SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB

  X          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-----                      EXCHANGE ACT OF 1934 (FEE REQUIRED)

                   For the fiscal year ended December 31, 1997

            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
-----            SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                         Commission File Number: 0-22464

                                KOALA CORPORATION
                 (Name of Small Business Issuer in Its Charter)

           Colorado                                          84-1238908
           --------                                          ----------
(State of Other Jurisdiction of                           (I.R.S. Employer
Incorporation or Organization)                           Identification No.)


                       5031 South Ulster Street, Suite 300
                             Denver, Colorado 80237
                    (Address of Principal Executive Offices)

                                 (303) 770-3500
                                 --------------
                (Issuer's Telephone Number, Including Area Code)

       Securities Registered Under Section 12(b) of the Exchange Act: None

         Securities Registered under Section 12(g) of the Exchange Act:

                          Common Stock, $.10 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 past 12 months (or for such shorter
period  that the issuer was  required  to file such  reports),  and (2) has been
subject to such filing requirements for the past 90 days.

                                 _X_ Yes ___ 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 the  registrant's  knowledge,  in  definitive  proxy or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. _______

State the issuer's revenues for its most recent fiscal year:  $13,621,292

As of February 27, 1998, the aggregate  market value of the voting stock held by
nonaffiliates  of the issuer  computed by  reference to the last quoted price at
which such stock sold on such date as  reported  by the NASDAQ  National  Market
System was approximately $23,391,558.

As of February 27, 1998, there were outstanding 2,527,362 shares of the issuer's
Common Stock, $.10 par value.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  registrant's  Proxy  Statement  for its 1998 Annual  Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-KSB.

<PAGE>
                                     PART I


ITEM 1.   DESCRIPTION OF BUSINESS

This report  contains  forward-looking  statements  that  describe the Company's
business and the  expectations  of the Company and  management.  All statements,
other than statements of historical facts,  included in this report that address
activities,  events or developments that the Company expects,  believes, intends
or anticipates will or may occur in the future, are forward-looking  statements.
Forward-looking  statements are inherently  subject to risks and  uncertainties,
many of which cannot be predicted with accuracy and some of which might not even
be anticipated. Future events and actual results, financial and otherwise, could
differ materially from those set forth in or contemplated by the forward-looking
statements herein.  These risks and uncertainties  include,  but are not limited
to, the Company's reliance on the revenues from a major product,  the Koala Bear
Kare(R) Baby Changing Station,  which has generated a substantial  amount of the
Company's  revenues;  the uncertainties  associated with the introduction of new
products;  management  of growth,  including  the  ability to attract and retain
qualified employees; the ability to integrate its Delta Play acquisition and any
other  acquisition  that the Company may make and the costs associated with such
acquisitions;   dependence  on  Mark  Betker,   its  chief  executive   officer;
substantial  competition from larger companies with greater  financial and other
resources than the Company;  the success of its Koala Kare  marketing  strategy;
its dependence on suppliers for  manufacture  of some of its products;  currency
fluctuations   and  other  risks  associated  with  foreign  sales  and  foreign
operations; quarterly fluctuations in revenues, income and overhead expense; and
potential  products  liability  risk  associated  with its  existing  and future
products.


GENERAL

The Company is an  integrated  provider of  children's  protection  and activity
products  targeted  at  commercial   organizations  seeking  to  create  "family
friendly"  atmospheres  for their  patrons and  customers.  As more  parents are
taking their children with them on business and recreational outings, commercial
businesses have  recognized the value of attracting  these customers by offering
the Company's  products.  The  Company's  protection  and activity  products are
designed to assist parents in commercial  environments  with children ranging in
age from newborn infants to ten years old.

The Company is a leading  producer of infant diaper changing  stations and other
commercial  childcare,  child  protection  and  activity  products.  The Company
markets its products under the Koala Bear Kare(R) name. The Company  effectively
created the market for diaper  changing  stations.  The Koala Bear  Kare(R) Baby
Changing  Station,  introduced  in 1987, is installed in  approximately  300,000
public restrooms across the United States and in more than 50 countries.

The market for the  Company's  products has developed as a result of a number of
factors,  including  the steady  birthrate of  children.  As the number of "baby
boom" children of childbearing  age grew, the trend toward dining away from home
with children and the increased  emphasis by retail stores,  sports  facilities,
restaurants and other public facilities on marketing based upon customer service
rather than only upon product and price.  The Koala Bear  Kare(R) Baby  Changing
Station  is  perceived  as  an  affordable   method  for  such   enterprises  to
differentiate themselves from their competitors.  The Company believes, based in
large part on its success in marketing the Baby Changing Station, and in turn on
the success of its  commercial,  institutional  and  recreational  purchasers in
using the product to enhance their own image, that the customers and visitors of
such establishments have increasingly come to expect diaper changing stations as
a matter of course.

In August 1996,  the Company  relocated its offices and employees from St. Paul,
Minnesota to Denver,  Colorado and established a new manufacturing  relationship
with a Denver firm to manufacture  and assemble its child  protection  products.
Previously,  the  Company  assembled  its  own  products.  The  location  of the
Company's  offices  near the  contract  manufacturing  operation is an important
factor in  maintaining  the  Company's  high quality  standards  and  minimizing
product costs.


BUSINESS STRATEGY

The Company  believes that the Koala Bear Kare(R) Baby Changing  Station and its
other  products  have strong  brand name  recognition.  The  Company's  business
strategy  is  to  capitalize  on  its  strong  brand  name  recognition  through
maximizing the market  penetration for its Baby Changing Station and development
of new products  and to leverage its  distribution  channels by  acquisition  of
complementary  products.  This  strategy  will also  ensure  that the  Company`s
dependence  on revenues from the Baby  Changing  Stations  will be reduced.  The
following are the key elements of the Company's strategy:

                                       2
<PAGE>
         MAXIMIZE  MARKET  PENETRATION  OF THE BABY  CHANGING  STATION AND OTHER
         CHILD  PROTECTION  PRODUCTS.  Since its  October  1993  initial  public
         offering,  the Company has expanded  marketing  efforts  related to its
         Baby Changing Station and other child protection products.  The Company
         has  increased  its  presence  at  trade  shows  and has  expanded  its
         advertising  in trade  journals,  particularly  in more focused  market
         segments  and  geographical   areas.  It  has  expanded  its  marketing
         nationwide  and  internationally  through the creation of a distributor
         and dealer  network.  The Company  also is  marketing  its  products to
         national  accounts such as restaurant  chains and  franchises and child
         care centers, as well as other appropriate end-users.  The Company also
         has  increased  its  use of  direct  marketing  techniques  to  sell to
         customers  that  would not be  reached  by trade  shows,  journals  and
         distributors.

         EMPHASIZE PRODUCT ENHANCEMENT AND NEW PRODUCT DEVELOPMENT.  The Company
         has  an  active  product   development  and  enhancement   program  and
         continually  seeks to improve  its  products  and create  complementary
         products.

         ACQUIRE  COMPLEMENTARY  PRODUCTS.  The Company  intends to continue the
         acquisition  of new  products  which it  believes  it can market to its
         target market and dealer network.  In August 1994, the Company acquired
         molds and intellectual property rights associated with Booster Buddy(R)
         booster seats,  which are specially  designed and engineered for use by
         children in movie theaters,  auditoriums and similar settings. In March
         1996, the Company  acquired certain assets of Activities  Unlimited,  a
         privately held developer and distributor of commercial-use waiting room
         and  educational  activity  equipment for children.  In June 1997,  the
         Company  acquired  Delta Play,  Ltd.  ("Delta"),  a Vancouver,  British
         Columbia-based  provider of custom  themed  indoor and outdoor  modular
         children's  play equipment.  Primary  customers of Delta include family
         entertainment centers, fast food outlets and shopping malls.

PRODUCTS

The Company and its subsidiaries  operate in one industry segment  consisting of
manufacturing,  marketing,  selling and  distribution  of children's  protection
products,   activity  products  and  equipment  to  commercial  businesses.  The
Company's  umbrella of products can be broadly  categorized as child  protection
and care products, child activity products and soft modular play equipment.

Child Protection and Care Products.  The Company currently markets the following
products in this  category:  the Koala Bear Kare(R) Baby Changing  Station,  the
Koala Bear Kare(R) Child  Protection  Seat,  the Koala Bear Kare(R)  Infant Seat
Kradle,  the Booster Buddy(R) booster seat and the Koala Bear Kare(R) Highchair.
The Company also markets  disposable  sanitary  paper liners to be used with its
Baby Changing Stations.

All of these products,  except for the Infant Seat Kradle and the sanitary paper
liners,  are  constructed  out of durable  polyethylene  plastic  and are highly
resistant to accidental damage or vandalism.  The Infant Seat Kradle consists of
a metal frame with a nylon mesh cradle.

Child  Activity  Products  and  Systems.   The  Company  markets  the  following
children's activity products:  Koala Bear Kare(R) Block and Maze Activity Table,
Koala Bear Kare(R) Wonder Wall,  Koala Bear Kare(R)  Activity  Center Carpet and
other  manipulative  accessories.   These  products  are  designed  for  use  in
commercial  waiting areas of businesses such as auto dealers,  retail stores and
professional services. These products are solidly constructed to withstand heavy
use  and  include  hygienic  maintenance  features.   These  products  are  sold
individually  or are  included  in the Koala  Kare(R)  System.  The  Koala  Kare
System(R)  combines  selected  activity products with interactive video machines
and other  interactive  products to create a children's  activity setting at the
commercial  business  which  allows the parent to shop while their  children are
supervised in a safe, clean and child-friendly environment.

Child  Modular Play  Equipment.  The Company  markets  custom  themed indoor and
outdoor modular play equipment.  These play systems include  traditional modular
designed units with tunnels,  walkways,  ladders and ball pits. In addition, the
Company  creates and produces  custom  designs that  utilize  these  traditional
components  in a themed  environment,  such as a  pirate's  ship or jungle  tree
house. These products are designed for use in family entertainment centers, fast
food outlets and shopping malls. The play systems are permanently  installed and
are constructed to meet or exceed recognized safety standards.

MANUFACTURING

Child Protection and Care Products. A Denver-based plastic supplier manufactures
both the vertical and horizontal  models of the Koala Bear Kare(R) Baby Changing
Station and Child Protection  Seat.  Components are blow-molded to the Company's
specifications,  assembled and  delivered to the Company.  Prior to August 1996,
the Company  assembled  the  products.  The  Company  owns all molds used in the
manufacturing  process.  The Company  currently uses two plastics  suppliers and
believes that alternative sources of supply are available if necessary.

The Koala Bear Kare(R) Infant Seat Kradle,  the Koala Bear Kare(R) Highchair and
the Booster Buddy(R) booster seat are currently  manufactured for the Company by
outside jobbers.  The Company believes that other third-party  manufacturers are
readily available for these products.

                                       3

<PAGE>
A major manufacturer of paper products manufactures the bed liners used with the
Company's Baby Changing Station to the Company's specifications.

Child  Activity  Products.   An  independent   manufacturer  located  in  Denver
manufactures  most of  these  products  to the  Company's  specifications.  Some
products are purchased  from other outside  vendors.  The Company  believes that
alternative sources of supply are available if necessary.

Child  Modular  Play   Equipment.   Components  for  these  systems  are  either
manufactured to the Company's  specifications or purchased from outside vendors.
The Company  fabricates  certain  metal and  fiberglass  components at its plant
located near Vancouver,  British  Columbia,  Canada.  These  components are then
assembled  by the  Company at the plant.  The Company  owns the  majority of the
molds used in the manufacture of specialized components and the Company believes
there are alternative sources of supply for the manufacture of these components.

The Company performs all  administrative  functions  including order processing,
credit and  collection,  accounting,  inventory  control and  shipping  from the
Company's  facilities  in Denver,  Colorado  and  Vancouver,  British  Columbia,
Canada, except for container size orders of child protection products, which are
shipped directly from the manufacturers plant in Colorado.


SALES AND MARKETING

Child  Protection  and Care  Products.  The Company  markets  the Baby  Changing
Station and the other child protection products to commercial, institutional and
recreational establishments such as restaurants, shopping centers, retail stores
and  other  facilities  with  public  restrooms,  as a means  of  helping  these
establishments  enhance  their image with  customers  and  visitors by providing
facilities for changing diapers.

The United States  Department of Justice estimates that there are over 5,000,000
private   establishments   which  constitute  public   accommodations   such  as
restaurants,  retail  stores and shopping  centers,  many of which are potential
purchasers of the Company's  products.  The Company has not estimated the number
of restrooms in such  facilities.  This  estimate  does not include  commercial,
government,  or  religious  facilities  such  as  office  buildings,  factories,
churches, or government buildings, some of which are also potential purchasers.

The  Company  emphasizes  the  ability of a business  that  purchases  its child
protection and care products to differentiate  themselves from their competitors
by providing an added level of service to their  customers and  visitors.  Since
the Company began marketing its Baby Changing Station,  the expectations of such
purchasers'  customers  and  visitors  have  evolved such that the presence of a
diaper  changing  station like the Koala Bear Kare(R) Baby Changing  Station has
now  increasingly  come to be expected and those  establishments  without diaper
changing stations are perceived as lacking a necessary service.  Therefore,  the
Company  believes  that its Baby Changing  Station  provides  purchasers  with a
competitive advantage over their competition who do not offer such a service.

The Company  believes that it has achieved  widespread brand name recognition of
its products,  and its "Koala Bear Kare(R)"  trademarks  have been  important in
marketing the Company's products.  Each of the Company's products marketed under
this  trademark  prominently  displays a blue and white  sticker with one of the
Company's trademarks.

The  Company's  products  are  represented  in all 50 states with  higher  sales
concentrations in more heavily  populated  states.  The Company also markets its
products in foreign  countries and estimates  that  approximately  83 percent of
sales during the most recent year were domestic and 17 percent were foreign.

The Company's marketing strategy has consisted primarily of advertising in trade
journals,  attendance  and  display at various  trade  shows,  and other  direct
marketing techniques. The Company believes it has been successful in maintaining
a high profile and obtaining as much publicity as possible by providing  members
of the press,  particularly those affiliated with appropriate trade journals and
those  attending  trade shows  where the Company  displays  its  products,  with
packages  of   information   consisting   of  prior   articles,   brochures  and
descriptions,  and other  marketing  material.  The  Company has  increased  its
marketing  budget,  in an effort to  increase  sales of its  products to a wider
target market. The Company also has increased its use of direct sales techniques
to sell to  customers  that would not be reached by trade  shows,  journals  and
distributors.

Historically, most sales have been generated by trade journal advertising, trade
show  attendance  or  direct  marketing  techniques  with  little  or no  direct
solicitation  by the Company or its dealers.  Although the Company has appointed
dealers  to sell the  Company's  products,  most  dealers  are not  granted  any
exclusive  rights for products or territory.  Dealer sales have  accounted for a
minority of the Company's domestic sales and a majority of the Company's foreign
sales.  In 1997,  the Company  increased its emphasis on domestic  dealer sales,
adding  more  than  200  new  manufacturers   sales  agents  and  over  800  new
distributors.
                                       4
<PAGE>
The Company  intends to continue its  marketing  efforts  aimed at trade journal
advertising,  trade show attendance,  and direct mailings.  The Company plans to
focus on more  defined  market  segments  and  geographic  regions.  The Company
intends to continue to increase  sales to  distributors,  especially  those with
defined  markets.  In  addition,  the  Company  plans to  continue  its focus on
national accounts.

Child  Activity  Products.  The  Company  markets  these  products  domestically
primarily  through direct sales to commercial  customers using various marketing
techniques.   The  Company   also   markets   directly  to  national   accounts.
International sales are through dealers. These products are marketed and sold in
conjunction with the Company's child protection and care products.

Child Modular Play  Equipment.  The Company  markets and sells its custom indoor
and outdoor modular play equipment through the use of trade journal advertising,
trade show attendance and  manufacturer's  sales agents.  To enhance the sale of
its units,  the Company  utilizes  design  engineers  to provide  unique  themed
designs to the customer.


COMPETITION

Child  Protection  and Care  Products.  The Company plans to expand this product
area through the  attraction of additional  dealers and through  acquisition  of
complementary  products.  The  Company  is  not  aware  of any  other  companies
marketing diaper changing  stations intended for the commercial market that have
a greater  market  share than the  Company.  The  Company is aware of five other
companies,  two based in Minnesota, one based in Ohio, one based in Illinois and
one based in New Jersey,  marketing  products  that  directly  compete  with the
Company's Koala Bear Kare(R) Baby Changing  Station and Child  Protection  Seat.
The Company believes that each of such  competitors has a substantially  smaller
market share than the Company.  The Company competes with such competitors based
principally on the basis of brand name recognition,  price, quality and customer
service.  The Company  believes that its Koala Bear Kare(R)  products have brand
name  recognition  that  provides  the Company  with a  significant  competitive
advantage.

In 1996,  a large  manufacturer  of consumer  products,  commenced  marketing of
products that compete with the Company's Baby Changing  Stations.  Although this
competitor has not materially affected the Company to date, it has substantially
greater financial and marketing  resources than the Company.  There are a number
of well-known  manufacturers of consumer child safety  equipment,  furniture and
other juvenile products which are substantially  larger and better financed than
the Company.  Such companies have not introduced or marketed  products  directly
competing with the Koala Bear Kare(R) Baby Changing  Station or Child Protection
Seat.  Although the Company  believes that its products will continue to compete
effectively with such other  competitors,  such  manufacturers  could reduce the
Company's  margins and/or market share.  Conversely,  the Company  believes that
such  competition  could benefit the Company through  expansion of the Company's
markets as a result of  increased  customer  awareness  of the types of products
sold by the Company.

Child Activity Products.  Competition in the children's activity product area is
mainly from small companies that make similar products.  The Company competes in
this market on the basis of product uniqueness, product quality and service.

Child Modular Play  Equipment.  Competition  in indoor and outdoor  modular play
equipment is primarily from two larger companies and several smaller  companies.
The Company  competes in this  market on the basis of quality and  service.  The
Company has been able to differentiate  itself from its competitors by providing
a custom themed unit designed to meet the unique needs of the customer.


PATENTS AND TRADEMARKS

Although the Company holds patents  related to certain  aspects of its products,
the Company does not believe that such patents  provide  significant  protection
against competitors and potential  competitors whose products compete and likely
would compete with the Company without infringing upon the Company's patents.

The Company has registered various  trademarks,  including the "Koala Bear Kare"
name and several  variations of the Koala Bear Kare(R) picture which is featured
on the Company's  products,  and believes that such  trademarks are important in
assuring  recognition of the Company's  products.  The Company believes that the
various Koala Bear Kare(R)  trademarks  are widely  recognized.  The Company has
also  registered  the  trademark  "Booster  Buddy" and the  registration  of the
trademark "Delta Play" is currently being sought.

                                       5
<PAGE>
REGULATION

The  Company's  operations  are  not  subject  to  any  significant   government
regulations other than those regulations applicable to businesses generally. The
Company is aware of several  jurisdictions which have adopted or are considering
adopting regulations requiring parity between men's and women's restrooms in the
installation of diaper changing stations. The number of jurisdictions which have
adopted  such  regulations  is minimal  and the Company is unable to assess what
impact, if any, such or similar regulations would have on the Company's sales.

The Company may, in the future,  market its current  products or other  products
developed or acquired by it directly to consumers. If so, the Company's products
would then be subject to the provisions of the Federal  Consumer  Product Safety
Act and the  Federal  Hazardous  Substances  Act (the  "Acts")  and  regulations
promulgated   thereunder.   The  Acts  authorize  the  Consumer  Product  Safety
Commission  (the  "CPSC") to protect the public from  products  which  present a
substantial risk of injury. The CPSC can require the repurchase or recall by the
manufacturer  of products  which are found to be  defective  and impose fines or
penalties on the manufacturer.  Similar laws exist in some states and cities and
in other countries in which the Company may market such products.

The Company's  operations in the United States do not involve  manufacturing  or
activities   that  would   subject  it  to  laws  and   regulations   concerning
environmental  issues.  The  Company's  assembly  plant  in  Vancouver,  British
Columbia does perform light fabrication  activities  utilizing paint,  metal and
fiberglass.  The Company has obtained  the  necessary  permits to conduct  these
activities, and the Company believes that they have been conducted in compliance
with Canadian environmental laws and regulations.

EMPLOYEES

The Company had approximately 90 full-time  employees at December 31, 1997, with
30  located  in the United  States  and 60  located  in  Canada.  The  Company's
employees are not covered by any collective  bargaining  agreements.  Management
believes that relations with its employees are excellent.

FOREIGN OPERATIONS

The Company  acquired the assets of Delta,  a Canadian based provider of modular
play equipment,  in June 1997. The Company  created a foreign  subsidiary to own
and operate this business.  The subsidiary's sales,  marketing,  administrative,
manufacturing  and distribution  functions are  decentralized.  The President of
Delta reports to the Chief Executive Officer of the Company. Strategic planning,
market  development  and  resource  allocation  are  the  responsibility  of the
President in conjunction with the Company's Chief Executive Officer. The Company
believes  that there is no  greater  known  significant  risk  attendant  to the
business  conducted  by the  foreign  subsidiary  than to that of the  Company's
domestic operations.

ITEM 2.    DESCRIPTION OF PROPERTIES

The Company leases, from an unrelated party, approximately 15,000 square feet in
Denver, Colorado for its distribution operations.  The lease expires on July 31,
2001. The rent is approximately  $6,100 per month, plus operating expenses.  The
Company also leases approximately 1,100 square feet of office space in Metairie,
Louisiana  for the direct sales  operations  of the  division  selling the child
activity  products.  The rent was  approximately  $1,125  per  month in 1996 and
increased to $1,148 per month in January  1997.  This lease expired in February,
1998 and the Company is currently  making  monthly rental  payments.  In January
1998, the Company leased offices containing  approximately  1,000 square feet to
serve as its corporate headquarters.  The rent is approximately $1,000 per month
plus operating expenses. This lease expires on December 31, 2000.

The Company conducts the operations of Delta from a 28,000 square foot plant and
office facility located in Surrey,  British  Columbia,  Canada.  The facility is
leased from an unrelated  party . The rent is  approximately  $11,000 per month.
The lease  expires in June 1998,  and has renewal  provisions  at the  Company's
election.

ITEM 3.    LEGAL PROCEEDINGS

The Company currently is not involved in any material legal proceedings.

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

There were no matters which were submitted to a vote of security  holders during
the fourth quarter of the fiscal year ended December 31, 1997.

                                       6
<PAGE>
                                     PART II

ITEM 5.    MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


The Common Stock of the Company trades on the Nasdaq  National  Market under the
symbol KARE. The following table sets forth, for the periods indicated, the high
and low sales prices for the Company's  Common Stock for each quarter within the
last  two  fiscal  years  as  reported  by  Nasdaq.   These  quotations  reflect
inter-dealer prices, without retail markup,  markdown or commissions and may not
represent actual transactions.

                                                             SALES PRICE
                                                             -----------

                                                         LOW            HIGH
                                                         ---            ----
      YEAR ENDED DECEMBER 31, 1996

      First quarter............................        $10 5/8         $19 1/4

      Second quarter...........................        $16 3/8         $19 1/8

      Third quarter............................        $13 3/4         $21

      Fourth quarter...........................        $12 1/4         $17

      YEAR ENDED DECEMBER 31, 1997

      First quarter............................        $10 3/4         $14 3/8

      Second quarter...........................        $ 9 7/8         $16 3/8

      Third quarter............................        $14 5/8         $17 1/4

      Fourth quarter...........................        $14 1/8         $18 1/4



As of February 27, 1998, there were approximately 103 shareholders of record.

The Company has never paid cash  dividends on its Common  Stock.  The  Company's
credit agreement  contains a restrictive  covenant that prohibits the payment of
dividends without the lender's consent.  The Company currently intends to retain
any earnings for use in its operations  and does not anticipate  payment of cash
dividends in the foreseeable future.

Recent Sales of Unregistered Securities

Effective  June  1,  1997,   the  Company   acquired  the  assets  of  Delta  in
consideration  for the payment of  $4,180,609 in cash and the issuance of 40,000
shares of its Common  Stock.  The Common  Stock was issued to one  sophisticated
purchaser  in  reliance  upon the  exemption  provided  by  Section  4(2) of the
Securities Act of 1933.


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

INTRODUCTION

Over the past two years the Company has experienced  consistent  growth in sales
and pre-tax profits. Sales have increased from $8,938,232 in 1996 to $13,621,292
in 1997,  while  pre-tax  profits  have  increased  from  $2,539,722  in 1996 to
$3,776,609 in 1997.  Cash provided by operating  activities  has increased  over
this same period from $1,323,426 in 1996 to $3,535,712 in 1997. Cash provided by
operating  activities  has been and will be used by the Company for expansion of
its marketing and product lines and for acquisitions. See "Liquidity and Capital
Resources" below.

                                       7
<PAGE>
COMPONENTS OF REVENUE AND EXPENSES

The  Company's  revenues are derived  primarily  from the sale of Baby  Changing
Stations,  disposable  sanitary  liners for the Baby  Changing  Stations,  Child
Protection  Seats,  Infant Seat Kradles,  and Booster Buddy seats which are sold
primarily to commercial,  institutional,  and  recreational  facilities  such as
shopping centers,  retail establishments,  restaurants,  sports and recreational
facilities,  and other public  buildings.  In addition,  in  furtherance  of the
Company's  "Koala  Kare"  strategy,  the  Company  acquired  certain  assets  of
Activities Unlimited,  a developer and distributor of commercial-use  children's
activities  products  at the end of first  quarter  1996 and  Delta,  a  leading
provider of custom indoor and outdoor modular play  equipment,  in June 1997. It
is  anticipated  that  revenues from these  companies  will reduce the Company's
dependency on the sale of Baby Changing Stations.

Cost of sales  consists of  components  manufactured  for the Company and direct
labor and manufacturing  overhead incurred by the Company.  All major components
are manufactured by outside  vendors.  Direct labor and  manufacturing  overhead
relate to the assembly of the products. Beginning in September 1996, the Company
sub-contracted out the assembly operations for the Baby Changing Stations, Child
Protection Seats and Infant Seat Kradles.

Selling, general, and administrative expenses consist primarily of executive and
office  salaries,   related  payroll  taxes,  advertising  expenses,  and  other
miscellaneous selling expenses.


RESULTS OF OPERATIONS

The following table outlines  certain items in the Company's income statement as
a percentage of sales for each of the last two years:

                                          Years Ended December 31,
                                          ------------------------

                                         1996                1997
                                         ----                ----

Sales............................         100%                100%

Cost of sales....................          36                  41
                                       ------              ------
Gross profit.....................          64                  59

Selling, general and
administrative expenses..........          32                  31
                                       ------              ------

Operating income.................          32                  28

Other (income) expense...........           2                  (1)

Amortization of intangibles......           1                   2
                                      -------             -------
Income before provision for
income taxes.....................          29                  27

Provision for income taxes.......           8                   9
                                            -                   -

Net income.......................          21%                 18%
                                           ===                 ===


1997 COMPARED TO 1996

Sales  increased 52% from $8,938,282 in 1996 to $13,621,292 in 1997, as a result
of continued growth in demand for the Company's products. A portion of the sales
revenue  increase  resulted  from  sales by Delta,  reflecting  seven  months of
operating activities following the Delta acquisition. In addition, the sales and
marketing  strategy  implemented  by the  Company  for its other  product  lines
contributed  to  the  additional  sales  revenue  for  1997  and  also  provided
diversification of the Company's product line. The Company continued to increase
sales and marketing efforts through focused marketing  programs and the addition
of sales personnel during 1997 and 1996.

Gross profit  increased to $8,092,750  (59% of sales)  compared with  $5,696,954
(64% of sales) for 1996. The gross profit percentage for 1997 decreased from the
gross profit percentage achieved for 1996 primarily because of the lower margins
                                       8


<PAGE>
achieved on Delta's sales along with higher sales of products to distributors at
reduced  margins.  These gross profit  reductions  were offset somewhat by gross
margin  improvements from price reductions achieved in the cost of raw materials
and component parts and the change to sub-contracted assembly in September 1996.

Selling,  general and  administrative  expenses for 1997 increased to $4,230,988
(31% of sales) from $2,892,095 (32% of sales) for the same period in 1996. Sales
and marketing expenses increased by $1,084,455 during 1997. These cost increases
were due to the  inclusion of Delta and the higher  level of sales  achieved and
included costs for various marketing programs, commissions paid to manufacturers
sales  representatives  and salaries of the sales and marketing  personnel added
during 1997. These costs were incurred in furtherance of the Company's sales and
marketing  strategies  discussed  above.  General  and  administrative  expenses
increased  $254,438  during 1997 over 1996.  The  relatively  small  increase in
general and administrative  expense compared to the sales increase was primarily
the  result  of  cost  reductions  obtained  by  more  efficient  management  of
collections,  accounting  and investor  relations  activities.  The Company also
incurred  approximately  $100,000  in  non-recurring  personnel  recruiting  and
employee  relocation  costs in  1996.  These  cost  reductions  offset  the cost
increases  resulting  from the inclusion of Delta's  general and  administrative
costs for seven months of 1997.

Net  income for 1997 was  $2,435,912  (18% of sales)  compared  to net income of
$1,895,540  (21% of sales) for 1996,  representing an increase of 29%. The lower
margins obtained from Delta's sales contributed to the decrease in net income as
a  percentage  of sales.  Net  income  per share  (assuming  dilution)  for 1997
increased  28% to $0.96 per  share  compared  to $0.75  per share for 1996.  The
percentage  increase  in net  income  per  share  was  slightly  lower  than the
percentage increase in net income primarily as a result of an increase in common
stock equivalents of 24,883 shares.

1996 COMPARED TO 1995

Sales  increased 37% from  $6,537,440 in 1995 to $8,938,282 in 1996, as a result
of  continued  growth in demand for the  Company's  products.  Sales of the Baby
Changing Station accounted for the majority of the total growth in the Company's
sales.  Sales of the Booster Buddy, Child Protection Seat and Infant Seat Kradle
increased during the year and the addition of the Activities  Unlimited  product
line  beginning in April 1996  contributed  to the increase in total sales.  The
sales and marketing  strategy  implemented by the Company  resulted in increased
sales and net  income as  discussed  below,  as well as  diversification  of the
Company's product line.

Gross profit  increased to $5,696,954 (64% of sales) during 1996,  compared with
$3,985,764 (61% of sales) for 1995. The increase in gross profit as a percentage
of sales was due to price  reductions  achieved in the cost of raw materials and
component parts and the change to sub-contracted assembly in September 1996. The
Company  no longer  maintains  a  manufacturing  facility  for  assembly  of its
products thus reducing overhead costs.

Selling,  general and administrative expenses were $2,892,095 (32% of sales) for
1996 compared with  $1,543,495 (24% of sales) for 1995, an 87% increase in terms
of actual dollars;  however, the percentage relationship to sales increased only
9  percentage   points  because  the  Company  has  increased  sales  without  a
proportionate  increase in general and administrative  overhead. The increase in
selling,  general,  and  administrative  expenses is primarily  due to increased
sales, marketing and administrative  salaries, which includes the salary for the
chief  financial  officer  added in 1996, as well as  approximately  $100,000 in
non-recurring  personnel  recruiting and employee relocation costs. In addition,
the Company experienced  increased  advertising costs and other costs associated
with sales and marketing including travel,  telephone,  consultants and contract
labor. The Company also increased its use of outside sales representatives which
resulted in an increase in sales commissions. The Company made the investment in
these increased levels of selling,  general and administrative expenses in order
to support the expanded sales and marketing strategies begun in 1995.

Net  income for 1996 was  $1,895,540  (21% of sales)  compared  to net income of
$1,574,696  (24% of sales)  for  1995,  representing  an  increase  of 20%.  The
additional  expenses  incurred as discussed above resulted in the decline in net
income as a percent of sales;  however, the Company believes that the investment
in these areas will result in continued sales growth in the future.

LIQUIDITY AND CAPITAL RESOURCES

The Company  finances its business  activities  primarily  from cash provided by
operating  activities.  Cash provided by operating  activities for 1996 and 1997
was $1,323,426 and $3,535,712, respectively. The Company completed 1996 and 1997
with  working  capital of  $5,643,924  and  $3,945,110,  respectively,  and cash
balances  of  $3,442,601   and   $1,832,677  at  December  31,  1996  and  1997,
respectively.

The Company has  historically  utilized  its  operating  cash flow to expand the
Company's marketing activities, for product development, and acquisitions of new
products and  companies as well as for working  capital  purposes.  As discussed
above, in June 1997 the Company utilized $4,634,802 in cash generated during the
first six months of 1997 and existing cash reserves to purchase  certain  assets
of Delta.  This is the principal  reason for the decrease in working capital and
cash balances at December 31, 1997.

In  anticipation  of the impact of the Delta  acquisition  on cash  reserves and
working capital, the Company obtained a $2.0 million line of credit from a bank.
Management  expects to utilize the credit facility  periodically  for short-term
                                       9

<PAGE>
working capital needs and for short-term financing of future  acquisitions.  The
interest  rate on amounts  borrowed  under the line of credit  ranges from LIBOR
plus 2.25% to LIBOR plus  2.75%.  There were no  borrowings  against the line of
credit as of December 31, 1997.

The Company has developed a plan to make its  information  technology  ready for
the year  2000 and  believes  that its  critical  data  processing  systems  are
currently ready for the year 2000. Although the Company has not initiated formal
communications with all of its significant  suppliers and customers to determine
the extent to which the  Company's  interface  systems are  vulnerable  to those
third  parties'  failure  to make their own  systems  Year 2000  compliant,  the
Company does not foresee any significant problems with this issue.

INCOME TAXES

During 1997, the Company's  effective tax rate  normalized to an overall rate of
35.5% for  combined  state,  federal and foreign  corporate  income  taxes.  The
Company  will file a Canadian  corporate  income tax  return  with an  effective
income tax rate of 38.9%. However, the Company will receive a foreign tax credit
against its domestic state and federal corporate income tax liability.
Future effective tax rates are expected to be approximately 36%.

The Company's effective tax rate declined in 1996 compared to prior years due to
the  Company's  move to  Colorado,  which has lower state  income tax rates than
Minnesota.  The  Company  also  realized a tax  benefit  from the tax  deduction
generated by the exercise of non-qualified  stock options by a former officer of
the Company, resulting in an overall effective tax rate of 25%.

NEW ACCOUNTING STANDARDS

SFAS No. 128, EARNINGS PER SHARE, was issued in February 1997 and was adopted by
the  Company  effective  for  1997.  Earnings  per share  amounts  for 1996 were
restated in  accordance  with the  provisions of SFAS No. 128. See Note 1 to the
Financial Statements.

On June 30, 1997, the FASB issued SFAS No. 130, REPORTING  COMPREHENSIVE INCOME.
This  statement  requires  companies  to classify  items of other  comprehensive
income by their  nature in a financial  statement  and  display the  accumulated
balance of other  comprehensive  income  separately  from retained  earnings and
additional  paid-in  capital in the equity  section of a statement  of financial
position,  and is effective  for the Company's  fiscal year ending  December 31,
1998.  Management  intends to comply with the  disclosure  requirements  of this
statement.

The FASB issued SFAS No. 131,  DISCLOSURE  ABOUT  SEGMENTS OF AN ENTERPRISE  AND
RELATED  INFORMATION,  on June 30, 1997. This statement  establishes  additional
standards for segment reporting in the financial statements and is effective for
the Company's fiscal year ended December 31, 1998.  Management intends to comply
with the  disclosure  requirements  of this  statement and does not anticipate a
material impact on the results of operations of each segment.

ITEM 7.    FINANCIAL STATEMENTS

See Financial Statements beginning on page F-1.

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

The  firm  of  Blanski  Peter  Kronlage  & Zoch,  P.C.  acted  as the  Company's
independent auditors for the fiscal year ended December 31, 1996. In April 1997,
the  Company's  Board of Directors  retained  Ernst & Young LLP as the Company's
independent  public  accountants  and replaced the  Company's  former  auditors,
Blanski Peter Kronlage & Zoch, P.C. There were no disagreements  with the former
auditors  on  any  matter  of  accounting  principles  or  practices,  financial
statement  disclosure  or  auditing  scope  or  procedure  with  respect  to the
Company's financial statements for the fiscal year ended December 31, 1996 or up
through the time of replacement  which, if not resolved to the former  auditors'
satisfaction,  would have caused them to make reference to the subject matter of
the  disagreement  in connection  with their report.  Prior to retaining Ernst &
Young LLP,  the  Company  had not  consulted  with  Ernst & Young LLP  regarding
accounting principles.
                                       10
<PAGE>
                                    PART III


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

The information  required by Item 9 is  incorporated  herein by reference to the
Company's  proxy  statement for its 1998 Annual Meeting of  Shareholders,  which
will be filed with  Securities  and Exchange  Commission  within 120 days of the
Company's fiscal year ended December 31, 1997.


ITEM 10. EXECUTIVE COMPENSATION

The information  required by Item 10 is incorporated  herein by reference to the
Company's  proxy  statement for its 1998 Annual Meeting of  Shareholders,  which
will be filed with  Securities  and Exchange  Commission  within 120 days of the
Company's fiscal year ended December 31, 1997.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information  required by Item 11 is incorporated  herein by reference to the
Company's  proxy  statement for its 1998 Annual Meeting of  Shareholders,  which
will be filed with  Securities  and Exchange  Commission  within 120 days of the
Company's fiscal year ended December 31, 1997.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information  required by Item 12 is incorporated  herein by reference to the
Company's  proxy  statement for its 1998 Annual Meeting of  Shareholders,  which
will be filed with  Securities  and Exchange  Commission  within 120 days of the
Company's fiscal year ended December 31, 1997.

                                       11
<PAGE>
ITEM 13.     EXHIBITS AND REPORTS ON FORM 8-K

     (a)        Exhibits.
     3.1        Articles of Incorporation of Koala Corporation.(1)
     3.2        Bylaws of Koala Corporation.(1)
     4.1        Specimen Common Stock Certificate.(1)
     10.1       Omitted.
     10.2       Incentive Stock Option Plan dated August 19, 1993.(1)
     10.3       Omitted.
     10.4       Nondisclosure and Noncompetition Agreement between Koala
                Corporation and Jeff H. Hilger dated as of July 12, 1993.(1)
     10.5       Omitted.
     10.6       Nondisclosure and Noncompetition Agreement between Koala
                Corporation and Robert Dainty dated as of July 12, 1993.(1)
     10.7       Nondisclosure and Noncompetition Agreement between Koala
                Corporation and James P. Galarneault dated as of July 12,
                 1993.(1)
     10.8       Omitted.
     10.9       Omitted.
     10.10      Koala  Corporation  1995 Stock Option Plan.(2) 10.11 Industrial
                Lease dated August 1, 1996 between Buckhead
                Industrial Properties, Inc. and Koala Corporation. (3)
     10.12      Agreement for Sale and Purchase of Assets dated June 23, 1997
                between Delta Play, Ltd, et al and Koala Corporation. (4)
     10.13      Registration Rights Agreement dated June 23, 1997 between
                Delta Play, Ltd, and Koala Corporation. (5)
     21.1*      Subsidiaries.
     23.1*      Independent Auditors' Consent of Ernst & Young LLP.
     23.2*      Independent Auditors' Consent of Blanski Peter Kronlage & 
                Zoch, P.A.
     27.1*      1997 Financial Data Schedule.
     27.2*      1996 Financial Data Schedule, restated.   
             ------------------------------------------------------------------
         *       Filed herewith.
           (1) Incorporated  by  reference  to the  same  exhibit  number
               included in the Company's  Registration  Statement on Form
               SB-2, Registration No. 33-68482C.
           (2) Incorporated   by  reference  to  Exhibit   10.10  of  the
               Company's  Form  10-KSB  for the year ended  December  31, 1995.
           (3) Incorporated by reference to Exhibit 10.11 of the Company's Form 
               10-KSB for the year ended December 31, 1996.
           (4) Incorporated by reference to Exhibit 2.1 of the Company's Form
               8-K filed on July 8, 1997.  
           (5) Incorporated  by reference to
               Exhibit 4.1 of the Company's Form 8-K filed on July 8, 1997.

     (b) Reports on Form 8-K.
                   None.
  
                                       12
<PAGE>
                                   SIGNATURES

In accordance  with Section 13 of the  Securities  and Exchange Act of 1934, the
registrant  caused  this report on Form 10-KSB to be signed on its behalf by the
undersigned, thereunto duly authorized.

                           KOALA CORPORATION

Date:    March 27, 1998       By:   /s/ Mark A. Betker
         --------------             -------------------
                                    Mark A. Betker, Chairman,
                                    Chief Executive Officer and President

Date:    March 27, 1998       By:   /s/ Jeffrey L. Vigil
         --------------             ---------------------
                                    Vice President of Finance and Administration
                                    (Principal Financial and Accounting Officer)


In accordance  with the Exchange Act, this report on Form 10-KSB has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated:

         Signature                      Title                         Date

/s/ Mark A. Betker            Chairman, Chief Executive Officer   March 27, 1998
---------------------------   and President (Principal Executive
Mark A. Betker                Officer)and Director

/s/ Michael C. Franson        Director                            March 27, 1998
---------------------------  
Michael C. Franson

/s/ Thomas W. Gamel           Director                            March 27, 1998
---------------------------
Thomas W. Gamel

/s/ John T. Pfannenstein      Director                            March 27, 1998
---------------------------
John T. Pfannenstein

/s/ Ellen Robinson            Director 
---------------------------                                       March 27, 1998
Ellen Robinson


                                       13
<PAGE>

                                KOALA CORPORATION
                        CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED DECEMBER 31, 1997 AND 1996

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                        Page

Independent Auditor's Reports                                            F-2

Consolidated Balance Sheets                                              F-3

Consolidated Statements of Income                                        F-4

Consolidated Statements of Changes in Shareholders' Equity               F-5

Consolidated Statements of Cash Flows                                    F-6

Notes to Consolidated Financial Statements                               F-7



                                       F-1
<PAGE>


SHAREHOLDERS AND
BOARD OF DIRECTORS
KOALA CORPORATION
DENVER, COLORADO

                         REPORT OF INDEPENDENT AUDITORS

We have audited the accompanying  balance sheet of KOALA CORPORATION (a Colorado
corporation)  as of December  31,  1996,  and the related  statement  of income,
changes in shareholders'  equity,  and cash flows for the year then ended. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position of KOALA  CORPORATION,  as of
December 31, 1996,  and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.

BLANSKI PETER KRONLAGE & ZOCH, P.A.

Minneapolis, Minnesota

February 12, 1997





SHAREHOLDERS AND
BOARD OF DIRECTORS
KOALA CORPORATION
DENVER, COLORADO

                         REPORT OF INDEPENDENT AUDITORS

We have audited the accompanying consolidated balance sheet of KOALA CORPORATION
(a Colorado  corporation) as of December 31, 1997, and the related  consolidated
statements of income,  changes in shareholders'  equity,  and cash flows for the
year then  ended.  These  financial  statements  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audit.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the consolidated financial position of KOALA CORPORATION,
at December 31, 1997,  and the  consolidated  results of its  operations and its
cash  flows for the year then  ended,  in  conformity  with  generally  accepted
accounting principles.



                                                               ERNST & YOUNG LLP
Denver, Colorado

February 10, 1998


                                       F-2
<PAGE>
KOALA CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS


                                                                       December 31       December 31
                                                                           1997             1996
                                                                           ----             ----
                             ASSETS
                           
<S>                                                                   <C>             <C>         
Current Assets
  Cash and cash equivalents .......................................   $  1,832,677    $  3,442,601
  Accounts receivable, trade ( less allowance for doubtful accounts
     of $45,703 in 1997 and $30,000 in 1996)                             2,212,802       1,656,515
  Refundable income taxes .........................................         74,523         338,200
  Inventories .....................................................      1,103,355         443,680
  Prepaid expenses ................................................        416,120          82,460
  Deferred income taxes ...........................................         14,314          10,900
                                                                        ----------      ----------
 Total current assets .............................................      5,653,791       5,974,356
                                                                        ----------      ----------
Property and equipment ............................................      1,561,324         863,285
 Less accumulated depreciation and amortization....................        322,616         165,496
                                                                        ----------      ----------
                                                                         1,238,708         697,789
                                                                        ----------      ----------
Other Assets:
  Intangibles (net of accumulated amortization
  of $496,221 in 1997 and 295,360 in 1996) ........................      8,064,301       3,679,057
                                                                        ----------      ----------
                                                                         8,064,301       3,679,057
                                                                        ----------      ----------
                                                                      $ 14,956,800    $ 10,351,202
                                                                      ============    ============

  LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
  Accounts payable ................................................   $  1,312,518    $    273,511
  Accrued expenses and income taxes ...............................        396,163          56,921
                                                                        ----------      ----------
                                                                                         
     Total current liabilities ....................................      1,708,681         330,432
                                                                        ----------      ----------

Deferred income taxes .............................................        398,047         242,200
                                                                        ----------      ----------
                                                                                       
Commitments and contingencies (Notes 3 and 4)

Shareholders' Equity:
  Preferred stock, no par value; 1,000,000 shares authorized;
     issued and outstanding - none                                            ---            ---
  Common stock, $.10 par value; 10,000,000 shares authorized;
     issued and outstanding - 2,527,362 in 1997 - 2,481,260 in 1996        252,736         248,126
  Additional paid-in capital ......................................      5,307,988       4,651,884
  Equity adjustment from foreign currency translation                      (25,124)           --
  Retained earnings ...............................................      7,314,472       4,878,560
                                                                         ---------       ---------
                                                                        12,850,072       9,778,570
                                                                        ----------       ---------
                                                                      $ 14,956,800    $ 10,351,202
                                                                      ============    ============
</TABLE>
                 See notes to consolidated financial statements

                                       F-3
<PAGE>
KOALA CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME

                                                                      Years ended December 31,
                                                                      1997                  1996
                                                                  -----------            ----------


<S>                                                               <C>                    <C>       
Sales                                                             $13,621,292            $8,938,282
Cost of sales                                                       5,528,542             3,241,328
                                                                    ---------             ---------
Gross profit                                                        8,092,750             5,696,954

Selling, general and administrative expenses                        4,230,988             2,892,095
                                                                    ---------             ---------

Income from operations                                              3,861,762             2,804,859
                                                                    ---------             ---------
Other (income) expense:
  Interest income                                                    (115,708)             (129,463)
                                                             
  Relocation expenses                                                    ---                288,923
                                   
  Amortization of intangibles                                         200,861               105,677
                                                                    ---------             ---------
                                                                       85,153               265,137
                                                                    ---------             ---------
Income before income taxes                                          3,776,609             2,539,722
Provision for income taxes                                          1,340,697               644,182
                                                                    ---------             ---------
                                                         
Net income                                                         $2,435,912            $1,895,540
                                                                   ==========            ==========

Net income per share                                                    $0.97                 $0.78
                                                                   ==========            ==========

Weighted average shares outstanding                                 2,503,654             2,431,016
                                                                   ==========            ==========

Net income per share - assuming dilution                                $0.96                 $0.75
                                                                   ==========            ==========
Weighted average shares outstanding - assuming dilution             2,548,148             2,523,265
                                                                   ==========            ==========
</TABLE>



                 See notes to consolidated financial statements

                                       F-4
<PAGE>
KOALA CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

                                                                                        Equity
                                                                                      Adjustment
                                                                       Additional    From Foreign
                                               Common Stock             Paid-In        Currency      Retained
                                          Shares          Amount        Capital      Translation     Earnings        Total
                                          ------          ------        -------      -----------     --------        -----
<S>                                      <C>          <C>            <C>            <C>            <C>           <C>        
Balance, December 31, 1995 .........     2,399,312    $   239,931    $ 4,639,179    $      --      $ 2,983,020   $ 7,862,130
Issuance of common stock, exercise
  of options and warrants (cashless)        81,948          8,195         (8,195)                                      --
Issuance of 2,200 warrants .........                                      20,900                                      20,900
Net income .........................                                                                 1,895,540     1,895,540
                                         ---------     ----------     ----------      ---------      ---------     ---------
Balance, December 31, 1996 .........     2,481,260        248,126      4,651,884                     4,878,560     9,778,570
                                                                                                                
Issuance of common stock for
 acquisition of Delta Play, Ltd. ...        40,000          4,000        596,000                                     600,000
Issuance of common stock for
 exercise of warrants ..............         6,102            610         60,104                                      60,714
Translation adjustment .............                                                    (25,124)                     (25,124)
Net income .........................                                                                 2,435,912     2,435,912
                                         ---------    -----------    -----------    -----------      ---------    ----------
Balance, December 31, 1997 .........     2,527,362    $   252,736    $ 5,307,988    ($   25,124)   $ 7,314,472   $12,850,072
                                         =========    ===========    ===========    ===========    ===========   ===========
</TABLE>

                 See notes to consolidated financial statements

                                      F-5
<PAGE>
KOALA CORPORATION
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                         Years ended December 31,
                                                                        1997                  1996
                                                                     ---------             ---------


<S>                                                                 <C>                   <C>       
Cash flows from operating activities:
  Net income                                                        $2,435,912            $1,895,540
  Adjustments to reconcile net income to
    net cash provided by operating activities:
      Depreciation                                                     163,133                83,148
      Amortization                                                     200,861               105,677
      Loss on disposal of property and equipment                          --                  31,796
      Deferred income taxes                                            152,433               (18,852)

      (Increase) decrease in assets:
         Accounts receivable, trade                                   (416,618)             (683,191)
         Refundable income taxes                                       263,677              (172,815)
         Inventories                                                  (106,791)              (80,410)
         Prepaid expenses                                             (313,293)              (35,942)
      Increase (decrease) in liabilities:
         Accounts payable                                              818,509               177,492
         Accrued expenses                                              157,125                20,983
         Accrued income taxes                                          180,764                 --    
                                                                     ---------             ---------          
                                                                           
Net cash provided by operating activities                            3,535,712             1,323,426
                                                                     ---------             ---------

Cash flows from investing activities:
  Payments for capital expenditures                                  (520,321)             (367,264)
  Purchase of Activities Unlimited, LLC                                  --                (501,188)
  Purchase of Delta Play, Ltd., net of cash acquired               (4,634,802)                 --     
  Payments for patents and intangibles                                (21,730)               (6,503)
                                                                   ----------           ----------- 
Net cash used by investing activities                              (5,176,853)             (874,955)
                                                                   ----------           ----------- 

Cash flows from financing activities:
 Proceeds from exercise of common stock warrants                       39,633                 --
                                                                  -----------           -----------        
                                                                      
Net cash provided by financing activities                              39,633                 --    
                                                                  -----------           -----------            

Effect of exchange rate changes on cash                                (8,416)                 --

Net (decrease) increase in cash                                    (1,609,924)              448,471

Cash at beginning of year                                           3,442,601             2,994,130
                                                                    ---------             ---------
Cash at end of year                                                $1,832,677            $3,442,601
                                                                   ==========            ==========
</TABLE>



                 See notes to consolidated financial statements

                                       F-6
<PAGE>
                                KOALA CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED DECEMBER 31, 1997 AND 1996


1.       Summary of significant accounting policies:

         Nature of operations:

         Koala Corporation and its wholly owned  subsidiaries (the "Company") is
         engaged in  developing,  designing,  manufacturing,  distributing,  and
         marketing infant and child  protection  products,  children's  activity
         furniture and children's play equipment for  commercial,  institutional
         and recreational  establishments.  Its products include diaper changing
         stations,  child protection seats, infant seat cradles, a child booster
         seat, block and wire maze activity tables and custom indoor and outdoor
         modular play systems.

         Principles of consolidation:

         The  consolidated  financial  statements  include the accounts of Koala
         Corporation  and  all  subsidiaries.   All  significant   inter-company
         accounts and transactions  have been eliminated in  consolidation.  The
         operations  of  Delta  Play,  Ltd.  are  included  in the  accompanying
         financial  statements  from June 1,  1997,  the  effective  date of its
         acquisition. See note 10 below.

         Relocation:

         The Company  completed the relocation of its executive offices from St.
         Paul,  Minnesota to Denver,  Colorado during the third quarter of 1996.
         Total  relocation  costs were $289,000.  The Company also established a
         new  manufacturing  relationship  with a Denver firm to manufacture and
         assemble  its  products.  Previously,  the  Company  assembled  its own
         products.

         Use of estimates:

         Management  uses  estimates  and  assumptions  in  preparing  financial
         statements in accordance with generally accepted accounting principles.
         Those estimates and assumptions  affect the reported  amounts of assets
         and liabilities,  the disclosure of contingent  assets and liabilities,
         and the reported  revenue and expenses.  Actual results could vary from
         the estimates that were used.

         Cash and cash equivalents:

         Cash and  cash  equivalents  include  cash on  hand,  demand  deposits,
         savings accounts,  and short-term  investments with original maturities
         of three months or less. Cash and cash  equivalents  include  financial
         instruments that potentially  subject the Company to a concentration of
         credit risk. The Company places its cash and temporary cash investments
         with high  credit  quality  institutions.  At  times,  cash held in the
         Company's  primary bank may be in excess of the FDIC  insurance  limit.
         Cash in money market mutual funds is not federally insured. The Company
         performs periodic  evaluations of the relative credit standing of these
         financial institutions. As of December 31, 1997 and 1996, cash and cash
         equivalents approximate fair value and consisted of the following:

                                                     1997                1996
                                                     -----               ----
       Cash in primary banking institution        $ 863,084          $ 459,364
       Cash in money market mutual funds            969,593          2,983,237
                                                  ---------          ---------
                                                $ 1,832,677        $ 3,442,601
                                                ===========        ===========

         Inventories:

         Inventories  are  stated  at the  lower  of  first-in,  first-out  cost
         (including manufacturing overhead applied to finished goods) or market.
         As of  December  31,  1997  and  1996,  inventories  consisted  of  the
         following:

                                      F-7
<PAGE>
1.       Summary of significant accounting policies (continued):

                                                    1997               1996
                                                    ----               ----
                  Raw materials                 $  605,066          $  62,879
                  Finished goods                   498,289            380,801
                                                 ---------          ---------
                                                $1,103,355          $ 443,680
                                                ===========         =========

         Property and equipment:

         Property and  equipment is stated at the lower of  depreciated  cost or
         net realizable  value.  Depreciation and amortization is being provided
         on the  straight-line  method over the  estimated  useful  lives of the
         assets.  The  following  is a schedule  of  estimated  useful  lives of
         property and equipment:

                  Furniture and fixtures                     7 years
                  Tooling and molds                       6-10 years
                  Shop and office equipment               3-10 years

         Intangibles:

         Acquisition  intangibles  represent  the  excess  of  the  cost  of the
         companies  acquired over the fair value of their net assets at the date
         of acquisition. Acquisition intangible costs are being amortized on the
         straight-line method using an estimated useful life of up to 40 years.

         Costs of obtaining patents and trademarks are capitalized and amortized
         on the  straight-line  basis over 17 years for patents and 20 years for
         trademarks once approval is granted.  Costs are expensed if approval is
         denied.

         Revenue recognition:

         The Company recognizes revenues at the time its products are shipped.

         Research and development costs:

         Research  and  development  costs  are  expensed  when  incurred.   The
         Company's  research and development  costs were not significant in 1997
         or 1996.

         Advertising costs:

         Advertising costs are expensed when incurred.  Advertising  expense for
         the periods ended  December 31, 1997 and 1996 was $405,178 and $728,528
         respectively.  Prepaid  advertising costs at December 31, 1997 and 1996
         were  $35,724  and  $29,508,  respectively,  and  consist  of  costs of
         advertising which have not taken place.

         Income taxes:

         The  Company  provides  for  deferred  taxes on  temporary  differences
         arising  from  assets and  liabilities  whose bases are  different  for
         financial reporting and state, federal and foreign income tax purposes.
         The differences  relate primarily to depreciable and amortizable assets
         and the allowance for uncollectible accounts.

         The Company does not provide US income taxes on the unremitted earnings
         of its foreign  subsidiary  ($290,337 at December 31, 1997) because the
         Company  intends to  reinvest  such  unremitted  earnings.  Where it is
         contemplated earnings may be remitted from the foreign subsidiary,  the
         credit for foreign  taxes  already paid  generally  offsets  applicable
         federal income taxes.

         Net income per share:

         In 1997, the Financial  Accounting Standards Board issued Statement No.
         128,  Earnings per Share.  Statement  128 replaced the  calculation  of
         primary  and fully  diluted  earnings  per share with basic and diluted
         earnings per share.  Unlike primary earnings per share,  basic earnings
         per share  excludes  any  dilutive  effects of  options,  warrants  and
         convertible  securities.  Diluted earnings per share is very similar to
         the previously  reported fully diluted earnings per share. All earnings
         per share  amounts  for all  periods  were  restated  to conform to the
         Statement 128 requirements.

                                      F-8
<PAGE>
1.       Summary of significant accounting policies (continued):


         There is no difference  between after tax earnings for  calculation  of
         basic  earnings  per share  versus  diluted  earnings  per  share.  The
         reconciliation of the weighted average shares  outstanding for purposes
         of calculating  basic  earnings per share versus  diluted  earnings per
         share is as follows:

                                                       1997             1996
                                                       ----             ----
                  Weighted average shares
                  outstanding for basic
                  earnings per share                2,503,654        2,431,016

                  Effect of dilutive securities:
                     Employee stock options            39,666           79,448
                     Warrants                           4,828           12,801
                                                    ---------        ---------
                                                      
                  Dilutive potential common shares     44,494           92,249
                                                    ---------        ---------
                                                              
                  Weighted average shares
                  outstanding for diluted
                  earnings per share                2,548,148        2,523,265
                                                    =========        =========


         Foreign Currency Translation:

         The financial  statements of the Company's  subsidiary  located outside
         the  United  States  are  measured  using  the  local  currency  as the
         functional  currency.  Assets and  liabilities  of this  subsidiary are
         translated  at the rates of  exchange at the  balance  sheet date.  The
         resultant  translation  adjustments  are included in equity  adjustment
         from   foreign   currency   translation,   a  separate   component   of
         shareholders'  equity.  Income  and  expense  items are  translated  at
         average  rates of  exchange.  Gains  and  losses  on  foreign  currency
         transactions of these subsidiaries are included in net earnings.

         Geographic Area Data:

         The Company  operates in one principal  industry  segment:  the design,
         manufacture  and sale of children's  protection and activity  products.
         The  Company's  products  are  sold  primarily  to the  commercial  and
         governmental  markets.  Geographically,  sales,  operating  income  and
         identifiable  assets  for  non-domestic  entities  for the  year  ended
         December   31,  1997  were   $3,189,800,   $439,000   and   $1,931,400,
         respectively.  There were no  material  amounts  of sales or  transfers
         among geographic areas during 1997.

2.       Credit Facility:

         The Company  obtained a $2.0 million  unsecured  line of credit in June
         1997.  The line of credit may be used for  short-term  working  capital
         needs  and  future  acquisitions.  There  are no  compensating  balance
         requirements and the credit facility requires compliance with financial
         loan covenants related to debt levels compared to annualized cash flows
         from operations. The credit facility terminates on June 24, 1998. There
         were no amounts  outstanding  under the credit  facility as of December
         31, 1997.

3.       Commitments and contingencies:

         Operating lease:

         The Company has entered into operating leases for facilities located in
         Denver, Colorado, New Orleans,  Louisiana and Surrey, British Columbia,
         Canada.

         The lease terms vary and run through July 31, 2001. All leases call for
         monthly  base  rents,  with the  Company  responsible  for its share of
         common building operating costs, payable on a monthly basis.

         Facilities  rent  expense was  $187,719  and  $85,146 for years  ending
         December 31, 1997 and 1996, respectively. Total minimum operating lease
         commitments for the years ending December 31 are:

                                      F-9
<PAGE>
3.       Commitments and contingencies (continued):


                Year Ended December 31,                      Amount
                -----------------------                      ------

                          1998                              $ 122,841
                          1999                                 85,440
                          2000                                 85,440
                          2001                                 42,931
                                                            ---------
                                                            $ 336,652
                                                            =========


         Warranties:

         The Company provides a replacement guarantee for one year from purchase
         protecting against damage from natural disasters or vandalism,  subject
         to a $100 deductible. The Company also provides a five year warranty on
         parts and labor  covering any defects in  workmanship.  The Company has
         experienced  minimal  returns and  warranty  claims;  therefore,  as of
         December 31, 1997 and 1996, no accrual has been made for future claims.

4.       Stock options and warrants:

         Options:

         The Company adopted a Stock Option Plan (1993 Plan) in August 1993. The
         1993 Plan  provides  that  options to purchase up to 100,000  shares of
         common  stock may be  granted.  The  Company  adopted a second  plan in
         November  1995 (1995 Plan) which  provides that  additional  options to
         purchase  up to  400,000  shares of common  stock may be  granted.  The
         exercise  price of each  option  is equal  to the  market  price of the
         Company's stock on the date of grant.  The option term varies,  as well
         as the vesting periods, at the discretion of the Board of Directors.

         The Company  applies APB Opinion 25 in  accounting  for its stock based
         compensation  plans.   Accordingly,   no  compensation  cost  has  been
         recognized  for the plan in 1997 and 1996. Had  compensation  cost been
         determined  on the basis of fair value  pursuant to FASB  Statement No.
         123,  net income and  earnings  per share would have been  presented as
         follows:



       Net income                               1997                    1996
       ----------                               ----                    ----

            As reported                      $ 2,435,912             $ 1,895,540
                                             ===========             ===========

            Pro forma (FASB 123)             $ 2,259,337             $ 1,713,373
                                             ===========             ===========

       Basic earnings per share

            As reported                           $ .97                    $ .78
                                             ==========               ==========

            Pro forma (FASB 123)                  $ .90                    $ .70
                                             ==========               ==========

       Diluted earnings per share

            As reported                           $ .96                    $ .75
                                             ==========               ==========

            Pro forma (FASB 123)                  $ .89                    $ .68
                                             ==========               ==========


                                      F-10
<PAGE>
4.       Stock options and warrants (continued):

         The fair value of each option  granted is  estimated  on the grant date
         using the Black-Scholes  Model. The following  assumptions were made in
         estimating fair value:

                Assumption                          1997              1996
                ----------                          ----             -----

                Dividend yield                      0.00%             0.00%
                Risk-free interest rate
                   5 year                           5.71%             5.38%
                   2 year                             -               5.18%
                Expected life                      5 years        2 to 5 years
                Expected volatility                38.70%            30.47%


         Following is a summary of the status of the plans during 1997 and 1996:

                                                Number of     Weighted Average
                                                 Shares        Exercise Price
                                                 ------        --------------
           Outstanding 12/31/95                 347,500           $10.18

               Surrendered - 1996               (46,783)           $7.94
               Exercised - 1996                 (50,717)           $7.93
                                                --------

           Outstanding 12/31/96                 250,000           $11.25

               Granted - 1997                    33,000           $13.54
                                                 ------

           Outstanding 12/31/97                 283,000           $11.52
                                                =======


In 1997, no options were exercised.  In 1996, 46,783 options were exercised in a
cashless exercise; 50,717 shares were issued.

                                                     1997           1996
                                                     ----           ----

        Options exercisable                        103,000         50,000
                                                   =======         ======

        Weighted average fair value  of
        options granted during the year             $ 5.76         $ 0.00
                                                    ======         ======


         A summary of the status of fixed  options  outstanding  at December 31,
1997 is as follows:

                           Outstanding Options               Exercisable Options
              -------------------------------------------    -------------------
                               Weighted
                                Average         Weighted                Weighted
                               Remaining        Average                  Average
                              Contractual       Exercise                Exercise
    Price        Number          Life            Price        Number      Price
    -----        ------          ----            -----        ------      -----

 $ 9.25 to
    $11.25       151,000       8.0 years         $9.92        61,000      $9.92

 $13.00 to
    $15.00       132,000       8.5 years        $13.34        52,000     $13.24

                                      F-11
<PAGE>
4.       Stock options and warrants (continued):


         The Company acquired  Activities  Unlimited in March 1996. A portion of
         the purchase  price is in the form of options to purchase  common stock
         of the  Company.  Options  are  granted to the  sellers  of  Activities
         Unlimited based on operations  during the first two years following the
         closing of the acquisition  (March 1997 and 1998).  Options to purchase
         1,000  shares  will  be  granted  for  each  $25,000  of  product  line
         contribution, will be fully vested when granted and will be exercisable
         at date of grant,  expiring 5 years after date of grant.  The  exercise
         price will be the fair market  value of a share of stock on the date of
         grant.  As of December 31, 1997,  1,000  options had been granted under
         this agreement.

         Warrants:

         The Company granted to the underwriter of its 1993 stock offering,  for
         nominal consideration,  warrants to purchase up to 70,000 shares of its
         common stock at $7.20 per share, beginning in October 1994 and expiring
         in October  1999.  In  January  1996,  the  underwriter  exercised  the
         warrants  in  a  cashless  transaction,  receiving  31,231  shares  and
         surrendering 38,769 warrants.

         The  Company  acquired  the assets of A & B Booster,  Inc.  in 1994.  A
         portion of the  purchase  price is in the form of  warrants to purchase
         common  stock at an exercise  price of $6.50 per share.  Warrants  were
         issuable to the sellers of A & B Booster  based on 100 shares of common
         stock of the  Company  for each  whole  multiple  of $10,000 of Booster
         Buddy sales in each of the three years  beginning  August 1, 1994, 1995
         and 1996. The warrants were exercisable at any time prior to January 1,
         1998. As of December 31, 1997,  all warrants had been  surrendered  and
         6,102 shares of common stock had been issued.  At of December 31, 1996,
         there were 3,900 warrants outstanding.


5.       Income taxes:
<TABLE>
<CAPTION>
         The components of the provision for income tax were:


                                                                  1997
                                  ---------------------------------------------------------------------
                                      Federal           Foreign           State            Total
                                      -------           -------           -----            -----
<S>                               <C>                <C>                <C>           <C>           
   Current tax expense            $     963,764      $    159,798       $ 64,702      $    1,188,264
   Deferred tax expense                 152,406              --               27             152,433
                                  -------------     -------------       --------      --------------
   Provision for income taxes     $   1,116,170      $    159,798       $ 64,729      $    1,340,697
                                  =============     =============       ========      ==============

                                                                  1996
                                  ---------------------------------------------------------------------
                                      Federal           Foreign           State            Total

   Current tax expense            $     600,306      $     --           $ 62,728      $     663,034
                                              
   Deferred tax (benefit)               (15,170)           --             (3,682)           (18,852)
                                  -------------      -----------        --------      -------------
   Provision for income taxes     $     585,136      $                  $ 59,046      $     644,182
                                   ============      ===========        ========       ============
</TABLE>



         The Company's net deferred tax asset and liability consists of:

                                                             1997
                                             -----------------------------------
                                                Federal        State       Total

Deferred income tax asset (current)          $  13,538     $    776   $  14,314
Deferred income tax liability (non-current)   (376,459)     (21,588)   (398,047)
                                             ---------     --------     --------
                                             $(362,921)    $(20,812)  $(383,733)
                                             =========     ========   ==========

                                      F-12
<PAGE>
5.       Income taxes (continued):


                                                              1996
                                             -----------------------------------
                                                Federal      State       Total
                                                -------      -----       -----
     Deferred income tax asset (current)     $   9,850     $  1,050   $  10,900
     Deferred income tax liability 
          (non-current)                       (218,850)     (23,350)   (242,200)
                                             ---------     ---------  ----------
                                             $(209,000)    $(22,300)  $(231,300)
                                             =========     ========   =========


         The effective tax rate differs from the statutory rate as follows:

                                                             1997         1996
                                                             ----         ----

     Federal statutory rate                                  34.0%        34.0%
     Foreign taxes in excess of federal statutory rate        4.6           -
     Tax benefit of foreign tax credit                       (4.4)          -
     State income taxes - net of federal effect               1.7          2.4
     Effect of difference in tax basis of goodwill           (1.1)        (1.5)
     Cumulative effect of change in estimated
          effective state income tax rate                      -          (3.3)
     Tax basis of non-qualified stock options exercised        -          (5.6)
     Miscellaneous tax adjustments                             .7         ( .6)
                                                               --           -- 
     Effective tax rate                                      35.5%        25.4%
                                                            =====        =====


6.       Major suppliers:

         For the periods ended December 31, 1997 and 1996, the Company purchased
         a  significant  amount of  component  parts  from three  vendors  which
         accounted for  approximately 47% and 69% of the Company's total cost of
         sales, respectively.


7.       Supplemental cash flow information:

                                            1997                1996
                                        -----------          ---------

          Interest received             $   104,839         $   129,463
                                        ===========         ===========

          Interest paid                 $       989         $         -
                                        ===========         ===========

          Income taxes paid             $   872,304         $   835,849
                                        ===========         ===========


8.       401(k) Plan:

         Effective  January  1997,  the  Company  adopted a 401(k)  Plan for the
         benefit of substantially  all of its U.S.  employees  meeting specified
         eligibility requirements. The Plan permits contributions by the Company
         but does not require them.
         The Company made no contributions to the Plan during 1997.

9.       Preferred stock:

         During  1996  the   shareholders   voted  to  amend  the   Articles  of
         Incorporation to provide for the issuance of 1,000,000 shares of no par
         value preferred stock. At December 31, 1997 and December 31, 1996, none
         were  outstanding.  The Board of  Directors  is  granted  authority  to
         determine dividends on the preferred stock.

                                      F-13
<PAGE>
10.      Acquisitions:

         On June 23, 1997, the Company acquired  substantially all of the assets
         of Delta Play, Ltd.  (Delta),  a leading  provider of custom indoor and
         outdoor  modular play equipment based in Vancouver,  British  Columbia.
         The  acquisition  was effective June 1, 1997 and was accounted for as a
         purchase. Results of operations of Delta were included in the Company's
         consolidated statements of income beginning on the effective date.

         As initial  consideration,  the Company paid $4,180,609 cash and issued
         40,000 shares of Koala Corporation common stock valued at $600,000.  In
         addition,  costs related to the acquisition of  approximately  $455,559
         were incurred and capitalized as goodwill.  The purchase agreement also
         provides for additional  consideration  in the form of cash payments if
         certain  operating  performance  criteria  are met by  Delta  over  the
         twelve-month  period  from June 1, 1997 to May 31,  1998.  The range of
         additional  consideration  is  C$900,000  (US$648,000)  to  C$1,500,000
         (US$1,080,000).  If minimum performance is not achieved,  no additional
         consideration will be payable. Any subsequent payment will be allocated
         to cost in excess of the fair value of assets acquired.

         The pro forma  unaudited  results of  operations  for the twelve months
         ended December 31, 1997 and 1996, assuming consummation of the purchase
         as of January 1, 1997 and 1996, are as follows:

                                              Twelve Months Ended December 31

                                                 1997                 1996
                                                 ----                 ----

          Sales                              $15,499,336          $13,526,902
          Net income                          $2,513,770           $2,167,408
          Net income per share                     $0.98                $0.85
         (assuming dilution)


         In March 1996,  the Company  acquired  all of the  operating  assets of
         Activities  Unlimited,  LLC for  $500,000  paid in  cash.  The  Company
         markets  children's   recreational  and  activity  products  under  the
         Activities Unlimited product line, including commercial-use  children's
         play tables featuring  interlocking  construction blocks, games, mazes,
         wall activities and other manipulative products.


                                      F-14
 .