in thirty six equal monthly installments commencing on the
closing of the transaction.

We are currently indebted to our Chairman in the amount of approximately
$312,000. This indebtedness is payable on demand and secured by all the
assets of the Company and DaMert.

If the Company defaults on its obligations under the note, the secured party
(or any assignee) would be able to force a sale of the assets constituting
the collateral to satisfy the debt.

Our operating activities used $288,031 of cash for the year ended
December 31, 2000, as compared to $1,004,266 for the comparable prior period.
The decrease in cash used by our operating activities is primarily
attributable to an increase of approximately $1,014,000 in accounts payable
and accrued expenses during the year ended December 31, 2000, compared to a
decrease of $226,000 in accounts payable and accrued expenses in the same
period in 1999, partially offset by an increase in net loss of approximately
$353,000 (excluding stock based compensation) and decreased depreciation
expense of approximately $320,000. The increase in accounts payable and
accrued expenses primarily reflects our lack of operating capital. In
addition, we provided an accrual of $399 for the year ended December 31, 2000
related to litigation.

Our investing activities generated $375 during the year ended December
31, 2000, compared to using $63,281 during the same period in 1999. The decrease
of approximately $63,656 in cash used by investing activities is a result of our
lack of operating capital.

Our financing activities provided $289,190 of cash during the year
ended December 31, 2000, compared to providing $1,009,055 in cash during the
same period in 1999. The decrease in cash generated from financing activities
is primarily a result of decreased advances from Futech, partially offset by
a $313,000 increase in loans and notes payable.

As of December 31, 2000, subject to the availability of operating
capital and assuming the completion of the Futech acquisition, we plan to make
capital expenditures over the next twelve months of up to $500,000 to fund new
product development, including initial licensing charges and tooling. Assuming
the completion of the Futech acquisition, we will have significantly more
employees. Staff numbers and efficiency will be considered as part of our
overall approach to reduction and control of operating expenses within the new
corporate structure.

INFLATION

We do not believe that inflation has had a significant impact on our
costs and profits during the past two years.

FORWARD-LOOKING STATEMENTS

We have made forward-looking statements in this report that are subject
to a number of risks and uncertainties including, without limitation, those
described below and other risks and uncertainties indicated from time to time in
our filings with the SEC. These forward-looking statements are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements include the information concerning possible or
assumed future results of operations. Also, when we use words such as "believe,"
"expect," "anticipate" 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:

* the implementation of our growth strategy, including our ability to
consummate the planned acquisition;

* the effects of the DaMert and Futech acquisitions and new relationships
with complementary companies;

* the availability of additional capital;

* variations in stock prices and interest rates;

* fluctuations in quarterly operating results; and

* other risks and uncertainties described in our filings with the SEC.

We make no commitment 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.

-23-

NEW ACCOUNTING STANDARDS

The Financial Accounting Standards Board (FASB) issued several
pronouncements and interpretations and the Securities and Exchange
Commission (SEC) issued several Staff Accounting Bulletins (SAB).
Certain of these pronouncements may have future applicability,
Statement of Financial Accounting Standards (SFAS) No. 132 "Employers
Disclosures about Pensions and other Postretirement Benefits,"
effective June 15, 2000, and No. 137 "Accounting for Derivative
Instruments and Hedging Activities," effective June 15, 2000 would not
have impacted the financial statements as the Company has not
participated in derivative transactions nor does the company have a
defined benefit plan.

In December 1999, the SEC issued SAB No. 101 "Revenue Recognition in
Financial Statements". SAB 101 summarizes certain areas of the SEC's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company believes that its
current revenue recognition policies comply with SAB 101.

In March 2000 the FASB issued FASB Interpretation No. 44 "Accounting
for Certain Transactions involving Stock Compensation", and
interpretations of Accounting Principles Board No. 25. This
interpretation is effective July 1, 2000. The effects of applying this
interpretation would be recognized on a prospective basis from July 1,
2000. The impact of this interpretation is not expected to be material.

In August 1999, the SEC issued SAB No. 99 "Materiality". SAB 99
provides that exclusive reliance on certain quantitative benchmarks to
assess materiality in preparing financial statements is inappropriate;
misstatements are not immaterial simply because they fall beneath a
numerical threshold. Management believes the company is in compliance
with SAB 99.

INFLATION

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

-24-

ITEM 7. FINANCIAL STATEMENTS.

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS'

Report of Abrams and Company, P.C.

CONSOLIDATED FINANCIAL STATEMENTS:

Balance Sheet as of December 31, 1999 and December 31, 2000

Statements of Operations for the years ended
December 31, 1999 and December 31, 2000

Statement of Changes in Stockholders' Deficit for the years ended
December 31, 1999 and December 31, 2000

Statements of Cash Flows for the years ended
December 31, 1999 and December 31, 2000

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

-25-

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

The Board of Directors and Shareholders
Janex International, Inc.

We have audited the accompanying consolidated balance sheet of Janex
International, Inc. and subsidiaries as of December 31, 2000 and 1999 and the
related consolidated statements of operations, changes in shareholders' deficit,
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 audit.

We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. 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 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 consolidated financial position of
Janex International, Inc. and subsidiaries as of December 31, 2000 and 1999
and the consolidated results of their operations and their cash flows for
each of the two years then ended in conformity with accounting principles
generally accepted in the United States of America.

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, continuing negative net worth, and has continued to experience a
significant decline in revenues. Further, the Company has no cash and is
experiencing a severe working capital deficiency. Currently, the Company does
not have sufficient authorized and unissued shares of common stock to execute
its business and financial plans. These factors raise substantial doubt about
its ability to continue as a going concern. Management's plans regarding
those matters also are described in Notes 1 and 17. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

/s/ ABRAMS AND COMPANY, P.C.

Melville, New York
April 6, 2001

See accompanying summary of accounting policies
and notes to financial statements

-26-

JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

DECEMBER 31,

1999 2000
---- ----

ASSETS
Current assets
Cash $ 3,920 $ 5,079
Accounts receivable 55,978 --
Prepaid royalties 79,245 --
Other current assets 5,061 17,818
--------------- ---------------
Total current assets 144,204 22,897
--------------- ---------------
Property and equipment, net 3,025 --
Intangible assets, net 270,662 --
--------------- ---------------
TOTAL ASSETS $417,891 $22,897
=============== ===============
LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities
Note payable - bank $256,943 $331,943
Other note payable -- 10,000
Loans payable -- 228,183
Accounts payable 1,033,671 1,361,423
Accrued expenses 546,155 1,063,760
Due to Futech Interactive Products, Inc. 1,630,192 1,606,199
--------------- ---------------
Total current liabilities 3,466,961 4,601,498
--------------- ---------------
TOTAL LIABILITIES 3,466,961 4,601,498
--------------- ---------------
Shareholders' deficit
Class A convertible preferred stock
no par value
Authorized shares - 5,000,000;
Issued and outstanding - 5,000,000 shares 569,022 569,022
Common stock, no par value
Authorized shares - 20,000,000;
Issued 28,070,388 shares 12,803,507 16,289,321
Less: Treasury stock, at cost: 15,330,129 shares -- (3,056,083)
Additional paid in capital 554,517 554,517
Accumulated deficit (16,976,116) (26,027,904)
--------------- ---------------
(3,049,070) (11,671,127)
Due to Related Parties -- 7,092,526
--------------- ---------------
TOTAL SHAREHOLDERS' DEFICIT (3,049,070) (4,578,601)
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $417,891 $22,897
=============== ===============

See accompanying summary of accounting policies
and notes to financial statements

-27-

JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1999 2000
---- ----

Net sales $283,995 $ 3,337
------------------ -----------------
Cost of sales 311,508 279
Royalty expense 229,833 89,245
------------------ -----------------
541,341 89,524
------------------ -----------------
Gross (loss) (257,346) (86,187)
------------------ -----------------
Operating expenses
Selling, general and administrative 730,346 1,431,204
Stock-based Compensation -- 7,228,198
Depreciation and amortization 327,096 3,025
Impairment loss 126,226 270,662

------------------ -----------------
Loss from operations (1,441,014) (9,019,276)
------------------ -----------------
Other income (expenses)
Interest income 1,214 --
Interest expense (25,230) (28,512)
Other income 1,638 --
------------------ -----------------
Loss before income taxes (1,463,392) (9,047,788)
------------------ -----------------
Provision for income taxes (6,925) (4,000)
------------------ -----------------
NET LOSS $(1,470,317) $(9,051,788)
================== =================
BASIC AND DILUTED NET LOSS PER SHARE $ (0.08) $ (0.64)
================== =================
WEIGHTED AVERAGE OF NUMBER OF SHARES OUTSTANDING 18,098,832 14,246,388
================== =================

See accompanying summary of accounting policies
and notes to financial statements

-28-

JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE TWO YEARS ENDED DECEMBER 31, 1999

CLASS A CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------------- -------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- --------- ---------- ------------ ---------

Balance at December 31, 1998 5,000,000 $569,022 18,098,750 $ 12,803,327 $ 554,517
Common stock issued for services
30,000 180
Net loss
--------- --------- ---------- ------------ ---------
Balance at December 31, 1999 5,000,000 569,022 18,128,750 12,803,507 554,517
Exercise of stock options 3,075,000 2,071,326
Stock based compensation 725,000
Stock issued upon conversion of debt 3,566,638 379,288
Acquisiton of treasury stock
Issuance of shares and shares
issuable for services 3,300,000 310,200
Net loss
--------- --------- ---------- ------------ ---------
Balance at December 31, 2000 5,000,000 $569,022 28,070,388 $ 16,289,321 $ 554,517
========= ========= ========== ============ =========

TREASURY STOCK DUE TO RELATED PARTIES TOTOAL
ACCUMULATED ------------------------ ------------------------ SHAREHOLDERS'
DEFICIT SHARES AMOUNT SHARES AMOUNT DEFICIT
-------------- ---------- ------------ ---------- ------------ ------------

Balance at December 31, 1998 $ (15,505,799) - $ - - $ - $(1,578,933)
Common stock issued for services
180
Net loss (1,470,317) (1,470,317)
-------------- ---------- ------------ ---------- ------------ ------------
Balance at December 31, 1999 (16,976,116) - - - - (3,049,070)
Exercise of stock options 2,071,326
Stock based compensation 725,000
Stock issued upon conversion of debt 379,288
Acquisiton of treasury stock 15,330,129 (3,056,083) 15,297,129 3,052,486 (3,597)
Issuance of shares and shares
issuable for services 2,000,000 4,040,040 4,350,240
Net loss (9,051,788) (9,051,788)
-------------- ---------- ------------ ---------- ------------ ------------
Balance at December 31, 2000 $(26,027,904) 15,330,129 $(3,056,083) 17,297,129 $ 7,092,526 $(4,578,601)
============== ========== ============ ========== ============ ============

See accompanying summary of accounting policies
and notes to financial statements

-29-

JANEX INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31,
1999 2000
------------- -------------

Cash flows from operating activities

Net loss $(1,470,317) $(9,051,788)

Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation 191,822 3,025
Amortization of intangible assets 135,274
Stock based compensation -- 7,228,198
Provision for doubtful accounts 13,711
Compensation -- 125,000
Write off of inventory 19,144
Unrealized foreign exchange losses/(gains) (1,368)
Issuance of common stock for services 180
Impairment loss 126,226 270,662

Changes in current assets and current liabilities
Accounts receivable 94,389 55,978
Inventories 111,954
Prepaid expenses and other current assets 885 66,488
Accounts payable 430,956 327,752
Accrued expenses (657,122) 686,654
----------- -------------
NET CASH USED BY OPERATING ACTIVITIES (1,004,266) (288,031)
----------- -------------

Cash flows from investing activities
Purchases of property and equipment 63,256
Product development costs (126,537)
Proceeds from stock options 375
------------ -------------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (63,281) 375
------------ -------------

Cash flows from financing activities
Advances (reductions) from Futech
Interactive Products, Inc. 1,009,112 (23,993)
Proceeds from line of credit 75,000
Net payments on notes payable (57)
Increase in loans payable 238,183
--------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,009,055 289,190
----------- --------------

Net change in cash and cash equivalents (58,492) 1,159

Cash and cash equivalents, beginning of year 62,412 3,920
----------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,920 $ 5,079
=========== ==============
Supplemental cash flow information:

Cash paid for interest $ 25,127 $ 29,246
=========== ==============
Cash paid for income taxes $ 3,925 $ 0
=========== ==============

See accompanying summary of accounting policies
and notes to financial statements

-30-

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Janex International, Inc. and subsidiaries (including DaMert Toys and
Games, Inc., See Note on Subsequent Events) (the Company) are in the
business of developing, marketing, and selling toys and functional
children's products which are manufactured by subcontractors. The
Company sells its products primarily to U.S. based retailers.

The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation. All balance
sheet accounts of the Company's foreign subsidiaries are translated at
the current exchange rate, at the 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 (at 1999 and 2000 the adjustment was not significant), are
recorded as comprehensive income.

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.

The financial statements have been prepared assuming the Company will
continue as a going concern. The Company has incurred significant
operating losses in the past several years, continuing negative net
worth, and negative working capital at December 31, 2000, and has
continued to experience a significant decline in revenues from
$5,596,979 in 1997 to $3,117,599 in 1998 and $283,995 in 1999 and
$3,337 in 2000. The Company has no cash and is experiencing a severe
working capital deficiency. Accordingly, management has been unable to
devote resources to the development of products or sales. Currently,
the Company does not have sufficient authorized and unissued shares of
common stock to execute its business and financial plans. The Company
expects that the absence of available shares of common stock will make
it substantially more difficult for it to raise capital, as any
transaction involving its common stock will have to be made subject to
an increase in the number of authorized shares of such stock. As soon
as practicable, the Company plans to seek stockholder approval of an
increase in the number of authorized shares of common stock. These
factors raise significant doubt as to the Company's ability to continue
as a going concern.

The Company experienced a severe shortage of capital during 2000, which
had the effect of substantially curtailing the Company's operating
activities, to the point that the Company had essentially become
inactive from an operating point of view. In order to restart the

-31-

Company's business operations, the Company has sought to acquire
businesses that focused on children's toys and educational products.

In February 2001, the Company completed the acquisition of the DaMert
Company, which is focused on the production, marketing and distribution
of toys and gifts. The Company's ultimate ability to continue as a
going concern depends on the market acceptance of products, an increase
in revenues, and the achievement of operating profits and positive cash
flow. The Company will also require additional financial resources from
other sources to provide near term operating cash to enable the Company
to execute its plans to move toward profitability. Management believes
that the future financings, the effectuated and planned acquisitions
described in the Subsequent Events Note 16 and additional sales to be
generated from new product lines that are being developed, will be
sufficient to allow the Company to continue in operation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH EQUIVALENTS

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

INVENTORIES

Inventories 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 is computed
principally by the straight-line method over the estimated useful lives
of the assets which range from two to five 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.

FAIR VALUE OF FINANCIAL INSTRUMENTS

At December 31, 2000, the Company has the following financial
instruments: cash and cash equivalents, accounts payable, accrued
expenses, and short-term debt. The carrying value of cash and cash
equivalents, accounts payable, and accrued expenses and short term debt
approximates their fair value based on the liquidity of these financial
instruments or based on their short-term nature.

-32-

INTANGIBLE ASSETS

Intangible assets consist of goodwill and product development costs.

Costs of business acquisitions in excess of net asset of subsidiaries
acquired (goodwill) are amortized on a straight-line basis over a ten
year period. The Company records impairment losses on long-lived assets
used in operations when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows estimated to
be generated by those assets are less than the carrying amounts of
those assets. This methodology includes intangible assets acquired.
Goodwill relating to specific intangible assets is included in the
related impairment measurements to the extent it is identified with
such assets.

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 carried at the lower of cost or net
realizable value and amortized on a straight-line basis over a one to
five year period.

Management reviews goodwill and other intangible assets periodically
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.

REVENUE RECOGNITION

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

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 the weight of available evidence is more
likely than not that some portion, or all of, the deferred tax assets
will not be realized.

-33-

STOCK-BASED COMPENSATION

The company accounts for stock-based employee compensation arrangements
in accordance with provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" and complies
with the disclosure provisions of SFAS No. 123, "Accounting for Stock
Based Compensation." Under APB Opinion No. 25, compensation expense for
employees is based on the excess, if any, on the date of grant, of the
fair value of the company's stock over the exercise price.

LOSS PER SHARE

Loss per common share is calculated 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 outstanding. Diluted earnings
per common share include the potential exercise of employee stock
options. Common share equivalents have been excluded from the
calculation of loss per share for all periods presented, as their
effect is anti-dilutive.

COMPREHENSIVE LOSS/ INCOME

As of January 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 loss/income and
its components. The components, relative to the company, include the
effect of foreign currency translation. Comprehensive loss for the
Company is the same as net loss for all periods presented as the effect
of foreign currency translation is not material.

SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

Effective January 1, 1998, the Company adopted the 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 (see Note 13).

-34-

PENSION PLAN

The Company has a 401K Plan 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 accounts, 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 plan 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. The Company did not make
contributions to the 401K for 1999 and 2000.

NEW ACCOUNTING STANDARDS

-35-

RECLASSIFICATIONS

Certain reclassifications were made to the 1999 financial statements to
conform to those used in 2000.

3. IMPAIRMENT LOSS

The Company concluded in 1999 that an impairment loss occurred related
to the Company's long-lived assets in its Hong Kong subsidiary. The
loss was incurred as a consequence of the suspension of manufacturing
activities resulting from the Company's lack of operating capital.
Accordingly, in 1999, the Company provided for an impairment loss of
$126,226.

In 2000, the Company recognized an impairment loss of $270,662 related
to intangible assets, principally goodwill, in connection with a
previous acquisition. The loss was incurred as management suspended its
marketing and selling efforts related to the products offered by its
subsidiary.

4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

1999 2000
---- ----

Molds $ 1,861,874 $ 1,861,874
Machinery and equipment 146,583 146,583
Leasehold improvements 3,866 3,866
-------------- --------------
2,012,323 2,012,323
Less: Accumulated depreciation
and amortization (1,917,498) (1,920,523)
Accumulated Impairment
loss (91,800) (91,800)
-------------- --------------
$ 3,025 $ 0
============== ==============

-36-

5. INTANGIBLE ASSETS

Intangible assets consist of the following:

1999 2000
---- ----

Goodwill $ 422,220 $ 422,220
Product development costs 109,942 109,942
------------ ------------
532,162 532,162
Less: Amortization (243,722) (261,500)
Impairment loss (17,778) (270,662)
------------ ------------
$ 270,662 $ 0
============ ============

6. ACCRUED EXPENSES

Accrued expenses consist of the following:

1999 2000
---- ----

Accrued judgments $ -- $ 399,622
Accrued royalties 273,225 273,225
Accrued professional fees -- 101,116
Accrued commissions 102,635 102,635
Accrued compensation 100,000 146,915
Other accrued expenses 70,295 33,237
Accrued taxes -- 7,000
----------- ------------
$ 546,155 $ 1,063,750
=========== ============

7. RELATED PARTY TRANSACTIONS WITH FUTECH INTERACTIVE PRODUCTS, INC.

During 1998, Futech claims to have advanced an aggregate of
approximately $620,000 to the Company to fund the Company's operations.
These amounts were unsecured and non-interest bearing. During 1999,
Futech claims to have advanced approximately an additional $1 million
to fund the Company's operations. These amounts were also unsecured and
non-interest bearing. At December 31, 2000, Futech claims the Company
owes it approximately $1.6 million. The Company is currently reviewing
the amount Futech claims the Company owes it, with a view to
determining the amount that is properly chargeable to the Company.
In connection with the planned acquisition of certain of Futech's
assets (described below), such $1.6 million of indebtedness of the
Company to Futech is to be discharged.

In January, 2000, the Company entered into a license agreement
("License Agreement") with Futech. Under the License Agreement, Futech
granted the Company an exclusive license

-37-

of the technology related to the "Toynet" system of interactive talking
toys. The License Agreement may be terminated by either party upon 60
days written notice, without penalty. The License Agreement specifies
a royalty rate of 10% for non-licensed product and 5% for licensed
product.

In February 2000, the Company entered into two asset purchase
agreements, as amended, with Futech, one to acquire all the assets of
Futech (other than those related to the website www.oKid.com), and the
other to purchase the URL domain name and related website,
www.oKid.com, and the related assets.

In June 2000, Futech filed for bankruptcy protection under Chapter 11
of the United States Bankruptcy Code. Following the filing of the
bankruptcy petition, on July 12, 2000, the Company entered into a new
Purchase and Sale Agreement with Futech (the "July Agreement"), which
agreement superseded all then prior agreements between the Company and
Futech. This transaction was subject to, among other conditions,
approval of the Bankruptcy Court, which was initially denied on August
18, 2000. Accordingly, the Company withdrew from the transactions
contemplated by the July Agreement, including the purchase of the
assets of Futech.

The Company entered into a new asset purchase agreement with Futech,
effective as of October 23, 2000 (the "Futech Agreement"). In January
2001, the U.S. Bankruptcy Court approved the Company's proposed
purchase of certain Futech assets. Under the Futech Agreement, as
approved by the Bankruptcy Court, the Company agreed to acquire certain
assets of Futech in exchange for the following consideration: (i) an
aggregate of approximately 23 million shares of common stock; (ii)
the assumption of an aggregate of approximately $3 million of
indebtedness; and (iii) the payment of approximately $150,000 in cash,
of which approximately $61,000 has already been paid. Vincent Goett,
our Chairman, has indicated he intends to personally guarantee
$2,000,000 of the indebtedness being assumed. In addition,
approximately $1.6 million of indebtedness Futech claims the Company
owes it would be discharged in connection with the acquisition.
The consummation of the transaction is subject to numerous
conditions, which may or may not be met, including an amendment of the
Company's charter to increase the number of its authorized shares of
common stock to at least 125,000,000. There is no assurance that the
Futech acquisition will be completed. The Futech Agreement filed with
this report is the form of agreement submitted to the U.S. Bankruptcy
Court. The terms and conditions of the Futech asset purchase approved
by the Bankruptcy Court, as described above, are different than the
terms and conditions set forth in the Futech Agreement. The Company
expects that the Court approved terms and conditions will be
memorialized in a writing prior to the closing.

-38-

8. DUE TO RELATED PARTIES AND TREASURY STOCK

Because the Company did not have sufficient authorized but unissued
shares of common stock to execute its business and financial plans, in
March 2000, Palmilla Ventures, an affiliate of Vincent Goett (the
Company's Chairman), agreed to surrender to the Company an aggregate of
10 million shares of its common stock so that such shares could be
restored to the status of authorized but unissued shares of common
stock. Of the aggregate 10 million shares surrendered, 1,159,952 (6.0%
of the outstanding common stock prior to surrender) were being held for
the benefit of Dan Lesnick, the then Chief Operating Officer (now,
President) and a Director, 2,182,417 (11.4% of the outstanding common
stock prior to surrender) were being held for the benefit of Mr. and
Mrs. Howard Moore, and 1,657,631 (8.6% of the outstanding common stock
prior to surrender) were being held for the benefit of Mr. Les
Friedland, a former President.

Under this Agreement, as soon as possible following an increase to
65,000,000 in the number of authorized but unissued shares, the
Company will return the 10 million shares surrendered and will issue
the surrendering shareholders, PRO RATA, based on the number of shares
surrendered, an aggregate of 2 million additional shares of common
stock as compensation for surrendering their shares.

In addition, if the price of the Company's common stock is lower when
the 10 million replacement shares are issued than it was on the date
the shares were surrendered, the surrendering shareholders will be
issued additional shares, PRO RATA, based on the number of shares
surrendered, such that the total replacement shares issued is equal in
value on the replacement date to the value of the shares surrendered on
the date of surrender. For example, if the value of 10 million shares
on the date of surrender was $15 Million and the market price of the
Company's common stock on the replacement date was $1.00, the
surrendering shareholders would be issued 15 million shares of common
stock on the replacement date to replace the $15 Million in value
surrendered at the surrender date. For purposes of this arrangement,
the "price" of the common stock is based on a five day trailing average
closing price, as quoted on the OTC Bulletin Board.

On March 9, 2000, the date of surrender of the 10 million shares, the
five day trailing average closing price of the common stock was $1.79,
as quoted on the OTC Bulletin Board. Based on the quoted price of the
common stock, the value of the 10 million shares surrendered was $17.9
million. On March 30, 2001, the five day trailing average closing price
of the common stock was $.088, as quoted on the OTC Bulletin Board. If
the Company were to replace, as of March 30, 2001, the 10 million
shares surrendered, the

-39-

Company would be obligated to issue approximately 203.4 million shares
of its common stock in replacement of the 10 million shares originally
surrendered.

In November, 2000, Palmilla Ventures surrendered to the Company an
additional 4,697,129 shares of its common stock. These shares are to be
re-issued upon an increase to 125,000,000 in the number of authorized
shares of common stock.

Treasury Stock Shares are valued at the price paid, for such shares,
by the shareholders' who have returned their stock. The number of
shares reissuable and issuable at December 31, 2000 was 17,297,129.

9. NOTE PAYABLE - BANK

The Company's outstanding debt under a line of credit bears interest at
the bank's prime rate (9.00% at December 31, 2000) plus 0.25%. The debt
has been extended from time to time and is currently due July 1,
2001. The note is personally guaranteed by three significant
shareholders, one of whom is the President of the Company. The note is
collateralized by certificates of deposit in the name of the
shareholders and a UCC Security Agreement executed by the Company
covering all corporate assets. If the Company defaults on its
obligations under the note, the secured party (or any assignee) would
be able to force a sale of the assets constituting the collateral to
satisfy the debt. Interest on the note has been paid by one of the
guarantors.

The maximum amount of debt outstanding approximated $331,000 and
$257,000 during 2000 and 1999 respectively. The weighted average
interest rate was 9.08% and 8.375% for 2000 and 1999 respectively. The
weighted average interest is calculated by dividing the interest cost
by the weighted average debt outstanding during the year

10. INCOME TAXES

The income tax provision, all of which is current, consists of the
following:

1999 2000
---- ----

Federal $ $
State 6,925 4,000
Foreign
---------- ----------
$ 6,925 $ 4,000
========== ==========

-40-

The Company's net deferred tax asset and deferred tax asset valuation
allowance are comprised of the following carryforwards:

1999 2000
---- ----

Net operating loss carryforward $ 4,000,000 $ 5,300,000
Less: Valuation allowance $ (4,000,000) $ (5,300,000)
--------------- ---------------
$ 0 $ 0
=============== ===============

Because of the Company's recurring losses, the net deferred tax assets
have a 100 percent valuation allowance at December 31, 1999 and 2000.

The income tax provision differs from the amount computed by applying
the U.S. federal income tax rate (34 percent). This is due to the
effect of foreign losses not deductible on the U.S. income tax return
and the tax effect of unrecognized net operating loss deductions.

At December 31, 1999 and 2000, the Company had federal net operating
loss (NOL) carryforwards of approximately $20,000,000 and $10,000,000,
respectively. The Company also had state net operating loss (NOL)
carryforwards. NOL carryforwards may be available to offset future
taxable income. If not used, the federal and state NOL carryforwards
will expire through 2020 and 2004, 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, 1999 and 2000 were $285,000 and approximately
$115,000, respectively.

The company has not filed its 1999 tax returns. Since the Company has
had continuous losses and available net operating losses, the Company
believes that the tax liability, if any, would not be material.

11. OPERATING EXPENSES

A. RENT EXPENSE

Rent expense for 1999 approximated $108,000 and sublease rental income
approximated $71,000. Rent expense for 2000 approximated $49,000 and
sublease income approximated $7,000.

B. ROYALTIES

-41-

At December 31, 1999, the Company has a commitment for a minimum
guaranteed royalty under a licensing agreement for $15,000 due in 2000.

Total royalty expense was approximately $230,000 and $89,000 for the
years ended December 31, 1999 and 2000, respectively.

12. COMMITMENTS AND CONTINGENCIES

A. LITIGATION

On May 16, 2000, Golden Books Family Entertainment, Inc., as plaintiff
("Golden Books"), served the Company with a Second Amended Complaint
which names Futech, Vincent W. Goett ("Goett"), and the Company as
defendants. The Company was not named in the original complaint or the
first amended complaint. The case was pending in the United States
Bankruptcy court for the Southern District of New York (Bankruptcy case
No. 99-10030). In March, 2001, Golden Books and the Company entered
into a stipulation to suspend this litigation until the earliest to
occur of: (1) the closing of the transactions contemplated by the
Agreement with Futech for the Purchase and Sale of Assets, as amended
(the "Agreement"); (2) rescission or invalidation of the Agreement; or
(3) July 2, 2001.

The proceeding originally commenced in June 1999. The Second Amended
Complaint alleges, among other things, (i) that Futech is indebted to
Golden Books in the amount of $1 million under a promissory note dated
August 14, 1996 ("Note"), (ii) that Futech has defaulted on its
obligations under the Note, (iii) that Goett has personally guaranteed
performance of Futech's obligations under the Note, (iv) that Goett in
January 2000 caused Futech to transfer all or virtually all of its
assets to the Company, and (v) that the transfer was made by Goett and
Futech knowingly with intent to deplete Futech of assets and that the
Company accepted the transfer knowingly and with intent to assist Goett
and Futech in depleting Futech of assets and thereby rendering it
judgment-proof or, in the alternative, that Futech, on or about January
2000, transferred to the Company Futech's Interactive Books division
and all of the assets and liabilities thereof. On the basis of the
foregoing, the Second Amended Complaint alleges that Futech, Goett and
the Company (or in the alternative Goett and the Company) are jointly
and severally liable for the $1 million under the Note, plus interest,
costs and reasonable attorney's fees.

The Second Amended Complaint also alleges (i) that Futech transferred
its assets to the Company with intent to hinder, delay or defraud
Golden Books in pursuit of its claim against Futech, (ii) that such
transfer was made without receiving a reasonably equivalent value for
the transfer, (iii) that Futech was insolvent at the time of transfer
(or became insolvent as a

-42-

result), (iv) that the transfer included all or substantially all of
Futech's assets to the Company, (v) that the transfer of Futech assets
to the Company was a "fraudulent conveyance" under Arizona law, and
(vi) that Goett conspired with Futech and Janex to effect the asset
transfer with the intent and for the purpose of hindering, delaying
and defrauding Futech's creditors, including rendering Futech
judgment-proof, and that such conduct was malicious and intended to
injure Golden Books.

Based on the foregoing, Golden Books claims it is entitled to
garnishment, avoidance of the transfer, and attachment or other
provisional remedy and $1 million, plus interest and punitive damages.

As described above, the Company has not yet consummated the planned
acquisition of the specified Futech assets and, further, the U.S.
Bankruptcy Court has approved the planned acquisition of such assets.
Consequently, the Company believes that it has strong defenses against
the foregoing claims and intends to vigorously defend against them.
Although the Company believes that it has strong defenses, no
assurance can be given as to the outcome of the litigation, which
could have a material adverse effect on the Company.

On June 20, 2000, Jon Weber, d/b/a Alma Designs, as plaintiff
("Weber"), served the Company with a Complaint which names Futech and
the Company as defendants. The case is pending in the United States
District court for the Northern District of California, San Jose
Division (Case No. CA-00 20670). The Complaint alleges, among other
things, (i) that the defendants solicited the plaintiff to ship goods
valued in excess of $240,000, and failed to pay for the goods after
their sale, (ii) that Futech issued purchase orders to the plaintiff,
(iii) that the Company is the parent company of Futech, and that the
Company caused Futech to transfer substantially all of its liquid
assets to the Company, and (iv) that the defendants fraudulently
induced the plaintiff to ship the merchandise knowing that it did not
have sufficient funds to pay the amount due and with the intent of not
paying the amounts due. On the basis of the foregoing, the Complaint
demands judgment for $243,000, interest and costs and punitive damages
of $200,000. On August 2, 2000, the Court awarded a Default Judgment
against the Company and Futech in the amount of approximately
$237,000. The Company is not the parent company of Futech and, as
described above, has not yet consummated the acquisition of Futech's
assets. The Company intends to attempt to have the Default Judgment
vacated, as it believes that it has strong defenses against the
foregoing claims. The Company gives no assurance that it will be able
to have the Default Judgment vacated, and it has accrued the full
amount of the default judgment as of December 31, 2000. Even if it
were able to have the Default Judgment vacated, there is no assurance
as to the outcome of the litigation, which could have a material
adverse effect on the Company.

-43-

On January 26, 2000, Caterpillar, Inc., as plaintiff ("Caterpillar"),
served the Company with a Complaint which names it and Futech as
defendants. The case was pending in the Circuit Court of the Tenth
Judicial Circuit of Illinois, Peoria County (case No. 00 L26). The
Complaint alleged that the Company is indebted to Caterpillar in the
amount of $45,000 in unpaid minimum royalty payments under a Trademark
Merchandise License Agreement dated April 15, 1997. On May 23, 2000,
the Court awarded a Default Judgment against the Company and Futech
in the amount of $60,621.80. The Company has accrued the full amount
of the default judgment as of December 31, 2000.

On May 16, 2000, A.H. Warner Properties. L.L.C., as plaintiff
("Warner"), served the Company with a Complaint which names the
Company, Futech, and others as defendants. The case was pending in the
Superior Court of the State of California for the County of Los Angeles
(case No. 00B03229). The Complaint alleges that the Company is indebted
to Warner for unpaid rent pursuant to a lease for a property located in
Woodland Hills, California, and seeks judgment for the debt and
interest, legal fees and expenses. The lease on the subject property
expired on June 30, 2000. On July 17, 2000, the Court awarded a Default
Judgment against the Company in the amount of approximately $22,000.
The Company has accrued the full amount of the default judgment as of
December 31, 2000.

On June 30, 2000, CarrAmerica Realty Corporation, L.P., as Plaintiff,
served the Company with a Complaint which names it and others as
defendants. On July 7, 2000 the Company was served with a first amended
Complaint which changed the Plaintiff to CarrAmerica Realty, L.P.
("Carr"). The case is pending in the Superior Court of the State of
Arizona in and for the County of Maricopa (case No. CV2000-012389). The
Complaint alleges that, on or about June 1, 2000, the Company issued a
check for $61,812.78 which was returned to Carr for insufficiency of
funds. The Complaint further alleges that the Company intended to
defraud Carr. The Company issued the check to Carr in payment of a
portion of the rent owed by Futech Interactive Products, Inc.
("Futech") to Carr on a property located in Phoenix, Arizona. Carr
sought judgment against the Company for twice the amount of the check
(that is, $123,635.56), in addition to interest, court costs and
reasonable attorneys' fees. On September 14, 2000 the Company answered
the amended Complaint and asserted several affirmative defenses.

On October 24, 2000 Carr served the Company and Futech, among others,
with a Complaint for forcible entry and detainer. The case was filed in
the Superior Court of the State of Arizona, in and for the County of
Maricopa (case no. CU2000-019259). The Complaint alleges that Carr's
lease with Futech was deemed rejected by operation of law in connection
with Futech's bankruptcy proceeding and sought to have all the
defendants vacate the leased premises. The Company stipulated to a
judgment ordering the defendants (including the

-44-

Company) to vacate the premises leased by Futech at 2999 North 44th
Street, Phoenix, Arizona, and the Company has since vacated such
premises.

On March 8, 2001, Carr filed a motion for summary judgment against the
Company, seeking judgment in the approximate amount of $75,000. The
Company has not filed a responsive pleading and the due date for such
pleading has passed. The Court has entered a judgment against the
Company in the approximate amount of $68,000 plus interest at the
rate of 10% per annum from June 1, 2000 until paid in full. The
Company has accrued $80,000 as a result of this judgment.

13. STOCK OPTIONS AND STOCK BASED COMPENSATION

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

WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
--------------- ----------------

Balance, December 31, 1998 45,000 $ 1.67
----------------
Granted
Exercised
Forfeited (25,000) (1.25)
--------------- ----------------
Balance, December 31, 1999 20,000 2.13
----------------
Granted 5,940,000 $ (1.45)
Exercised (5,730,000) ----------------
Forfeited (20,000) 2.13
--------------- ----------------
Balance, December 31, 2000 210,000 $ 0
=============== ================

The exercise price for options outstanding as of December 31, 2000 is
$.001 per share.

The fair value of options and warrants is estimated on the date of
grants utilizing the Black-Scholes option pricing model with the
following weighted average assumptions for the years ended December 31,
1999 and 2000: expected life of 4.4 years, expected volatility of 22.5
percent, risk-free interest rate of 6 percent, and a 0 percent dividend
yield.

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.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the applicable vesting period. The
pro forma effect of SFAS No. 123 was not material for any year
presented.

-45-

In March 2000, the Company adopted the 2000 Combination Stock Option
Plan and amended and restated such plan in October, 2000 ("the Plan").
This Plan is to be made available to employees of the Company and its
subsidiaries and to individuals whose services contribute to the growth
and development of the Company. Options to purchase up to 7,000,000
shares may be issued under the Plan, and options may be awarded for up
to ten (10) years.

14. COMMON STOCK

Warrants

The Company has 100,000 warrants outstanding at $.64. The warrants are
all exercisable and expire on March 26, 2001. The warrants have not
been exercised.

1,725,000 Public Warrants which were issued in connection with the 1991
Public Offering expired in 1999.

In 1999, 30,000 shares of common stock were issued for services at $180
($.06 per share).

15. SEGMENT INFORMATION

The Company operates exclusively in the children's products industry.
For geographical reporting, revenues are attributed to the geographic
location from which goods are shipped. Intercompany sales are recorded
at cost.

In 1999 sales to two customers approximated 68%. Sales to these
customers were made by the Hong Kong segment. Revenues for 2000 were
not material.

-46-

A summary of the Company's operations by geographical area for the
years ended December 31, 1999 and 2000 were as follows:

UNITED STATES HONG KONG CONSOLIDATED
------------- --------- ------------

1999
Net sales: $ 3,671 $ 280,324 $ 283,995

Operating loss (1,097,331) (343,683) (1,441,014)
------------ ------------ ------------
Interest expense 24,580 650 25,230
------------ ------------ ------------
Depreciation and
amortization 120,422 332,900 453,322
------------ ------------ ------------

Total assets $ 354,164 $ 63,727 $ 417,891
------------ ------------ ------------

Segment reporting is not significant for 2000.

16. RELATED PARTY TRANSACTIONS

The Company has engaged the services of a manufacturer's 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 one of its largest
customers, Toys R Us. The principal owner and operator of LFA, Mr.
Leslie Friedland, is a former President of Janex and is the beneficial
owner of approximately 11.91% of the Company's issued and outstanding
common stock as of April 5, 2001. 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%. Effective September, 2000, the commission rate
was increased to 5%. 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, or will be paid, $0 for the year ended December 31, 2000, $47,500
for the year ended December 31, 1999, and $65,154 for the year ended
December 31, 1998.

In 1998, the Company obtained a line of credit for up to $400,000. At
December 31, 2000 the Company owed approximately $337,000 under this
line of credit. The Company's obligations under this facility are
secured by all the Company's assets and guaranteed by Dan Lesnick,
President; Les Friedland, a former President who currently owns 10.91%
of the

-47-

outstanding common stock; and Howard Moore, who currently owns 12.78%
of the outstanding common stock. The line of credit, which has been
extended from time to time, is currently due July 1, 2001.

In June 1999, the Company entered into a merger agreement ("Merger
Agreement") with, among other parties, Futech Interactive Products,
Inc. ("Futech"), then the majority stockholder of the Company. Vincent
Goett, the Company's Chairman, is President, Chief Executive Officer
and a major stockholder and creditor of Futech. The Company, Futech,
Trudy Corporation, DaMert Company and Fundex Games, Ltd. were going to
combine into a diversified children's product company that would
design, develop and distribute proprietary children's products, such as
books, games, toys and stationery. Effective as of December 1, 1999,
the parties terminated the Merger Agreement and all rights and
obligations of the parties thereunder.

During 1998, Futech claims to have advanced an aggregate of
approximately $620,000 to the Company to fund the Company's operations.
These amounts were unsecured and non-interest bearing. During 1999,
Futech claims to have advanced approximately an additional $1 million
to fund the Company's operations. These amounts were also unsecured and
non-interest bearing. At December 31, 2000, Futech claims the Company
owes it approximately $1.6 million. The Company is currently reviewing
the amount Futech claims the Company owes it, with a view to
determining the amount that is properly chargeable to the Company. In
connection with the planned acquisition of certain of Futech's assets
(described below), such $1.6 million of indebtedness of the Company
to Futech is to be discharged.

In January, 2000, the Company entered into a license agreement
("License Agreement") with Futech. Under the License Agreement, Futech
granted the Company an exclusive license of the technology related to
the "Toynet" system of interactive talking toys. The License Agreement
may be terminated by either party upon 60 days written notice, without
penalty. The License Agreement specifies a royalty rate of 10% for
non-licensed product and 5% for licensed product.

-48-

Agreement"), which agreement superseded all then prior agreements
between us and Futech. This transaction was subject to, among other
conditions, approval of the Bankruptcy Court, which was initially
denied on August 18, 2000. Accordingly, the Company withdrew from the
transactions contemplated by the July Agreement, including the
purchase of the assets of Futech.

The Company entered into a new asset purchase agreement with Futech,
effective as of October 23, 2000 (the "Futech Agreement"). In January
2001, the U.S. Bankruptcy Court approved the proposed purchase of
certain Futech assets. Under the Futech Agreement, as approved by the
Bankruptcy Court, the Company has agreed to acquire certain assets of
Futech in exchange for the following consideration: (i) an aggregate
of approximately 23 million shares of the Company's common stock;
(ii) the assumption of an aggregate of approximately $3 million of
indebtedness; and (iii) the payment of approximately $150,000 in
cash, of which approximately $61,000 has already been paid. Vincent
Goett, our Chairman, has indicated he intends to personally
guarantee $2,000,000 of the indebtedness being assumed. In addition,
approximately $1.6 million of indebtedness Futech claims the Company
owes it would be discharged in connection with the acquisition. The
consummation of the transaction is subject to numerous conditions,
which may or may not be met, including an amendment of the Company's
charter to increase the number of its authorized shares of common
stock to at least 125,000,000. There is no assurance that the Futech
acquisition will be completed. The Futech Agreement filed with this
report is the form of agreement submitted to the U.S. Bankruptcy
Court. The terms and conditions of the Futech asset purchase
approved by the Bankruptcy Court, as described above, are different
than the terms and conditions set forth in the Futech Agreement. The
Company expects that the Court approved terms and conditions will be
memorialized in a writing prior to the closing.

On June 28, 2000, the Company issued 2,250,000 shares of unregistered
common stock to Vincent Goett, Chairman and former President, in
satisfaction of accrued salary in the amount of $225,000, owed to Mr.
Goett for fiscal 1999 and the ten months ended October 31, 2000. On
June 28, 2000, the closing price of the common stock, as quoted on the
OTC Bulletin Board, was $.156 per share.

On September 18, 2000, the Company agreed to issue 1,341,638 shares of
the Company's unregistered common stock in satisfaction of expenses
incurred on behalf of the Company by Vincent Goett, Chairman and former
President, in the amount of $67,082. On September 18, 2000, the closing
price of the common stock, as quoted on the OTC Bulletin Board, was
$.115 per share.

-49-

In January 2001, the Company's Board of Directors authorized the
Company to borrow up to $1,300,000 from an affiliate of Vincent
Goett, Palmilla Ventures Limited Partnership ("Palmilla Ventures")
(which borrowings may consist of Mr. Goett's personal guarantee of
Company obligations), of which approximately $312,000 has already
been advanced to, or for the benefit of, the Company. Of the
aggregate $312,000 advanced, approximately $31,000 has been advanced
to, or for the benefit of, the Company, approximately $61,000 has
been advanced on behalf of Janex to Futech as a down-payment on the
$150,000 due at closing of the asset purchase, and the remaining
$220,000 was used as a portion of the consideration given in
connection with the acquisition of the DaMert Company. The advances
made by Palmilla Ventures are payable on demand and bear interest at
the rate of 10% per annum. Such advances are secured by all the
assets of the Company and DaMert Toys and Games, Inc., the Company's
wholly owned subsidiary. If the Company defaults on its obligations
under the note, the secured party (or any assignee) would be able to
force a sale of the assets constituting the collateral to satisfy
the debt. As additional consideration for making the $1,300,000 loan
to the Company, the Company have agreed to issue Palmilla Ventures
that number of shares of common stock equal to approximately 19% of
the issued and outstanding common stock, on a fully-diluted basis,
after giving effect to certain specified transactions. Based on the
amount advanced to date (approximately $312,000 of the total $1.3
million), the Company is obligated to issue Palmilla Ventures that
number of shares of common stock equal to approximately 4.6% of the
issued and outstanding common stock on a fully-diluted basis, after
giving effect to certain specified transactions. In addition, in
connection with the acquisition of DaMert, Vincent Goett personally
guaranteed approximately $1,300,000 of the obligation of the DaMert
Company to Amresco Financial I, L.P. (a creditor of DaMert). In
consideration of making this guarantee, the Company agreed to issue
Mr. Goett (or his designee) that number of shares of common stock
equal to approximately 19% of the issued and outstanding common
stock, on a fully-diluted basis, after giving effect to certain
specified transactions. The issuance of the foregoing shares is
subject to an increase to 125,000,000 in the number of authorized
and unissued shares of common stock.

Because the Company did not have sufficient authorized but unissued
shares of common stock to execute its business and financial plans, in
March 2000, Palmilla Ventures agreed to surrender to the Company an
aggregate of 10 million shares of common stock so that such shares
could be restored to the status of authorized but unissued shares of
common stock. Of the aggregate 10 million shares surrendered,
1,159,952 (6.0% of the outstanding common stock prior to surrender)
were being held for the benefit of Dan Lesnick, then Chief Operating
Officer (now, President) and a Director; 2,182,417 (11.4% of the
outstanding common stock prior to surrender) were being held for the
benefit of Mr. and Mrs. Howard Moore; and 1,657,631 (8.6% of the
outstanding common stock prior to surrender) were being held for
the benefit of Mr. Les Friedland, a former President.

-50-

Under this Agreement, as soon as possible following an increase to
65,000,000 in the number of authorized but unissued shares, the Company
will return the 10 million shares surrendered and will issue the
surrendering shareholders, PRO RATA, based on the number of shares
surrendered, an aggregate of 2 million additional shares of common
stock as compensation for surrendering their shares to the Company.

In November, 2000, Palmilla Ventures surrendered an additional
4,697,129 shares of common stock to the Company. These shares are to be
re-issued upon an increase to 125,000,000 in the number of authorized
shares of common stock.

17. SUBSEQUENT EVENTS

A. ACQUISITIONS

By 1999, it was apparent to Company management that the level of sales
was not sufficient to sustain the Company as a going concern without
significant growth in revenue and profitability, and that there would
need to be a substantial increase in the Company's business volume and
product availability to support future growth. Accordingly, during
1999, Company management began a process of seeking significant
acquisitions of, and new

-51-

relationships with, several companies with complementary products or
functional services. The Company entered into a global merger
agreement that involved the Company combining with several other
companies. The proposed merger transaction was not consummated and
the parties withdrew from the overall transaction. The Company
believes that the focus of the Company's management on the
acquisitions had an adverse impact upon the Company's financial
condition and results of operations.

As a result, the Company experienced a severe shortage of capital
during 2000, which had the effect of substantially curtailing the
Company's operating activities, to the point that the Company had
essentially become inactive from an operating point of view. In order
to restart the Company's business operations, the Company has sought to
acquire businesses that focus on children's toys and educational
products.

In February 2001, the Company completed the acquisition of the DaMert
Company, which is focused on the production, marketing and distribution
of toys and gifts. The DaMert Company was merged with, and into, DaMert
Toys and Games, Inc., an Arizona corporation and wholly-owned
subsidiary of the Company. The Company's business currently consists
solely of the business of the DaMert Company, which is now conducted
through DaMert Toys and Games, Inc. As a result of consummating the
DaMert acquisition, the Company expects to generate substantially more
revenue in fiscal 2001, compared to fiscal 2000. The Company also
expects to incur substantially greater expenses in 2001, compared to
the prior year. The Company expects to incur negative cash flow for the
foreseeable future.

In connection with the Acquisition of DaMert, the Company paid the
following consideration: (i) 2,000,000 shares of common stock; (ii) a
promissory note in the approximate amount of $129,000 to an officer of
DaMert (in replacement of a note in the same amount owed by DaMert to
such officer); (iii) the issuance of an aggregate of 3,000,000 shares
of common stock to Amresco Financial I, L.P. ("Amresco") (a creditor of
DaMert), of which 1,500,000 shares were issued at the closing of the
acquisition and the remaining 1,500,000 shares are issuable by June 15,
2001; (iv) $220,000 in cash was paid (at or before the closing) to
Amresco in satisfaction of certain indebtedness of DaMert; and (v) a
promissory note, personally guaranteed by Vincent Goett, the
Company's Chairman, in the principal amount of $1,300,000 was issued
to Amresco (the note is payable as follows: $180,000 by April 15,
2001 (paid); $400,000 by May 15, 2001; and the remaining $720,000 is
payable beginning August 15, 2001 in five equal quarterly
installments of $116,667 and one final quarterly installment of
$136,666). The note is secured by certain assets of the Company and
DaMert. In addition, the Company issued options to purchase an
aggregate of 1,000,000 shares of the Company's common stock, at a
price of $.001 per share, to Fred and Gail DaMert (who are employees
of DaMert).

In the event that the quoted price of the Company's common stock
does not average at least $1.00 per share over a twenty-day trading
period during the 24 months following the closing, the Company will
be obligated to pay Fred and Gail DaMert in the aggregate (in cash or
stock at their option) an amount equal to the excess of $1 million
over the product of 1 million and the highest 20 day average quoted
price of the common stock during the 24 months following the closing.

-52-

B. RELATED PARTY BORROWINGS

In January 2001, the Company's Board of Directors authorized the
Company to borrow up to $1,300,000 from an affiliate of Vincent
Goett, Palmilla Ventures Limited Partnership ("Palmilla Ventures")
(which borrowings may consist of Mr. Goett's personal guarantee of
Company obligations), of which approximately $312,000 has already
been advanced to or for the benefit of the Company. Of the aggregate
$312,000 advanced, approximately $31,000 has been advanced to or for
the benefit of Janex, approximately $61,000 has been advanced on
behalf of Janex to Futech as a down-payment on the $150,000 due at
closing of the asset purchase, and the remaining $220,000 was used
as a portion of the consideration given in connection with the
acquisition of the DaMert Company. The advances made by Palmilla
Ventures are payable on demand and bear interest at the rate of 10%
per annum. Such advances are secured by all the assets of the
Company and DaMert Toys and Games, Inc., the Company's wholly owned
subsidiary. If the Company defaults on its obligations under the
note, the secured party (or any assignee) would be able to force a
sale of the assets constituting the collateral to satisfy the debt.
As additional consideration for making the $1,300,000 loan to the
Company, the Company has agreed to issue Palmilla Ventures that
number of shares of common stock equal to approximately 19% of the
issued and outstanding common stock, on a fully-diluted basis, after
giving effect to certain specified transactions. Based on the amount
advanced to date (approximately $312,000 of the total $1.3 million),
the Company is obligated to issue Palmilla Ventures that number of
shares of common stock equal to approximately 4.6% of the issued and
outstanding common stock on a fully-diluted basis, after giving
effect to certain specified transactions. In addition, in connection
with the acquisition of DaMert, Vincent Goett personally guaranteed
approximately $1,300,000 of the obligation of the DaMert Company to
Amresco Financial I, L.P. (a creditor of DaMert). In consideration
of making this guarantee, the Company has agreed to issue Mr. Goett
(or his designee) that number of shares of common stock equal to
approximately 19% of the issued and outstanding common stock, on a
fully-diluted basis, after giving effect to certain specified
transactions. The issuance of the foregoing shares is subject to an
increase to 125,000,000 in the number of authorized and unissued
shares of our common stock.

C. STOCK OPTIONS

In February 2001, the Company granted Vincent Goett, its chairman,
immediately exercisable options to purchase 1,000,000 shares of
common stock at a price of $.001 per share. The options have since
been exercised.

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

As reported in the Company's Form 8-K dated February 25, 1999, the
Company engaged Ernst & Young, LLP as its independent auditor for the fiscal
year ending December 31, 1998, to replace the firm of BDO Seidman, LLP. The
decision to change auditors was made in the ordinary course of business.

The reports of BDO Seidman, LLP on the Company's financial statements
for 1996 and 1997 did not contain an adverse opinion or a disclaimer of opinion
and were not qualified as to uncertainty, audit scope, or accounting principles,
except as relating to the Company's ability to continue as a going concern.

-53-

In connection with the audits of the Company's financial statements for
each of the two fiscal years ended December 31, 1996 and 1997, there were no
disagreements with BDO Seidman, LLP on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of BDO Seidman, LLP would have caused
BDO Seidman, LLP to make references to the matter in their report.

As reported in the Company's Form 8-K dated April 28, 2000, the Company
engaged Abrams and Company, PC as its independent auditor and BDO McCabe Lo &
Co. as auditor for its subsidiary, Pro Gains Company Limited, for the fiscal
year ending December 31, 1999, in each case to replace Ernst & Young, LLP. The
decision to change auditors was made in the ordinary course of business.

The report of Ernst & Young, LLP on the Company's financial statements
for 1998 did not contain an adverse opinion or a disclaimer of opinion and were
not qualified as to uncertainty, audit scope, or accounting principles, except
as discussed in the following paragraph.

The report of Ernst & Young, LLP on the Company's financial statements
for the fiscal year ending December 31, 1998, indicates that recurring losses
and net working capital deficiency raise substantial doubt as to the Company's
ability to continue as a going concern. Although Management discusses, in a
footnote, its plans in regard to these matters, the financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

In connection with the audits of the Company's financial statements for
the fiscal year ended December 31, 1998, there were no disagreements with Ernst
& Young, LLP on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope and procedures which, if not resolved to
the satisfaction of Ernst & Young, LLP, would have caused Ernst & Young, LLP to
make references to the matter in their report.

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, 2000. Each of the Directors
will hold his office until the next annual meeting and until his successor is
duly elected and qualified. Each officer will hold his office until his
successor is duly elected and qualified or until his earlier resignation or
removal.

-54-

Name Age Title
------------------------ --- -----

Vincent W. Goett 37 Chairman of the Board
Daniel Lesnick 48 President, Chief Executive Officer, and
Director

VINCENT W. GOETT. Mr. Goett has served as Chairman of the Board and
Director of the Company since December 11, 1998, Chief Executive Officer from
December 1998 until October 2000, and as President from December 1998 until
August 2000. From September 1985 to August 1991, Mr. Goett was President of
Westplex, Inc., a company that effected major investments in commercial real
estate. From August 1991 to January 1994, Mr. Goett owned and operated Paradise
International, an investment business engaged in acquisition and joint venture
activities. Mr. Goett joined Futech Interactive Products, Inc. ("Futech") as its
Chief Operating Officer on January 5, 1994, and has served as Chairman and Chief
Executive Officer and Director of Futech since March 1995. Mr. Goett attended
Arizona State University, where he studied Business Management.

DANIEL LESNICK. Mr. Lesnick has been a Director of the Company since
August 29, 1997, Chief Operating Officer since January 1, 2000, President since
August, 2000 and Chief Executive Officer since October, 2000. Mr. Lesnick was
Executive Vice President and Chief Operating officer of the Company from August
4, 1997 to December 11, 1998. Prior to that time, Mr. Lesnick had been Executive
Vice President of Janex Corporation, a wholly owned subsidiary of the Company,
from October 6, 1993 to January 31, 1997, at which time he left Janex. 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.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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 with respect to the year ended
December 31, 2000 applicable

-55-

to the Company's executive officers, directors, and more than 10%
shareholders were complied with, except that each of Vincent Goett, the
Company's Chairman, and Dan Lesnick, the Company's President and Chief
Executive Officer, failed to file a Form 5 Annual Statement of Beneficial
Ownership of Securities.

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 three fiscal years ended December 31, 2000, to
the Chief Executive Officer and the other executive officers or key employees
whose total annual salary and bonus exceeded $100,000:

---------------------------------- --------- ---------------------------------------------------- ------------------------
ANNUAL COMPENSATION(1) LONG TERM
COMPENSATION
---------------------------------- --------- ---------------------------------------------------- ------------------------
OTHER AWARDS ALL
NAME & PRINCIPAL ANNUAL SECURITIES OTHER
POSITION YEAR SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
OPTIONS
(SHARES)
---------------------------------- --------- ------------ --------- ------------------ ----------------- -----------------

Vincent W. Goett 2000 $150,000 -- $213,206(2) 3,700,000 --
Chairman 1999 $100,000 -- -- -- --
1998 -- -- -- -- --

Daniel Lesnick 2000 $125,000 -- -- 200,000(3) --
President, Chief Executive 1999 $104,000 -- -- -- --
Officer, Director 1998 $104,000 -- -- -- --

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

(1) Compensation under Company employee benefit plans, to which all
employees of the Company are eligible, is not included in the table.

(2) During the Year ended December 31, 2000, Vincent Goett converted salary
and expenses due to him in the aggregate amount of $292,082, into an
aggregate 3,591,638 shares of common stock. The value of the

-56-

common stock, as quoted on the OTC Bulletin Board, issued exceeded
the dollar amount of salary and expenses converted by $213,206.

(3) In May 2000, Mr. Lesnick was granted options to purchase 300,000
shares. Such option was subsequently amended and reduced to 200,000
shares.

STOCK OPTION PLAN

In March 2000, the Company adopted the 2000 Combination Stock Option
Plan, as amended and restated in October, 2000 ("the Plan"). The Plan is to be
made available to employees of the Company and its subsidiaries (if any), and to
individuals whose services contribute to the growth and development of the
Company. Options to purchase up to 7,000,000 shares may be issued under the
Plan, and options may be awarded for up to ten (10) years.

The following table provides information concerning grants of options
to purchase the Company's Common Stock made during the fiscal year ended
December 31, 2000, to persons named in the Summary Compensation Table:

--------------------------------------------------------------------------------------------------------------------------
Option Grants in Last Fiscal Year
Individual Grants in Fiscal 2000
--------------------------------------------------------------------------------------------------------------------------
Market Price
Number of Securities % of Total Options Exercise of on Grant
Underlying Options Granted to Base Date
Name Granted Employees in Fiscal Year Price ($/sh) Expiration Date
--------------------- ---------------------- -------------------------- ---------------- ------------------ --------------

400,000 9.30% $.001 5/12/10 $.687
Vincent W. Goett 3,300,000 76.74% $.001 10/13/10 $.094
--------------------- ---------------------- -------------------------- ---------------- ------------------ --------------
Daniel Lesnick 200,000(1) 4.65% $.001 5/12/10 $.687
--------------------- ---------------------- -------------------------- ---------------- ------------------ --------------

(1) In May 2000, Mr. Lesnick was granted options to purchase 300,000
shares. Such option was subsequently amended and reduced to 200,000
shares.

The following table provides information concerning each exercise of
stock options during the fiscal year ended December 31, 2000, and the value of
unexercised options at December 31, 2000, to persons named in the Summary
Compensation Table:

Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values

---------------------- ------------------ ------------------- ---------------------------- -------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Shares Acquired Options at FY-End FY-End ($)
Name on Exercise (#) Value Realized ($) (Exercisable/Unexercisable) (Exercisable/Unexercisable)
---------------------- ------------------ ------------------- ---------------------------- -------------------------------

Vincent W. Goett 3,700,000 $581,300 0/0 -/-
---------------------- ------------------ ------------------- ---------------------------- -------------------------------
Daniel Lesnick 200,000(1) $137,200 0/0 -/-
---------------------- ------------------ ------------------- ---------------------------- -------------------------------

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EMPLOYMENT ARRANGEMENTS

As of December 31, 2000, the Company had not entered into employment
agreements with any of the named executive officers.

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

The following table sets forth information, as of April 5, 2000, 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:

Name and address of Shares Owned Percent
Beneficial Owners Beneficially of Class
-------------------- ------------ ---------

Security ownership of beneficial owners:

Vincent W. Goett 19,030,129(1) 66.91%(1)
6400 North 48th St.
Paradise Valley, AZ 85253

Daniel Lesnick 1,591,943(2) 8.26%(2)
564 Grant St.
Newtown, PA 18940

Les Friedland 2,389,157(2) (3) 11.91%(2)
615 Hope Road
Building One
Eatontown, NJ 07724

Howard W. & Helene Z. Moore 2,618,900(2) 12.78%(2)
2540 Hayesville Ave.
Henderson, NV 89052

Security ownership of management:

Vincent W. Goett 19,030,129(1)(2) 67.25%(2)

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Daniel Lesnick 1,591,943(2) 8.26%(2)

All Executive Officers and Directors
as a group (2 persons): 20,622,072(2) 68.37%(2)

(1) 533,000 shares held of record by Palmilla Ventures Limited Partnership,
over which Mr. Goett shares voting and investment control. 2,800,000
shares pledged by Vincent Goett and held of record by the Pledgee.
Includes the minimum 6,000,000 and 4,697,129 shares issuable to Mr.
Goett following an increase to 65,000,000 and 125,000,000,
respectively, in the number of authorized but unissued shares of common
stock. Also includes 5,000,000 shares of common stock issuable upon
conversion of 5,000,000 shares of the Company's convertible preferred
stock. Mr. Goett has waived his right to convert these shares of
preferred stock until the number of the Company's authorized but
unissued shares is increased. As described in Item 12, "Certain
Relationships and Related Transactions", Mr. Goett is currently
entitled to that additional number of shares of common stock equal to
approximately 23.6% of the outstanding common stock of the Company,
determined on a fully-diluted basis for certain specified transactions.
Accordingly, Mr. Goett's percentage ownership has been increased to
reflect these additional number of shares.

(2) Includes the minimum of 1,391,943, 1,989,157 and 2,618,900 shares of
common stock issuable to Messrs. Lesnick, Friedland and Mr. and Mrs.
Moore, respectively, following an increase to 65,000,000 in the number
of authorized but unissued shares of common stock of the Company. In
certain circumstances, additional shares of common stock may be
issuable to the foregoing persons. See Item 12: "Certain Relationships
and Related Transactions".

(3) Includes 200,000 shares of common stock committed for issuance to
Mr. Friedland.

For purposes of computing "Percent of Class" owned by each of the
foregoing persons, the number of issued and outstanding shares of common stock
has been increased with respect to each such person to reflect the aggregate
minimum of shares of common stock issuable to such person.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The Company has engaged the services of a manufacturer's 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 one of its largest customers, Toys R Us. The principal
owner and operator of LFA, Mr. Leslie Friedland, is a former President of Janex
and is the beneficial owner of approximately 11.91% of the Company's issued and
outstanding common stock as of April 5, 2001. 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%. Effective September, 2000, the commission rate was increased to
5%. 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

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was paid, or will be paid, $0 for the year ended December 31, 2000, $47,500
for the year ended December 31, 1999, and $65,154 for the year ended December
31, 1998.

In 1998, the Company obtained a line of credit for up to $400,000. At
December 31, 2001 the Company owed approximately $337,000 under this line of
credit. The Company's obligations under this facility are secured by all the
Company's assets and guaranteed by Dan Lesnick, our President, Les Friedland, a
former President who currently owns 10.91% of our outstanding common stock, and
Howard Moore, who currently owns 12.78% of our outstanding common stock. The
line of credit, which has been extended from time to time, is currently due
July 1, 2001.

In June 1999, the Company entered into a merger agreement ("Merger
Agreement") with, among other parties, Futech Interactive Products, Inc.
("Futech"), then the majority stockholder of the Company. Vincent Goett, the
Company's President and Chief Executive Officer, is President, Chief Executive
Officer and a major stockholder and creditor of Futech. The Company, Futech,
Trudy Corporation, DaMert Company and Fundex Games, Ltd. were going to combine
into a diversified children's product company that would design, develop and
distribute proprietary children's products, such as books, games, toys and
stationary. Effective as of December 1, 1999, the parties terminated the Merger
Agreement and all rights and obligations of the parties thereunder.

During 1998, Futech claims to have advanced an aggregate of
approximately $620,000 to the Company to fund the Company's operations. These
amounts were unsecured and non-interest bearing. During 1999, Futech claims to
have advanced approximately an additional $1 million to fund the Company's
operations. These amounts were also unsecured and non-interest bearing. At
December 31, 2000, Futech claims the Company owes it approximately $1.6 million.
We are currently reviewing the amount Futech claims we owe it, with a view to
determining the amount that is properly chargeable to us. In connection with the
planned acquisition of certain of Futech's assets (described below), such $1.6
million of indebtedness of the Company to Futech is to be discharged.

In January, 2000, the Company entered into a license agreement
("License Agreement") with Futech. Under the License Agreement, Futech granted
the Company an exclusive license of the technology related to the "Toynet"
system of interactive talking toys. The License Agreement may be terminated by
either party upon 60 days written notice, without penalty. The License Agreement
specifies a royalty rate of 10% for non-licensed product and 5% for licensed
product.

In February 2000, we entered into two asset purchase agreements, as
amended, with Futech, one to acquire all the assets of Futech (other than those
related to the website www.oKid.com), and the other to purchase the URL domain
name and related website, www.oKid.com, and the related assets.

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In June 2000, Futech filed for bankruptcy protection under Chapter 11
of the United States Bankruptcy Code. Following the filing of the bankruptcy
petition, on July 12, 2000, we entered into a new Purchase and Sale Agreement
with Futech (the "July Agreement"), which agreement superseded all then prior
agreements between us and Futech. This transaction was subject to, among other
conditions, approval of the Bankruptcy Court, which was initially denied on
August 18, 2000. Accordingly, we withdrew from the transactions contemplated by
the July Agreement, including the purchase of the assets of Futech.

We entered into a new asset purchase agreement with Futech,
effective as of October 23, 2000 (the "Futech Agreement"). In January 2001,
the U.S. Bankruptcy Court approved our purchase of certain Futech assets.
Under the Futech Agreement, as approved by the Bankruptcy Court, we have
agreed to acquire certain assets of Futech in exchange for the following
consideration: (i) an aggregate of approximately 23 million shares of our
common stock; (ii) the assumption of an aggregate of approximately $3 million
of indebtedness; and (iii) the payment of approximately $150,000 in cash, of
which approximately $61,000 has already been paid. Vincent Goett, our
Chairman, has indicated he intends to personally guarantee $2,000,000 of the
indebtedness being assumed. In addition, approximately $1.6 million of
indebtedness Futech claims we owe it would be discharged in connection with
the acquisition. The consummation of the transaction is subject to numerous
conditions, which may or may not be met, including an amendment of our
charter to increase the number of our authorized shares of common stock to at
least 125,000,000. There is no assurance that the Futech acquisition will be
completed. The Futech Agreement filed with this report is the form of
agreement submitted to the U.S. Bankruptcy Court. The terms and conditions of
the Futech asset purchase approved by the Bankruptcy Court, as described
above, are different than the terms and conditions set forth in the Futech
Agreement. We expect that the Court approved terms and conditions will be
memorialized in a writing prior to the closing.

On June 28, 2000, we issued 2,250,000 shares of unregistered common
stock to Vincent Goett, our Chairman and former President, in satisfaction of
accrued salary in the amount of $225,000, owed to Mr. Goett for fiscal 1999 and
the ten months ended October 31, 2000. On June 28, 2000, the closing price of
our common stock, as quoted on the OTC Bulletin Board, was $.156 per share.

On September 18, 2000, we agreed to issue 1,341,638 shares of our
unregistered common stock in satisfaction of expenses incurred on our behalf by
Vincent Goett, our Chairman and former President, in the amount of $67,082. On
September 18, 2000, the closing price of the common stock, as quoted on the OTC
Bulletin Board, was $.115 per share.

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In January 2001, our Board of Directors authorized us to borrow up
to $1,300,000 from an affiliate of Vincent Goett, Palmilla Ventures Limited
Partnership ("Palmilla Ventures") (which borrowings may include Mr. Goett's
personal guarantee of Company obligations), of which approximately $312,000
has already been advanced to or for the benefit of the Company. Of the
aggregate $312,000 advanced, approximately $31,000 has been advanced to or
for the benefit of Janex, approximately $61,000 has been advanced on behalf
of Janex to Futech as a down-payment on the $150,000 due at closing of the
asset purchase, and the remaining $220,000 were used as a portion of the
consideration given in connection with the acquisition of the DaMert Company.
The advances made by Palmilla Ventures are payable on demand and bear
interest at the rate of 10% per annum. Such advances are secured by all the
assets of the Company and DaMert Toys and Games, Inc., the Company's wholly
owned subsidiary. If the Company defaults on its obligations under the note,
the secured party (or any assignee) would be able to force a sale of the
assets constituting the collateral to satisfy the debt. As additional
consideration for making the $1,300,000 loan to the Company, we have agreed
to issue Palmilla Ventures that number of shares of common stock equal to
approximately 19% of our issued and outstanding common stock, on a
fully-diluted basis, after giving effect to certain specified transactions.
Based on the amount advanced to date (approximately $312,000 of the total
$1.3 million), we are obligated to issue Palmilla Ventures that number of
shares of common stock equal to approximately 4.6% of our issued and
outstanding common stock on a fully-diluted basis, after giving effect to
certain specified transactions. In addition, in connection with our
acquisition of DaMert, Vincent Goett personally guaranteed approximately
$1,300,000 of the obligation of the DaMert Company to Amresco Financial I,
L.P. (a creditor of DaMert). In consideration of making this guarantee, we
have agreed to issue Mr. Goett (or his designee) that number of shares of
common stock equal to approximately 19% of our issued and outstanding common
stock, on a fully-diluted basis, after giving effect to certain specified
transactions. The issuance of the foregoing shares is subject to an increase
to 125,000,000 in the number of authorized and unissued shares of our common
stock.

Because we did not have sufficient authorized but unissued shares of
common stock to execute our business and financial plans, in March 2000,
Palmilla Ventures agreed to surrender to us an aggregate of 10 million shares of
our common stock so that such shares could be restored to the status of
authorized but unissued shares of common stock. Of the aggregate 10 million
shares surrendered, 1,159,952 (6.0% of the outstanding common stock prior to
surrender) were being held for the benefit of Dan Lesnick, our then Chief
Operating Officer (now, our President) and a Director, 2,182,417 (11.4% of the
outstanding common stock prior to surrender) were being held for the benefit of
Mr. and Mrs. Howard Moore, and 1,657,631 (8.6% of the outstanding common stock
prior to surrender) were being held for the benefit of Mr. Les Friedland, a
former President.

Under this Agreement, as soon as possible following an increase to
65,000,000 in the number of our authorized but unissued shares, we will return
the 10 million shares surrendered and will issue the surrendering shareholders,
PRO RATA, based on the number of shares surrendered, an aggregate of 2 million
additional shares of common stock as compensation for surrendering their shares
to us.

-62-

In addition, if the price of our common stock is lower when the 10
million replacement shares are issued than it was on the date the shares were
surrendered, the surrendering shareholders will be issued additional shares, PRO
RATA, based on the number of shares surrendered, such that the total replacement
shares issued is equal in value on the replacement date to the value of the
shares surrendered on the date of surrender. For example, if the value of 10
million shares on the date of surrender was $15 Million and the market price of
the Company's common stock on the replacement date was $1.00, the surrendering
shareholders would be issued 15 million shares of common stock on the
replacement date to replace the $15 Million in value surrendered at the
surrender date. For purposes of this arrangement, the "price" of our common
stock is based on a five day trailing average closing price, as quoted on the
OTC Bulletin Board.

On March 9, 2000, the date of surrender of the 10 million shares, the
five day trailing average closing price of our common stock was $1.79, as quoted
on the OTC Bulletin Board. Based on the quoted price of the common stock, the
value of the 10 million shares surrendered was $17.9 million. On March 30, 2001,
the five day trailing average closing price of our common stock was $.088, as
quoted on the OTC Bulletin Board. If we were to replace, as of March 30, 2001,
the 10 million shares surrendered, we would be obligated to issue approximately
203.4 million shares of our common stock in replacement of the 10 million shares
originally surrendered.

In November, 2000, Palmilla Ventures surrendered to us an additional
4,697,129 shares of our common stock. These shares are to be re-issued upon an
increase to 125,000,000 in the number of our authorized shares.

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 Global Merger Agreement dated June 4, 1999 and incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K filed with the
Commission June 15, 1999. (1)

2.2 Termination Agreement dated as of December 1, 1999 relating to
Global Merger Agreement. (1)

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EXHIBIT
NUMBER DESCRIPTION

2.3 Termination, Release and Settlement Agreement dated December 1999.
(1)

2.4 Agreement for Purchase and Sale of Assets between Futech
Interactive Products, Inc. and the Company dated February 25, 2000,
as amended by the First Amendment thereto dated April 28, 2000.
(11)

2.5 Agreement for Purchase and Sale of oKid Assets between Futech
Interactive Products, Inc. and the Company dated February 25, 2000,
as amended by the First Amendment thereto dated April 28, 2000.
(11)

2.6 Letter withdrawing from the Agreement for Purchase and Sale of
Assets between the Company and Futech Interactive Products, Inc.,
dated July 12, 2000 ("Purchase Agreement") and Purchase Agreement.
(12)

2.7 Agreement for Purchase and Sale of Assets between Futech
Interactive Products, Inc. and the Company, dated as of October 23,
2000. (13)

2.8 Merger Agreement between, among others, the Company and DaMert
Company dated March 2000, as amended by the First Amendment thereto
dated May 10, 2000. (11)

2.9 Merger Agreement between, among others, the Company and DaMert
Company, dated November 9, 2000. (13)

3.1 Articles of Incorporation. (2)

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. (4)

3.6 Articles of Amendment to Articles of Incorporation, dated August
11, 1994 and filed on August 16, 1994. (5)

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EXHIBIT
NUMBER DESCRIPTION

4.1 Specimen Common Stock Certificate. (3)

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. (6)

10.26 Indemnification Agreement wherein the Company is indemnifying its
former accountants BDO Seidman, LLP for claims arising out of the
reissuance of the Company's 1997 financial statements. (7)

10.27 Letter Agreement between Palmilla Ventures Limited Partnership and
the Company dated March 9, 2000, as supplemented by a Letter
Agreement dated April 15, 2000. (11)

10.28 First Amendment of Option Agreement between the Company and Daniel
Lesnick dated May 12, 2000. (12)

10.30 Subscription Agreement between the Company and Vincent W. Goett,
dated as of June 28, 2000. (12)

10.32 Debt Conversion Agreement between the Company and Vincent W. Goett,
dated September 18, 2000. (13)

16 Letter of BDO Seidman, LLP. (8)

16.1 Letter of Ernst & Young, LLP. (9)

21 Subsidiaries of the Registrant.

99.1 Amended and Restated 2000 Combination Stock Option Plan. (10)

-65-

--------------------------------------------------------------------------------
(1) Filed as an Exhibit with the same exhibit number to the Company's Form
10-KSB for the year ended December 31, 1999 and incorporated by this
reference.

(2) 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.

(3) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form S-1 filed August 8, 1990.

(4) 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.

(5) Incorporated by reference to an exhibit to the Company's Registration
Statement filed with the Commission December 20, 1994.

(6) Incorporated by reference to an exhibit to the Company's Form 10-KSB
for the fiscal year ended December 31, 1993.

(7) Incorporated by reference to an exhibit to the Company's Form 10-K SB
for the year ended December 31, 1998.

(8) Incorporated by reference to Exhibit 16 to the Company's Form 8-K filed
with the Commission of March 10, 1999.

(9) Incorporated by reference to Exhibit 16 to the Company's Form 8-K filed
with the Commission on April 28, 2000.

(10) Incorporated by reference to Exhibit 99.1 to the Company's Form S-8
Registration Statement filed with the Commission on November 21, 2000.

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(11) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 2000.

(12) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 2000.

(13) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 2000.

(B) REPORTS ON FORM 8-K

The Company did not file a Current Report on Form 8-K during the
quarter ended December 31, 2000.

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SIGNATURES

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

Dated: April 14, 2001
JANEX INTERNATIONAL, INC.

By: /s/ Daniel Lesnick
------------------
Daniel Lesnick,
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/ Vincent Goett Chairman (director) April 14, 2001
---------------------------
Vincent Goett

/s/ Daniel Lesnick
--------------------------- President, Chief Executive April 14, 2001
Daniel Lesnick Officer and Director
(principal executive officer
and director)

-68-

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION

2.1 Global Merger Agreement dated June 4, 1999 and incorporated by
reference to Exhibit 2.1 to the Company's Form 8-K filed with the
Commission June 15, 1999. (1)

2.2 Termination Agreement dated as of December 1, 1999 relating to
Global Merger Agreement. (1)

2.3 Termination, Release and Settlement Agreement dated December 1999.
(1)

2.4 Agreement for Purchase and Sale of Assets between Futech
Interactive Products, Inc. and the Company dated February 25, 2000,
as amended by the First Amendment thereto dated April 28, 2000.
(11)

2.7 Agreement for Purchase and Sale of Assets between Futech
Interactive Products, Inc. and the Company, dated as of October 23,
2000. (13)

2.8 Merger Agreement between, among others, the Company and DaMert
Company dated March 2000, as amended by the First Amendment thereto
dated May 10, 2000. (11)

2.9 Merger Agreement between, among others, the Company and DaMert
Company, dated November 9, 2000. (13)

3.1 Articles of Incorporation. (2)

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

-69-

EXHIBIT
NUMBER DESCRIPTION

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. (4)

3.6 Articles of Amendment to Articles of Incorporation, dated August
11, 1994 and filed on August 16, 1994. (5)

4.1 Specimen Common Stock Certificate. (3)

10.26 Indemnification Agreement wherein the Company is indemnifying its
former accountants BDO Seidman, LLP for claims arising out of the
reissuance of the Company's 1997 financial statements. (7)

10.27 Letter Agreement between Palmilla Ventures Limited Partnership and
the Company dated March 9, 2000, as supplemented by a Letter
Agreement dated April 15, 2000. (11)

10.28 First Amendment of Option Agreement between the Company and Daniel
Lesnick dated May 12, 2000. (12)

10.30 Subscription Agreement between the Company and Vincent W. Goett,
dated as of June 28, 2000. (12)

10.32 Debt Conversion Agreement between the Company and Vincent W. Goett,
dated September 18, 2000. (13)

16 Letter of BDO Seidman, LLP. (8)

16.1 Letter of Ernst & Young, LLP. (9)

-70-

EXHIBIT
NUMBER DESCRIPTION

21 Subsidiaries of the Registrant.

99.1 Amended and Restated 2000 Combination Stock Option Plan. (10)

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

(1) Filed as an Exhibit with the same exhibit number to the Company's Form
10-KSB for the year ended December 31, 1999 and incorporated by this
reference.

(2) 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.

(3) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form S-1 filed August 8, 1990.

(4) 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.

(5) Incorporated by reference to an exhibit to the Company's Registration
Statement filed with the Commission December 20, 1994.

(6) Incorporated by reference to an exhibit to the Company's Form 10-KSB
for the fiscal year ended December 31, 1993.

(7) Incorporated by reference to an exhibit to the Company's Form 10-K SB
for the year ended December 31, 1998.

(8) Incorporated by reference to Exhibit 16 to the Company's Form 8-K filed
with the Commission of March 10, 1999.

-71-

(9) Incorporated by reference to Exhibit 16 to the Company's Form 8-K filed
with the Commission on April 28, 2000.

(10) Incorporated by reference to Exhibit 99.1 to the Company's Form S-8
Registration Statement filed with the Commission on November 21, 2000.

(11) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended March 31, 2000.

(12) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 2000.

(13) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 2000.

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