At Rumpus Toys' airy headquarters in New York, a Dalmatian and a toddler roam the rooms. Employees in their teens tap their feet to music while designing cartoon skits for the company's Web site. The Rumpus Road Rocket--a big school bus painted white with bright polka dots--brightens the streetscape.

At the center of this noisy upstart company is Larry Schwarz, a 29-year-old entrepreneur who has delighted children (and grossed out their parents) with such toys as Gus Gutz, a plaything whose organs can be pulled out of his mouth. "We create toys I want to play with," Schwarz said. "It's so much about fun--and that translates to kids."

His formula is working. The privately owned Rumpus has pushed its revenue from about $1 million in 1997 to about $15 million last year, according to industry estimates, with Internet sales becoming a fast-growing part of the business. FAO Schwarz, Noodle Kidoodle Inc. and online retailer eToys Inc. have stocked up on his playthings, which now include the popular Harry Hairball plush cat and the Wake Me Willy toy alarm clock.

This is the kind of success that has lately eluded some of the biggest toy corporations, which have watched a new generation of children spurn Barbies and action figures in favor of computer games, sporting goods and interactive toys.

And while Mattel Inc., Hasbro Inc. and Toys R Us Inc. struggle to cope with changing preferences, Rumpus and other specialty toy companies are nipping at their heels on the ground and in cyberspace, finding a place in the hearts of children and parents no longer interested in traditional playthings.

"For us, it's a major shift in the toy industry," said Cliff Annicelli, managing editor for Playthings Magazine. "Over the past five years, there definitely has been incredible growth in the specialty toy market."

There are no reliable estimates on the size of this niche, according to Annicelli and other industry officials. But it's clear that specialty chains are having an impact on the old-line toy companies, they said.

Janet Koerner, executive director of the American Specialty Toy Retailing Association, said her organization's membership has grown to about 880. Most of them say sales have been picking up, and a few of the mom-and-pop merchants are opening more stores.

"We have a lot of room for growth," Koerner said. "Parents are looking for products that have longevity."

The toy giants have been posting slim sales gains. But take a look at the smaller companies. Specialty toy retailer Noodle Kidoodle's revenue grew by 32 percent and Zany Brainy Inc.'s 37 percent in 1998. Sales at FAO Schwarz, a chain of more than 40 stores that sell hard-to-find toys in addition to the mainstays, grew 8.8 percent, to $197 million.

The success of these chains has in turn rewarded small manufacturers such as Rumpus, which have had a hard time breaking into Toys R Us.

Rumpus's Schwarz, for instance, recalls his experience calling on two buyers at Toys R Us before the industry's big fair in February 1997. "Both of the buyers were really nasty," he said.

According to Schwarz, one buyer proclaimed: "I don't like yours. I see a million toys a day."

Toys R Us officials did not return telephone calls.

Younger and smaller retailers seem to delight in discovering exciting toys, even if it means giving inexperienced manufacturers a few tips.

"There are a lot of small manufacturers . . . that started in their garages," said Stanley Greenman, chief executive of Noodle Kidoodle. "And we have helped them grow."

At FAO Schwarz, buyers looked at Rumpus Toys with skepticism but fell in love with the company's products.

"Rumpus is an example of something unique that we took a chance on," buyer Marnie Lawrence said. "We bought Gus Gutz; he went on Kathie Lee [Gifford's television show] and demand skyrocketed."

Today, Lawrence is pushing a huge Frisbee-like toy by small toymaker Good Stuff Inc. that she believes will be a big seller in 2000. "I'm really being aggressive about it this year," she said.

But even as the nation's economy continues its long-lasting boom, the corporate toy giants don't seem to be riding the wave. There have been no home-grown hits in recent years at Hasbro and Mattel. And the toy licensing business isn't what it used to be.

Hasbro, considered the stronger of the two toy-making companies, surprised some analysts in December when it said it would cut about 2,200 jobs, or about 19 percent of its work force.

In an attempt to drive sales, Mattel paid $3.8 billion for educational software maker Learning Co. in 1998 to get its hands on such toys as the Carmen Sandiego line. But the El Segundo, Calif., manufacturer revealed in November that Learning Co. would post a loss of $105 million in the third quarter of 1999, rather than the expected $50 million profit.

Mattel spokesman Glenn Bozarth said the company still sees a strong future with Learning Co.

"The merger with the Learning Co. has bought us addition expertise in software as well as new brands and characters," he said. "We look at it as diversifying our business line and being in the software business."

On the other end of the business, Toys R Us, once the nation's top toy retailer, has seen its star eclipsed by Wal-Mart Stores Inc. while a host of younger chains and online retailers poach on its territory. Perhaps the biggest insult to Toys R Us is that some smaller companies no longer feel the need to become a part of it.

Consider Ty Inc., maker of Beanie Babies. Toys R Us rejected it, and Ty turned to specialty retailers and never looked back.

"Once the Beanie Babies were a hit, I think there was a thumbing of their nose at Toys R Us," said Annicelli of Playthings Magazine. "It was 'You didn't pick our toys, so who needs you?' "

Sometimes success is the best revenge. Rumpus Toys' Schwarz ended up recruiting one of the Toys R Us buyers who had spurned his company.

"Now we're punishing him," he joked.