SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

       [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                   For the fiscal year ended December 26, 1998

                                       OR

     [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                 For the transition period from ...... to ......

                         Commission file number 0-14399

                     Golden Books Family Entertainment, Inc.
             (Exact name of registrant as specified in its charter)

                 Delaware                                   06-1104930
  (State or other jurisdiction of          (I.R.S. Employer Identification No.)
   incorporation or organization)

888 Seventh Avenue, 40th Floor, New York, New York                10106
      (Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code:  (212) 547-6700

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

Securities  registered  pursuant to Section 12(g) of the Act: Common Stock,
par value $ .01 per share 

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months,  and (2) has been subject to such filing  requirements
for the past 90 days. Yes X or No

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

The  aggregate   market  value  of  the   Registrant's   voting  stock  held  by
non-affiliates  of the Registrant was  $8,206,836,  computed by reference to the
bid price as quoted on the OTC Bulletin Board on April 6, 1999 of  approximately
$0.29.* As of April 6, 1999, 28,299,434 shares of Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.
--------
*        For  purposes of this  calculation,  all  outstanding  shares of Common
         Stock  have  been  considered  held by  non-affiliates  other  than the
         6,546,353 shares held by directors and certain principal  shareholders.
         In making such  calculation,  the  Registrant  does not  determine  the
         affiliate or non-affiliate status of any shares for any other purpose.


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            GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

                                December 26, 1998

                                      INDEX




PART I
ITEM 1.    BUSINESS............................................................1
ITEM 2.    PROPERTIES..........................................................8
ITEM 3.    LEGAL PROCEEDINGS...................................................9
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................11

PART II
ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
           STOCKHOLDER MATTERS................................................12
ITEM 6.    SELECTED FINANCIAL DATA............................................13
ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS..............................................14
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........25
ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................26
ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
           AND FINANCIAL DISCLOSURE...........................................27

PART III
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................28
ITEM 11.  EXECUTIVE COMPENSATION..............................................30
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......34
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................37

PART IV
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.....39



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                                     PART I

In February 1999, the Registrant  reached an agreement with its major  creditors
pursuant to which its existing long term debt would be significantly reduced. In
accordance  with that  agreement,  the Registrant  and two of its  subsidiaries,
Golden Books Publishing  Company,  Inc.  ("Golden Books  Publishing") and Golden
Books Home Video,  Inc. ("GBHV" and collectively  with the Registrant and Golden
Books  Publishing,  the  "Debtors")  on February  26, 1999 filed  petitions  for
reorganization  under  Chapter  11 of the United  States  Bankruptcy  Code.  The
Debtors have filed a Joint Plan of  Reorganization  and a  Disclosure  Statement
pursuant to Section 1125 of the Bankruptcy  Code,  both of which are exhibits to
this  Form  10-K.  The  Debtors  hope to  confirm  and  consummate  the  Plan of
Reorganization by June or July of 1999. See "Item 1. Business -- Recent Events,"
below.   As  used  herein,   the   "Company"   refers  to  Golden  Books  Family
Entertainment,  Inc. (the  "Registrant"),  its subsidiaries,  and the Debtors as
debtors-in-possession.


                                ITEM 1. BUSINESS

The Company  publishes,  produces,  licenses and markets an  extensive  range of
children's  books and family  related  entertainment  products.  The Company has
three  business  segments,  which it operates  primarily  through its  principal
operating  subsidiary,  Golden Books  Publishing  Company,  Inc.  ("Golden Books
Publishing"):  (1) Consumer  Products,  which  includes its Children's and Adult
Publishing  divisions,  (2)  Entertainment,  which  operates as the Golden Books
Entertainment Group division ("GBEG"), and (3) Commercial Products,  through its
Commercial Printing division.  For certain financial information with respect to
the  Company's  business  segments  see  note 18 to the  Company's  Consolidated
Financial Statements herein.

On March 11, 1999, the Company signed an agreement to sell its Adult  Publishing
division to St. Martin's Press,  Inc., subject to certain  conditions.  On March
25, 1999, the bankruptcy  court gave final approval  authorizing  the closing of
the sale, which has not yet occurred.

Consumer Products

Children's Publishing. Golden Books is the largest publisher of children's books
in the North American retail market and has published its flagship product line,
"Little Golden Books",  for over 50 years.  The Children's  Publishing  division
produces storybooks,  coloring/activity  books, puzzles,  educational workbooks,
reference books,  novelty books,  chapter books and electronic  storybooks.  The
products of the Children's  Publishing  division utilize both owned (in whole or
in part)  characters,  such as The Poky Little Puppy and Lassie,  and characters
licensed  by the  Company  from  third  parties,  such as Disney (A Bug's  Life,
Mulan), Mattel (Barbie) and Mercer Mayer (Little Critters).

The Children's  Publishing  division's products have traditionally been designed
primarily for children up to age seven and have been distributed  mainly through
mass market  channels  (which include  national  discount store chains,  such as
Wal-Mart,  K mart, Target and Toys "R" Us). The Company has also sold children's
products  through  bookstores  and  other  retailers   (children's   educational
specialty retailers,  other toy stores,  supermarkets,  drugstores and warehouse
clubs), special markets (such as school book clubs, school book fairs, paperback
jobbers,   catalogue  sales  and  educational  institutions)  and  international
channels.

The Company's  Children's  Publishing  products fall into four broad categories:
(i) "Classic Format," (ii) education and  reference,(iii)  trade and novelty and
(iv) electronic storybooks.

(i)  Classic Format Products

The Company's  Classic  Format  category of products  consists of storybooks and
coloring/activity  books and  products,  as described  below.  This  category of
products accounts for the largest share of the Company's  Children's  Publishing
revenues and unit sales.  Most products in the Classic Format  category are high
volume  products  that carry a retail  price under  $5.00.  The volume and price
point of these  products  makes  them  particularly  attractive  to mass  market
retailers,  although  Classic  Format  products are  distributed  through  other
channels to a lesser extent. In 1998, the Company


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continued  to introduce  new Classic  Format  products  with higher price points
which were sold through mass market  channels,  in  bookstores  and in specialty
retail stores.  Effective January 1, 1999, the Company raised prices on selected
products, principally in the Classic Format Category.

Storybooks are published principally under the Golden Books, Little Golden Books
and Golden Look Look  trademarks.  In addition to  storybooks  in the  foregoing
formats, the Company also publishes paperback books and touch and feel books for
babies, including Pat the Bunny.

Coloring/activity  books and  products  include  coloring  books,  paint  books,
sticker  books,  paper doll books,  crayons  and boxed  activity  products.  The
Company  markets  these  products  under the Golden  Books and  Merrigold  Press
trademarks.

The Company's  coloring/activity books and products generally are designed to be
appropriate  for  children  ages  three to five and are  designed  to  encourage
age-appropriate  activities,  particularly the development of artistic and motor
skills.  They contain less thematic  material than the Company's  storybooks and
focus primarily on images and scenes utilizing licensed or owned characters.

(ii)  Education and Reference

The Company's  education and  reference  products  consist of Road to Reading (a
level reading series), workbooks,  flashcards and reference books. The Company's
workbook and flashcard  products  have price points  between $2.00 and $3.50 and
its Road to Reading books have price points  between  $4.00 and $5.00.  All such
products are sold primarily  through mass market  outlets,  although the Company
continues to take advantage of sales  opportunities  for these products  through
bookstores,  specialty  retail and special markets  distribution  channels.  The
Company first began  publishing its Road to Reading level reading series in 1998
using its existing characters and titles, as well as licensed characters such as
Barbie.

(iii)  Trade and Novelty Products

The Company's  current product offerings in this category consist of flap books,
pop-up books,  book plus products,  multiple format books and  treasuries.  Most
products in this  category are in the $5.00 to $10.00 retail price range and are
primarily distributed through bookstores and specialty retail stores and special
markets.

The Company  continues to expand its product  offerings in the trade and novelty
category,  with an emphasis  on products  featuring  the  Company's  proprietary
characters.  The Company believes that significant  sales  opportunities for its
higher priced trade and novelty products exist through bookstores,  mass market,
special market and international distribution channels.

(iv)  Electronic Storybooks

The Company is marketing a declining number of electronic  books. The electronic
books are sold primarily through mass market outlets.

Adult  Publishing.  Less  than  10% of the  revenues  of the  Consumer  Products
business segment is accounted for by the Adult Publishing division. The division
publishes trade books focusing on hobbies, parenting and the family.

The  Company  has  distributed  its  adult  trade  book line  primarily  through
bookstores,  although the line also includes books published in formats suitable
for mass market  distribution.  Since February 1998,  products  published by the
Adult Publishing  division have been distributed in the United States and Canada
by St.  Martin's Press,  Incorporated.  On March 11, 1999, the Company signed an
agreement to sell its Adult Publishing  division to St. Martin's Press,  subject
to certain conditions.  If all of the conditions are satisfied,  the sale should
be closed shortly. If the closing does not occur as scheduled,  either party may
terminate the agreement.


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Licensing and Publishing Agreement  Developments.  In December 1998, the Company
signed a license  agreement  with Disney,  amending the terms of the license the
Company had entered into with Disney in 1997.  The Disney  agreement  allows the
Company to use, in selected  product  categories  and for a limited time, all of
Disney's  animated  characters,  including  Mickey  Mouse,  Winnie  the Pooh and
Pinocchio and characters from The Little Mermaid,  The Lion King,  Aladdin,  The
Hunchback of Notre Dame and Toy Story,  as well as  characters  from more recent
releases such as Hercules,  Mulan and A Bug's Life. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" below.

The Company also has a licensing  agreement in connection  with the  educational
television series Between the Lions, anticipated to debut on PBS in Spring 2000.
The Company's  character license with Children's  Television Workshop terminated
by its terms in December,  1998. In January,  1999, the Company renegotiated its
publishing  agreement with Parachute  Press,  pursuant to which the Company will
continue to publish only R. L. Stine's  "Seniors" series, a part of R.L. Stine's
Fear Street  series,  through June 1999.  The Fear Street  books,  including the
"Seniors" series, are intended for older children and young adult readers,  ages
8 and up.

Golden Books Entertainment Group Division

The  Company  generates  revenues  from the GBEG  division  by selling its video
products,   licensing  properties  from  its  library  to  third  parties,  both
domestically and  internationally,  for use on television,  on home video and in
ancillary  media,  licensing  properties  from its library for  merchandise  and
exploiting  certain music  publishing  rights.  The Company's  GBEG division was
established  in  August  1996,   upon  the   acquisition   from  Broadway  Video
Entertainment,   L.P.  of  an  extensive  library  of   character-based   family
entertainment  properties.  The  division's  library is comprised of copyrights,
distribution rights, trademarks and licenses relating to characters,  television
programs and motion  pictures,  both  animation  and live  action,  and includes
individual  specials and multiple  episode series.  Among the library titles are
Rudolph the  Red-Nosed  Reindeer,  Frosty the Snowman,  Santa Claus Is Coming to
Town, Lassie, Underdog, The Lone Ranger, Tennessee Tuxedo, Shari Lewis' Lambchop
and Hush  Puppy,  as well as 26  half-hour  episodes  of Felix  the Cat,  and 52
half-hour episodes of Abbott and Costello.

The existing licenses granted to third parties in respect of the GBEG division's
properties  generally  cover a limited time period,  usually two to three years.
GBEG's  licenses  are  typically  narrow,  allowing  the  same  property  to  be
simultaneously licensed to multiple parties for different purposes and enhancing
the ability of the GBEG division to maximize license revenue from the properties
in its library.

Commercial Products

The  Commercial  Printing  division  allows the  Company  to market its  surplus
manufacturing  capabilities  to third parties.  In addition,  the division sells
printing services. In 1998, the Company manufactured products for its Commercial
Printing Division at its printing facility in Sturtevant,  WI and at third party
printing  facilities.  Customers of the  Commercial  Printing  Division  include
educational  publishers,   religious  publishers,  brand  marketers,  and  other
juvenile publishers and entertainment  companies.  Additionally,  the Commercial
Printing  division  engages  in  commodity  printing  (such  as tax  instruction
booklets and tax forms).

Distribution and Sales

The Company's  Children's  Publishing  products are distributed through (i) mass
market, both directly and through independent distributors,  (ii) bookstores and
specialty retail stores, (iii) special markets,  such as book clubs and internet
distributors, and (iv) international distribution channels.  Historically,  mass
market distribution has accounted for, and continues to account for, the largest
portion of children's  publishing  product  sales.  Among the Company's  largest
customers in 1998 were  Wal-Mart,  K mart and Target.  To a lesser  extent,  the
Company  has  distributed  its  children's  publishing  products  through  other
domestic distribution channels.



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In June 1998, the Company closed its distribution center in Coffeyville,  Kansas
and consolidated it into its distribution  facility in Crawfordsville,  Indiana.
The Company  believes this  consolidation  will allow it to further simplify its
supply chain and improve its inventory management function.

Internationally,  the Company  distributes  its Children's  Publishing  products
mainly  through third parties and through a  wholly-owned  subsidiary in Canada.
The  Company's  sales in Canada  account for the  majority of its  international
sales  revenues.  In 1998,  the Company wound down its  operations in the United
Kingdom,  substantially eliminating its sales operation and engaging independent
sales representatives.

The GBEG  division  exploits  its  library  assets in all media and  territories
worldwide directly or through  sub-distributors.  GBEG's series,  specials,  and
features  are  licensed  directly to  domestic  and  international  broadcasters
(terrestrial,  cable and  satellite)  and home  video  distributors  through  an
internal program distribution staff.  Sub-agents have been appointed in specific
territories  on  a  case-by-case   basis.   Similarly,   product  licensing  and
merchandising  is conducted by an internal  department  with  occasional  use of
outside agents.  The GBEG division has a long-term  distribution  agreement with
Sony  Wonder,  a division of Sony Music,  under which Sony Wonder  produces  and
distributes the division's  children's  home video and audio products,  with the
Company  receiving  the gross  proceeds,  less Sony's  manufacturing  cost and a
distribution fee.

Competition

The children's  publishing  market is highly  competitive.  Competition is based
primarily on price,  quality,  distribution,  marketing  and  licenses.  In mass
market sales, the Company faces competition  primarily from smaller competitors,
including, but not limited to, Landoll, Inc., in the coloring/activity category,
School  Zone  Publishing  Co.,  in  the   educational   workbook   category  and
Publications  International,  Ltd., in the electronic storybook category. In the
trade and specialty trade categories,  the Company's  principal  competitors are
Random House, Inc., Simon & Schuster,  Inc.,  Scholastic Corp. and HarperCollins
Publishers,  Inc. The Company also competes for a share of consumer  spending on
children's  entertainment and educational products against companies that market
a broad range of  products  utilizing  a broad  range of  technologies  that are
unrelated to those marketed by the Company, such as computer-based products. The
market for licenses is also highly  competitive and the Company competes against
many other licensees for  significant  licenses.  Many of the Company's  current
competitors have greater  financial  resources than the Company and, in selected
markets,  greater experience than the Company.  Many of the markets in which the
Company operates contain a number of competing entities,  many of which may have
greater  financial  resources and experience  with respect to these markets than
the Company.

The licensing industry is highly competitive, and the GBEG division faces strong
competition  from other  independent  licensing  agencies  and from the in-house
licensing divisions of motion picture and television studios.  Additionally, the
division   faces  intense   competition   for  available   creative   personnel,
distribution  channels and  financing  including  from motion  picture  studios,
television  networks and independent  production  companies,  many of which have
greater financial resources than the Company.

Manufacturing

Prior to 1998, a substantial part of the Company's Children  Publishing products
were manufactured at a facility in Racine, WI, which was sold in 1997.

During 1998, the Company manufactured the majority of its Children's  Publishing
products  from its plant in  Sturtevant,  WI,  with  additional  components  and
services obtained from third party vendors in the United States and abroad.  The
Company began manufacturing at the Sturtevant,  WI facility in February 1998. As
a result of the decline in the revenues of the Children's  Publishing  division,
the Sturtevant,  WI facility exceeds the Company's current needs. Because of the
Company's  inability to utilize the full capacity of the  facility,  among other
reasons,  the  facility  is  burdened by high  operating  costs.  The Company is
seeking a buyer for the Sturtevant, WI facility. See "Item 2. Properties."



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Employees

The Company and its subsidiaries have approximately 950 employees, calculated on
a full-time  equivalent  basis.  Approximately  350 employees are represented by
labor unions.  The Company  negotiated and signed new agreements  with its labor
unions  in the first  quarter  of 1998.  The  Company's  contracts  with (i) the
Graphic  Communications  International  Union,  Local  223B,  (ii)  the  Graphic
Communications International Union, Local 254M, (iii) the International Union of
Operating Engineers, Local 309, (iv) the International Brotherhood of Teamsters,
Local 43, and (v) the United Auto  Workers  Local 1007,  expire on December  31,
2002. The Company's  Canadian  subsidiary  signed a new contract in January 1998
with Local 1024 of the United  Rubber,  Cork,  Linoleum  and Plastic  Workers of
America AFL-CIO, CLC, which expires on December 31, 2000.

In connection with the production of storybooks and coloring/activity books, the
Company  typically  hires writers,  illustrators  and other creative talent on a
freelance, work-for-hire basis to complete its projects.

Recent Events

The Company has  experienced  liquidity  difficulties  as a result of  operating
losses,  working capital  deficiencies and negative  operating cash flows. These
difficulties have hampered the Company's ability to fund day-to-day  operations.
On  September  15,  1998,  the Company  announced  that it was  deferring a $5.7
million interest payment on its 7.65% senior notes due 2002 (the "Senior Notes")
due on such date for a 30-day  grace  period in  accordance  with the  Indenture
("Indenture") governing the Senior Notes. Subsequently, on October 15, 1998, the
Company  announced  that it would not pay the September  15th interest  payment.
Accordingly,  at October 15th the Company was in default under the Indenture and
the holders of the Senior Notes,  at their option,  have the right (i) to demand
the redemption of the entire $150 million  principal  amount of the Senior Notes
due and (ii) foreclose on the collateral securing the Senior Notes.

Due to the default under the Senior Notes,  cross-default  provisions  regarding
the  Company's  $30  million   Revolving  Credit  Facility  with   NationsCredit
Commercial    Funding,   a   division   of   NationsCredit    Commercial   Corp.
("NationsCredit")  entered into June 3, 1998 and its $25 million  Loan  Facility
with Golden Press Holdings,  LLC,  entered into September 4, 1998 (see Note 9 to
the  Consolidated   Financial   Statements)  resulted  in  defaults  under  such
agreements.

The Company  also decided on November 5, 1998 that it would defer a $2.5 million
interest  payment  on  the  Guaranteed  Preferred  Beneficial  Interests  in the
Company's and Golden Books Publishing  Company,  Inc.'s  Convertible  Debentures
(the " TOPrS") due on the TOPrS in accordance  with the Indenture  governing the
TOPrS.  Additionally,  on February 20, 1999, the Company again deferred the next
scheduled $2.5 million  interest payment due on the TOPrS in accordance with the
Indenture governing the TOPrS.

As a result of the Company's  failure to make the interest payment on the Senior
Notes, a steering  committee  representing  certain  holders of the Senior Notes
(the "Senior Notes Steering  Committee")  was  established.  Additionally,  as a
result of the Company's failure to make the interest payment due on the TOPrS, a
steering  committee  representing  certain  holders  of the  TOPrS  (the  "TOPrS
Steering Committee") was established.

The  Company,  along  with the Senior  Notes  Steering  Committee  and the TOPrS
Steering Committee engaged in extensive  negotiations  regarding a restructuring
of the Company's  indebtedness and capital equity structure.  These negotiations
resulted in an  agreement  in  principle  regarding  the terms of the  Company's
restructuring,  which the parties  determined  would be  accomplished  through a
pre-negotiated  Chapter 11  proceeding.  Accordingly,  on February 24, 1999, the
Company announced that it had reached an agreement with its major creditors. The
agreement  in  principle  would  allow the Company to  significantly  reduce its
existing debt,  pay all trade  creditors in full and, under the direction of its
current   management  team,   proceed  with  its  publishing  and  entertainment
operations. Under the agreement in principle, the restructuring of the Company's
indebtedness and revised capital structure will be provided for as follows:



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o        The Senior Notes will be  converted  into (i) a new secured note in the
         principal  amount of $87 million due 2004, with interest at the rate of
         10%, if paid in cash,  or, at the Company's  option for the first three
         years,  13.5%  payable  in kind,  and (ii) 42.5% of the  Company's  new
         common stock to be issued post recapitalization, prior to dilution. The
         note will be secured by the existing  collateral already granted to the
         holders of the Senior Notes as well as certain additional collateral.

o        The TOPrS  indebtedness will be converted into 50% of the Company's new
         common stock to be issued post recapitalization, prior to dilution.

o        The Golden  Press  Holdings,  L.L.C.  loan in the amount of $10 million
         will be  converted  into 5% of the  Company's  new  common  stock to be
         issued post recapitalization, prior to dilution.

Existing  preferred  and  common  shareholders  will  surrender  their  stock in
exchange for out-of-the  money warrants to purchase 5% of the new Company stock,
exercisable until the third anniversary of the Joint Plan of Reorganization  (as
defined below), to be allocated two-thirds to the preferred and one-third to the
common shareholders, to be issued post recapitalization,  prior to dilution. The
agreement also provides for a management  stock incentive  program for an amount
of common stock equal to 10% of the common stock issued on the effective date of
the  Joint  Plan  of  Reorganization.  Of that  amount,  one-half  (5%)  will be
allocated to senior management on the effective date with the balance being made
available  for other  management  personnel and for future  grants.  Also on the
effective date of the Joint Plan of  Reorganization,  the  employment  agreement
with Richard E. Snyder,  the Company's Chairman of the Board and Chief Executive
Officer,  will be amended as further  described in the Disclosure  Statement and
the exhibits  thereto,  and Mr. Snyder will  receive,  in  consideration  of his
surrendering certain claims and rights under his current employment arrangement,
2-1/2% of the Company's new common stock, among other things.

The  foregoing  is an  incomplete  summary  of the  principal  provision  of the
agreement. For a full understanding of the restructuring arrangements, reference
should be made to the Joint Plan of Reorganization and the Disclosure  Statement
referred  to  below.  Similarly,  wherever  licensing,   distribution  or  other
agreements of the Company are  described or  summarized in this Form 10-K,  such
descriptions  are  subject  to the  provisions  of  such  agreements,  to  which
references should be made.

The  agreement  in  principle  regarding  the  restructuring  provided  that the
restructuring  be  effectuated  pursuant to a Chapter 11 Plan.  Accordingly,  on
February 26, 1999 the Debtors filed petitions for  reorganization  under Chapter
11 of the United States  Bankruptcy Code. The petitions were filed in the United
States  Bankruptcy Court for the Southern  District of New York. The Debtors are
continuing   to   operate   their    business   and   hold   their   assets   as
debtors-in-possession. No trustee has been appointed.

The Debtors  received  approval from the Bankruptcy  Court to pay on time and in
full undisputed pre-petition  obligations including salaries, wages and benefits
to all of its  employees.  On March 25, 1999,  the  Bankruptcy  Court gave final
approval to a $55 million  three-year  debtor-in-possession  financing  facility
consisting  of a $45 million  credit  facility and a $10 million term  facility,
which is provided by The CIT Group (the "DIP Loan").  The DIP Loan is subject to
covenants and events of default.  The Company utilized the proceeds from the DIP
Loan to repay all outstanding  amounts under the Revolving  Credit Facility with
NationsCredit  with  the  remainder  to be used to fund  operations  during  the
pendency of the Chapter 11 proceedings.

On March 25, 1999, the Debtors filed a Joint Plan of Reorganization  (the "Joint
Plan of  Reorganization")  with the Bankruptcy Court and a Disclosure  Statement
(the  "Disclosure  Statement")  pursuant to Section 1125 of the Bankruptcy Code.
The  Disclosure  Statement and the Joint Plan of  Reorganization  are subject to
approval  of the  Bankruptcy  Court.  Prior to the  filing of the Joint  Plan of
Reorganization   and   Disclosure   Statement,   the  Debtors   entered  into  a
Restructuring  Agreement  with certain  holders of senior notes and the TOPrS as
well as Golden Press  Holdings,  LLC and Richard E. Snyder which  obligates such
signatories  to support the  restructuring  provided for under the Joint Plan of
Reorganization  providing  certain  conditions  are met including that the Joint
Plan  of  Reorganization  is  confirmed  within  150  days  of the  date  of the
Restructuring Agreement.


                                        6

<PAGE>



On March 25,  1999,  the  Bankruptcy  Court  gave  final  approval  to the Asset
Purchase  Agreement with St. Martin's Press,  Incorporated  dated March 11, 1999
with respect to the sale of certain  assets of the  Company's  Adult  Publishing
business.  If  all  of the  conditions  of the  Agreement  are  met,  the  Adult
Publishing  sale  should be closed  shortly.  If the  closing  does not occur as
scheduled, either party may terminate the Agreement.

A Bankruptcy  Court hearing on the Disclosure  Statement is currently  scheduled
for May 10, 1999.  The Company hopes to confirm and consummate the Joint Plan of
Reorganization by June or July of 1999,  although there can be no assurance that
the  Joint  Plan  of  Reorganization  will  be  confirmed  or  consummated.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations -- Liquidity and Capital Resources".

Since the  latter  part of fiscal  1998,  a number of  executives  have left the
Company,  including  Eric  Ellenbogen  (President of the GBEG),  John C. Ferrara
(Chief  Financial  Officer)  and  Robert  J.  Asahina  (President  of the  Adult
Publishing  division).  See Executive Officers of the Registrant, below.


                                        7

<PAGE>



ITEM 2.  PROPERTIES

The  principal  properties  currently  used by the Company in the conduct of its
business are the following:

The Company's  corporate  offices,  publishing  and principal  sales offices are
located in leased  premises on three  floors at 888  Seventh  Avenue in New York
City. In January 1999,  the Company  reduced the space covered by the lease from
112,000  square feet (on six floors) to 55,000  square feet.  The amended  lease
covering the reduced  space is for a term  expiring  July 31, 2013.  The Company
believes that the  facilities  covered by the amended lease are adequate for the
restructured Company's needs.

The  Company's  printing  facilities  and principal  administration  offices are
located in 498,300  square foot  leased  facilities  in  Sturtevant,  WI.  These
facilities were constructed for the Company and service the Company's publishing
and commercial divisions. The Company began manufacturing at the new Sturtevant,
WI facility in February  1998.  The printing  facilities  have a capacity  which
exceeds  the  Company's  current  needs.  The Company is seeking a buyer for the
Sturtevant,  WI facility who would enter into an  agreement  with the Company to
continue to manufacture certain of the Company's Children's  Publishing products
at the facility.

The Company's principal warehousing and distribution facilities are located in a
403,000 square foot building owned by the Company and located in Crawfordsville,
Indiana.  In 1998,  the Company  closed a  distribution  center in  Coffeyville,
Kansas and consolidated the distribution  functions in Crawfordsville,  Indiana.
The Coffeyville, Kansas property was sold in January 1999.

In addition, the Company owns or rents several other smaller properties that are
used for  administration,  sales offices and warehousing,  or are held for sale,
such as a  building  in  Racine,  WI,  which  was  formerly  known as the
Creative Center.

As part of the Company's  program to dispose of non-core assets,  the Company in
December  1998 sold its 702,000  square foot  facility  in  Fayetteville,  North
Carolina which had been used primarily in connection  with the  manufacture  and
distribution  of games and  puzzles.  In December  1997,  the  Company  sold the
facility  that had been its  Canadian  warehousing  and  distribution  center in
Cambridge, Ontario.


                                        8

<PAGE>



ITEM 3.  LEGAL PROCEEDINGS

On February 26, 1999,  the Debtors  filed  petitions  for  reorganization  under
Chapter 11 of the United States  Bankruptcy  Code, 11 U.S.C.  ss.ss. 101 et seq.
The petitions were filed in the United States  Bankruptcy Court for the Southern
District  of New  York and were  assigned  Cases  Nos.  99-10030,  99-10031  and
99-10032,  assigned to Judge Tina L.  Brozman.  The Debtors  are  continuing  to
operate  their  business  and hold  their  assets as  debtors-in-possession.  No
trustee has been appointed.

On August 12,  1998,  a class action  complaint  was filed in the United  States
District  Court for the  Southern  District of New York on behalf of all persons
who purchased the Common Stock of the Company between May 13, 1997 and August 4,
1998,  inclusive  (the  "Class  Period").  On October  7,  1998,  holders of the
Company's TOPrS filed a class-action complaint based on substantially  identical
allegations,  which complaints were subsequently consolidated.  The consolidated
complaint  charges that the Company and certain  officers  and  directors of the
Company  during the relevant  time period were in violation of Section 10(b) and
20(a) of the  Securities  Exchange Act of 1934.  The complaint  alleges that the
defendants  issued  a series  of  materially  false  and  misleading  statements
concerning the impact of the Company's 1996  restructuring plan on the Company's
financial  condition,  liquidity and future prospects.  While the outcome of the
case cannot be predicted  with any certainty,  the Company  believes that it has
meritorious defenses to the claims, and that the claims against the Company will
be resolved or discharged during the pendency of the Chapter 11 proceedings.

Golden Books Publishing and Penn Corporation  ("Penn") have been informed by the
Environmental  Protection  Agency (the "EPA") and/or state  regulatory  agencies
that they may be potentially  responsible  parties ("PRPs") and face liabilities
under the Comprehensive Environmental Response,  Compensation, and Liability Act
(commonly  known as "CERCLA" or "Superfund") or similar state laws. In all cases
except those  described  below,  the Company has resolved its liability or is in
the process of resolving its  liability  for amounts not material.  Although the
Company  divested  Penn in December  1996,  the Company has agreed to  indemnify
Contempo  Colours,  Inc.  ("Contempo")  against certain of Penn's  environmental
liabilities,  including  the Cork Street  Landfill and Fulford  Street  Property
discussed herein.

The Wisconsin  Department  of Natural  Resources  (the "WDNR")  alleges that the
Company  is  a  responsible   party  for  drums  found  at  a  site  located  in
unincorporated  Racine  County.  The WDNR and the Company  have  entered into an
agreement which requires the Company to remove drums and soil from the site. The
disposal  of these  drums  dates  back  almost 30  years.  The  Company  did not
authorize disposal of its waste drums at the site. The Company has completed the
removal of drums and soil from the site.

At the Hunt's Landfill site in Racine County, Wisconsin, the Company's liability
pursuant to the terms of a consent decree is limited to  approximately 4% of the
total remedial  costs.  Although the last phase of  construction  activities was
completed in 1996,  Golden Books  Publishing and the other PRPs are obligated to
fund the operation  and  maintenance  of the site for the next 20-30 years.  The
current  estimate of the total costs of such operation and maintenance is in the
range of $14 million.  In accordance  with the consent  decree,  the Company has
established a reserve for its share of the probable clean-up costs.

In 1991 the United  States  Environmental  Protection  Agency  ("EPA")  issued a
unilateral administrative order (the "1991 Order") to the Company and four other
PRPs, requiring the respondents to perform a remedial design and remedial action
at the Hertel Landfill Superfund Site in Plattekill,  New York (the "Site"). The
Company  did not agree to  comply  with the  Order.  EPA  subsequently  sued the
Company and other PRPs seeking  recovery of its costs at the Site.  Various PRPs
in the  litigation  brought claims for  contribution  against each other and the
Company.   The  Company   settled  its   liability  to  the  United  States  for
noncompliance  with the 1991  Order  and  agreed  to  comply  with the  Order by
implementing  the remedy at the Site,  which is now estimated to cost up to $4.9
million, excluding potential groundwater remediation costs.

On July 9, 1998,  the Company and other PRPs entered into a Consent  Decree with
the United States and the State of New York to resolve  their alleged  Liability
for past response costs and formalize  their  agreement to perform the remedy at
the site.  Under the  Decree,  the Company  and the other  settling  parties are
jointly and severally obligated to perform


                                        9

<PAGE>



the remedy and reimburse  certain  governmental  past and future  costs.  Golden
Books has paid  approximately  $1.7 million toward remedial costs since 1996 and
has completed  construction  of the landfill cap. The Company's  share of future
costs for  operation  and  maintenance  of the cap and landfill  monitoring  are
expected to be less that $500,000.

The  Company  also has been  identified  as a PRP at  another  site  located  in
Poughkeepsie,  New York.  The  Company  and eight  other PRPs  received a notice
letter in 1995 from the State of New York  regarding  this site.  New York State
will be seeking  recovery of its past oversight costs of more than $600,000 plus
future  oversight and maintenance  costs  associated  with this site,  currently
estimated by the State at $830,000. There has been no attempt made to develop an
allocation or to identify all PRPs to date,  but the  construction  phase of the
remedy has been completed by other parties without Company involvement.

On October 2, 1996,  the  Company  received  notice  from the City  Attorney  of
Kalamazoo,  Michigan that Beach  Products,  a division of Penn, will be asked to
participate in the  remediation of the Cork Street  Landfill site located in the
city  which was  allegedly  used by Beach  Products  in the past.  Current  cost
estimates for the  remediation  required at the site are as high as $24,000,000.
More than 70 entities will be requested to provided  financial  contribution  to
the remediation.

On November 14, 1996, the Michigan Department of Environmental Quality requested
that  corrective  actions  be taken as a result  of the  discovery  of a leaking
underground storage tank system at the Fulford Street Property of the Company on
November 8, 1996. An initial site assessment is being completed by the Company's
outside  consultant.  Current estimates  indicate that the costs associated with
this  release  should  not  exceed  $200,000.  However,  in the  event  that the
contamination  has  migrated  off the  Company's  property,  these  costs  could
increase.

It is  uncertain  whether  the  claims  against  the  Company  in the  foregoing
environmental  matters  will be resolved  during the  pendency of the Chapter 11
proceedings.

In addition to these environmental  matters, the Company filed an action in 1994
in the United States District Court,  Eastern District of Wisconsin captioned as
Western  Publishing  Company,  Inc. v. MindGames,  Inc. seeking a declaration of
rights in regard to the Company's  alleged breach of various of its  obligations
under its licensing  agreement with the defendant for distribution  through 1994
of the adult  board game  known as "Clever  Endeavor."  This case  involves  the
Company's  now-discontinued  adult and children's game division.  The defendant,
believing  its board game had the potential to become one of the most popular of
all time,  has  maintained  that certain of the alleged  breaches  entitle it to
damages  of as much as $40  million  resulting  from  lost  profits  and  unpaid
royalties.  The Court recently granted the Company's  partial motion for summary
judgment and held that the defendant is precluded from  recovering lost profits.
Accordingly, the defendant's damage claim is now limited to its unpaid royalties
of $1.2 million. The Company denies that it has any liability to defendant.

The Company and its subsidiaries are parties to certain other legal  proceedings
which are  incidental  to their  ordinary  business,  none of which the  Company
believes are material to the Company and its subsidiaries taken as a whole.


                                       10

<PAGE>



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

None.


EXECUTIVE OFFICERS OF THE REGISTRANT

Since the  latter  part of fiscal  1998,  a number of  executives  have left the
Company,  including  Eric  Ellenbogen  (President of the GBEG),  John C. Ferrara
(Chief  Financial  Officer)  and  Robert  J.  Asahina  (President  of the  Adult
Publishing  division).  Set forth  below is  information  regarding  the current
executive officers of the Company.

Richard E. Snyder
Age:  65

Mr.  Snyder has served as Chief  Executive  Officer of the Company  since May 8,
1996.  Mr.  Snyder was  President of the Company from January 31, 1996 to May 8,
1996.  Prior to that time,  Mr.  Snyder  had,  since 1994,  been an  independent
business  consultant  and  investor.  He was the  Chairman  and Chief  Executive
Officer  of Simon & Schuster  from 1975 to 1994.  Mr.  Snyder is a  director  of
Reliance Group Holdings, Inc.

Richard Collins
Age:  47

Mr.  Collins  has  served as  Golden  Books  Publishing  Company,  Inc.'s  Chief
Operating  Officer since June 1998. From July 1997 until June 1998, he served as
the Company's Executive Vice President,  Director of Sales and Retail Marketing.
From October  1991 to July 1997,  Mr.  Collins was employed at  Unilever/Lipton,
most recently as Vice President, Strategic Customer Management.

Philip Galanes
Age:  35

Mr.  Galanes has served as Chief  Administrative  Officer of the  Company  since
November 1998. From December 1996 until November 1998 he served as the Company's
General Counsel and Vice President, Legal Affairs. From January 1995 to November
1996,  Mr.  Galanes was an  associate at the law firm of Paul,  Weiss,  Rifkind,
Wharton & Garrison.  Previously, Mr. Galanes was an associate at the law firm of
Debevoise & Plimpton.

Colin Finkelstein
Age: 39

Mr.  Finkelstein  has served as Executive  Vice  President  and Chief  Financial
Officer of the Company since January,  1999. He served as Senior Vice President,
Finance  and  Planning  of the Company and  Executive  Vice  President,  General
Manager of the Company's Children's  Publishing Division from October 1996 until
January 1999.  From November 1988 until  September  1996,  Mr.  Finkelstein  was
employed by EMI Music, Inc., most recently as Vice President, Controller.



                                       11

<PAGE>



                                     PART II

          ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
                               STOCKHOLDER MATTERS

                            STOCKHOLDERS' INFORMATION

COMMON STOCK PRICES

The  Company's  Common  Stock,  par value $.01 per share  ("Common  Stock")  has
historically  been  traded  over-the-counter  and quoted on the NASDAQ  National
Market System  (symbol GBFE).  On February 17, 1999, the Company's  Common Stock
was  delisted  from the  NASDAQ  National  Market  System  for  failure  to meet
continued listing standards. Since that date the Company's Common Stock has been
quoted on the OTC Bulletin Board.  Common stockholders of record at December 26,
1998 numbered  approximately  550. The  following  table sets forth the range of
prices (which represent  actual  transactions),  by quarter,  as provided by the
National Association of Securities Dealers, Inc.

<TABLE>
<CAPTION>
Fiscal Year Ended December 26, 1998
--------------------------------------------------------------------------------

 
                         High            Low

<S>                  <C>               <C>   
First Quarter        11 13/16        10 5/16
Second Quarter         11 3/4          3 3/4
Third Quarter           6 1/8           5/16
Fourth Quarter            7/8            1/8

Fiscal Year Ended December 27, 1997
--------------------------------------------------------------------------------
                         High            Low
First Quarter          12 1/4        8 11/16
Second Quarter         12 7/8          7 7/8
Third Quarter          12 5/8          9 1/2
Fourth Quarter         11 3/4          9 1/8

</TABLE>

DIVIDEND POLICY

Holders  of Common  Stock are  entitled  to  receive  such  dividends  as may be
lawfully declared by the Board of Directors. Since its organization in 1984, the
Company has not paid a cash dividend on its Common Stock and management does not
currently  anticipate  the payment of cash  dividends on the Common Stock in the
foreseeable future.





                                       12

<PAGE>



ITEM 6.  SELECTED FINANCIAL DATA

The selected consolidated  financial data below is derived from the consolidated
financial  statements of the Company and should be read in conjunction  with the
consolidated  financial statements of the Company and the notes thereto included
elsewhere  herein.  See  "Management's  Discussion  and  Analysis  of  Financial
Condition and Results of Operations" and "Consolidated Financial Statements." In
1996 the Company  changed its fiscal year end so as to end on the last  Saturday
of December in each year. As a result,  the fiscal 1996 results from  operations
are not necessarily comparable to other periods as presented.

<TABLE>
<CAPTION>
                                                                                  11 Months                                    
                                                        Year Ended                  Ended                 Year Ended
                                                December 26,     December 27,    December 28,      February 3,     January 28,
                                                    1998             1997            1996             1996            1995
                                                                         (In Thousands, Except Per Share Data)
<S>                                             <C>              <C>             <C>             <C>             <C>    
Income Statement Data:
Revenues
    Net sales                                    $193,573         $242,481        $254,046        $369,572        $398,354

    Royalties and other income                        653            1,080             959           1,722           2,207
                                                      ---            -----             ---           -----           -----

        Total Revenues                            194,226          243,561         255,005         371,294         400,561
                                                  -------          -------         -------         -------         -------

Costs and expenses:
    Cost of sales                                 181,141          176,238         231,792         281,392         297,421
    Selling, general and administrative            98,293          111,307         142,721         129,020         124,128
    Restructuring, net of (gains) losses on                                                                                   
        sales of assets                             6,462          (10,786)         65,741           6,701         (21,452)

    Write-off of assets                            10,609               --              --              --              --
                                                   ------                                                                 

        Total costs and expenses                  296,505          276,759         440,254         417,113         400,097
                                                  -------          -------         -------         -------         -------

(Loss) income before distributions on                                                                                      
    Guaranteed Preferred Beneficial Interests                                                                                  
    in the Company's and Golden Books                                                                           
    Publishing Company, Inc.'s Convertible                                                                             
    Debentures, interest expense and                                                                                       
    (benefit) provision for income taxes         (102,279)         (33,198)       (185,249)        (45,819)            464

Distributions on Guaranteed Preferred                                                                                      
    Beneficial Interests in the Company's and                                                                                  
    Golden Books Publishing Company,                                                                               
    Inc.'s Convertible Debentures                  10,282           10,282           3,597              --              --

Interest expense, net of interest income           16,704            6,163           6,764           9,896          15,573
                                                   ------            -----           -----           -----          ------

Loss before (benefit) provision for income                                                                                  
    taxes                                        (129,265)         (49,643)       (195,610)        (55,715)        (15,109)
(Benefit) provision for income taxes                 (666)              37           1,893          11,332           2,470
Net loss                                       $ (128,599)      $  (49,680)     $ (197,503)   $    (67,047)    $   (17,579)
                                               ===========      ===========     ===========   =============    ============ 

Net loss per common share - basic                  ($4.89)          ($2.18)         ($8.73)         ($3.23)         ($0.88)
                                               
Balance sheet data (at period end):
    Working (deficiency) capital              $  (264,297)     $    95,780     $   168,210    $    165,309    $    228,240
    Total assets                                  254,951          323,164         367,235         321,965         428,806
    Long-term debt (including amount show                                                                                  
             as current)                          150,000          149,897         149,862         149,845         149,828
    Guaranteed preferred beneficial interests                                                                                  
        in the Company's and Golden                                                                                        
        Books Publishing Company, Inc.'s                                                                                   
        Convertible Debentures                    115,000          110,707         110,488              --              --
    Convertible Preferred Stock - Series A             --               --              --           9,985           9,985
    Common stockholders' (deficit) equity        (189,081)         (61,309)        (19,637)         74,368         140,794
</TABLE>

                                       13
<PAGE>



ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Forward-Looking Statements

This Annual Report on Form 10-K and in particular  Management's  Discussion  and
Analysis  of  Financial  Condition  and Results of  Operations,  as well as Item
1-Business and Item 3-Legal  Proceedings,  contains  forward-looking  statements
within the meaning of Section 21E of the  Securities  Exchange  Act of 1934,  as
amended.  The  Company's  actual  results of  operations  and  future  financial
condition  may differ  materially  from those  expressed  or implied in any such
forward-looking  statements as a result of many factors,  including factors that
may be beyond the  Company's  control.  The Company is currently  operating  its
business  as  debtor-in-possession  under  Chapter  11 and  continuation  of the
Company as a going concern is contingent upon,  among other things,  the ability
to gain  approval of the requisite  parties  under the United States  Bankruptcy
Code and  confirmation  by the Bankruptcy  Court of the Company's  Joint Plan of
Reorganization.  In addition,  the Company's  continuation as a going concern is
contingent  upon its ability to comply with its  debtor-in-possession  financing
facility,  resolution of various litigations against the Company,  the Company's
ability to generate  sufficient  cash from  operations  and to obtain  financing
sources  to  meet  its  future  obligations.  If the  Company's  Joint  Plan  of
Reorganization  is confirmed  and  consummated,  continuation  of the  Company's
business thereafter is dependent, among other things, on the Company's near-term
ability  to  obtain  adequate  financing  to  meet  cash  flow  obligations  and
medium-term ability to generate sufficient cash flow to meet its operational and
financing  requirements.   Other  factors  that  may  cause  actual  results  of
operations  and future  financial  condition  to differ from those  expressed or
implied in any forward-looking  statements  contained herein include loss of key
licenses,  adverse changes in  relationships  with key customers,  the degree of
acceptance of new product introductions,  the level of product returns,  changes
in consumer  preferences,  such as the growth of  computer-based  products,  and
consumer spending habits,  competition from existing and potential  competitors,
pricing pressures, costs of labor and other costs and expenses, demographics and
general economic conditions.

The  Company  cautions  that the  foregoing  list of  important  factors  is not
exclusive.  The  Company  does  not  undertake  to  update  any  forward-looking
statements  contained  herein  or that  may be made  from  time to time by or on
behalf of the Company.

Financial Condition, Liquidity and Capital Resources

As a result of incurring  operating  losses,  working capital  deficiencies  and
negative  operating cash flows,  the Company,  in 1998,  defaulted on its Senior
Notes, its NationsCredit Revolving Credit Facility, and other obligations.

After extensive  negotiations  with the Senior Notes Steering  Committee and the
TOPrS Steering Committee, the Company reached an agreement in principle with its
major  creditors,  pursuant  to  which  its  existing  long-term  debt  would be
significantly reduced. In accordance with that agreement, the Company and two of
its subsidiaries on February 26, 1999 filed petitions for  reorganization  under
Chapter 11 of the United States  Bankruptcy Code. The Debtors have filed a Joint
Plan of Reorganization  and a Disclosure  Statement  pursuant to Section 1125 of
the Bankruptcy Code.

As  a  result  of  the  defaults  and  the  filing  of  the   petitions  in  the
pre-negotiated  Chapter 11  proceeding,  the Company's  long-term  debt has been
classified  as current  liabilities.  The  Company's  independent  auditors have
issued their opinion on the consolidated financial statements as at December 26,
1998 with a going concern paragraph.  The consolidated financial statements have
been  prepared  assuming  that the Company will  continue as a going concern and
they  do  not  include  any  adjustments  relating  to  the  recoverability  and
classification of recorded asset amounts or the amounts and  classifications  of
liabilities that might result from the outcome of these uncertainties.

The Joint Plan of Reorganization  allows the Company to significantly reduce its
existing debt,  pay all trade  creditors in full and, under the direction of its
current   management  team,   proceed  with  its  publishing  and  entertainment
operations.  The restructuring of the Company's indebtedness and revised capital
structure will be provided for as follows:


                                       14

<PAGE>



o        The Senior Notes will be  converted  into (i) a new secured note in the
         principal  amount of $87.0 million due 2004,  with interest at the rate
         of 10%,  if paid in cash,  or, at the  Company's  option  for the first
         three years, 13.5% payable in kind, and (ii) 42.5% of the Company's new
         common stock to be issued post recapitalization, prior to dilution. The
         new note will be secured by the existing  collateral already granted to
         the  holders  of  the  Senior  Notes  as  well  as  certain  additional
         collateral.

o       The TOPrS  Indebtedness  will be converted into 50% of the Company's new
        common stock to be issued post recapitalization, prior to dilution.

o       The Golden Press Holdings, L.L.C. loan in the amount of $10 million will
        be converted into 5% of the Company's new common stock to be issued post
        recapitalization, prior to dilution.

Existing  preferred  and  common  shareholders  will  surrender  their  stock in
exchange for out-of-the money warrants to purchase 5% of the new Company's stock
to be  allocated  two-thirds  to the  preferred  and  one-third  to  the  common
shareholders,  to be  issued  post  recapitalization,  prior  to  dilution.  The
restructuring  also  provides for a management  stock  incentive  program for an
amount of common stock equal to 10% of the common stock issued on the  effective
date of the Joint Plan of Reorganization.  Of that amount, one-half (5%) will be
allocated to senior  management  upon the effective  date with the balance being
made   available  for  other   management   personnel  and  for  future  grants.
Additionally, on the effective date of the Joint Plan of Reorganization, Richard
E. Snyder's (the  Company's  current  Chairman of the Board and Chief  Executive
Officer)  employment  agreement will be amended,  as more fully described in the
Disclosure  Statement and the exhibits thereto,  and Mr. Snyder will receive, in
consideration  of his  surrendering  certain claims and rights under his current
employment  arrangements,  2-1/2% of the Company's new common stock, among other
things.  The  foregoing  summary  of the Joint Plan of  Reorganization  does not
purport  to be  complete  and is  subject  to the  terms  of the  Joint  Plan of
Reorganization.

There  can be no  assurance  that  the  Joint  Plan  of  Reorganization  will be
confirmed by the Bankruptcy  Court.  If the Company is unable to obtain approval
of its Joint Plan of  Reorganization,  the Company,  its creditors and/or equity
security holders may seek other alternatives for the Company, including the sale
of the Company or parts thereof through an auction process.

The Bankruptcy Court has approved a $55 million  debtor-in-possession  financing
facility  consisting  of a $45 million  credit  facility  and a $10 million term
facility  from The CIT Group  (the "DIP  Loan").  The DIP Loan is for an initial
period of two years with annual renewals  thereafter with interest rates ranging
from the Prime Rate plus 1/8th of 1% to 5/8th of 1%. Additionally,  the DIP Loan
contains various  financial  covenants which the Company is required to maintain
on a  quarterly  basis.  The DIP Loan is  secured  by  certain  receivables  and
inventory of the Company. The Company utilized the proceeds from the DIP Loan to
repay all outstanding amounts under the NationsCredit  Revolving Credit Facility
(approximately  $9.6 million) with the remainder  anticipated  to be utilized to
fund operations during the pendency of the Chapter 11 proceedings.

Continuation of the Company as a going concern is contingent  upon,  among other
things,  the  ability  to gain  approval  of the  requisite  parties  under  the
Bankruptcy Code and confirmation by the Bankruptcy Court of the final Joint Plan
of  Reorganization,  the  ability  to comply  with the DIP Loan,  resolution  of
various  litigation  against the Company and the Company's  ability to return to
profitability,  generate  sufficient cash from  operations and obtain  financing
sources  to  meet  its   future   obligations.   Assuming   the  Joint  Plan  of
Reorganization  is  confirmed  and  consummated,  continuation  of the  business
thereafter is dependent on the Company's  near-term  ability to obtain  adequate
exit financing to meet cash flow obligations and medium-term ability to generate
sufficient cash flow to meet its operational and financing  requirements.  Under
the Joint Plan of Reorganization, the Company's ability to obtain exit financing
is  limited  to $60  million  as long as the new  $87  million  secured  note is
outstanding, and initially to $45 million.

Assuming the Joint Plan of  Reorganization  is confirmed  and  consummated,  the
Company is expected to adopt "Fresh Start  Accounting"  in  accordance  with SOP
90-7  "Financial  Reporting by Entities in  Reorganization  under the Bankruptcy
Code."


                                       15

<PAGE>



Cash Flow for Fiscal 1998 (including  one-time transition costs of $12.2 million
associated  with the  strategic  redirection  of the Company)  utilized  cash of
approximately  $42.1 million  compared to cash utilized of  approximately  $82.3
million for Fiscal 1997 (including  one-time  transition  costs of $11.5 million
associated  with the  strategic  redirection  of the  Company  and  payments  of
restructuring costs accrued during Fiscal 1996 of $4.2 million).

Acquisitions of property,  plant and equipment were approximately  $13.4 million
during  Fiscal 1998 as compared to  approximately  $20.4  million  during Fiscal
1997.  Additions to the Company's film library were  approximately  $4.7 million
during Fiscal 1998 as compared to approximately $6.3 million during Fiscal 1997.

Working  capital  deficiency  at  December  26, 1998 was  approximately  $(264.3
million)  as  compared  to working  capital of  approximately  $95.8  million at
December 27, 1997. The decrease resulted primarily from cash reductions, funding
the loss  from  operations  and the  classification  of all debt  facilities  as
current.

During 1998, the Company  continued its  disposition of non-core assets with the
sale of its distribution  center in Fayetteville,  North Carolina.  The facility
was sold for  approximately  $7.2  million in cash which  resulted  in a loss of
approximately $1.8 million,  which was recorded in the consolidated statement of
operations  and  comprehensive  loss for the year ended  December 26,  1998.  In
addition,  the  Company  has  recorded  losses of (i) $4.7  million  principally
composed of a write-off of leasehold improvements  associated with the Company's
reduction of office  space in  connection  with their New York lease  agreement,
(ii) $9.2  million  related to the write down of the  manufacturing  facility in
Sturtevant,  WI,  and (iii) $1.4  million  related  to the  acceleration  of the
amortization period of one of the Company's entertainment productions.  In 1998,
the Company also incurred  approximately  $12.2  million in one-time  transition
costs  consisting  of: (i) $4.4 million in  outsourcing  premium,  and (ii) $7.8
million in costs associated with the move to the new facility in Sturtevant, WI.

On December 12,  1998,  the Company  signed an amended  license  agreement  with
Disney (the "Amended  Disney  License  Agreement").  The Amended  Disney License
Agreement  supersedes a prior  agreement  signed on September  26, 1997 that ran
through  December 31, 2001. The Amended Disney  License  Agreement  commenced on
December 12, 1998 and ends September 30, 2000 with a possible  extension through
September  30, 2001 under  certain  conditions.  Royalty rates under the Amended
Disney License  Agreement vary by product.  The Amended Disney License Agreement
contains minimum royalty guarantees.

The Company is required to meet  contractual  payments in effect at December 26,
1998 of $13.4  million in Fiscal 1999 and $14.9 million in Fiscal 2000, of which
the minimum  royalty  guarantees  under the  Amended  Disney  License  Agreement
account for a significant portion. The Company expects to meet these obligations
through cash generated from operations or from its DIP Loan or exit financing.

The Company has announced its intention to sell the Sturtevant,  WI facility. On
March 25, 1999, the Bankruptcy Court gave formal approval to the Company to sell
its Adult  Publishing  business  for  approximately  $11.0  million,  subject to
working capital and certain other closing conditions.

The Company  reports  results under three  segments:  (i) the Consumer  Products
Segment,  (ii) the  Commercial  Products  Segment  and (iii)  the  Entertainment
Segment.  The Consumer Products Segment  ("Publishing")  includes the Children's
and Adult Publishing  Divisions and, during the eleven months ended December 28,
1996,  Penn  Corporation,  which was sold on December 23, 1996.  The  Commercial
Products Segment  includes the Commercial  Printing  division.  The Golden Books
Entertainment  Group,  which was formed following the Broadway Video Acquisition
on August 20, 1996, is reported as the  Entertainment  Segment and includes home
video, television program licensing, merchandising and other character licensing
results  since  its  date of  acquisition.  During  1998,  the  Company  adopted
Statement of Financial  Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" ("SFAS 131").

On November  30, 1996,  the Company  changed its fiscal year so as to end on the
last  Saturday of  December in each year.  As a result,  the  Company's  current
fiscal period of the twelve months ended December 26, 1998 (Fiscal 1998) is


                                       16

<PAGE>



compared to the twelve months ended December 27, 1997 (Fiscal 1997),  and Fiscal
1997 is compared to the eleven months ended December 28, 1996 (Fiscal 1996).

Fiscal Year Ended December 26, 1998 Compared to Fiscal Year Ended December 27,
        1997

Revenues

Total revenues for Fiscal 1998 decreased $49.3 million (20.3%) to $194.2 million
compared  to $243.5  million  for Fiscal  1997.  Excluding  the 20.9  million in
revenues from the Cambridge printing facility which was sold during Fiscal 1997,
revenues  decreased  $28.4 million (12.8%) to $194.2 million for the Fiscal 1998
compared to $222.7 million for Fiscal 1997 due to the factors described below.

Consumer  revenues  decreased $21.0 million (12.2%) to $150.7 million for Fiscal
1998 compared to $171.7  million for Fiscal 1997. The decline for Fiscal 1998 is
primarily due to lower electronic and education categories sales, higher returns
in Fiscal 1998, and a temporary  reduction in buying by certain major retailers,
including  K-Mart and Zellers during the first half of Fiscal 1998. This decline
was partially offset by revenue increases in the Company's  strategically priced
Merrigold line,  improvements in the trade and novelty  category,  and increased
sales with certain major retailers including Target and other key distributors.

Entertainment  revenues  decreased $0.3 million (1%) to $29.0 million for Fiscal
1998 compared to $29.3 million for Fiscal 1997. The decrease for Fiscal 1998 was
primarily due to a decline in video sales of  approximately  $3.6 million offset
by increases  in  television  distribution  and  merchandising  revenues of $2.5
million and $0.7 million, respectively.

Commercial revenues for Fiscal 1998 (excluding the 20.9 million in revenues from
the Cambridge  printing  facility  which was sold during Fiscal 1997)  decreased
$7.1 million (32.9%) to $14.5 million compared to $21.6 million for Fiscal 1997.
The overall  decline for Fiscal 1998 was primarily due to the new  manufacturing
facility in  Sturtevant,  WI, which did not become fully  operational  until the
second quarter of 1998.

Gross Profit

Total gross profit  (excluding  gross profit of $3.5 million in Fiscal 1997 from
the sale of the Cambridge Printing Facility that was sold as described above and
one-time  transition costs of $4.4 million in Fiscal 1998 related to outsourcing
premiums) decreased $46.3 million to $17.5 million (72.6)% for Fiscal 1998, from
$63.8  million  for  Fiscal  1997  due  to the  factors  described  below.  As a
percentage  of revenues,  total gross profit margin  (excluding  the items noted
above) decreased to 9.0% for Fiscal 1998 from 28.9% in Fiscal 1997.

Consumer gross profit decreased $42.3 million (87.8)% to $5.9 million for Fiscal
1998,  compared to $48.2  million for Fiscal 1997.  As a percentage of revenues,
the Consumer  gross profit  margin  decreased to 3.9% for Fiscal 1998 from 28.1%
for Fiscal 1997.  The decrease in gross profit for Fiscal 1998 was primarily due
to higher  manufacturing  costs, higher royalty rates associated with the Disney
and Mattel license arrangements,  an increased provision for royalty guarantees,
higher inventory obsolescence reserves for inventory relating to expired license
agreements, unprofitable product, and increased warehousing and shipping costs.

Entertainment  gross profit  decreased $4.3 million (25.6)% to $11.6 million for
Fiscal  1998  compared to $15.6  million for Fiscal  1997.  As a  percentage  of
revenues, the gross profit margin decreased to 40.0% for Fiscal 1998 compared to
53.1% for Fiscal 1997.  The  decrease is mainly  attributable  to lower  margins
related  to Home  Video  sales  due to  lower  overall  sales  and an  increased
provision for returns.  This decrease was  partially  offset by favorable  gross
profit related to television distribution and merchandising sales.

The Commercial  Products segment utilizes the Company's  manufacturing  facility
and third-party  manufacturers  to provide  printing,  graphic and  distribution
services to both the Company and third parties.  During Fiscal 1997, the Company
sold  its  primary  third  party  printing   operation   (Cambridge)  which  had
contributed a gross profit of


                                       17

<PAGE>



$3.5 million for Fiscal 1997.  During Fiscal 1998,  the Company's  manufacturing
facility  was  utilized  primarily  for  internal   production.   Such  internal
production costs were allocated to the Consumer Products segment.

Selling, General and Administrative Expenses

Selling,  general and administrative  expenses (before consideration of one-time
transition  costs described  below)  decreased $9.4 million to $90.5 million for
Fiscal  1998  compared  to $99.9  million  for Fiscal  1997.  The  decrease  was
primarily  attributable to lower advertising,  editorial and design costs, and a
general  reduction of overhead costs which were partially  offset by an increase
in the Company's general bad debt reserve.

One-time transition costs of $7.8 million in Fiscal 1998 was comprised primarily
of costs related to the move to the new  manufacturing  facility in  Sturtevant,
WI. One-time  transition  costs of $11.5 million in Fiscal 1997 was comprised of
$3.1 million of moving costs  associated with the new  facilities,  $3.5 million
for  outsourcing  the  information  technology   department,   $4.5  million  in
consulting  services  associated with implementing the Company's  Strategic Plan
and $0.4 million in other costs.

Restructuring, Net of (Gains) Losses on Sales of Assets

Restructuring,  net of  (gains)  losses on sales of assets  of $6.5  million  in
Fiscal 1998 was  comprised  of: (i) $4.7  million  principally  consisting  of a
write-off of leasehold  improvements  associated with the Company's reduction of
office space in  connection  with their New York lease  agreement  and (ii) $1.8
million  associated with the sale of the Fayetteville  facility.  Restructuring,
net of (gains)  losses on sales of assets of $(10.8  million) in Fiscal 1997 was
comprised primarily of a gain on the sale of the Company's Cambridge  commercial
printing operations.

Write-Off of Assets

Write-off of assets of $10.6  million in Fiscal 1998 was  comprised on: (i) $9.2
million associated with the write-down of the Company's  manufacturing  facility
in Sturtevant, WI due to recurring losses by the Company's Children's Publishing
business  primarily  due  to  reduced  level  of  sales,  high  operating  costs
(including an unfavorable lease agreement and  disadvantageous  union contracts)
and the  underutilization  of the  facility's  capacity  and (ii)  $1.4  million
related to the acceleration of the  amortization  period of one of the Company's
entertainment productions.

Interest Income

Interest income for Fiscal 1998 decreased $3.9 million to $1.7 million from $5.6
million for Fiscal 1997.  The decrease in interest  income was  attributable  to
decreased  investment  income  as a  result  of lower  cash and cash  equivalent
balances throughout the year.

Interest Expense

Interest  expense  (including  the  distributions  on the TOPrS) for Fiscal 1998
increased by $6.7  million to $28.7  million,  as compared to $22.0  million for
Fiscal  1997  due  to  increased  debt  levels  primarily  associated  with  the
NationsCredit  Revolving  Credit  Facility  which was entered into in June 1998.
Total average  outstanding  debt  (including  the TOPrS) was $281.3  million for
Fiscal 1998 and $265.0 million for Fiscal 1997.



                                       18

<PAGE>



Income Taxes

The income tax benefit recorded in Fiscal 1998 primarily relates to current year
losses of the  Company's  Canadian  Subsidiary,  which files  separately in that
jurisdiction.  These losses are expected to offset income already  recognized by
that Subsidiary.  In Fiscal 1997, the tax provision primarily related to various
state and local income taxes imposed on the Company.

At December  26,  1998,  the Company has net  operating  loss  carryforwards  of
approximately  $305  million  with  expiration  dates  between  2011  and  2018.
Utilization of such losses in the future could be  significantly  limited should
there have been an ownership change (as defined in Internal Revenue code Section
382). Further, there are specific modifications which may be required to be made
to the net  operating  loss  carryforwards  of the  Company  as a result  of the
Chapter 11  bankruptcy  proceedings.  At such time as the Company  emerges  from
bankruptcy,  it is likely  there will be an  ownership  change for tax  purposes
which would  result in a Section 382  limitation  on future  utilization  of net
operating  losses.  Since there are a number of variables which could affect the
Company's  Bankruptcy  proceedings  (including  the fact that the Joint  Plan of
Reorganization  has not yet been approved by the  Bankruptcy  Court),  it is not
currently  possible  to  determine  whether the  Company's  net  operating  loss
carryforwards will produce tax benefits in the future.  Benefit was not provided
for these loss carryforwards at December 26, 1998.

Net Loss

The net loss for Fiscal 1998 was $(128.6)  million,  or $(4.89) per basic common
share,  compared to a net loss of $(49.7)  million , or $(2.18) per basic common
share, for the year ended December 27, 1997. The changes were due to the factors
described above.


Fiscal Year Ended December 27, 1997 (Fiscal 1997)
Compared to Eleven Months Ended December 28, 1996 (Fiscal 1996)

Revenues

Revenues for Fiscal 1997 decreased  $14.9 million (5.8)% to $243.5  million,  as
compared to $258.4  million  (before  consideration  of $3.4 million of one time
charges to establish reserves to resolve differences with customers), for Fiscal
1996.

Consumer  Products  Segment  revenues  decreased $40.2 million (19.0)% to $171.7
million for Fiscal 1997,  compared to $211.9 million  (before  consideration  of
$3.4 million of one time charges to  establish  reserves to resolve  differences
with  customers)  for Fiscal  1996.  The  decrease in revenue  for the  Consumer
Products  Segment for Fiscal 1997  resulted  principally  from the sale of Penn,
which was sold in  December of 1996  (revenues  of $40.7  million)  along with a
sales decline in electronic storybooks, offset by a sales increase in classics.

Commercial Products Segment revenues were $42.4 million for both Fiscal 1997 and
Fiscal  1996.  During  1997 the  Company  has  focused  on  internal  production
requirements as inventory  levels have been built in preparation for the move to
the Company's manufacturing facility early in 1998.

Entertainment  Segment  revenues  increased  $25.2  million to $29.3 million for
Fiscal 1997  compared to $4.1 million for Fiscal 1996.  The increase in revenues
for 1997 was due to the fact that the Entertainment  Segment was active for only
four months in 1996 compared to the full year during 1997.

Gross Profit

Gross profit  increased  $15.7 million (30.4)% for Fiscal 1997 to $67.3 million,
compared to $51.6  million  (before  consideration  of $28.4 million in one-time
revenue and cost of sales charges associated with the strategic redirection


                                       19

<PAGE>



of the Company,  comprised of $3.4 million in revenue  reserves  established  to
resolve differences with customers, $17.6 million relating to the discontinuance
or  replacement  of certain  product  lines and $7.4 million of other  inventory
related  costs) for Fiscal 1996. As a percentage  of revenues,  the gross profit
margin  increased  to 28.9% for Fiscal 1997 from 20.0% for Fiscal  1996  (before
consideration of one time charges  associated with the strategic  redirection of
the Company).

In the Consumer Products Segment,  gross profit increased $1.1 million (2.3)% to
$48.2 million for Fiscal 1997, compared to $47.1 million for Fiscal 1996 (before
consideration  of one time  charges  of $28.4  million  described  above).  As a
percentage  of  revenues,  the gross  profit  margin for the  Consumer  Products
Segment  increased  to 28.1% for Fiscal  1997 from 22.2% for  Fiscal  1996.  The
increase in Consumer Products Segment gross profit for Fiscal 1997,  compared to
Fiscal 1996, resulted from lower manufacturing costs.

Commercial  Products Segment gross profit decreased $0.4 million (10.3%) to $3.5
million  for  Fiscal  1997,  compared  to $3.9  million  for Fiscal  1996.  As a
percentage  of revenues,  the gross profit  margin for the  Commercial  Products
Segment decreased to 8.2% for Fiscal 1997, compared to 9.1% for Fiscal 1996.

The Entertainment  Segment gross profit increased $15.0 million to $15.6 million
for Fiscal 1997  compared to $0.6  million for Fiscal 1996.  As a percentage  of
revenues,  the gross profit  margin was 53.1% for Fiscal 1997  compared to 15.8%
for Fiscal 1996.  The  increase in the  Entertainment  gross  profit  margin was
primarily  due to higher  levels of home video sales  activity with higher gross
margins in Fiscal 1997 compared to Fiscal 1996.

Selling, General and Administrative Expenses

Selling,  general and  administrative  expenses  (before  consideration of $11.5
million of one time  transition  costs  associated  with the  redirection of the
Company,  which  are  comprised  of (i)  $3.5  million  for  outsourcing  of the
information technology department,  (ii) $3.1 million of moving costs associated
with new facilities,  (iii) $4.5 million in consulting  services associated with
implementing the Strategic Plan, and (iv) $0.4 million in other costs were $99.9
million for Fiscal 1997, a decrease of $4.6 million from $104.5 million  (before
giving  consideration  to one time charges of $38.2 million,  comprised of $11.0
million  relating to costs  associated  with new  management's  plans to resolve
certain legal and contractual matters, $9.5 million in consulting fees and other
costs,  and $17.7 million of expenses  related to the  acquisition  of an equity
interest  by GP  Holding).  These  reductions  were  primarily  attributable  to
reductions in selling expenses due to lower sales levels.

Interest Expense, net

Interest income for Fiscal 1997 increased $1.4 million to $5.6 million from $4.2
million for Fiscal 1996. The increase  results from higher average cash balances
during 1997 due to cash generated towards the end of 1996 which has subsequently
been  reduced  during  1997  to fund  operations,  previous  period  restructure
expenses and one time transition costs necessary to implement management's plans
to change the strategic direction of the Company. The cash increases during 1996
were  generated as follows (1) the sale of the  Company's  Series B  Convertible
Preferred  Stock to GP Holding for an aggregate  purchase price of $65.0 million
in May 1996,  (2) the issuance of  Preferred  Securities  for $115.0  million in
August 1996, (3) the sale of the Company's  Common Stock for $25.0 million to HC
Crown Corporation,  an affiliate of Hallmark Cards,  Incorporated,  in September
1996  and  (4)  the  sale  of  Penn  Corporation  for  consideration   including
approximately  $14.0  million in cash,  partially  offset by the Broadway  Video
Acquisition  for $81.0 million in cash in August 1996 and the  redemption of the
Company's Series A Preferred Stock for $10.0 million in May 1996.

Interest expense (including the distributions on the Preferred Securities),  for
Fiscal 1997  increased  by $7.4 million to $22.0  million,  as compared to $14.6
million for Fiscal 1996.  The increase in interest  expense was primarily due to
higher  average debt  outstanding  resulting  from the issuance of the Preferred
Securities  in August  1996.  Total  average  outstanding  debt  (including  the
Preferred  Securities)  increased to $265.0 million for Fiscal 1997, compared to
$194.4 million for Fiscal 1996.


                                       20

<PAGE>




Income Taxes

The Company did not incur a significant provision or benefit for income taxes in
Fiscal 1997. As such,  operations  for Fiscal 1997 did not include an income tax
benefit  from  domestic  operations  as no tax benefit was provided on operating
losses.  The  provision for Fiscal 1996  pertained  principally  to  anticipated
resolution of outstanding issues from prior years.

The net loss for Fiscal 1997 was $(49.7)  million,  or $(2.18) per basic  common
share,  compared to a net loss of $(197.5) million,  or $(8.73) per basic common
share for Fiscal 1996. Results for Fiscal 1997 include one time transition costs
of $11.5  million,  and a gain on the  disposal  of assets of $10.8  million  as
follows:  (i) $10.2  million on the sale of the  Cambridge  facility,  (ii) $0.3
million on the sale of the old Racine plant,  and (iii) $0.3 million on the sale
of other assets.  Results for Fiscal 1996 included one time writedowns and other
charges in the consolidated  financial statements totaling  approximately $132.3
million as follows:

(i)      a restructuring charge totaling $65.7 million including:

         o    $21.5  million  loss on sale of disposal  of a business  resulting
              from the Company's decision to exit non-core business activities;
         o    $24.3 million non-cash charge consisting of: (i) $10.2 million for
              the  write-down  of  the  commercial  printing  operation  to  net
              realizable  value  to  be  disposed  of  in  connection  with  the
              Company's  plan to exit non-core  business  activities,  (ii) $9.6
              million  for  the  loss  on sale of  assets  associated  with  the
              Company's   strategic   decision  to  outsource  its   information
              technology department and (iii) $4.5 million for the write-down of
              assets to net  realizable  value  which  have been  identified  as
              non-productive  assets as a result of the Company's strategic plan
              to operate in a new efficient manufacturing facility;
         o    $8.0 million charge for severance related to the above;
         o    $3.0  million  net  realizable  value  adjustment  related to idle
              facility  associated  with the Company's game business,  which was
              previously sold;
         o    $7.6 million  write-off of  non-productive  assets associated with
              the termination of customer program initiatives in connection with
              the strategic redirection of the Company; and
         o    $1.3  million  for  facility   exit  costs   related  to  a  lease
              termination which were paid in December 1996.

(ii)     a cost of sales adjustment of $25.0 million comprised of:

         o    $17.6 million of costs  pertaining  to the  Company's  decision to
              discontinue  or replace  certain  product lines and  expeditiously
              liquidate related inventory and slow moving product; and
         o    $7.4  million  of  other  inventory   related  costs,   consisting
              primarily of licensing and prepublication costs.

(iii)    a selling,  general and administrative charge of $11.0 million relating
         to costs associated with management's  revised plans to resolve certain
         legal and contractual matters.

(iv)     adjustments totaling $5.7 million consisting of:

         o    $3.4 million in revenue adjustments; and
         o    $2.3  million in  operating  expenses  to  establish  reserves  to
              resolve  differences with customers with a view toward mending and
              improving the Company's relationships with its customers.

(v)      approximately $17.7 million of charges in connection with the sale of a
         significant equity interest to GP Holding.



                                       21

<PAGE>



(vi)     $7.2 million of other one time charges consisting primarily of:

         o    $3.8  million in  consulting  fees  incurred  in  relation  to new
              management's review of the operations of the
              Company;

         o    $1.7 million of facility costs; and o other one time miscellaneous
              charges of $1.7 million.

Legal Proceedings

The Company is currently involved in various litigation as described under "Item
3. Legal  Proceedings."  While it is not  feasible to predict or  determine  the
outcome of the proceedings,  it is the opinion of Management that their outcomes
have been adequately reserved for.

Year 2000 Compliance

Management  has  initiated an  enterprise-wide  program to prepare the Company's
computer  systems  and  applications  for the  Year  2000  (Y2K),  as well as to
identify  and  address  any other Y2K  operational  issues  which may affect the
Company.  Updates on the Company's Year 2000 program are presented  regularly to
senior management.

The  Company's  Year  2000  program  began  in  1997  and  is  currently   being
administered  by internal staff  augmented by outside  consultants.  The program
consists of the following three components relating to the Company's operations:
(i) Information  Technology ("IT") computer systems and applications that may be
impacted by the Year 2000  problem,  (ii) non-IT  systems  and  equipment  which
include  embedded  technology  that may be impacted by the Year 2000 problem and
(iii)  third-party  suppliers and customers  with which the Company has material
relationships.

The general  phases common to all three  components  of the Company's  Year 2000
program are: (1) ASSESSMENT (the  identification,  assessment and prioritization
of the Y2K issues  facing the Company in each of the above areas and the actions
to be taken in respect of such issues or items); (2) REMEDIATION (implementation
of  the  specific  actions   determined  upon  assessment,   including   repair,
modification  or  replacement  of items that are  determined not to be Year 2000
compliant);  (3) TESTING  (testing of the new or modified  information  systems,
other systems, and equipment to verify the Year 2000 readiness); (4) CONTINGENCY
PLANNING (designing contingency and business continuation plans for the Company;
and (5)  IMPLEMENTATION  (actual  operation  of systems  and  equipment  and, if
necessary,  the actual implementation of any contingency plans in the event Year
2000 problems occur, notwithstanding the Company's remediation program).

The progress to date of the three  components in the Company's Year 2000 program
is as follows:

IT SYSTEMS AND  APPLICATIONS.  The principal IT systems and  applications of the
Company  affected  by  Year  2000  issues  are  Order  Processing,   Purchasing,
Manufacturing,  Distribution  Systems  and  Financial  Systems.  The Company has
completed the Assessment  phase with respect to all IT systems and  applications
and has begun remediation  efforts. The Company anticipates that the replacement
phase related to these principal systems and applications should be completed by
the  end  of  July  1999  and  that  the  Testing,   Contingency   Planning  and
Implementation  phases  should be  substantially  completed by the end of August
1999. In addition,  the Company  expects to implement the remainder of Year 2000
remediated IT systems and  applications  based on current  assessments  prior to
September 30, 1999.

Excluding  normal system  upgrades,  the Company  estimates that total costs for
conversion  and  testing of new or modified  IT systems  and  applications  will
aggregate  approximately  $2.0  million to $2.2 million of which an aggregate of
$.25  million had been  incurred to date.  Total  conversion  and testing  costs
through fiscal 1999 are estimated at $1.9 million.



                                       22

<PAGE>



NON-IT SYSTEMS AND EQUIPMENT.  The principal non-IT systems and equipment of the
Company  which  utilizes  embedded  technology  affected by Y2K issues  include:
security systems,  elevator  systems,  HVAC, phone systems,  business  machines,
printing press equipment and distribution systems. The Company has completed the
Assessment of its principal  non-IT  equipment  and has begun  remediation.  The
Company  anticipates  the Remediation  phase related to these principal  systems
should be substantially completed by the end of April 1999 and that the Testing,
Contingency Planning and Implementation phases should be substantially completed
by the end of May, 1999. The Company estimates that total costs for modifying or
replacing  new systems and  equipment  in this area will be  approximately  $.50
million,  of which an aggregate of $.05 million has been incurred to date. Total
modification  and  replacement  costs through  fiscal 1999 are estimated at $.45
million.

MATERIAL  THIRD PARTY  RELATIONSHIPS.  Material  third  party  suppliers/vendors
affected by Year 2000 issues relates  primarily to paper and printing  supplies,
distribution/delivery services,  fulfillment,  licensing and financial services.
The Assessment  phase for  determining  the Year 2000 readiness of the Company's
principal  suppliers  is ongoing;  however the  Company  has  received  dates of
compliance from a majority of those suppliers.  Concentration  has been centered
on mission  critical vendors without whom the Company would be at risk for doing
business.

Substantially all of the Company's  principal  suppliers have reported that they
have  initiated  Year 2000  programs.  The Company  will seek updates from these
parties to attempt to ascertain the adequacy of their  programs as it relates to
the Company  including  personal  contact  interviews for those mission critical
suppliers.  The Company expects to have completed these updates by May 1999. The
Company  anticipates that it will develop  contingency plans with respect to its
principal third party suppliers by the end of May 1999.  Costs to the Company in
this area,  excluding costs due to unanticipated third party Year 2000 problems,
will principally  consist of internal staff costs,  which are not expected to be
material.

Including the costs set forth above,  the Company  estimates  that total program
costs  for  implementing  its Year 2000  program  will be $2.5  million  to $2.7
million,  of which  total  program  costs to date have been $.3  million.  Total
program costs through fiscal 1999 are estimated at $2.2 million to $2.4 million.
These costs include costs  related to the matters  above,  as well as consulting
and  other  expenses  related  to  infrastructure  and  facilities  enhancements
necessary  to prepare the  Company  for the Year 2000.  The costs do not include
internal  staff  costs  incurred  or to  be  incurred  in  connection  with  the
implementation  of the  program.  Costs are expected to be expensed as incurred,
and cash generated from the Company's  operations or borrowings under its credit
agreements will fund such costs. The above-stated amounts have been budgeted for
the appropriate fiscal years. Projected Year 2000 costs for fiscal 1999 comprise
approximately  15% to 20% of the  Company's IT budget for that period.  Based on
the current progress of the Company's Year 2000 program, the Company anticipates
its Year 2000 program to be substantially  completed by September 30, 1999. As a
result of the Company's Year 2000 program,  it is anticipated  that there may be
delays in other new and continuing IT projects,  although diligence is being put
forth to allow for concurrent  development where possible.  However, no material
adverse  affect is expected  from any delays,  as the Company has  procedures in
place to ensure that critical  projects will be handled in a timely manner.  The
cost of the Company's Year 2000 program and the dates provided  herein are based
on  management's  best  estimates,   which  were  derived   utilizing   numerous
assumptions of future events, many of which are beyond the Company's control.

The  failure  to  correct  a  material  Year  2000  problem  could  result in an
interruption in certain normal business activities or operations of the Company.
Such interruptions could materially and adversely affect the Company's financial
condition,  results of  operations  and cash flows.  Based on current  plans and
assumptions,  the Company  does not expect that the Year 2000 issue will have an
adverse  impact  on the  Company  as a  whole.  Due to the  general  uncertainty
inherent in the Year 2000 problem,  however,  there can be no assurance that all
Year 2000 problems will be foreseen and corrected, or if foreseen,  corrected on
a timely basis,  or that no material  disruption  to the  Company's  business or
operations  will occur.  Further,  the Company's  expectations  are based on the
assumption that there will be no general failure of external local,  national or
international   systems  (including  power,   communication,   postal  or  other
transportation  systems)  necessary  for the ordinary  conduct of business.  The
Company is currently  assessing  those  scenarios in which  unexpected  failures
would have a material adverse effect on the Company and will attempt to develop


                                       23

<PAGE>



contingency  plans  designed  to  deal  with  such  scenarios.  There  can be no
assurance, however, that successful contingency plans can, in fact, be developed
or implemented.

Seasonality

The Company has historically  experienced significant  fluctuations in quarterly
operating results. The children's publishing business in general is seasonal and
depends to a  significant  extent on the  Christmas  selling  season,  generally
resulting in a disproportionately higher percentage of revenues in the Company's
third  fiscal  quarter.  The  Company's  quarterly  operating  results also will
fluctuate  based on the timing of the  introduction  of  products  that  utilize
licensed characters,  which, in the case of characters appearing in movies, will
be  dependent  upon the period in which costs and expenses  attributable  to the
development and introduction of such products are incurred.

Accounting for Derivative Instruments and Hedging Activities

In June 1998,  the Financial  Accounting  Standard's  Board issued  Statement of
Financial  Accounting  Standards No. 133, Accounting for Derivative  Instruments
and Hedging  Activities ("SFAS No. 133"), which is effective for all quarters of
fiscal years beginning after June 15, 1999. SFAS No. 133 requires that an entity
recognize  all  derivatives  as either assets or  liabilities  and measure those
instruments at fair value. Unless the entity can treat the derivative as a hedge
according to certain criteria,  the entity may be required to deduct any changes
in the derivative's fair value from its operating  income.  The adoption of SFAS
133 is not  expected  to have a material  effect on the  Company's  Consolidated
Financial Statements.




                                       24

<PAGE>



ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.




                                       25

<PAGE>



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The  information  required  by  Item 8 of  Part  II is  incorporated  herein  by
reference to the Consolidated  Financial  Statements filed with this report; see
Item 14 of Part IV.

<TABLE>
CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In Thousands, Except For Per Share Data)
--------------------------------------------------------------------------------

<CAPTION>

<S>                                             <C>               <C>                 <C>                 <C>    

                                                  First             Second              Third             Fourth
                                                 Quarter            Quarter             Quarter           Quarter
1998
   Total revenues                              $   46,534        $    43,145        $    52,020        $    52,527
   Gross profit                                     9,559              1,313              6,589             (4,376)
   Net loss (1)                                   (20,872)           (30,642)           (18,850)           (58,235)
   Net loss per common share - basic                (0.85)             (1.21)             (0.71)             (2.10)
   Weighted average number of common
      shares - basic                               27,077             27,165             27,525             27,965

1997
   Total revenues                              $   65,624        $    50,445        $    52,805        $    74,687
   Gross profit (loss)                             20,815             15,135             15,599             15,774
   Net loss (2)                                    (8,872)           (11,292)           (17,899)           (11,617)
   Net loss per common share - basic                (0.41)             (0.52)             (0.76)             (0.51)
   Weighted average number of common
     shares - basic                                25,983             26,139             26,489             26,814

</TABLE>

(1)  Includes a charge of $9.2  million  relating to a writedown  of  long-lived
assets at the Sturtevant, WI facility during the fourth quarter.

(2)  Includes  gain on  disposal  of a number of  items,  mainly  the  Cambridge
facility, of $10,209 during the fourth quarter.





                                       26

<PAGE>



ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
              FINANCIAL DISCLOSURE

None.





                                       27

<PAGE>



                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  with  respect to Executive  Officers  required by this item is
included in Part I of the Company's Annual Report on Form 10-K.

                             Directors of Registrant

Shahara Ahmad-Llewellyn
Director since:  May 8, 1996
Age: 55

Ms.  Ahmad-Llewellyn is Vice Chairman of Philadelphia Coca-Cola Bottling Company
Inc.  From its founding in 1971 until 1991,  she served as President of H.A.V.A.
Inc., a home health care company. Ms.  Ahmad-Llewellyn is President of the Board
of Directors of the Northside  Center for Child  Development and a member of the
Board of Directors of The New 42nd Street Corporation (The New Victory Theatre),
Jazz at  Lincoln  Center,  WNET  Channel  Thirteen  and the  National  Board  of
America's  Promise -- The Alliance  for Youth.  Ms.  Ahmad-Llewellyn  previously
served as  Chairperson of the Small Business  Administration  District  Advisory
Council for Region II, as Vice  President  of the Home Care  Council of New York
City Inc. and as a Presidential appointee to the White House Conference on Small
Business.

Lorne Michaels
Director since:  September 17, 1996
Age:  54

Mr.  Michaels  is  the  Chairman  and  founder  of  Broadway  Video,   Inc.,  an
entertainment  company based in New York City.  Mr.  Michaels has worked for the
National  Broadcasting  Company  since  1975,  producing  such  comedy  shows as
Saturday Night Live and Late Night With Conan O'Brien.  Since 1991, Mr. Michaels
has produced motion pictures for Paramount Pictures.

Marshall Rose
Director since:  May 8, 1996
Age:  62

Mr. Rose is Chairman of The Georgetown Group, Inc., a privately held real estate
development and financial  services group.  Mr. Rose serves as a director of One
Liberty  Properties,  Estee  Lauder  Companies,  Inc. and BRT Realty  Trust.  In
addition,  Mr.  Rose serves as Chairman of the Board of Trustees of The New York
Public  Library;  as a Trustee of the New York  University  Medical  Center;  as
Director of Lincoln Center for the Performing Arts; as a member of the Executive
Committee of the Board of Visitors of the Graduate School and University  Center
of The City University of New York; as Director and Executive  Committee  member
of the Bryant Park Restoration  Committee;  and as a Trustee of the Robert Steel
Foundation for Pediatric Cancer Research.

Richard E. Snyder
Director since:  May 8, 1996
Age:  65

Mr.  Snyder has been  Chairman  of the Board of  Directors  and Chief  Executive
Officer of the  Company  since May 8, 1996.  Mr.  Snyder  was  President  of the
Company from  January 31, 1996 to May 8, 1996.  Prior to that time,  Mr.  Snyder
had, since 1994, been an independent  business  consultant and investor.  He was
the Chairman and Chief Executive  Officer of Simon & Schuster from 1975 to 1994.
Mr. Snyder is a director of Reliance Group Holdings, Inc. and HSN, Inc.


                                       28

<PAGE>



H. Brian Thompson
Director since:  1996
Age:  60

Mr.  Thompson has been  Chairman of the Board of Directors  and Chief  Executive
Officer of LCI International and its subsidiaries  since July 1991. Mr. Thompson
previously served as Executive Vice President of MCI Communications  Corporation
from 1981 to 1990, with  responsibility for its operating  divisions,  including
MCI International.  Prior to that time, Mr. Thompson was a management consultant
with  McKinsey & Company  for nine years in its  Washington,  D.C.  office.  Mr.
Thompson  serves as a member of the board of directors of Microdyne  Corporation
and  Comcast UK Cable  Partners  Limited  and is a member of the Listed  Company
Advisory Committee to The New York Stock Exchange Board of Directors.

John L. Vogelstein
Director since:  May 8, 1996
Age:  64

Mr. Vogelstein has served since 1982 as Vice Chairman of the Board of Directors,
and since 1994 as President,  of E.M. Warburg, Pincus & Co., LLC. Prior thereto,
he was an officer and a director of E.M. Warburg,  Pincus & Co., LLC and certain
of its affiliates.  Mr. Vogelstein currently is a director of ADVO Inc., Journal
Registry Company, Mattel, Inc., and several privately held companies.

Douglas M. Karp
Director since:  July 8, 1998
Age:  43

Mr. Karp is Managing  Director and a member of the Operating  Committee of E. M.
Warburg  Pincus &  Company,  L.L.C.  Prior to  joining  Warburg  Pincus he was a
Managing  Director of Mergers and Acquisitions at Salomon  Brothers,  Inc. and a
Manager with the Boston Consulting Group and founder of its New York office. Mr.
Karp is a member  of the Board of  Directors  of Qwest  Communications,  Journal
Register Company,  TV Filme, Inc., Primus  Telecommunications  Group,  StarMedia
Network,  Inc.  and  PageNet do Brasil.  He is a member of the  Connecticut  and
Florida  Bars,  a member  of the Board of  Trustees  of the New  Canaan  Country
School,  a  director  of the  Horizons  education  program  and the  City  Parks
Foundation.





                                       29

<PAGE>



ITEM 11.  EXECUTIVE COMPENSATION

The following table sets forth the aggregate compensation paid or accrued by the
Company to (i) its Chief Executive Officer,  (ii) its executive officers,  other
than the Chief  Executive  Officer,  who were serving as  executive  officers at
December 26, 1998, and (iii) two former  executive  officers who would have been
among the four most highly  compensated  executive officers other than the Chief
Executive Officer during Fiscal 1998.

<TABLE>
<CAPTION>

                           Summary Compensation Table



                                                                                 Long Term Compensation
                                                                                -------------------------
                                Annual Compensation                                     Awards
                         --------------------------------------------------------------------------------

<S>                      <C>        <C>           <C>           <C>            <C>              <C>             <C>    
                                                                Other     
        Name and                                                Annual         Restricted       Securities        All Other
       Principal                                                Compensation    Stock           Underlying      Compensation
       Position          Year (1)   Salary ($)    Bonus ($)       ($)          Awards ($)       Options (#)          ($
       --------          --------   ----------    ---------       ---          ----------       -----------          --

Richard E. Snyder        FY98       $949,985       ---       $403,099 (2)      $  ---              ---           $1,722 (3)
Chairman and Chief       FY97       $937,885    $500,000     $442,147             ---           293,210 (4)      $1,722 (3)
Executive Officer        FY96        465,891     491,667      276,143             ---         1,271,089             431

Philip Galanes           FY98        319,107         ---          ---             ---           240,000             ---
Chief Administrative     FY97        236,925 (5)     ---          ---             ---            62,243 (5)         ---
Officer                  FY96         16,053         ---          ---             ---            35,000             ---

Richard Collins          FY98        317,852         ---          ---             ---            65,000             ---
Chief Operating          FY97         94,490         ---          ---             ---            57,350             ---
Officer                  FY96            ---         ---          ---             ---               ---             ---

Robert J. Asahina (6)    FY98        200,000         ---          ---             ---               ---             ---
President of the         FY97        200,000         ---(7)       ---             ---            26,682 (7)         ---
Golden Books Adult       FY96        153,846      75,000          ---             ---           100,000             ---
Publishing division

Eric Ellenbogen (8)      FY98      1,062,486         ---          ---             ---            65,000          $1,722 (3)
President of the         FY97        769,808         ---(9)       ---             ---           277,194 (9)         ---
Golden Books             FY96        256,731     105,000          ---             ---           500,000             ---
Entertainment Group,
Executive Vice
President and
Director

John C. Ferrara (10)     FY98        334,316         ---          ---             ---           445,000             ---
Chief Financial          FY97            ---         ---          ---             ---               ---             ---
Officer                  FY96            ---         ---          ---             ---               ---             ---

</TABLE>


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


(1)      The three years  reported  upon in the table are the fiscal years ended
         December 28, 1996 ("FY96"), December 27, 1997 ("FY97") and December 26,
         1999 ("FY98").


                                       30

<PAGE>

(2)      Includes  $340,000 of imputed  income with respect to the  non-recourse
         note  issued  by Mr.  Snyder  to the  Company  in  connection  with his
         purchase  of  incentive   stock  in  January   1996.   See   "Executive
         Compensation -- Employment Agreements -- Richard E. Snyder."

(3)      Represents  payments made by the Company with respect to life insurance
         premiums.

(4)      Pursuant to the  Company's  Executive  Officer Bonus Plan, in May 1997,
         Mr.  Snyder   elected  to  exchange  100%  of  his  1997  target  bonus
         opportunity  for options  issued under the Company's  1995 Stock Option
         Plan,   as  amended,   with  a  value   (determined   pursuant  to  the
         Black-Scholes  method)  equal  to  twice  the  amount  of  such  target
         opportunity.  In 1997,  the  Company's  operating  divisions  (with the
         exception of the Golden Books  Entertainment  Group  ("GBEG"))  did not
         achieve the financial  targets  necessary for the payment of bonuses to
         eligible  employees  pursuant to the Company's  Executive Officer Bonus
         Plan. However, on December 15, 1997, the Compensation Committee decided
         to reward eligible employees for their  contributions.  With respect to
         employees who had previously elected to exchange all or a percentage of
         their target  bonuses for options  pursuant to the Company's  Executive
         Officer Bonus Plan, the  Compensation  Committee  reduced the amount of
         such options  initially  granted in May 1997 by 25% (12.5% with respect
         to GBEG employees).

(5)      Pursuant to the  Company's  Executive  Officer Bonus Plan, in May 1997,
         Mr.  Galanes  elected  to  exchange  100%  of  his  1997  target  bonus
         opportunity  for options  issued under the Company's  1995 Stock Option
         Plan,   as  amended,   with  a  value   (determined   pursuant  to  the
         Black-Scholes  method)  equal  to  twice  the  amount  of  such  target
         opportunity.  In 1997,  the  Company's  operating  divisions  (with the
         exception of GBEG) did not achieve the financial  targets necessary for
         the payment of bonuses to eligible  employees pursuant to the Company's
         Executive  Officer  Bonus Plan.  However,  on December  15,  1997,  the
         Compensation  Committee decided to reward eligible  employees for their
         contributions.  With respect to employees who had previously elected to
         exchange  all or a  percentage  of their  target  bonuses  for  options
         pursuant  to  the  Company's   Executive   Officer   Bonus  Plan,   the
         Compensation  Committee  reduced the amount of such  options  initially
         granted in May 1997 by 25% (12.5% with respect to GBEG employees).

(6)      Mr. Asahina's employment with the Company terminated in January 1999.

(7)      Pursuant to the  Company's  Executive  Officer Bonus Plan, in May 1997,
         Mr.  Asahina   elected  to  exchange  25%  of  his  1997  target  bonus
         opportunity  for options  issued under the Company's  1995 Stock Option
         Plan,   as  amended,   with  a  value   (determined   pursuant  to  the
         Black-Scholes  method)  equal  to  twice  the  amount  of  such  target
         opportunity.  In 1997,  the  Company's  operating  divisions  (with the
         exception of GBEG) did not achieve the financial  targets necessary for
         the payment of bonuses to eligible  employees pursuant to the Company's
         Executive  Officer  Bonus Plan.  However,  on December  15,  1997,  the
         Compensation  Committee decided to reward eligible  employees for their
         contributions  by granting stock options to such employees in an amount
         equal to .75 options for every $10 of target bonus at an exercise price
         of $10,  the closing  price of the Common  Stock on December  15, 1997.
         With respect to employees who had previously elected to exchange all or
         a  percentage  of their  target  bonuses  for  options  pursuant to the
         Company's  Executive  Officer Bonus Plan,  the  Compensation  Committee
         reduced the amount of such options initially granted in May 1997 by 25%
         (12.5% with respect to GBEG employees).

(8)      Mr.  Ellenbogen's  employment  with the Company  terminated in November
         1998. Mr. Ellenbogen resigned as a director in November 1998.

(9)      Pursuant to the  Company's  Executive  Officer Bonus Plan, in May 1997,
         Mr.  Ellenbogen  elected  to  exchange  100% of his 1997  target  bonus
         opportunity  for options  issued under the Company's  1995 Stock Option
         Plan,   as  amended,   with  a  value   (determined   pursuant  to  the
         Black-Scholes  method)  equal  to  twice  the  amount  of  such  target
         opportunity.  In 1997,  the  Company's  operating  divisions  (with the
         exception of GBEG) did not achieve the financial  targets necessary for
         the payment of bonuses to eligible  employees pursuant to the Company's
         Executive  Officer  Bonus Plan.  However,  on December  15,  1997,  the
         Compensation Committee decided to

                                       31
<PAGE>



         reward  eligible  employees  for their  contributions.  With respect to
         employees who had previously elected to exchange all or a percentage of
         their target  bonuses for options  pursuant to the Company's  Executive
         Officer Bonus Plan, the  Compensation  Committee  reduced the amount of
         such options  initially  granted in May 1997 by 25% (12.5% with respect
         to GBEG employees).

(10)     John Ferrara ceased to act as Chief Financial Officer of the Company in
         December 1998.

         Mr. Snyder is currently  employed  pursuant to an employment  agreement
dated  May 8,  1996,  as  amended.  See  Note 14 to the  Consolidated  Financial
Statements.  It is  contemplated  that on the  confirmation of the Joint Plan of
Reorganization,   such  employment   agreement  shall  be  deemed  canceled  and
terminated and the Company and Mr.
Snyder will enter into a revised employment agreement.

         On July 28, 1997, the Company entered into an employment agreement with
Mr. Collins,  commencing on such date and continuing  through December 31, 2000,
which agreement was  subsequently  amended by Amendment No. 1 dated September 1,
1998.  Under his  employment  agreement as amended,  Mr.  Collins is entitled to
receive  an annual  base  salary  of  $300,000  for each  year of the  term.  In
addition,  Mr.  Collins is eligible to receive an annual  bonus  pursuant to the
Bonus Plan of up to 200% of his annual base salary, subject to the attainment of
certain  goals,  with a target bonus of 100% of his annual base  salary.  In the
event the Company  terminates Mr. Collins'  employment for any reason other than
cause or Mr. Collins terminates his employment for good reason, the Company will
be required to pay him,  in  addition  to accrued  obligations,  his annual base
salary  for the longer of (a) two years or (b) the  duration  of the term of the
agreement,  to be offset by any new compensation earned over the balance of such
period by Mr.  Collins.  Pursuant to his employment  agreement,  Mr. Collins was
granted,  under the Company's 1995 Stock Option Plan,  options to acquire 25,000
shares of Common  Stock of the  Company at an exercise  price of  $12.375.  Such
options have a term of seven years from the date of grant and become exercisable
in equal parts on each of the first three consecutive  anniversaries of the date
of grant.

         On May 7,  1998,  the  Company  entered  into an amended  and  restated
employment agreement with Philip Galanes, commencing on such date and continuing
through May 6, 2002. Under the agreement,  Mr. Galanes is entitled to receive an
annual base salary of $350,000 for the first year of the term,  $357,000 for the
second  year of the term,  and  $400,000  for the third and fourth  years of the
term. In addition,  Mr.  Galanes is eligible to receive an annual bonus pursuant
to the  Bonus  Plan of up to 200% of his  annual  base  salary,  subject  to the
attainment  of certain  goals,  with a target  bonus of 100% of his annual  base
salary.  In the event the Company  terminates  Mr.  Galanes'  employment for any
reason other than cause or Mr. Galanes' terminates is employment for good reason
(including  upon a change of control),  the Company will be required to pay him,
in addition to accrued obligations,  his annual base salary and target bonus for
two years. Pursuant to his employment agreement,  Mr. Galanes was granted, under
the  Company's  1995 Stock Option  Plan,  options to acquire  200,000  shares of
Common Stock of the Company at an exercise price of $10.438. Such options have a
term of seven years from the date of grant and become exercisable in equal parts
on each of the first four consecutive anniversaries of the date of grant.

         Compensation  decisions  relating  to  executive  officers,   including
decisions  with respect to the granting of options,  were made through the first
part of  fiscal  1998  by a  Board  Compensation  Committee.  Certain  decisions
regarding  severance  arrangements  made  later in fiscal  1998 were made by the
Board of Directors.  During the latter part of 1998, the Company negotiated with
the  committees  representing  creditors  with  respect  to issues of  executive
compensation  in the  reorganized  Company,  as  proposed  in the Joint  Plan of
Reorganization.



                                       32

<PAGE>



                           FIVE-YEAR PERFORMANCE GRAPH

         Set  forth  below  is a  line  graph  comparing  the  cumulative  total
stockholder  return on the Company's  Common Stock against the cumulative  total
return for (i) the Standard & Poor's 500  Composite  Index ("S&P 500 Index") and
(ii) an index of Peer Group companies  selected by the Company for the five-year
period ended December 26, 1998 (the "Peer Group").  The graph below assumes that
$100 was invested at the close of business at December 26, 1993 in the Company's
Common Stock, the S&P 500 Index and the Peer Group. The total return  calculated
assumes the  reinvestment  of dividends.  The Company does not pay a dividend on
its Common Stock. 


                               [GRAPHIC OMITTED]









     The Peer Group is comprised of other  publishing  and related  companies of
comparable  size,  complexity  and quality as  selected by the Company  with the
assistance of an outside  consultant.  The Peer Group  consists of the following
companies:  American Greetings  Corporation,  Banta Corp.,  Courier Corporation,
Daily Journal Corp. S.C.,  Gibson Greetings Inc.,  Intervisual  Books Inc., John
Wiley and Sons Inc.,  Pharmaceuticals  Marketing  Services,  Pulitzer Publishing
Co.,  Scholastic  Corporation,  Thomas  Nelson Inc.,  and Topps Company Inc. The
following  companies,  which have previously been included in the Company's Peer
Group,  are not  included  because  the  common  stock  trading  prices for such
companies  are  unavailable:   American  City  Business  Journals  Inc.,Commerce
Clearing House, Inc., Multimedia Incorporated, Price Stern Sloan Inc. and United
Newspapers Public Ltd. Co. ADR.





                                       33

<PAGE>



ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                           PRINCIPAL STOCKHOLDERS AND
                          SHARE OWNERSHIP BY MANAGEMENT

Pursuant to the Joint Plan of  Reorganization  existing holders of the Company's
Preferred  and Common  Stock will  surrender  their stock for  out-of-the  money
warrants to purchase 5% of the new company  stock to be allocated  two-thirds to
the  preferred  shareholders  and  one-third to the common  shareholders,  to be
issued post recapitalization,  prior to dilution. See Item 1. Business -- Recent
Events.

The following  table sets forth  certain  information  regarding the  beneficial
ownership  of the  Common  Stock  and the  Preferred  Stock as of April 6,  1999
(except as set forth in notes, 5, 6 and 7 below),  based upon 28,299,434  shares
of Common Stock and 13,000 shares of Preferred  Stock  outstanding on such date,
by (a) each person or group known by the Company to be the  beneficial  owner of
more than 5% of each such  class of  capital  stock,  (b) each of the  Company's
Directors,  (c) the  Company's  Chief  Executive  Officer and the other  current
executive  officers of the Company named in the Summary  Compensation  Table and
(d) the Directors and executive officers of the Company as a group.

<TABLE>
<CAPTION>
                                                                       Beneficial Ownership (1)
                                              --------------------------------------------------------------------------
<S>                                             <C>                        <C>                          <C>    
                                                Number of Shares of        Number of Shares of          Percentage of
Name and Address of Beneficial Owner              Preferred Stock              Common Stock           Common Stock (1)
5% Holders

Warburg, Pincus Ventures, L.P.                                                                                             
Warburg, Pincus & Co.                                                                                                      
E.M. Warburg, Pincus & Co., LLC                                                                                            
   Golden Press Holding, L.L.C.                                                                                    
   466 Lexington Avenue                                                                                            
   New York, New York 10017..........                 13,000 (2)            15,018,271 (3)                43.2% (4)

Richard A. Bernstein                                                                                                       
   444 Madison Avenue                                                                                              
   New York, New York 10022..........                   ---                  3,513,271 (5)                12.4%

Hallmark Cards, Inc.                                                                                                       
   H C Crown Corp.                                                                                                 
   2501 McGee Street                                                                                               
   Kansas City, Missouri 64141.......                   ---                  2,356,198 (6)                 8.3%

Directors and Executive Officers
Shahara Ahmad-Llewellyn (7)                             ---                     19,100                       *
Lorne Michaels (7)                                      ---                    455,550                     1.6%
Marshall Rose (7)                                       ---                     15,000                       *
H. Brian Thompson (7)                                   ---                     15,000                       *
John L. Vogelstein (8)                                  ---                        ---                     ---
Douglas M. Karp (8)                                     ---                        ---                     ---
Philip Galanes                                          ---                     85,576                       *
Richard Collins                                         ---                     16,667                       *
Richard E. Snyder (9)                                   ---                    684,432                     2.4%
Directors and executive officers of the                 
Company as a group                                      ---                  1,291,325                     4.6%
</TABLE>

---------------------
*   Less than one percent.

                                       34

<PAGE>




(1)      Except where otherwise indicated, the Company believes that all parties
         named in the table, based on information provided by such persons, have
         sole  voting and  dispositive  power over the  securities  beneficially
         owned by them,  subject to community  property laws, where  applicable.
         For  purposes of this table,  a person or group of persons is deemed to
         be the "beneficial  owner" of any shares that such person has the right
         to acquire  within 60 days. For purposes of computing the percentage of
         outstanding shares held by each person or group of persons named in the
         table on a given date, any security that such person or persons has the
         right  to  acquire  within  60 days of April  6,1999  is  deemed  to be
         outstanding  (including by way of  conversion of the Preferred  Stock),
         but is not deemed to be  outstanding  for the purpose of computing  the
         percentage ownership of any other person.

(2)      Each share of Preferred Stock is convertible  into 500 shares of Common
         Stock, or a total of 6,500,000 shares of Common Stock. GPH owns 100% of
         the issued and outstanding shares of Preferred Stock.

(3)      Includes  1,755,000 shares of Common Stock owned by GPH, a warrant held
         by GPH (the  "Warrant")  to purchase  3,250,000  shares of Common Stock
         that became  exercisable on May 8, 1998 and 6,500,000  shares of Common
         Stock issuable upon  conversion of the 13,000 shares of Preferred Stock
         owned by GPH.  Each of the other  reporting  entities  may be deemed to
         share the power to vote and dispose of the shares of Common  Stock held
         by GPH,  the shares of Common Stock  issuable  upon  conversion  of the
         Preferred  Stock and the shares of Common Stock  issuable upon exercise
         of  the  Warrant.  Also  includes  3,513,271  shares  of  Common  Stock
         beneficially owned by Richard A. Bernstein (the "Bernstein  Shares") as
         to which Mr.  Bernstein  and  certain of his  affiliates  have  granted
         irrevocable  proxies to GPH to vote such shares on any matter presented
         for the vote or  consent  of the  Company's  stockholders.  Each of the
         reporting  entities  may be deemed to  beneficially  own the  Bernstein
         Shares  and to share  the  power to vote or  direct  the  voting of the
         Bernstein Shares.

(4)      Assumes the conversion of the Preferred Stock into Common Stock.

(5)      Beneficial ownership of these shares was reported in Amendment No. 3 to
         its Schedule 13G, that was filed on February 10, 1999.

(6)      Beneficial  ownership  of these  shares was  reported in a Schedule 13D
         that was filed on September 10, 1996. H C Crown Corp.  ("H C Crown") is
         a wholly owned subsidiary of Hallmark Cards,  Incorporated ("Hallmark")
         and Hallmark may be deemed to beneficially  own all of the shares owned
         by H C Crown.

(7)      Includes  non-qualified  stock  options to  purchase  15,000  shares of
         Common  Stock  granted  pursuant  to the 1995  Stock  Option  Plan,  as
         amended, of the Company. Such options are presently exercisable.

(8)      Such person is a general partner of WP, the general partner of Warburg,
         Pincus Ventures, an equity investor in GPH. Beneficial ownership of the
         securities owned by GPH is disclaimed by such person.

(9)      Consists  of 599,465  shares of Common  Stock  issued to Mr.  Snyder on
         January 31, 1996 pursuant to his employment  agreement with the Company
         and 84,967  shares of Common  Stock  issued to Mr.  Snyder  pursuant to
         certain anti-dilution provisions contained therein. Mr. Snyder controls
         the Snyder 1996 Family Limited Partnership,  an equity investor in GPH.
         Mr. Snyder  disclaims  beneficial  ownership of the securities owned by
         GPH.  Mr.  Snyder  also owns  non-qualified  stock  options to purchase
         1,271,089  shares of Common  Stock  granted  pursuant  to Mr.  Snyder's
         employment  agreement with the Company,  including  pursuant to certain
         anti-dilution provisions contained therein, as well as additional stock
         options to purchase 293,210 shares of


                                       35

<PAGE>



         Common  Stock  which  Mr.  Snyder  received  as  consideration  for his
         election  to forego  his 1997  bonus  pursuant  to the  Company's  1997
         Executive  Officer Bonus Plan.  None of the options owned by Mr. Snyder
         are exercisable within 60 days of April 6, 1999.




                                       36

<PAGE>



ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Georgetown Transaction

Pursuant to a letter agreement (the "Georgetown  Agreement")  dated as of August
1,1996, The Georgetown Company  ("Georgetown"),  a corporation of which Marshall
Rose (a current director of the Company) is the Managing Partner, has acted as a
real estate  advisor to the Company.  In March 1999,  the Company and Georgetown
agreed to terminate all remaining  obligations  under the Georgetown  agreement.
Pursuant to the  Georgetown  Agreement,  the Company was  obligated  to make the
following payments to Georgetown: (i) $25,000 per month for the period beginning
August 1, 1996 and ending July 1, 1999;  and (ii) an incentive  fee,  payable in
cash or Common Stock,  for each  completed  real estate  transaction  during the
period  beginning  August 1, 1996 and ending July 3, 2000, in an amount equal to
one-half of each commission that would be paid to an outside broker representing
the Company.  To date, the Company has paid to Georgetown (i) $75,000 in respect
of  a  property  located  at  630  Fifth  Avenue,   New  York,  New  York,  (ii)
approximately  $580,000 in respect of a property  located at 888 Seventh Avenue,
New York,  New York,  (iii)  approximately  $131,000  in  respect  of a property
located at 850 Third Avenue, New York, New York, (iv) approximately  $217,000 in
respect  of  a  property  located  in  Fayetteville,  North  Carolina,  and  (v)
approximately $78,000 in respect of a property located in Coffeyville, KS.

Tribeca Transaction

Pursuant to a letter  agreement  (the "Tribeca  Agreement")  dated as of July 1,
1996, the Company was obligated to pay to Tribeca Technologies LLC (" Tribeca"),
a limited liability company in which Philip E. Rowley (an officer of the Company
through May 1998) was a member,  as compensation  for the loss by Tribeca of the
exclusive  services of Mr. Rowley  following his employment by the Company,  the
sum of $200,000 on each of the following  dates  (provided that Mr. Rowley is in
the  employment  of the  Company at such time);  (i) July 1, 1996;  (ii) July 1,
1997; and (iii) July 1, 1998. In  consideration  for such  payments,  Tribeca is
obligated to pay the Company  one-third of the  aggregate  amount of any and all
distributions otherwise to be made by Tribeca to Mr. Rowley and the President of
Tribeca  on or  before  June  30,1999  (or  such  earlier  time as Mr.  Rowley's
employment with the Company ceases),  provided,  that the maximum amount payable
to the  Company is the lesser of (i)  $600,000  and (ii) the amount  paid by the
Company to Tribeca pursuant to the previous  sentence.  As of December 26, 1998,
the Company has fulfilled its obligation and made payments  totaling $570,000 as
follows:  $200,000 in Fiscal 1996, $200,000 during June 1997, and $170,000 (paid
in advance at a discounted rate) during November 1997.

Powerhouse Transaction

On  May  8,  1996,  the  Company  and  Powerhouse  Entertainment  Company,  Inc.
("Powerhouse"),  a corporation affiliated with Richard A. Bernstein,  the former
Chairman and Chief  Executive  Officer of the  Company,  entered into a software
development  agreement (the "Development and Licensing  Agreement")  relating to
the development by Powerhouse of six interactive PC CD-ROM  storybooks under the
Little Golden Books  Interactive name and logo (the  "Powerhouse  Products") and
certain other computer software products.

Under the terms of the Development and Licensing Agreement,  Powerhouse received
a fee in the  amount  of $1.0  million  for the  development  of the  Powerhouse
Products.  All development costs were incurred by Powerhouse with the Powerhouse
Products'  content,  packaging  and design  subject to the  Company's  approval.
Separately, Powerhouse is paid a royalty based upon the net proceeds of sales of
the Powerhouse  Products and such royalty  obligation  continues for the term of
copyright. The Company has paid approximately $75,000 to Powerhouse in royalties
through December 26, 1998.

There is also an agreement  (the "Support  Agreement")  of even date between the
parties wherein, Powerhouse, on behalf of Company and at the Company's sole cost
and expense, performed all services relating to the manufacturing,


                                       37

<PAGE>



marketing,  distribution,  sales and licensing of the  Powerhouse  Products.  To
date,  the Company has paid  approximately  $615,000 to Powerhouse in connection
with such services.




                                       38

<PAGE>



                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)(1  and  2)  Financial  Statements.   See  Index  to  Consolidated  Financial
Statements and Schedules which appears on Page F-1 herein.

(a)(3) Exhibits

Restated  Certificate of  Incorporation  of the Registrant  dated March 25, 1998
(incorporated  by reference to the  Registrant's  Annual Report on Form 10-K for
fiscal year 1997 (the "1997 Form 10-K")).

By-laws of the Registrant  (incorporated by reference to Exhibit 3.4 to the 1988
Form 10-K).

Form of certificate for shares of the Registrant's Common Stock (incorporated by
reference to Exhibit 4.4 to Registration Statement No. 33-4127).

Certificate of Designation of the Series B Convertible Preferred Stock dated May
8, 1996 (included in Exhibit 3.1 filed herewith).

Indenture governing the Golden Books Publishing Company's 7.65% Senior Notes due
2002 (incorporated by reference to Registration Statement 33-51568).

Certificate of Trust of Golden Book Financing Trust  (incorporated  by reference
to Exhibit 10.1 to the Registrant's Registration Statement No. 333-14335).

Amended and Restated Declaration of Trust of Golden Books Financing Trust, dated
as of August 20,  1996,  among  Golden  Books  Family  Entertainment,  Inc.,  as
Sponsor,  The  Bank of New  York,  as  Property  Trustee,  The  Bank of New York
(Delaware),  as Delaware  Trustee and Willa M. Perlman and Philip E. Rowley,  as
Trustees  (Incorporated  by reference to Exhibit 10.1 of the  Registrant's  Form
10-Q for the quarterly period ended August 3, 1996 (the "August 3, 1996 10-Q")).

Indenture for the 8 3/4%  Convertible  Debentures,  dated as of August 20, 1996,
among Golden Books Family Entertainment,  Inc., Golden Books Publishing Company,
Inc. and The Bank of New York, as Indenture  Trustee  (incorporated by reference
to Exhibit 10.2 of the August 3, 1996 Form 10-Q).

Form of 8 3/4%  Preferred  Securities  (included  in Exhibit  A-1 to Exhibit 4.4
above).

Form of 8 3/4%  Convertible  Debentures  (included  in Exhibit A to Exhibit  4.5
above).

Preferred Securities  Guarantee Agreement,  dated as of August 20, 1996, between
Golden Books Family Entertainment, Inc., as Guarantor, and The Bank of New York,
as Guarantee Trustee (incorporated by reference to Exhibit 10.3 of the August 3,
1996 Form 10-Q).

2.1* Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code, dated
March 25, 1999.

2.2*  Disclosure  Statement  pursuant to Section 1125 of the Bankruptcy Code for
the Joint Plan of Reorganization of the Debtors, dated March 25, 1999.



                                       39

<PAGE>



10.01 Golden Comprehensive Security Program, as amended and restated,  effective
January 1, 1993  (incorporated by reference to Exhibit 10.40 to the Registrant's
Annual Report on Form 10-K for Fiscal year 1993 (the "1993 Form 10-K")).

10.02 Golden Retirement Savings Program,  as amended and restated,  effective as
of January 1, 1993  (incorporated by reference to Exhibit 10.53 to the 1993 Form
10-K).

10.03  Amended and Restated  1986 Employee  Stock Option Plan  (incorporated  by
reference to Exhibit 10.40 to the 1988 Form 10-K).

10.04  Amendment  dated April 11, 1989 to the Amended and Restated 1986 Employee
Stock Option Plan  (incorporated  by reference to Exhibit 10.56 to the 1990 Form
10-K).

10.05 Golden Books Family  Entertainment,  Inc.  Amended and Restated 1995 Stock
Option Plan (incorporated by reference to Exhibit 10.05 to the 1997 Form 10-K).

10.06 Western Publishing  Company,  Inc.'s Executive Medical  Reimbursement Plan
dated  January 1, 1991  (incorporated  by reference to Exhibit 10.73 to the 1991
Form 10-K).

10.07 Registration  Rights Agreement,  dated August 20, 1996, among Golden Books
Financing  Trust,  Golden  Books  Family   Entertainment,   Inc.,  Golden  Books
Publishing  Company,  Inc.,  Merrill Lynch & Co.,  Donaldson,  Lufkin & Jenrette
Securities  Corporation  and SBC Warburg  Inc.  (incorporated  by  reference  to
Exhibit 10.4 to the August 3, 1996 Form 10-Q).

10.08  Registration  Rights  Agreement,  dated as of September 6, 1996,  between
Golden Books Family  Entertainment,  Inc. and H C Crown Corp.  (incorporated  by
reference to Exhibit 10.6 to the August 3, 1996 Form 10-Q).

10.09 Asset  Purchase  Agreement  dated as of July 30, 1996 among Broadway Video
Entertainment,  L.P., Broadway Video Enterprises, Inc., Lone Ranger Music, Inc.,
Palladium Limited Partnership,  Golden Books Family Entertainment,  Inc., Golden
Books  Publishing  Company,  Inc., and LRM Acquisition  Corp.  (incorporated  by
reference to the Registrant's current report on Form 8-K dated August 29, 1996).

10.10 Amendment No. 1 to Asset Purchase  Agreement,  dated as of August 20, 1996
among Broadway Video Entertainment, L.P., Broadway Video Enterprises, Inc., Lone
Ranger  Music,  Inc.,  Palladium  Limited   Partnership,   Golden  Books  Family
Entertainment,  Inc., Golden Books Publishing Company,  Inc. and LRM Acquisition
Corp.  (incorporated  by  reference  to Exhibit  10.7 to the August 3, 1996 Form
10-Q).

10.11 Registration Rights Agreement, dated August 20, 1996, between Golden Books
Family Entertainment,  Inc. and Broadway Video Entertainment, L.P. (incorporated
by reference to Exhibit 10.8 the August 3, 1996 Form 10-Q).

10.12 Amended and Restated Non-Recourse  Promissory Note, dated as of August 20,
1996,   executed  by  Richard  E.  Snyder  in  favor  of  Golden   Books  Family
Entertainment, Inc. (incorporated by reference to Exhibit 10.16 to the August 3,
1996 Form 10-Q).

10.13  Amended  and  Restated  Pledge  Agreement,  dated as of August 20,  1996,
executed by Richard E. Snyder (incorporated by reference to Exhibit 10.18 to the
August 3, 1996 Form 10-Q).

10.14 Golden Books  Family  Entertainment,  Inc.  Executive  Officer  Bonus Plan
(incorporated by reference to Appendix VII to the 1996 Proxy).



                                       40

<PAGE>



10.15 Amended and Restated  Employment  Agreement,  dated as of August 20, 1996,
between  Golden  Books  Family   Entertainment,   Inc.  and  Richard  E.  Snyder
(incorporated by reference to Exhibit 10.16 to the August 3, 1996 Form 10-Q).

10.16  Amendment  No. 1 to Richard E. Snyder's  Amended and Restated  Employment
Agreement,  dated as of September 9, 1997  (incorporated by reference to Exhibit
10.16 to the 1997 Form 10-K).

10.17  Employment  Agreement,  dated July 30, 1996,  between Golden Books Family
Entertainment,  Inc. and Eric Ellenbogen  (incorporated  by reference to Exhibit
10.19 to the August 3, 1996 Form 10-Q).

10.18  Employment  Agreement,  dated as of July 1, 1996,  between  Golden  Books
Family  Entertainment,  Inc. and Philip E. Rowley  (incorporated by reference to
Exhibit 10.20 to the August 3, 1996 Form 10-Q).

10.19  Employment  Agreement,  dated as of May 28,  1996,  between  Golden Books
Family  Entertainment,  Inc. and Willa M. Perlman  (incorporated by reference to
Exhibit 10.21 to the August 3, 1996 Form 10-Q).

10.20  Employment  Agreement,  dated as of July 28, 1997  between  Golden  Books
Publishing  Company,  Inc.  and Richard  Collins  (incorporated  by reference to
Exhibit 10.20 to the 1997 Form 10-K).

10.21*  Employment  Agreement  dated May 7, 1998  between  Golden  Books  Family
Entertainment, Inc. and Philip Galanes.

10.22  Industrial  Building  Lease  Agreement  dated as of June 23, 1997 between
Golden  Books  Family  Entertainment,  Inc.  and  First  Industrial  Development
Services  Group,  L.P.  (incorporated  by reference to Exhibit 10.21 to the 1997
Form 10-K).

10.23* Real Estate  Purchase  Agreement  dated  October 13, 1998 between  Golden
Books Family Entertainment, Inc. and Ablah Enterprises, Inc.

10.24 Licensed Book Publishing  Agreement between Disney Licensed Publishing and
Golden Books Publishing Company, Inc., dated September 26, 1997 (incorporated by
reference to exhibit 10.01 to the 10-Q/A filed on November 17, 1997).

10.25 Warrant  Agreement  between  Golden Books Family  Entertainment,  Inc. and
Disney Enterprises, Inc., dated September 26, 1997 (incorporated by reference to
exhibit 10.02 to the 10-Q/A filed on November 17, 1997).

10.26* Licensed Book Publishing Agreement between Disney Licensed Publishing and
Golden Books Publishing Company, Inc., dated December 12, 1998.

21.1 *   List of Subsidiaries.

23.1 *   Consent of Ernst & Young LLP, Independent Auditors

27.1 *   Financial Data Schedule.

99.1 Undertaking  incorporated by reference into certain registration statements
on Form S-8 of the Registrant  (incorporated by reference to Exhibit 99.4 to the
10-K for the year February 3, 1996).

*     Filed electronically herewith.
Reports on Form 8-K filed during the three months ended December 26, 1998:  Form
8-K filed September 16, 1998


                                       41

<PAGE>


                                   Signatures

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


April 9, 1999                  GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.


                               /s/ Richard. E. Snyder
                               Richard E. Snyder
                               Chairman of the Board of Directors and
                               Chief Executive Officer


                               /s/ Colin Finkelstein
                               Colin Finkelstein
                               Chief Financial Officer
                               (principal financial and accounting officer)


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


Name                            Title                              Date

/s/ Richard E. Snyder           Chairman of the Board and Chief    April 9, 1999
----------------------------
Richard E. Snyder               Executive Officer


/s/ Shahara Ahmad-Llewellyn     Director                           April 9, 1999
----------------------------
Shahara Ahmad-Llewellyn


/s/ Marshall Rose               Director                           April 9, 1999
----------------------------
Marshall Rose



----------------------------    Director                           April 9, 1999
John L. Vogelstein


/s/ H. Brian Thompson
----------------------------    Director                           April 9, 1999
H. Brian Thompson



----------------------------    Director                           April 9, 1999
Lorne Michaels


/s/ Douglas Karp
----------------------------    Director                           April 9, 1999
Douglas Karp

<PAGE>
            GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES
            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

<TABLE>
<CAPTION>

                                                                           Page

<S>                                                                        <C>

Report of Independent Auditors..............................................F-2

Consolidated Financial Statements:

Consolidated Balance Sheets at December 26, 1998 and December 27, 1997......F-3

Consolidated Statements of Operations and Comprehensive Loss
for the years ended December 26, 1998 and December 27, 1997 and
the eleven months ended December 28, 1996...................................F-5

Consolidated  Statements of Changes in Stockholders' Deficit for the years
ended December 26, 1998 and December 27, 1997 and the eleven months ended
December 28, 1996...........................................................F-6

Consolidated Statements of Cash Flows for the years ended December 26, 1998
and December 27, 1997 and the eleven months ended December 28, 1996.........F-7

Notes to Consolidated Financial Statements..................................F-9

Schedule I - Condensed Financial Information of Registrant..................S-1

Schedule II - Valuation and Qualifying Accounts.............................S-4
</TABLE>


All other  schedules have been omitted because the information is not applicable
or is not  material  or because  the  information  required  is  included in the
consolidated financial statements or the notes thereto.







                                       F-1


<PAGE>
                         Report of Independent Auditors

To the Board of Directors and Stockholders
Golden Books Family Entertainment, Inc.

We have audited the  accompanying  consolidated  balance  sheets of Golden Books
Family  Entertainment,  Inc. and Subsidiaries (the "Company") as of December 26,
1998  and  December  27,  1997,  and  the  related  consolidated  statements  of
operations and comprehensive loss,  stockholders' deficit and cash flows for the
years then ended and the period from February 4, 1996 to December 28, 1996.  Our
audits also included the financial  statement  schedules  listed in the Index at
Item 14(a).  These financial  statements and schedules are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated financial position of Golden
Books  Family  Entertainment,  Inc.  and  Subsidiaries  at December 26, 1998 and
December 27, 1997, and the  consolidated  results of their  operations and their
cash  flows for the years then ended and the  period  from  February  4, 1996 to
December 28, 1996, in conformity with generally accepted accounting  principles.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic financial  statements taken as a whole,  present fairly
in all material respects the information set forth therein.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 2 to the
consolidated  financial  statements,  on February 26, 1999,  the Company filed a
voluntary  petition for relief under Chapter 11 of the United States  Bankruptcy
Code ("Chapter  11"). The Company is currently  operating its business under the
jurisdiction  of  Chapter  11 and the  United  States  Bankruptcy  Court for the
Southern District of New York (the "Bankruptcy  Court"), and continuation of the
Company as a going concern is contingent upon,  among other things,  the ability
to gain  approval of the requisite  parties  under the United States  Bankruptcy
Code  and   confirmation   by  the  Bankruptcy   Court  of  the  joint  plan  of
reorganization,  the ability to comply with its  debtor-in-possession  financing
facility,  resolution  of  various  litigation  against  the  Company,  and  the
Company's  ability to return to  profitability,  generate  sufficient  cash from
operations  and obtain  financing  sources to meet its  future  obligations.  In
addition,   the  Company  has  experienced  operating  losses,  working  capital
deficiencies,  negative  operating  cash flows and is currently in default under
substantially all of its debt agreements.  These matters raise substantial doubt
about the Company's ability to continue as a going concern. In the event a joint
plan  of  reorganization  is  confirmed  and  consummated,  continuation  of the
business  thereafter  is dependent on the Company's  ability to obtain  adequate
exit financing to meet cash flow obligations and ability to generate  sufficient
cash flow to meet its operational and financing  requirements.  The accompanying
financial   statements   do  not  include  any   adjustments   relating  to  the
recoverability  and  classification of recorded asset amounts or the amounts and
classifications  of  liabilities  that might  result  from the  outcome of these
uncertainties.


                                                              ERNST & YOUNG LLP

New York, New York
April 7, 1999




                                       F-2

<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS
(In Thousands)                                                                 
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS

                                       December 26,            December 27,
CURRENT ASSETS                            1998                     1997
                                     ------------------     -------------------

<S>                                  <C>                         <C>       
 Cash and cash equivalents           $    15,330                 $   57,411
 Accounts receivable                      41,411                     51,153
 Inventories                              33,068                     34,659
 Royalty advances                         17,198                     10,416
 Refundable income taxes                   1,781                      1,781
 Net assets held for sale                  1,292                      9,873
 Deposits                                  7,708                          -
 Other current assets                      7,165                      5,053
                                   -------------------      -------------------
 Total current assets                    124,953                    170,346
                                   -------------------      -------------------

OTHER ASSETS
 Deposits                                      -                      3,497
 Accounts receivable - long term           4,127                      3,207
 Other noncurrent assets                  10,667                     13,629
                                   -------------------     -------------------
 Total other assets                       14,794                     20,333
                                   -------------------     -------------------

PROPERTY PLANT AND EQUIPMENT,
 net of accumulated depreciation
 and amortization of $37,946 as
 of December 26, 1998 and $39,620
 as of December 27, 1997                  29,955                     38,256

FILM LIBRARY, net of accumulated
 amortization of $7,849 as of                                                        
 December 26, 1998 and $4,364
 as of December 27, 1997                  55,858                     63,638

GOODWILL, net of accumulated
 amortization of $2,805 as of
 December 26, 1998 and $1,605
 as of December 27, 1997                  29,391                     30,591
                                   -------------------     -------------------

TOTAL ASSETS                       $     254,951           $        323,164
                                   ===================     ===================
</TABLE>



See notes to consolidated financial statements



                                       F-3


<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS
(In Thousands, Except for Per Share Data)                                       
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>

                                                    December 26,     December 27,
                                                       1998              1997
                                                   --------------    ------------                                                   
CURRENT LIABILITIES
<S>                                                <C>               <C>       
 Accounts payable                                  $   26,002        $   21,454
 Accrued compensation and fringe benefits               4,977             5,887
 Revolving credit facility                             21,637               -
 Loan facility                                         10,000               -
 Long term debt in default                            150,000               -
 Guaranteed preferred beneficial interests
  in the Company's and Golden Book
  Publishing Company, Inc.'s convertible
  debentures                                          115,000                 
 Other current liabilities                             61,634            47,225
                                                   --------------    ------------

 Total current liabilities                            389,250            74,566
                                                   --------------    ------------

NONCURRENT LIABILITIES
 Long term debt                                           -             149,897
 Accumulated post-retirement benefit
  obligation                                           29,609            29,365
 Deferred compensation and other
  deferred liabilities                                 25,173            19,938
                                                   --------------    ------------
 Total noncurrent liabilities                          54,782           199,200
                                                   --------------    ------------

Guaranteed preferred beneficial interests
 in the Company's and Golden Books Publishing
 Company, Inc.'s convertible debentures                   -             110,707

STOCKHOLDERS' DEFICIT:
 Convertible Preferred Stock - Series B,
  13,000 shares authorized, no par value,
  13,000 shares issued and outstanding;                65,000            65,000
 Common Stock, $.01 par value, 60,000,000
  shares authorized, 27,899,047 and 26,887,313
  shares issued as of December 26, 1998 and
  December 27, 1997, respectively                         279               269
     Additional paid in capital                       128,956           128,533
     Accumulated deficit                             (379,390)         (250,791)
     Accumulated other comprehensive loss              (1,104)           (1,498)
                                                   --------------    ------------
                                                     (186,259)          (58,487)
 Less cost of Common Stock in treasury -
   208,800 shares                                       2,822             2,822
                                                   --------------    ------------
Total common stockholders' deficit                   (189,081)          (61,309)
                                                   --------------    ------------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT        $  254,951        $  323,164
                                                   ==============    ============

</TABLE>

See notes to consolidated financial statements


                                       F-4


<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In Thousands, Except for Per Share Data)                                      
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                Eleven Months
                                          Year Ended           Year Ended         Ended
                                         December 26,          December 27,     December 28,
                                             1998                 1997            1996
                                         -------------       ------------      -------------

Revenues:
<S>                                              <C>              <C>                 <C>
 Net sales                               $   193,573         $  242,481        $  254,046
 Royalties and other income                      653              1,080               959
                                         -------------       ------------      -------------
 Total revenues                              194,226            243,561           255,005
                                         -------------       ------------      -------------

Costs and Expenses:
 Cost of sales                               181,141            176,238           231,792
 Selling, general and administrative          98,293            111,307           142,721
 Restructuring, net of (gains) losses
   on sales of assets                          6,462            (10,786)           65,741
 Write-off of assets                          10,609                -                 -
                                         -------------       ------------      -------------
   Total costs and expenses                  296,505            276,759           440,254
                                         -------------       ------------      -------------

Loss Before Interest Income, Distributions
  on Guaranteed Preferred Beneficial
  Interests in the Company's and Golden
  Books Publishing Company, Inc.'s
  Convertible Debentures, Interest
  Expense and (Benefit) Provisions for
  Income Taxes                              (102,279)           (33,198)         (185,249)

Interest Income                                1,700              5,579             4,235

Distributions on Guaranteed Preferred
  Beneficial Interest in The Company's
  And Golden Books Publishing Company,
  Inc.'s Convertible Debentures              (10,282)           (10,282)           (3,597)

Interest Expense                             (18,404)           (11,742)          (10,999)
                                         -------------       ------------      -------------

Loss Before (Benefit) Provision
  For Income Taxes                          (129,265)           (49,643)         (195,610)

(Benefit) Provision For Income Taxes            (666)                37             1,893
                                         -------------       ------------      -------------

Net Loss                                    (128,599)           (49,680)         (197,503)

Other Comprehensive Income (Loss):
  Foreign Currency Translation                   394               (159)              330
                                         -------------       ------------      -------------

Comprehensive Loss                       $  (128,205)        $   (49,839)      $ (197,173)
                                         =============      =============      ==============

Net Loss per Basic Common Share          $     (4.89)        $     (2.18)      $    (8.73)
                                         =============      ==============     ==============
</TABLE>


See notes to consolidated financial statements


                                       F-5

<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED  DECEMBER 26, 1998 AND DECEMBER 27, 1997 AND THE ELEVEN MONTHS ENDED
DECEMBER 28, 1996 (In Thousands Except for Shares and Per Share Data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                      Convertible                                       
                                              Common Stock     Preferred Stock - Series B     Additional  Note Receivable
                                         -------------------- ----------------------------     Paid-In    from sale of
                                           Shares      Amount    Shares        Amount          Capital    Common Stock
                                         ----------- --------  ----------- ---------------  ----------- -------------
<S>                                         <C>         <C>         <C>        <C>             <C>           <C>     
Balances, February 3,1996                21,875,539   $    219         -    $    -         $   87,044    $    (4,796)
Net loss                                       -            -          -         -                -              -
Issuance of Preferred Stock - Series B         -            -       13,000     65,000          (6,248)           -
Dividends on Preferred Stock - Series A
 - $42.50                                      -            -          -         -               (221)           -
Common Stock issued as dividend on
Preferred Stock - Series B                  390,000          4         -         -                 (4)           -
Exercise of stock options                   356,599          3         -         -              3,883            -
Issuance of Common Stock                  3,342,573         33         -         -             35,922          4,796
Currency translation adjustment                -            -          -         -                -              -
                                         ----------- --------- ----------- ---------------  ----------- -------------
Balances, December 28, 1996              25,964,711        259      13,000     65,000         120,376            -
Net loss                                       -            -          -         -                -              -
Common Stock issued as dividend on 
Preferred Stock - Series B                  780,000          8         -         -                 (8)           -
Exercise of stock options                   142,602          2         -         -              1,554            -
Issuance of Warrants                           -            -          -         -              6,611            -
Currency translation adjustment                -            -          -         -                -              -
                                         ----------- --------- ----------- ---------------  ----------- -------------
Balances, December 27, 1997              26,887,313        269      13,000     65,000         128,533            -
Net loss                                       -            -          -         -                -              -
Common Stock issued as dividend on 
  Preferred Stock - Series B                585,000          6         -         -                 (6)           -
Exercise of stock options                    17,501         -          -         -                183            -
Common Stock issued as contribution to 
  Company 401k Plan                         409,233          4         -         -                539            -
Dividends on Preferred Stock - Series B        -            -          -         -               (293)           -
Currency translation adjustment                -            -          -         -                -              -
                                         ----------- --------- ----------- ---------------  ----------- -------------
Balances, December 26, 1998              27,889,047  $     279      13,000  $  65,000      $  128,956   $        -
                                        ===========  ========= =========== =============== ===========  =============
</TABLE>

<TABLE>
<CAPTION>
                                                       Accumulated                     
                                                         Other          Treasury Stock   
                                         Accumulated  Comprehensive  ---------------------
                                           Deficit       Loss          Shares     Amount  
                                        ------------  -------------  ---------- ----------
<S>                                         <C>         <C>              <C>      <C>
Balances, February 3,1996               $    (3,608) $  (1,669)       208,800   $    2,822
Net loss                                   (197,503)
Issuance of Preferred Stock - Series B         -            -            -             -
Dividends on Preferred Stock - Series A
 - $42.50                                      -            -            -             -
Common Stock issued as dividend on
  Preferred Stock - Series B                   -            -            -             -
Exercise of stock options                      -            -            -             -
Issuance of Common Stock                       -            -            -             -
Currency translation adjustment                -           330           -             -
                                        ------------  -------------  ---------- -----------
Balances, December 28, 1996                (201,111)    (1,339)       208,800        2,822
Net loss                                    (49,680)        -            -             -
Common Stock issued as dividend on 
  Preferred Stock - Series B                   -            -            -             -
Exercise of stock options                      -            -            -             -
Issuance of Warrants                           -            -            -             -
Currency translation adjustment                -          (159)          -             -
                                        ------------  -------------  ---------- -----------
Balances, December 27, 1997                (250,791)    (1,498)       208,800        2,822
Net loss                                   (128,599)        -            -             -
Common Stock issued as dividend on 
  Preferred Stock - Series B                   -            -            -             -
Exercise of stock options                      -            -            -             -
Common Stock issued as contribution to 
  Company 401k Plan                            -            -            -             -
Dividends on Preferred Stock - Series B        -            -            -             - 
Currency translation adjustment                -           394           -             -
                                        ------------  -------------  ---------- -----------
Balances, December 26, 1998             $  (379,390)  $ (1,104)       208,800   $    2,822
                                        ============  =============  ========== ===========
</TABLE>
                                                        F-6

<PAGE>



GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)                                                                 
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                             Eleven Months
                                                                Year Ended       Year Ended        Ended
                                                               December 26,     December 27,    December 28,
                                                                  1998             1997             1996
                                                              -------------    ------------   -------------
<S>                                                            <C>              <C>            <C>    
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                    $   (128,599)    $  (49,680)    $   197,503)
  Adjustments to reconcile net loss to net cash used in
    operating activities:

    Depreciation and amortization                                    7,895          6,732          12,534
    Amortization of intangibles                                      4,685          4,482           1,487
    Provision for losses on accounts receivable                      3,734          3,608           5,719
    Restructuring, net of (gains) losses on sales of assets          4,396        (10,786)        103,367
    Write-off of assets                                             10,609            -               -
    Non-cash compensation expenses                                     -              -            14,335
    Loss (gain) on sale of equipment                                 4,692            -               (98)
    Other                                                            1,320            -             1,439
  Changes in assets and liabilities, net of effect of
    acquisition and dispositions:
    Decrease (increase) in accounts receivable                      11,556        (15,392)          1,001
    Decrease (increase) in inventories                               1,591         (7,051)         27,432
    (Increase) decrease in net assets held for sale                  (213)          1,755           1,628
    Decrease in refundable income taxes                                -              -             1,463
    Increase in other current assets and royalty advances          (12,894)        (3,215)         (3,600)
    Increase (decrease) in accounts payable                          4,548          3,199          (5,916)
    Increase (decrease) in accrued compensation and fringe
      benefits                                                        (910)           100             143
  Other                                                             23,373        (12,970)         17,149
                                                              -------------    ------------   -------------

    Net cash used in operating activities                          (64,217)       (79,218)        (19,420)

CASH FLOWS FROM INVESTING ACTIVITIES:
   Broadway Video acquisition                                          -              -           (81,000)
   Investment in joint venture                                         -                -          (2,250)
   Deposits and other                                                 (211)        (3,497)            229
   Acquisitions of property, plant and equipment                   (13,400)       (20,386)         (5,739)
   Additions to film library                                        (4,668)        (6,348)             -
   Proceeds from streamlining plan                                     -              -               661
   Proceeds from sales of assets                                     7,667         22,712          14,535
                                                              -------------    ------------   -------------

     Net cash used in investing activities                         (10,612)        (7,519)        (73,564)
</TABLE>



                                                        F-7

<PAGE>



GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In Thousands)                                         
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                               Eleven Months
                                                                 Year Ended       Year Ended       Ended
                                                                December 26,     December 27,    December 28,
                                                                    1998             1997          1996
                                                                ------------     ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:

<S>                                                                   <C>              <C>           <C>
  Proceeds from issuance of Guaranteed Preferred Beneficial                                               
    Interests in the Company's and Golden Books Publishing                                                
    Company, Inc.'s Convertible Debentures                             -                 -        115,000
  Issuance costs of Guaranteed Preferred Beneficial Interests                                             
    in the Company's and Golden Books Publishing Company,                                         
    Inc.'s Convertible Debentures in the                               -                 -         (4,579)
  Proceeds from Municipal Government Grants                            -               3,000          -
  Net proceeds from Loan Facility                                   10,000               -            -
  Net proceeds from Revolving Credit Facility                       21,637               -            -
  Proceeds from issuance of Preferred Stock - Series B                 -                 -         65,000
  Issuance costs of Preferred Stock - Series B                         -                 -         (6,248)
  Redemption of Preferred Stock - Series A                             -                 -         (9,985)
  Proceeds from sale of Common Stock                                   -               1,556       28,886
  Dividends paid on Preferred Stock - Series A                         -                 -           (646)
  Common Stock Transactions - Other                                    728               -            (74)
                                                               -------------     ------------- --------------

    Net cash provided by financing activities                       32,365             4,556      187,354
                                                               -------------     ------------- --------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                383               (94)          93
                                                               -------------     ------------- --------------

NET (DECREASE) INCREASE IN CASH AND CASH                                                                    
   EQUIVALENTS                                                     (42,081)          (82,275)      94,463

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                        57,411           139,686       45,223
                                                               -------------     ------------- --------------

CASH AND CASH EQUIVALENTS, END OF YEAR                         $    15,330       $    57,411   $  139,686
                                                               =============     ============= ==============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
    INFORMATION:
  Cash paid during the year for:
    Interest and distributing on Guaranteed Preferred      
    Beneficial Interests in the Company's and Golden Books                                        
      Publishing Company, Inc.'s Convertible Debentures        $    15,235       $    21,553   $   13,992
                                                               =============     ============= =============
    Income taxes, net of refunds received                      $      (108)      $      (416)  $     (319)
                                                               =============     ============= =============
Non-cash activity:
    Issuance of warrants in connection with Disney License    
      Agreement                                                $         -       $     6,611   $      -
                                                               =============     ===========   =============
</TABLE>
See notes to consolidated financial statements



                                                        F-8

<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998
--------------------------------------------------------------------------------

1.  Nature of Business and Organization

Golden Books Family  Entertainment,  Inc. and Subsidiaries  (the "Company") is a
publisher  of  children's  books  and  family  related  entertainment   products
primarily in the North American retail market. The Company, through its Consumer
Products  division  creates,   publishes  and  markets  an  extensive  range  of
children's  entertainment  products,  including  "Little Golden Books" and other
storybooks,   coloring  /  activity  books,   electronic  storybooks,   puzzles,
educational workbooks, reference books and novelty book formats. The Company has
published its flagship product line, "Little Golden Books", for over 50 years.

The  Company,  through the  Commercial  Printing  Division  of its wholly  owned
subsidiary,  Golden Books Publishing Company,  Inc. ("Golden Books Publishing"),
provides  creative,  printing  and  publishing  services to third  parties.  The
Company  groups these  activities  into three business  categories:  graphic art
services and commercial  printing;  educational  kit  manufacturing;  and custom
publishing services.

The Company's Golden Books  Entertainment  Group ("Golden Books  Entertainment")
division was  established  in August 1996,  upon the  acquisition  from Broadway
Video  Entertainment,  L.P. ("BVELP") of an extensive library of character-based
family  entertainment  properties.  The Golden  Books  Entertainment  division's
library is comprised of copyrights, distribution rights, trademarks and licenses
relating to characters,  television programs and motion pictures, both animation
and live action, and includes individual specials and multiple episode series.

On May 8,  1996,  the  Company  effected  a  reorganization  of  certain  of its
subsidiaries (the "1996 Reorganization").  First, the Company conveyed to Golden
Books,  Inc. ("GB"),  a Delaware  corporation and wholly owned subsidiary of the
Company,  (i) all of the issued and outstanding  shares of capital stock of Penn
Corporation  ("Penn")  and (ii) all of the  issued  and  outstanding  shares  of
capital stock of Western Publishing.  Immediately thereafter, the Company caused
GB to merge with and into Western Publishing Company Inc. In connection with the
1996 Reorganization, the Company, Western Publishing and GB entered into a First
Supplemental Indenture, dated as of May 8, 1996, with Marine Midland Bank, a New
York banking and trust company, as Successor Trustee,  pursuant to which Western
Publishing  (the  name  of  which  was  subsequently  changed  to  Golden  Books
Publishing) was substituted for the Company as obligor with respect to the 7.65%
Senior Notes due 2002 (the "Senior Notes") originally issued by the Company.





                                       F-9

<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------
2.  Liquidity and Business Outlook

The Company has  experienced  liquidity  difficulties  as a result of  operating
losses,  working capital  deficiencies and negative  operating cash flows. These
difficulties have hampered the Company's ability to fund day-to-day  operations.
As a result of the  aforementioned  facts and as more fully described  below, on
February 26, 1999 the Company,  as well as Golden  Books  Publishing  and Golden
Books Home  Video,  Inc.  (collectively,  the  "Debtors")  filed  petitions  for
reorganization   under  Chapter  11  of  the  United  States   Bankruptcy   Code
("Bankruptcy  Code").  The petitions were filed in the United States  Bankruptcy
Court for the  Southern  District  of New York  (the  "Bankruptcy  Court").  The
Debtors  are  continuing  to operate  their  business  and hold their  assets as
debtors-in-possession. No trustee has been appointed.

On  September  15,  1998,  the Company  announced  that it was  deferring a $5.7
million interest payment on the Senior Notes due on such date for a 30-day grace
period in  accordance  with the  Indenture  ("Indenture")  governing  the Senior
Notes.  Subsequently,  on October 15, 1998, the Company  announced that it would
not pay the September 15th interest  payment.  Accordingly,  at October 15th the
Company was in default  under the Indenture and the holders of the Senior Notes,
at their  option,  have the right (i) to demand  the  redemption  of the  entire
$150.0  million  principal  amount of the Senior Notes due and (ii) foreclose on
the collateral  securing the Senior Notes.  The Company does not have sufficient
resources to repay this obligation. Additionally, on March 15, 1999, the Company
defaulted  on a $5.7  million  interest  payment on the Senior Notes due on such
date. As a result of the defaults,  the Senior Notes are classified as a current
liability on the  accompanying  consolidated  balance sheet. The Company has not
been informed of any such acceleration of payment.

Due to the  October  15,  1998  default  under the Senior  Notes,  cross-default
provisions  regarding the Company's $30.0 million  Revolving Credit Facility (as
defined)  with  NationsCredit  and its $25.0  million Loan Facility (as defined)
with Golden Press  Holdings,  LLC, (see Note 9) have resulted in defaults  under
such  agreements.  Accordingly,  the lenders under the Revolving Credit Facility
and  the  Loan  Facility  have  the  right,  at  their  option,  to  demand  the
acceleration of all amounts due thereunder. The Company does not have sufficient
resources to repay these  obligations.  The Revolving  Credit  Facility and Loan
Facility  have  been  classified  as  current  liabilities  on the  accompanying
consolidated  balance  sheet.  The  Company  has not been  informed  of any such
acceleration of payment.

The Company  also decided on November 1, 1998 that the  dividend  consisting  of
195,000  shares of Class A common stock and $292,500 in cash due on the Series B
Preferred  Stock would not be declared or paid in accordance with the consent of
the holders of its Series B Preferred Stock.  Additionally,  on February 1, 1999
the Company again  decided that it would not declare the dividend  consisting of
195,000  shares of Class A common  stock or pay a cash  dividend on the Series B
Preferred  Stock in  accordance  with the consent of the holders of the Series B
Preferred Stock.

The Company  also decided on November 5, 1998 that it would defer a $2.5 million
interest  payment  on  the  Guaranteed  Preferred  Beneficial  Interests  in the
Company's and Golden Books Publishing  Company,  Inc.'s  Convertible  Debentures
(the "TOPrS" or the "Preferred Securities") due in accordance with the Indenture
underlying the TOPrS.  Additionally,  on February 20, 1999, the Company deferred
the next scheduled $2.5 million  interest payment due on the TOPrS in accordance
with the Indenture governing the TOPrS.

As a result  of the  Bankruptcy  filing,  default  provisions  in the  Indenture
underlying  the TOPrS have been  violated  which have resulted in the holders of
the TOPrS  having the right,  at their  option,  to demand  acceleration  of the
$115.0  million  due  under  the  TOPrS  agreement.  The  Company  does not have
sufficient  resources to repay this obligation.  As a result of the default, the
TOPrS are  classified as a current  liability on the  accompanying  consolidated
balance  sheet.  The Company has not been informed of any such  acceleration  of
payment.



                                      F-10

<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------

2.  Liquidity and Business Outlook (continued)

As a result of the Company's failure to make the interest payments on the Senior
Notes, a steering  committee  representing  certain  holders of the Senior Notes
(the "Senior Notes Steering  Committee")  was  established.  Additionally,  as a
result of the Company's  failure to make interest  payments due on the TOPrS,  a
steering  committee  representing  certain  holders  of the  TOPrS  (the  "TOPrS
Steering Committee") was established.

The  Company,  along  with the Senior  Notes  Steering  Committee  and the TOPrS
Steering Committee engaged in extensive  negotiations  regarding a restructuring
of the Company's  indebtedness and capital equity structure.  These negotiations
ultimately  resulted in the filing of a joint plan of  reorganization  regarding
the terms of the Company's  restructuring (the "Joint Plan of  Reorganization").
Accordingly,   on  March  25,  1999,   the  Company  filed  the  Joint  Plan  of
Reorganization  with the  Bankruptcy  Court.  The Joint  Plan of  Reorganization
allows the Company to  significantly  reduce its  existing  debt,  pay all trade
creditors  in full and,  under the  direction  of its current  management  team,
proceed with its publishing and entertainment  operations.  The restructuring of
the Company's indebtedness and revised capital structure will be provided for as
follows:

o    The  Senior  Notes will be  converted  into (i) a new  secured  note in the
     principal  amount of $87.0  million due 2004,  with interest at the rate of
     10%,  if paid in cash,  or, at the  Company's  option  for the first  three
     years,  13.5%  payable in kind,  and (ii) 42.5% of the Company's new common
     stock to be issued post  recapitalization,  prior to dilution. The new note
     will be secured by the existing  collateral  already granted to the holders
     of the Senior Notes as well as certain additional collateral.

o    The TOPrS  indebtedness  will be converted  into 50% of the  Company's  new
     common stock to be issued post recapitalization, prior to dilution.

o    The Golden Press Holdings, L.L.C. loan in the amount of $10 million will be
     converted  into 5% of the  Company's  new  common  stock to be issued  post
     recapitalization, prior to dilution.

Existing  preferred  and  common  shareholders  will  surrender  their  stock in
exchange for out-of-the money warrants to purchase 5% of the new Company's stock
to be  allocated  two-thirds  to the  preferred  and  one-third  to  the  common
shareholders,  to be  issued  post  recapitalization,  prior  to  dilution.  The
restructuring  also  provides for a management  stock  incentive  program for an
amount of common stock equal to 10% of the common stock issued on the  effective
date of the Joint Plan of Reorganization.  Of that amount, one-half (5%) will be
allocated to senior  management  upon the effective  date with the balance being
made   available  for  other   management   personnel  and  for  future  grants.
Additionally, on the effective date of the Joint Plan of Reorganization, Richard
E. Snyder's (the  Company's  current  Chairman of the Board and Chief  Executive
Officer)  employment  agreement will be amended,  as more fully disclosed in the
Disclosure  Statement and the exhibits thereto,  and Mr. Snyder will receive, in
consideration  of his  surrendering  certain claims and rights under his current
employment  agreement,  2-1/2% of the Company's  new common  stock,  among other
things.  The  foregoing  summary  of the Joint Plan of  Reorganization  does not
purport  to be  complete  and is  subject  to the  terms  of the  Joint  Plan of
Reorganization.

There  can be no  assurance  that  the  Joint  Plan  of  Reorganization  will be
confirmed by the Bankruptcy  Court.  If the Company is unable to obtain approval
of its Joint Plan of Reorganization,  the Company, its creditors and/or security
holders may seek other  alternatives for the Company,  including the sale of the
Company or parts thereof through an auction process.

The  Debtors  received  approval  from  the  Bankruptcy  Court  to pay  in  full
satisfaction  and on a timely basis,  all  undisputed  pre-petition  obligations
including  salaries,  wages  and  benefits  to  all of  its  current  employees.
Additionally,


                                      F-11

<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------

2.  Liquidity and Business Outlook (continued)

On March 25, 1999, the  Bankruptcy  Court gave final approval to a $55.0 million
debtor-in-possession  financing  facility  consisting of a $45.0 million  credit
facility and a $10.0  million term facility from The CIT Group (the "DIP Loan").
The DIP  Loan  is for an  initial  period  of two  years  with  annual  renewals
thereafter  with interest  rates ranging from the Prime Rate plus 1/8th of 1% to
5/8th of 1%.  Additionally,  the DIP Loan contains various  financial  covenants
which the Company is required to maintain on a quarterly  basis. The DIP Loan is
secured by  certain  receivables  and  inventory  of the  Company.  The  Company
utilized the proceeds from the DIP Loan to repay all  outstanding  amounts under
their Revolving Credit Facility  (approximately $9.6 million) with the remainder
anticipated to be utilized to fund operations during the pendency of the Chapter
11 proceedings.

As previously  noted, the Company is currently  operating its business under the
Bankruptcy  Court  and  continuation  of  the  Company  as a  going  concern  is
contingent  upon,  among  other  things,  the  ability to gain  approval  of the
requisite  parties under the Bankruptcy Code and  confirmation by the Bankruptcy
Court of the final Joint Plan of Reorganization,  the ability to comply with its
debtor in possession  financing  facility (the DIP Loan),  resolution of various
litigation   against  the  Company  and  the  Company's  ability  to  return  to
profitability,  generate  sufficient cash from  operations and obtain  financing
sources to meet its future obligations. In addition, the Company has experienced
recurring  operating losses,  working capital  deficiencies,  negative operating
cash  flow and is  currently  in  default  under  substantially  all of its debt
agreements. Those matters raise substantial doubt about the Company's ability to
continue as a going concern.  In the event the Joint Plan of  Reorganization  is
confirmed and consummated,  continuation of the business thereafter is dependent
on the Company's  near-term  ability to obtain  adequate exit  financing to meet
cash flow obligations and medium-term  ability to generate  sufficient cash flow
to meet its  operational  and  financing  requirements.  Under the Joint Plan of
Reorganization,  the  Company's  ability to obtain exit  financing is limited to
$60.0 million as long as the new $87.0 million secured note is outstanding,  and
initially to $45.0 million.

The Company has announced its intention to sell the Sturevant,  WI facility.  On
March 25, 1999, the Bankruptcy Court gave formal approval to the Company to sell
its Adult Publishing business for approximately $11.0 million subject to working
capital and certain other closing conditions. The Company is expecting to record
again upon the consummation of the sale.

3.  Summary of Significant Accounting Policies

Basis of Presentation

The consolidated  financial  statements  include the accounts of the Company and
all its wholly owned subsidiaries.  The consolidated financial statements of the
Company  include the operations of Golden Books  Entertainment  from the date of
its  acquisition on August 20, 1996. The results of Golden Books Financing Trust
(the "Trust") are included in the Company's  consolidated  financial  statements
since its  inception on August 20, 1996.  The Trust,  which is the issuer of the
Preferred  Securities,  is  wholly  owned  by the  Company,  has no  independent
operations and its assets consist  solely of the 8 3/4%  Convertible  Debentures
due 2016 of the Company and Golden Books  Publishing (see Note 10). All material
intercompany items and transactions have been eliminated.

The  Company  has  experienced  recurring  operating  losses,   working  capital
deficiencies,  negative  operating  cash flows and they are currently in default
under  substantially  all of their debt  agreements.  As discussed in Note 2, on
February 26, 1999 the Company filed petitions for  reorganization  under Chapter
11 of the  Bankruptcy  Code.  These  matters raise  substantial  doubt about the
Company's ability to continue as a going concern.  These consolidated  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.



                                      F-12

<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------

3.  Summary of Significant Accounting Policies (continued)

Basis of Presentation (continued)

Certain prior years' amounts have been  reclassified to conform with the current
year's presentation.

Change in Year End

On November  30, 1996,  the Company  changed its fiscal year so as to end on the
last  Saturday  of  December  in  each  year.   Accordingly,   the  accompanying
consolidated  financial statements present the financial position of the Company
as of  December  26,  1998  and  December  27,  1997,  and  the  results  of its
operations,  stockholders'  deficit and cash flows for the years ended  December
26, 1998 and December 27, 1997, and the eleven months ended December 28. 1996.

Cash and Cash Equivalents

The  Company  considers  all  highly  liquid  debt  investments  purchased  with
maturities  of three  months or less to be cash  equivalents.  Cash  equivalents
consist  of  investments  in high grade  commercial  paper.  Accordingly,  these
investments  are subject to minimal credit and market risk. At December 26, 1998
and December 27, 1997, all of the Company's cash  equivalents  are classified as
held to maturity and their carrying amounts approximate fair value.

The Company has placed  approximately $3.7 million in certificates of deposit to
collateralize   lease  obligations   associated  with  the  Company's  corporate
headquarters  located in New York City. Such amounts are included in deposits on
the accompanying consolidated balance sheets.

Income Taxes

The Company  accounts for income taxes in accordance with the liability  method.
Under this method,  deferred income taxes are provided for  differences  between
the book and tax bases of the Company's assets and liabilities.

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the  reported  amounts  of assets  and  liabilities  and  disclosures  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual  results  could  differ  from those  estimates.  The  principal  areas of
judgment  relate to provision for returns and other sales  allowances,  doubtful
accounts,  slow moving and obsolete inventories,  reserve for royalty guarantees
and advances, film forecast ultimates,  long-term asset impairments,  net assets
held for sale and taxes.

Property, Plant and Equipment

Property,  plant and equipment are stated at cost and depreciated / amortized on
the straight-line method over the following estimated useful lives:


           Classifcation                     Estimated Life (Years)
     ---------------------------------     --------------------------

          Buildings and improvements                 10 - 20

          Machinery and equipment                     3 - 10



                                      F-13

<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------

3.  Summary of Significant Accounting Policies (continued)

Property, Plant and Equipment (continued)

Expenditures which  significantly  increase the value or extend the useful lives
of assets are  capitalized,  while  maintenance  and  repairs  are  expensed  as
incurred.  The cost and  related  accumulated  depreciation  /  amortization  of
assets,  replaced,  retired or disposed of are eliminated from their  respective
property,  plant and  equipment  accounts,  and any gain or loss is reflected in
consolidated statements of operations.

Costs related to the  development  of  information  systems that are expected to
benefit future periods are capitalized  and amortized over the estimated  useful
lives of the systems.

Revenue Recognition

Sales are recorded upon shipment of products.  Sales made on a returnable  basis
are recorded net of  provisions  for  estimated  returns and  allowances.  These
estimates are revised,  as necessary,  to reflect  actual  experience and market
conditions. Revenue from the sale of film rights, principally for the home video
and domestic and foreign syndicated  television  markets, is recognized when the
film is available for showing or exploitation. Income from licensing is recorded
at the time  characters  are  available  to the  licensee  and  collections  are
reasonably assured.  Receivables due more than one year beyond the balance sheet
date are discounted to their present value.

Loss Per Common Share

Net loss per basic  common  share  for the years  ended  December  26,  1998 and
December 27, 1997,  and the eleven  months ended  December 28, 1996 are based on
the net loss for the period plus preferred dividend  requirements divided by the
weighted average number of basic common shares outstanding. Shares issuable upon
the  exercise of all common  stock  equivalents  consisting  primarily  of stock
options and warrants are not included in the computations  since their effect is
antidilutive (see Note 19).

Inventories

Inventories are valued at the lower of cost or market value.  Cost is determined
by the  last-in,  first-out  ("LIFO")  method  for  substantially  all  domestic
inventories.  Inventories  of  international  operations  are  valued  using the
first-in,  first-out  method.  At  December  26,  1998 and  December  27,  1997,
approximately 75 % and 89%, respectively, of total inventories were valued under
the LIFO method.

Foreign Currency Translation

Foreign  currency  assets and  liabilities  are  translated  into United  States
dollars at end of period rates of exchange,  and income and expense accounts are
translated at the weighted  average rates of exchange for the period.  The gains
and losses resulting from the translation adjustments have been accumulated as a
separate  component  of common  stockholders'  deficit.  During  the year  ended
December 26, 1998, the Company  recorded a translation  charge of  approximately
$777,000 relating to the wind-down of the United Kingdom operations. Such amount
has been  included  in  selling,  general  and  administrative  expenses  in the
consolidated statement of stockholders' deficit.

Advertising Costs

The Company expenses  advertising costs related to its publishing  operations as
they are incurred.  Advertising  expenses for the years ended  December 26, 1998
and December 27, 1997,  and for the eleven month period ended December 28, 1996,
amounted  to  approximately  $2.4  million,   $3.6  million  and  $1.0  million,
respectively.


                                      F-14

<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------

3.  Summary of Significant Accounting Policies (continued)

Film Library

Film  library  consists of the costs of  acquiring  the film  library,  costs of
additional  licenses and television  production  costs,  which are stated at the
lower  of  unamortized  costs or net  realizable  value.  The  costs  are  being
amortized using the film-forecast  method which amortizes such costs in the same
ratio that current  revenues  bear to  anticipated  total  revenues.  Under this
method, the useful lives do not exceed 20 years in duration. The liabilities for
various profit  participations and residuals are accrued in the proportion which
revenue for a period bears to ultimate revenue.

During the fourth  quarter of 1998,  the Company  recorded a non-cash  charge of
approximately  $1.4  million  as a  component  of  write-off  of  assets  in the
consolidated   statement  of  operations  and  comprehensive  loss  due  to  the
acceleration of the  amortization  period of one of the Company's  entertainment
productions.

Goodwill and Long Lived Assets

Goodwill at December 26, 1998 and  December  27,  1997,  consists of the cost in
excess  of  net  assets   acquired  in  connection   with  the   acquisition  of
substantially  all  the  assets  of  BVELP,   which  is  being  amortized  on  a
straight-line basis over a 25-year period (see Note 12).

It is the  Company's  policy to account for  goodwill at the lower of  amortized
cost  or  estimated  realizable  value.  As  part of an  ongoing  review  of the
valuation and  amortization of goodwill and long lived assets of the Company and
its  subsidiaries,  management  assesses the carrying value of goodwill and long
lived assets if facts and circumstances suggest that there may be impairment. If
this  review  indicates  that  goodwill  and  long  lived  assets  will  not  be
recoverable  as  determined  by a  non-discounted  cash  flow  analysis  of  the
operating results over the remaining  amortization period, the carrying value of
the goodwill  and long lived  assets  would be reduced to  estimated  realizable
value.


                                      F-15

<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------

3.  Summary of Significant Accounting Policies (continued)

Goodwill and Long Lived Assets (continued)

As a result  of the  recurring  losses  by the  Children's  Publishing  business
primarily due to a reduced level of sales,  high operating  costs  (including an
unfavorable lease agreement and  disadvantageous  union contracts) and the under
utilization  of  manufacturing  capacity  at  their  manufacturing  facility  in
Sturtevant,  WI,  during the fourth  quarter of 1998,  management  evaluated the
ongoing  value  of  the  property,  plant  and  equipment  associated  with  its
manufacturing facility in Sturtevant,  WI. Based on this evaluation, the Company
determined  that assets with a carrying value of $19.2 million were impaired and
wrote them down by  approximately  $9.2 million to their  estimated  fair value.
Fair value was based upon  estimates by management  using current  market values
from  vendors and  appraisals.  Such amount has been  included in  write-off  of
assets  in  the   accompanying   consolidated   statement  of   operations   and
comprehensive  loss.  The  Company  has  announced  its  intention  to sell  the
Sturtevant, WI facility.

Reporting Comprehensive Income

In the first quarter of 1998, the Financial  Accounting  Standards  Board issued
Statement of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive
Income"  ("SFAS  130").  SFAS 130  established  new rules for the  reporting and
display  of  comprehensive  income and its  components.  SFAS 130  requires  the
Company's foreign currency translation adjustments, which are currently reported
in stockholders'  deficit, to be included in other  comprehensive  income (loss)
and the disclosure of total comprehensive income (loss). The Company adopted the
requirements in the first quarter of 1998.

Disclosures About Segments of an Enterprise and Related Information

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No.  131,  "Disclosures  About  Segments of An
Enterprise and Related  Information" ("SFAS 131"), which is effective for fiscal
years beginning after December 15, 1997. SFAS established  standards for the way
that public business  enterprises  report  information and operating segments in
annual financial  statements and requires that these enterprises report selected
information  about  operating  segments in interim  financial  reports.  It also
established  standards  for related  disclosures  about  products and  services,
geographic  areas and major  customers.  The Company adopted the requirements of
SFAS 131 in the fourth quarter of 1998. The adoption of SFAS 131 did not have an
effect on the Company's  consolidated  statement of operations and comprehensive
loss (see Note 18).

Employer's Disclosure about Pensions and Other Post-Retirement Benefits

In February 1998, the Financial  Accounting  Standards Board issued Statement of
Financial Accounting  Standards No. 132, "Employer's  Disclosures about Pensions
and Other Post-Retirement  Benefits" ("SFAS 132"), which is effective for fiscal
years beginning after December 15, 1997.  SFAS 132  standardizes  the disclosure
requirements  for  pension  and other  post-retirement  benefits  to the  extent
practicable,   requires  additional   information  on  charges  in  the  benefit
obligations  and fair  value  of plan  assets  that  will  facilitate  financial
analysis,   and  eliminates   certain   disclosure.   The  Company  adopted  the
requirements of SFAS 132 in the fourth quarter of 1998. The adoption of SFAS 132
did not have a material effect on the Company's  consolidated  state of position
or revenue, only on its disclosure (see Note 17).

Reporting the Costs of Start-up Activities

In April 1998 the American  Institute of Certified  Public  Accountants  (AICPA)
issued  Statement  of Position  No.  98-5,  "Reporting  on the Costs of Start-Up
Activities"  ("SOP 98-5").  SOP 98-5 requires that  companies  expense  start-up
costs and  organization  costs as they are  incurred.  SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. Earlier
application is encouraged. The initial application of SOP 98-5 is to be reported
as


                                      F-16

<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------

3.  Summary of Significant Accounting Policies (continued)

Reporting the Costs of Start-up Activities (continued)

a cumulative effect or a change in accounting principle. The Company has not yet
completed  it's review of SOP 98-5,  but does not  anticipate  that its adoption
will have a material effect in the consolidated financial statements.

4.  Restructuring, Net Assets Held for Sale and Other Charges

During  1996,  the Company  made  decisions  with  respect to certain of the its
assets resulting in writedowns and other charges in the  consolidated  financial
statements for the eleven months ending December 28, 1996 totaling approximately
$132.3 million as follows:

(i)   a restructuring charge totaling $65.7 million including a:
      o $21.5 million loss on sale of disposal of a business  resulting from the
        Company's decision to exit non-core business activities;
      o $24.3 million  non-cash  charge  consisting of: i) $10.2 million for the
        write-down of the commercial  printing operation to net realizable value
        to be disposed of in connection with the Company's plan to exit non-core
        business  activities,  ii) $9.6  million  for the loss on sale of assets
        associated  with the  Company's  strategic  decision  to  outsource  its
        information  technology  department,  and  iii)  $4.5  million  for  the
        write-down of assets to net realizable  value which have been identified
        as non-productive  assets as a result of the Company's strategic plan to
        operate in a new efficient manufacturing facility;
      o $8.0 million  charge for severance  related to the above; o $3.0 million
        net realizable value adjustment  related to an idle facility  associated
        with the Company's  game  business,  which was  previously  sold; o $7.6
        million   write-off  of   non-productive   assets  associated  with  the
        termination  of customer  program  initiatives  in  connection  with the
        strategic redirection of the Company; and
      o $1.3 million for facility exit costs related to lease terminations which
        were paid in December 1996.

(ii)  a cost of sales  adjustment of $25.0 million  comprised of:
      o $17.6  million  of  costs  pertaining  to  the  Company's   decision  to
        discontinue or replace certain product lines and expeditiously liquidate
        related inventory and slow moving product; and
      o $7.4 million of other inventory related costs,  consisting  primarily of
        licensing and prepublication costs.

(iii) a selling,  general and administrative charge of $11.0 million relating to
      costs associated with management's  revised plans to resolve certain legal
      and contractual matters

(iv)  adjustments totaling $5.7 million consisting of: o $3.4 million in revenue
      adjustments;  and o  $2.3  million  in  operating  expenses  to  establish
      reserves to resolve  differences with customers with a view toward mending
      and improving the Company's relationships with its customers.

(v)   approximately  $17.7 million of charges in  connection  with the sale of a
      significant equity interest to GP Holding.

(vi)  $7.2 million of other one time charges consisting primarily of:

      o $3.8 million in consulting fees incurred in relation to new management's
        review of the operations of the Company;

      o $1.7  million  of  facility  costs;  and o other one time  miscellaneous
        charges of $1.7 million



                                      F-17

<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------

4.  Restructuring Net Assets Held for Sale and Other Charges (continued)

During the year ended December 28, 1996,  management  also determined that Penn,
formerly a wholly owned  subsidiary of Golden Books  Publishing  that  designed,
produced and  distributed  decorated  paper  tableware,  party  accessories  and
giftware,  did not fit  into  the  Company's  future  strategic  direction  and,
accordingly,  decided to divest Penn (see Note 16). As a result, on December 23,
1996 Golden  Books  Publishing  sold the stock of Penn for  approximately  $14.5
million in cash plus notes, subject to a working capital adjustment. The results
of  operations  of Penn are included in the  Company's  consolidated  results of
operations  until its date of disposition.  Penn's results of operations for the
eleven months ended December 28, 1996 were as follows:


<TABLE>
<CAPTION>
                                             Period from February 4, 1996 to
                                                  December 23, 1996
                                                (date of disposition)
                                                   (In thousands)
                                              ------------------------------

<S>                                                      <C>  
Revenues                                           $    40,660
Gross profit                                             4,930
   Loss before interest expense and                
   provision for income taxes                           (7,152)
</TABLE>

During 1997,  the Company sold its printing  operations in Cambridge,  Maryland,
the sale of the  building  which  had  housed  its main  plant  in  Racine,  and
disposals  of other  assets.  On  December  1, 1997,  the  Cambridge  commercial
printing operation was sold for approximately  $20.2 million in cash, subject to
a working capital  adjustment  which resulted in a gain of  approximately  $10.2
million recorded in the consolidated  statement of operations for the year ended
December 27,  1997.  The results of  operations  of the  Cambridge  facility are
included in the Company's  consolidated  results of operations until its date of
disposition.  The  facilities  results of operations for the year ended December
27, 1997, and the eleven months ended December 28, 1996 were as follows:

<TABLE>
<CAPTION>


                                        Period from December 29, 1996          Eleven months
                                             to December 1, 1997                  Ended
                                            (date of disposition)           December 28, 1996
                                                (In thousands)              ------------------
                                        -----------------------------

<S>                                          <C>                            <C>          
Revenues                                     $     25,552                   $      26,962
Gross profit                                        3,656                           1,694
   Income (loss) before interest
   expense and provision for
   income taxes                                     1,952                            (223)

</TABLE>

Additionally,  the sales of the Racine plant and other  assets each  resulted in
gains of $0.3 million for the year ended  December 27, 1997. In connection  with
the Company's  strategic plan, the Company incurred  approximately $11.5 million
in one time  transition  costs  during 1997  consisting  of: (i) $3.1 million of
moving costs  associated with new facilities,  (ii) $3.5 million for outsourcing
of the  information  technology  department,  (iii) $4.5  million in  consulting
services  associated with implementing the strategic plan, and (iv) $0.4 million
in other costs. These one time transition costs are included in selling, general
and  administrative  expenses  in the  accompanying  consolidated  statement  of
operations and comprehensive loss.

                                      F-18

<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------

4.  Restructuring, Net Assets Held for Sale and Other Charges (continued)

During  1998,  the  Company  continued  its  restructuring  with the sale of its
facility in Fayetteville,  North Carolina and a reduction of its office space in
New York (see Note 15). The  Fayetteville  facility  was sold for  approximately
$7.2 million in cash which  resulted in a loss of  approximately  $1.8  million,
which was recorded in the consolidated statement of operations and comprehensive
loss for the year ended December 26, 1998.  Accordingly,  restructuring,  net of
(gains)  losses on the sales of the assets for the year ended  December 26, 1998
is  composed  of the  following:  (i)  $1.8  million  loss  on the  sale  of the
Fayetteville facility, and (ii) $4.7 million principally composed of a write-off
of leasehold  improvements  associated  with the  Company's  reduction of office
space in connection with their New York lease agreement.  Additionally, in 1998,
the Company incurred  approximately  $12.2 million in one-time transition costs,
consisting of: (i) $4.4 million in outsourcing  premium and (ii) $7.8 million in
costs  associated  with the move to the new Sturtevant,  WI facility.  These one
time  transition  costs are  included  in:  (i) cost of sales and (ii)  selling,
general  and  administrative   expenses,   respectively,   in  the  accompanying
consolidated statement of operations and comprehensive loss.

As of December 26, 1998, substantially all of the facility closing and severance
costs, except for approximately $0.3 million (which is contractually obligated),
have been paid.

As of December 27, 1997, net assets held for sale,  totaling  approximately $9.9
million,  included the Company's, (i) Fayetteville facility, which was closed in
conjunction with the sale of the Company's game and puzzle business (and sold in
1998),  (ii)  Coffeyville  Distribution  Center,  a  facility  of  Golden  Books
Publishing  , and  (iii)  the  Creative  Center,  a  facility  of  Golden  Books
Publishing in Racine, WI.

As of December 26, 1998,  net assets held for sale totaling  approximately  $1.3
million  included  the  Company's,  (i)  Creative  Center  and (ii)  Coffeyville
Distribution Center, both facilities of Golden Books Publishing.

In January  1999 the  Company  sold their  Coffeyville  Distribution  Center for
approximately  $2.2  million,  which  resulted in a gain of  approximately  $1.4
million.  Such gain will be recorded in the  Company's  three months ended March
27, 1999 results of operations.  The Company has announced its intention to sell
the Sturtevant, WI facility. On March 25, 1999, the Bankruptcy Court gave formal
approval to the Company to sell its Adult Publishing  business for approximately
$11.0 million subject to working  capital and certain other closing  conditions.
If the sale is consummated, the Company is expecting to record a gain.



                                      F-19

<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------

5.  Accounts Receivable

Accounts receivable consisted of the following:

<TABLE>
<CAPTION>
                                         December 26,          December 27,
                                             1998                  1997
                                         ------------          -------------
                                                 (In thousands)

<S>                                      <C>                  <C>         
Accounts receivable                      $   79,165           $     78,609
Allowance for doubtful accounts              (6,800)                (7,208)
  Allowance for sales discount                                       
   and returns                              (26,827)               (17,041)
                                         ------------         -------------- 
                                             45,538                 54,360
Less: long term portion                      (4,127)                (3,207)
                                         ------------         -------------- 
                                         $   41,411           $     51,153
                                         ============         ==============
</TABLE>


6.  Inventories

Inventories consisted of the following:

<TABLE>
<CAPTION>

                                         December 26,          December 27,
                                             1998                  1997
                                         ------------          ------------
                                                 (In thousands)

<S>                                      <C>                  <C>         
Raw materials                            $    1,911           $      2,373
Work-in-process                               2,914                  3,819
Finished goods                               24,993                 25,121
Film library                                  3,250                  3,346
                                         ------------         -------------- 
                                         $   33,068           $     34,659
                                         ============         ==============
</TABLE>


At December 26, 1998 and December 27, 1997, the replacement  cost of inventories
valued  using LIFO  exceeded  the net  carrying  amount of such  inventories  by
approximately $3.2 million and $2.5 million, respectively. For the eleven months
ended December 28, 1996, the liquidation of LIFO  inventories  decreased cost of
sales by $5.2 million.  For the year ended December 26, 1998 the  liquidation of
LIFO inventories  decreased cost of sales by approximately $1.4 million. For the
year ended December 27, 1997 there was no LIFO  liquidation  and  therefore,  no
impact on the consolidated financial statements.




                                      F-20

<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------

7.  Property, Plant and Equipment

Property, plant and equipment consisted of the following:

<TABLE>
<CAPTION>


                                              December 26,    December 27,
                                                 1998            1997
                                              ------------    ------------
                                                    (In thousands)

<S>                                          <C>               <C>        
Land                                        $     393          $       393
Building and improvements                       9,265               13,393
Machinery and equipment                        56,162               55,381
Machinery and equipment in the process
  of installation                               2,081                8,709
                                            ----------         -------------

                                               67,901               77,876
Less accumulated depreciation and
  amortization                                (37,946)             (39,620)
                                            ----------         -------------
                                            $  29,955          $    38,256
                                            ==========         =============
</TABLE>

8.  Other Current Liabilities

Other current liabilities consisted of the following:

<TABLE>
<CAPTION>

                                             December 26,    December 27,
                                                1998            1997
                                             ------------    ------------
                                                     (In thousands)

<S>                                         <C>                <C>        
Royalties payable                           $  17,426          $    12,841
Accrued interest                               12,958                4,388
Accrued worker's compensation                   3,524                3,221
Restructuring costs                               620                4,559
Other                                          27,106               22,216
                                            ----------         -------------
                                            $  61,634          $    47,225
                                            ==========         =============
</TABLE>






                                      F-21

<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------

9.  Short-Term Borrowings and Long-Term Debt

Short-term borrowings and long-term debt consisted of the following:

<TABLE>
<CAPTION>

                                             December 26,    December 27,
                                                1998              1997
                                             ------------    ------------
                                                   (In thousands)


<S>                                            <C>              <C>                     
7.65% Senior Notes ($150,000,000 face
  amount) due 2002                          $ 150,000         $    149,897
Revolving credit facility                      21,637                 --
Loan facility                                  10,000                 --
                                            ----------        --------------
                                              181,637              149,897
Less long-term portion                           --               (149,897)
                                            ----------        --------------
                                            $ 181,637         $       --
                                            ==========        ==============
</TABLE>


Senior Notes:  The Company  currently has outstanding  $150.0 million  principal
amount of Senior Notes.  Interest is payable  semiannually on September 15th and
March 15th.  The  Indenture  contains  certain  provisions  limiting  subsidiary
indebtedness,  guarantees,  liens and the payment of cash dividends on Preferred
and Common  Stock.  On September  15, 1998,  the Company  announced  that it was
deferring,  at its option,  a $5.7 million  interest payment on the Senior Notes
due on such date for a 30-day grace  period in  accordance  with the  Indenture.
Subsequently,  on October 15, 1998, the Company  announced that it would not pay
the September  15th  interest  payment.  As a result,  the Company is in default
under the  Indenture  and the holders of the Senior  Notes have the right (i) to
demand the entire $150.0 million  principal  amount of the Senior Notes and (ii)
to foreclose on the collateral  securing the Senior Notes.  The Company does not
have sufficient resources to repay this obligation.  As a result of the default,
the Senior Notes have been classified as a current liability on the consolidated
balance  sheet.  As  described  in Note 2,  under the terms of the Joint Plan of
Reorganization,  the Senior Notes will be converted  into (i) a new secured note
in the principal amount of $87.0 million, due 2004, with interest at the rate of
10%, if paid in cash,  or, at the  Company's  option for the first three  years,
13.5%  payable in kind,  and (ii) 42.5% of the  Company's new common stock to be
issued post recapitalization, prior to dilution. The note will be secured by the
existing  collateral  already granted to the holders of the Senior Notes as well
as certain additional collateral.

Revolving  Credit  Facility:  On June 3, 1998, the Company  entered into a $30.0
million  three-year  revolving credit  facility,  with  NationsCredit  ("Line of
Credit").  Borrowings  under the facility bear  interest at the prime rate.  The
Line of Credit is secured by certain  receivables  and inventory of Golden Books
Publishing.  As a result  of  entering  into the Line of  Credit,  Golden  Books
Publishing  amended the Indenture  governing the Senior Notes due 2002 to, among
other things,  (i) permit Golden Books  Publishing to secure up to $30.0 million
of borrowings and related  obligations  under the Line of Credit,  (ii) grant to
the holders of the Senior Notes a security  interest in certain assets of Golden
Books Publishing, (iii) add a guarantee from the Company and (iv) add additional
covenants  and amend  certain  existing  covenants.  At December 26,  1998,  the
Company  had   outstanding   borrowings   under  the  Line  of  Credit  totaling
approximately  $21.6 million.  As a result of the Company's  failure to make the
required interest payment under the Indenture (see above), the Company is not in
compliance  with certain  covenants under the Line of Credit.  Accordingly,  the
lender at its option may give notice that the amounts  outstanding are immediate
due and  payable.  As a result,  the Line of  Credit  has been  classified  as a
current  liability on the consolidated  balance sheet. The Company does not have
sufficient resources to repay this obligation.  As described in Note 2, on March
25, 1999, the Company entered into a


                                      F-22

<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------

9.  Short-Term Borrowings and Long-Term Debt (continued)

$55.0 million,  three-year  revolving  credit ($45.0  million) and term facility
($10.0  million),  with The CIT Group. The revolving credit and term facility is
for an initial period of two years with annual renewals thereafter with interest
rates  ranging from the Prime Rate plus 1/8% of 1% to 5/8% of 1%.  Additionally,
they  maintain  various  financial  covenants  which the  Company is required to
maintain on a quarterly  basis.  The revolving  credit and term  facilities  are
secured by  certain  receivables  and  inventory  of the  Company.  The  Company
utilized a portion of the proceeds from the financing  arrangements to repay all
outstanding  amounts under the Company's  Line of Credit of  approximately  $9.6
million.

Loan Facility:  On September 4, 1998,  the Company  entered into a $25.0 million
loan facility with GP Holdings (the "Loan Facility").  The Loan Facility permits
Golden  Books  Publishing  to borrow  at its  option,  but  subject  to  certain
conditions,  up to  $25.0  million.  Borrowings  under  the  Loan  Facility  are
guaranteed by the Company and secured by certain assets. All outstanding amounts
under the Loan Facility are due,  together with accrued and unpaid interest,  on
September  9, 1999 or earlier  under  certain  conditions,  including if certain
assets of the Company are sold. Interest is due monthly and is set at an initial
rate of 5% per annum  increasing  to 7% in  February  1999,  but the  payment of
interest may be deferred at the Company's option until maturity. At December 26,
1998, the Company had outstanding  borrowings  under the Loan Facility  totaling
$10.0  million.  Due to the  Company's  failure to make the  September  15, 1998
interest  payment on the Senior Notes, the Company is in default under the terms
of the Loan Facility.  Accordingly,  the Loan Facility has been  classified as a
current  liability  on  the  consolidated  balance  sheet.  As a  result  of the
Company's  filing  for  Bankruptcy  and in  accordance  with the  Joint  Plan of
Reorganization,  the  Loan  Facility  in the  amount  of $10.0  million  will be
converted  into  5%  of  the  Company's  new  common  stock  to be  issued  post
recapitalization,  prior to  dilution.  Additionally,  GPH will  also  waive and
release the collateral extended to it with respect to the borrowings and will be
relieved of its  obligation  to loan up to an  additional  $15.0  million to the
Company.

The Indenture  covering the Senior Notes contains  certain  provisions  limiting
subsidiary indebtedness,  guarantees, liens and the payment of cash dividends on
Preferred  and Common  Stock.  At  December  26,  1998,  there were no  retained
earnings available to pay dividends on the Company's Common Stock.

10.  Preferred Securities ("TOPrS")

During the eleven months ended  December 28, 1996, the Company raised a total of
$115.0 million through a private  placement of Preferred  Securities  under Rule
144A under the Securities Act of 1933, as amended (the "Preferred  Securities").
The Preferred  Securities  were issued by the Trust,  a Delaware  business trust
financing  vehicle.  The Company owns all of the common securities of the Trust.
The  net  proceeds  of such  offering,  after  commissions  and  expenses,  were
approximately   $110.8   million.   The  Preferred   Securities   pay  quarterly
distributions at an annual  distribution rate of 8 3/4% (subject to any deferral
of interest payments on the Preferred Securities by the Company and Golden Books
Publishing),  have an aggregate liquidation preference of $115.0 million and are
convertible at the option of their holders into  Convertible  Debentures,  which
are immediately  convertible into Common Stock at an initial conversion price of
$13.00 per share. The Convertible Debentures will mature on August 20, 2016, and
may be redeemed,  in whole or in part, at any time after the occurrence of a Tax
Event or on Investment  Company Event (both as defined).  Effective  January 10,
1997, the Company  registered the Preferred  Securities  with the Securities and
Exchange Commission.

The Company and its subsidiary,  Golden Books Publishing,  are joint and several
obligor's of the Preferred  Securities  and they have fully and  unconditionally
guaranteed  the Trust's  obligations  under the Preferred  Securities.  Separate
financial  statements  of Golden  Books  Publishing  are not  presented in their
entirety as the separate financial  statements would not be materially different
from the consolidated financial statements of the Company. Summarized financial


                                      F-23

<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------

10.  Preferred Securities ("TOPrS") (continued)

statements of Golden Books  Publishing for the years ended December 26, 1998 and
December 27, 1997 and the eleven  months ended  December 28, 1996 are as follows
(in thousands):

<TABLE>
<CAPTION>
                                         December 26,    December 27,     December 28,
                                             1998            1997           1996
                                         ------------    ------------     ------------

<S>                                     <C>            <C>                  <C>
Current assets                          $   116,931    $     150,837
Non current assets                          126,804          134,560
                                        ------------  ---------------
   Total Assets                         $   243,735    $     285,397
                                        =============  ===============
Current liabilities                     $   498,683    $     149,452
Noncurrent liabilities                       46,854          188,290
                                        -------------  ---------------
   Total Liabilities                        545,537          337,742
   Preferred Securities                        --            110,707
Stockholders' Deficit                      (301,802)        (163,052)
                                        -------------  ---------------
   Total Liabilities and Stockholders'
      Deficit                           $   243,735    $     285,397
                                        =============  ================

Revenues                                $   194,226    $     243,561      $   255,005
                                        =============  ================   =============
Gross profit                            $    13,085    $      67,323      $    23,213
                                        =============  ================   =============
Loss before interest expense and
   provision for income taxes           $  (102,625)   $     (32,136)     $  (169,594)
                                        =============  ================   =============
Net loss                                $  (138,750)   $     (57,347)     $  (186,417)
                                        =============  ================   =============
</TABLE>


The  Indenture  covering the Senior Notes (see Note 9) restricts  the ability of
Golden Books  Publishing to pay cash dividends or make other cash  distributions
to the Company.

Due to its liquidity difficulties,  the Company decided on November 5, 1998 that
it was deferring a $2.5 million interest payment on the Preferred  Securities on
such date until  February 20, 1999, in accordance  with the indenture  governing
the Preferred  Securities.  On February 20, 1999, the Company again decided that
it was deferring the $2.5 million interest  payment on the Preferred  Securities
in accordance with the indenture governing the Preferred Securities.

On February 26, 1999,  the Company  filed  petitions  for  reorganization  under
Chapter 11 of the United States Bankruptcy Code. As a result, the holders of the
TOPrS, at their option, can demand  acceleration of the $115.0 million due under
the TOPrS  agreement.  The Company does not have  sufficient  resources to repay
this  obligation.  As a result of the  default,  the TOPrS are  classified  as a
current liability,  on the accompanying  consolidated balance sheet. The Company
has not been  informed of any such  acceleration.  As described in Note 2, under
the terms of the Joint Plan of Reorganization  the Preferred  Securities will be
converted  into  50% of  the  Company's  new  common  stock  to be  issued  post
recapitalization, prior to dilution.



                                      F-24

<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------


11.  Preferred Stock

Prior to May 8, 1996, the Company had 100,000  authorized  preferred  shares, no
par value, including 20,000 shares of Convertible Preferred Stock, Series A. The
Series A Convertible  Preferred Stock had a dividend rate of 8.5% per annum. The
conversion  price was $24 per share.  The stock was  redeemable at the option of
the  Company at any time for $500 a share  plus all  dividends  (whether  or not
earned or declared) accrued and unpaid to the date fixed for redemption.

On May 8, 1996,  the  Company  completed  the sale,  for net  proceeds  of $58.8
million  after  giving  effect  to  $6.2  million  of  transaction  costs,  of a
significant  equity  interest to Golden Press  Holdings,  LLC ("GPH  Holding" or
"GPH") whereby the Series A Convertible  Preferred Stock was retired at its face
value plus  accrued  dividends  and the Company  issued to GPH  Holding,  for an
aggregate  purchase price of $65.0  million,  (i) 13,000 shares of the Company's
Series B  Convertible  Preferred  Stock,  no par value,  each of which shares is
convertible into shares of the Company's  Common Stock at an initial  conversion
price of $10 per  share,  and (ii) a warrant  to  purchase  3,250,000  shares of
Common Stock at an initial exercise price of $10 per share (the "Warrant").  The
Series B Preferred Stock votes on an as-converted basis with the Common Stock on
all matters  submitted to a vote of the  stockholders of the Company,  including
the election of directors.  The Warrant became  exercisable  beginning on May 8,
1998,  subject to acceleration upon certain  circumstances.  The Warrant will be
exercisable  until  May  8,  2003.  Upon  confirmation  of  the  Joint  Plan  of
Reorganization, the Warrants will in effect be cancelled.

The Series B  Preferred  Stock  entitles  GPH to  receive a 12% annual  dividend
payable (i) during each of the first four years following  issuance in an amount
equal to  approximately  195,000 shares of the Company's Common Stock per fiscal
quarter of the Company,  subject to certain  adjustments,  and (ii)  thereafter,
when and as declared out of legally available funds, in cash at the rate of $150
per share, compounded quarterly, all of which dividends shall be cumulative from
the initial issuance. In addition,  the Certificate of Designation governing the
Series B Preferred  Stock  prevents the Company from paying  dividends or making
other distributions on the Common Stock until all dividends owed on the Series B
Preferred  Stock have been paid in full.  On November 5, 1998,  the Company with
the  consent of the  holders of its Series B  Preferred  Stock  stated  that the
dividend due on November 1, 1998 would not be declared or paid.  At December 26,
1998, the Company had cumulative  preferred  dividends payable of 195,000 shares
of  Common  Stock  and  $292,500  in cash  which  has  been  accrued  for in the
accompanying consolidated balance sheet.  Additionally,  on February 1, 1999 the
Company  again  decided  that it would not declare the  dividend  consisting  of
195,000  shares of Class A Common  Stock or pay a cash  dividend on the Series B
Preferred  Stock in  accordance  with the consent of the holders of the Series B
Preferred Stock.

The Series B Preferred Stock is subject to optional redemption by the Company at
a redemption price of $5,000 per share,  plus an amount equal to any accrued and
unpaid  dividends,  at any time on or after  May 8,  2000.  The  Company  is not
required to  mandatorily  redeem the Series B  Preferred  Stock and the Series B
Preferred Stock is not the subject of any sinking fund requirement.

The Series B Preferred Stock is convertible, at the option of the holders of the
Series B Preferred  Stock,  into shares of Company Common Stock, at the exchange
rate of 500 shares of Company  Common Stock for each share of Series B Preferred
Stock, representing a conversion price of $10.00 per share of Series B Preferred
Stock.  The  number of shares of  Company  Common  Stock for which the  Series B
Preferred Stock may be converted is subject to antidilution adjustments pursuant
to the  Certificate  of  Designations  to prevent  dilution on the occurrence of
certain events as described in the Certificate of Designations.





                                      F-25

<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------


11.  Preferred Stock (continued)

As described in Note 2, in accordance with the Joint Plan of Reorganization, the
existing  preferred  shareholders  will  surrender  their stock in exchange  for
out-of-the money warrants to purchase to 3.3% of the Company's new common stock,
to be issued post recapitalization, prior to dilution.

12.  Acquisition

On August 20, 1996, pursuant to an Asset Purchase Agreement dated as of July 30,
1996,  among BVELP, the Company and certain of the Company's  subsidiaries,  the
Company acquired,  among other things,  substantially all of BVELP's  television
and film library properties,  and assumed payables and all liabilities  incurred
in  connection  with the  exploitation  of such assets  after the closing for an
aggregate  purchase  price of  approximately  $81.0  million  in cash and  $10.0
million in Common Stock (901,408 shares),  as provided for in the Asset Purchase
Agreement (the "Broadway Video Acquisition").  On November 22, 1996, the Company
paid an additional amount of approximately  $900,000 to BVELP in satisfaction of
the Company's  obligations under the working capital adjustment  provided for in
the Asset Purchase Agreement.  The Broadway Video Acquisition has been accounted
for under  the  purchase  method of  accounting.  Based on the  Company's  final
allocation  of purchase  price,  goodwill,  consisting  of the excess of the net
assets and film library acquired, amounted to approximately $32.2 million and is
being amortized on a straight-line  basis over a 25-year period.  The results of
operations  of the Broadway  Video  Acquisition  are  included in the  Company's
consolidated results of operations from the date of its acquisition.

13.  Employee Stock Options

In December 1995, the Company adopted a stock option plan,  which as amended and
restated as of March 11, 1997 (the "1995  Plan"),  provides  for the granting of
options to purchase up to  5,750,000  shares of Common Stock to employees of the
Company  and its  subsidiaries.  As of  December  26,  1998  options to purchase
4,292,310 shares of Common Stock have been granted under the 1995 Plan. In March
1986, the Company  adopted a stock option plan which,  as amended,  provides for
the  granting  of options to  purchase up to  2,100,000  shares of Common  Stock
through 1996 to employees of the Company and its subsidiaries.

Prior to February 3, 1990, one half of these options  granted  generally  become
exercisable two years after the date of grant and the remaining one-half of such
options three years after the date of grant. Options granted between February 4,
1990 and January 29, 1994  generally  become  exercisable in their entirety five
years  after the date of grant.  Options  granted  between  January 30, 1994 and
February 28, 1995 generally become exercisable as follows:  (i) one-third of the
options  granted on the date of grant,  (ii)  one-third of such options one year
after the date of grant and (iii) the  remaining  one-third  of such options two
years after the date of grant.  Options granted  subsequent to February 28, 1995
generally  become  exercisable over various periods in accordance with the terms
of the individual awards.




                                      F-26

<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------


13.  Employee Stock Options (continued)

The  following  table of data is presented in  connection  with the stock option
plans:

<TABLE>
<CAPTION>

                                            Shares            Option Price Per      Weighted Average
                                                                  Share             Exercise Price
                                         -------------       -----------------      ----------------
<S>                                      <C>                         <C>             <C>    

Outstanding at February 3, 1996           1,564,100                                       
Exercised                                  (356,579)           $9.25 - $12.00           $ 10.90
Canceled                                   (547,221)            9.25 - $20.00           $ 15.84
Granted                                   2,851,089           $10.44 - $14.25           $ 12.34
                                         -------------
Outstanding at December 28, 1996          3,511,389
Exercised                                   (47,500)           $8.25 - $11.75           $ 10.61
Canceled                                   (441,300)           $9.88 - $16.75           $ 12.79
Granted                                   1,559,721            $8.50 - $12.75           $  9.64
                                         -------------
Outstanding at December 27, 1997          4,582,310
Exercised                                    (8,339)                   $11.06           $ 11.06
Canceled                                 (1,010,453)           $4.63 - $14.25           $ 10.72
Granted at December 26, 1998              1,243,000            $3.94 - $11.63           $  8.04
                                         -------------
Exercisable at December 26, 1998          4,806,518
                                         =============
</TABLE>

The weighted  average  fair value of options was $5.53,  $5.90 and $7.90 for the
years ended  December 26, 1998 and December 27, 1997 and the eleven months ended
December  28,  1996,  respectively.  Options to  purchase  1,414,892  shares and
1,174,869  shares were  exercisable  at December 26, 1998 and December 27, 1997,
respectively.

<TABLE>
<CAPTION>
                                         Options Outstanding                                 Options Exercisable
-------------------  ---------------------------------------------------------  --------------------------------------
                                                Weighted                                                                       
                            Number              Average          Weighted           Number                                 
                        Outstanding at         Remaining          Average       Exercisable at                             
 Range of Exercise       December 26,         Contractual        Exercise        December 26,        Weighted Average
      Prices                 1998                 Life             Price             1998             Exercise Price
 -----------------      --------------        -----------        ---------      --------------       ----------------
   <S>                  <C>                   <C>                <C>            <C>                     <C> 
  $3.94 - $5.91             515,000                 9.53            $ 4.61                 -                  -
  $5.92 - $8.86              20,000                 9.17            $ 7.88             1,667               $  8.63
  $8.87 - 13.38           4,271,518                 7.43            $10.40         1,413,225               $ 12.21
                          ---------                =====            ------         ---------               --------
                          4,806,518                 7.66            $ 9.77         1,414,892               $ 12.20
                          =========                =====            ======         =========               ========
</TABLE>

The Company has elected to follow  Accounting  Principles  Board Opinion No. 25,
Accounting  for Stock  Issued  to  Employees,  and  related  interpretations  in
accounting  for  its  employee  stock  options.  The  Company  has  adopted  the
disclosure-only  provisions of Statement of Financial  Accounting  Standards No.
123 ("SFAS 123").  Pro forma  information  regarding net income and earnings per
share is required  by SFAS 123,  which also  requires  that the  information  be
determined  as if the Company  has  accounted  for its  employee  stock  options
granted subsequent to December 31, 1994 under the fair value method described in
SFAS 123. For purposes of SFAS 123 pro forma


                                                       F-27

<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------


13.  Employee Stock Options (continued)

disclosures,  the  estimated  fair value of the options is  amortized to expense
over the option's  vesting period.  Had  compensation  cost for the stock option
plans been determined based on the fair value at the grant date for awards under
the stock option plans  consistent  with the methodology  prescribed  under SFAS
123, the  Company's pro forma net loss and net loss per basic common share would
have been  approximately  $136.0  million or $4.96 per basic common  share,  and
$67.6  million or $2.56 per basic common share for the years ended  December 26,
1998 and December 27, 1997, respectively.

The fair value for each option  grant was  estimated  at the date of grant using
the Black-Scholes  option-pricing  model with the following  assumptions for the
various  grants made during 1998 and 1997:  risk-free  interest rate of 5.6% and
6.5%;  expected  volatility of 66.1% and 50.1%; no dividend yield; no forfeiture
rate and expected lives of seven years. The Black-Scholes option valuation model
was developed for use in estimating  the fair value of traded options which have
no vesting  restrictions  and are fully  transferable.  In addition,  the option
valuation models require input of highly  subjective  assumptions  including the
expected  stock  price  volatility.  Because  changes  in the  subjective  input
assumptions  can  materially  affect the fair value  estimate,  in  management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of employee stock options.

Upon  confirmation  of  the  Joint  Plan  of  Reorganization,   all  outstanding
unexercised  stock  options,  warrants  and  similar  rights  will in  effect be
cancelled.

14.  Stockholders' Deficit

In connection  with the GP Holding  Transaction,  13,000 shares of the Company's
Series B Preferred  Stock was issued for an  aggregate  purchase  price of $65.0
million.  Net proceeds  associated with the transaction was approximately  $58.8
million, after giving effect to approximately $6.2 million of transaction costs.
For the first four years, the Series B Preferred Stock provides for dividends to
be paid equal to approximately  195,000 shares of the Company's Common Stock per
fiscal quarter.

On January 31, 1996, the Company  entered into an interim  employment  agreement
(the "Interim Employment  Agreement") with Richard E. Snyder, whereby Mr. Snyder
became President of the Company.  Pursuant to the Interim Employment  Agreement,
the Company issued 599,465 shares of Common Stock (the "Snyder Incentive Stock")
to Mr. Snyder at a price of $8 per share in exchange for a non-recourse  note in
the amount of the purchase  price  secured by a pledge of the shares.  On May 8,
1996, the Interim Employment  Agreement was superseded by a five-year employment
agreement (the "Employment Agreement") pursuant to which Mr. Snyder was entitled
to receive  annual  compensation  of $500,000  and  received  options to acquire
1,113,293  shares of Common  Stock at a price of $12.81 per share  (the  "Snyder
Option"),  as well as special  bonuses  based on the market  price of the Common
Stock,  supplemental  retirement benefits,  post-retirement medical benefits and
certain  other  benefits.   Accordingly,   the  Company  recorded  a  charge  of
approximately  $12.8 million in costs  associated with the Employment  Agreement
which is included in the  consolidated  statements of operations  for the eleven
months ended December 28, 1996. In connection with the offering of the Preferred
Securities (see Note 10), the Broadway Video  Acquisition  (see Note 12) and the
Hallmark  Transaction  (see below),  and in  accordance  with the  anti-dilution
provisions of the Employment  Agreement,  the Company  issued 84,987  additional
shares of Snyder  Incentive  Stock in exchange  for a non  recourse  note in the
amount  of the  purchase  price,  increased  by  157,796  the  number  of shares
exercisable  under the Snyder Option and adjusted the special  bonuses  provided
for in the Employment Agreement. Accordingly, the Company recorded an additional
charge of  approximately  $1.5  million  which is included  in the  consolidated
statements  of  operations  for the eleven  months ended  December 28, 1996.  On
September 9, 1997, the  Employment  Agreement was amended  whereby Mr.  Snyder's
annual compensation was increased and his term of employment was extended to May
8, 2003. On February 26, 1999, the


                                                       F-28

<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------


14.  Stockholders' Deficit (continued)

Company filed petitions for reorganization under Chapter 11 of the United States
bankruptcy  Code.  In  accordance  with the Joint  Plan of  Reorganization,  Mr.
Snyder's  employment  agreement will be amended,  as more fully described in the
Disclosure  Statement and the exhibits thereto,  and Mr. Snyder will receive, in
consideration  of his  surrendering  certain claims and rights under his current
employment  arrangement,  2 1/2% of the Company's new common stock,  among other
things (see Note 2).

On September 6, 1996, the Company completed the sale to H.C. Crown  Corporation,
a wholly owned subsidiary of Hallmark Cards Incorporated, of 2,356,198 shares of
Common Stock for approximately $25.0 million (the "Hallmark Transaction").

On September  26, 1997,  the Company  entered  into a licensed  book  publishing
agreement (the  "Agreement")  with Disney  Licensed  Publishing  ("Disney").  In
connection with the Agreement,  Disney received warrants to purchase 1.1 million
shares of the Company's Common Stock (valued at approximately $6.6 million) at a
per share price of $11.375  exercisable  beginning on the earlier of (i) 90 days
after the expiration of the Agreement or (ii) 30 days after the  announcement by
either  Disney or the Company (a) that they will be entering  into a new license
agreement  or (b) that they will not be entering  into a new license  agreement,
and expiring on March 31, 2008.

As of December 26, 1998,  the Company has reserved  24,283,214  shares of common
stock for the  conversion  of the (i) Series B Preferred  Stock,  (ii)  warrants
issued in connection with the GPH Transaction,  (iii) Preferred Securities, (iv)
warrants issued in connection with the Disney  Agreement and (v) the exercise of
outstanding options.

As described in Note 2, in accordance with the Joint Plan of Reorganization, the
existing  preferred  and common  shareholders  will  surrender  their shares for
out-of-the  money  warrants  to  purchase  5% of the  new  Company  stock  to be
allocated  two-thirds to the preferred and one-third to the common shareholders,
to be issued post recapitalization, prior to dilution.

15.  Commitments and Contingencies

The Company  leases  certain  facilities,  machinery and vehicles  under various
noncancellable  operating  lease  agreements  over  periods of one to ten years.
Future minimum lease  payments  required under such leases in effect at December
26, 1998 and thereafter are as follows:

                         Amount
                     (In thousands)
                     --------------

1,999                $   5,873
2,000                    4,816
2,001                    4,486
2,002                    3,998
2,003                    4,070
and thereafter          41,655

Total rent expense charged to operations was  approximately  $5.8 million,  $5.7
million and $4.7 million for the years ended  December 26, 1998 and December 27,
1997 and the eleven  months ended  December 28, 1996,  respectively.  In January
1999,  the Company  reduced their New York office space from six floors to three
floors. In connection with


                                      F-29
<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------

15.  Commitments and Contingencies (continued)

such reduction,  the Company  recorded a non-cash charge of  approximately  $3.1
million as a  component  of  restructuring,  net of  (gains)  losses on sales of
assets in the consolidated statement of operations and comprehensive loss.

The Company is required to meet certain contractual  payments under contracts in
effect at December 26, 1998 and thereafter, as follows:

                         Amount
                     (In thousands)
                     --------------
 
1,999                 $  13,351
2,000                    14,908
2,001                    15,638
2,002                     1,388
2,003                      --
and thereafter            5,585

Contingencies

On August 12,  1998,  a class action  complaint  was filed in the United  States
District  Court for the  Southern  District of New York on behalf of all persons
who purchased the Common Stock of the Company between May 13, 1997 and August 4,
1998,  inclusive  (the  "Class  Period").  On October  7,  1998,  holders of the
Company's TOPrS filed a class- action complaint based on substantially identical
allegations,  which complaints were subsequently consolidated.  The consolidated
complaint  charges that the Company and certain  officers  and  directors of the
Company  during the relevant  time period were in violation of Section 10(b) and
20(a) of the  Securities  Exchange Act of 1934.  The complaint  alleges that the
defendants  issued  a series  of  materially  false  and  misleading  statements
concerning  the  impact of the  Company's  restructuring  plan on the  Company's
financial  condition,  liquidity and future prospects.  While the outcome of the
case cannot be predicted  with any certainty,  the Company  believes that it has
meritorious  defenses to the claims, and that the claim against the Company will
be relieved or discharged during the pendency of the Chapter 11 proceedings.

Golden  Books  Publishing  and  Penn  Corporation  have  been  informed  by  the
Environmental  Protection  Agency (the "EPA") and/or state  regulatory  agencies
that they may be potentially  responsible  parties ("PRPs") and face liabilities
under the Comprehensive Environmental Response,  Compensation, and Liability Act
(commonly know as "CERCLA" or  "Superfund")  or similar state laws. In all cases
except those  described  below,  the Company has resolved its liability or is in
the process of resolving its  liability  for amounts not material.  Although the
Company  divested  Penn in December  1996,  the Company has agreed to  indemnify
Peacock  Papers,  Inc.  against  certain  of Penn's  environmental  liabilities,
including the Cork Street Landfill and Fulford Street Property discussed herein.

The Wisconsin  Department  of Natural  Resources  (the "WDNR")  alleges that the
Company  is  a  responsible   party  for  drums  found  at  a  site  located  in
unincorporated  Racine  County.  The WDNR and the Company  have  entered into an
agreement which requires the Company to remove drums and soil from the site. The
disposal of these drums dates back almost 30 years.  Golden Books Publishing did
not authorize disposal of its waste drums at the site. The Company has completed
the removal of drums and soil from the site.

At  the  Hunt's  Landfill  site  in  Racine  County,  Wisconsin,   Golden  Books
Publishing's  liability  pursuant to the terms of a consent decree is limited to
approximately  4% of the  total  remedial  costs.  Although  the  last  phase of
construction  activities was completed in 1996,  Golden Books Publishing and the
other  potentially  responsible  parties are obligated to fund the operation and
maintenance  of the site for the next 20-30 years.  The current  estimate of the
total costs of such


                                      F-30

<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------


15.  Commitments and Contingencies (continued)

operation and maintenance is in the range of $14 million. In accordance with the
consent  decree,  the  Company  has  established  a reserve for its share of the
probable clean-up costs.

In 1991 the EPA issued a unilateral  administrative  order (the "1991 Order") to
the Company and four other PRPs, requiring the respondents to perform a remedial
design and remedial action at the Hertel Landfill  Superfund Site in Plattekill,
New York (the "Site").  The Company did not agree to comply with the Order.  EPA
subsequently  sued the Company and other PRPs  seeking  recovery of its costs at
the Site. Various PRPs in the litigation brought claims for contribution against
each other and the  Company.  The Company  settled its  liability  to the United
States for noncompliance with the 1991 Order and agreed to comply with the Order
by  implementing  the remedy at the Site,  which is now  estimated to cost up to
$4.9 million, excluding potential groundwater remediation costs.

On July 9, 1998,  the Company and other PRPs entered into a Consent  Decree with
the United States and the State of New York to resolve  their alleged  liability
for past response costs and formalize  their  agreement to perform the remedy at
the site.  Under the  decree,  the Company  and the other  settling  parties are
jointly and  severally  obligated  to perform the remedy and  reimburse  certain
governmental  past and future  costs.  The Company has paid  approximately  $1.7
million toward  remedial costs since 1996 and has completed  construction of the
landfill cap. The Company's  share of future costs for operation and maintenance
of the cap and landfill monitoring are expected to be less that $500,000.

Golden  Books  Publishing  also has been  identified  as a PRP at  another  site
located in Poughkeepsie,  New York. Golden Books Publishing and eight other PRPs
received a notice letter in 1995 from the State of New York regarding this site.
New York State will be seeking recovery of its past oversight costs of more than
$600,000 plus future oversight and maintenance  costs associated with this site,
currently estimated by the State at $830,000.  There has been no attempt made to
develop an  allocation  or to identify  all PRPs to date,  but the  construction
phase  of the  remedy  has  been  completed  by other  parties  without  Company
involvement.

On October 2, 1996,  the  Company  received  notice  from the City  Attorney  of
Kalamazoo,  Michigan that Beach  Products,  a division of Penn, will be asked to
participate in the  remediation of the Cork Street  Landfill site located in the
city which commitments and contingencies was allegedly used by Beach Products in
the past. Current cost estimates for the remediation required at the site are as
high  as  $24,000,000.  More  than 70  entities  will be  requested  to  provide
financial contribution to the remediation.

On November 14, 1996, the Michigan Department of Environmental Quality requested
that  corrective  actions  be taken as a result  of the  discovery  of a leaking
underground storage tank system at the Fulford Street Property of the Company on
November 8, 1996. An initial site assessment is being completed by the Company's
outside  consultant.  Current estimates  indicate that the costs associated with
this  release  should  not  exceed  $200,000.  However,  in the  event  that the
contamination  has  migrated  off the  Company's  property,  these  costs  could
increase.

It is  uncertain  whether  the  claims  against  the  Company  in the  foregoing
environmental  matters  will be resolved  during the  pendency of the Chapter 11
proceedings.

In addition to these  environmental  matters,  Golden Books  Publishing filed an
action  in 1994  in the  United  States  District  Court,  Eastern  District  of
Wisconsin  captioned as Western  Publishing  Company,  Inc. v.  MindGames,  Inc.
seeking a declaration of rights in regard to Golden Books  Publishing's  alleged
breach of various of its  obligations  under its  licensing  agreement  with the
defendant for distribution through 1994 of the adult board game known as "Clever
Endeavor."  This  case  involves  the  Company's   now-discontinued   adult  and
children's  game  division.  The  defendant,  believing  its board  game had the
potential to become one of the most  popular of all time,  has  maintained  that
certain

                                      F-31

<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------


15.  Commitments and Contingencies (continued)

of the  alleged  breaches  entitle  it to  damages  of as  much  as $40  million
resulting from lost profits and unpaid  royalties.  The Court  recently  granted
Golden Books Publishing's  partial motion for summary judgment and held that the
defendant  is  precluded  from   recovering  lost  profits.   Accordingly,   the
defendant's damage claim is now limited to its unpaid royalties of $1.2 million.
Golden Books Publishing denies that it has any liability to defendant.

In  consideration  of the  aforementioned  matters,  the  Company  has  recorded
accruals in the "deferred  compensation and other deferred  liabilities" account
of approximately $5.8 million in the consolidated balance sheet.

While  it is not  feasible  to  predict  or  determine  the  outcomes  of  these
aforementioned  proceedings,  it is the opinion of management that they maintain
adequate reserves in the consolidated balance sheet.

The Company and its subsidiaries are parties to certain other legal  proceedings
which are  incidental  to their  ordinary  business,  none of which the  Company
believes are material to the Company and its  subsidiaries  taken  together as a
whole.

The  Company's  Common Stock was  delisted  from the NASDAQ  National  Market on
February 17, 1999 for failure to meet continued listing standards. The Company's
Common Stock is currently being quoted on the OTC bulletin board.

16.  Income Taxes

Income  tax  expense  calculated  in  accordance  with  Statement  of  Financial
Accounting  Standards No. 109,  "Accounting for Income Taxes",  consisted of the
following:

<TABLE>
<CAPTION>
                                                                   Eleven
                                 Year             Year             Months
                                Ended            Ended             Ended
                             December 26,     December 27,      December 28,
                                 1998            1997               1996
                             ------------    -------------     -------------
                                     (In thousands)

<S>                         <C>              <C>               <C>        
Current payable (benefit):
  Federal                   $      -         $         -       $     2,051
  State                            25                 59               (53)
  Foreign                        (691)               (22)             (105)
                             ------------    -------------     -------------
                                 (666)                37             1,893
                             ------------    -------------     -------------
Deferred:
  Federal                          -                   -                -
  State                            -                   -                -
  Foreign                          -                   -                -
                                   -                   -                -
                             ------------    -------------     -------------
                            $    (666)       $        37       $     1,893
                            =============    =============     =============
</TABLE>

Loss before income tax expense of Golden Books Publishing's  Canadian subsidiary
was  approximately  $(3,067,000),  $(669,000) and $(577,000) for the years ended
December 26, 1998 and December 27, 1997 and the eleven months ended December 26,
1996, respectively.



                                      F-32

<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------


16.  Income Taxes (continued)

A  reconciliation  of the statutory United States Federal income tax rate to the
Company's effective income tax rate follows:

<TABLE>
<CAPTION>
                                                                                            Eleven
                                                        Year               Year             Months
                                                        Ended              Ended            Ended
                                                      December 26,      December 27,     December 28,
                                                        1998               1997             1996
                                                     --------------    --------------    -------------
<S>                                                       <C>              <C>               <C>
Statutory rate                                            35.0%              35.0%            35.0%
State income taxes, net of Federal benefit                 5.0                5.0              4.2
  Valuation allowance, net of refundable amounts         (42.0)             (38.5)           (33.7)
  Permanent differences relating to the sale of                          
  Division/Subsidiaries                                     -                (0.6)            (4.1)
  Other - net                                              2.6               (1.0)            (2.4)
                                                     --------------    --------------    -------------
                                                           0.6%             (0.1)%            (1.0)%
                                                     ==============    ==============    =============
</TABLE>

The income tax effects of temporary  differences  that give rise to  significant
portions of the  deferred  tax assets and  liabilities  at December 26, 1998 and
December 27, 1997 are as follows:
<TABLE>
<CAPTION>
                                                         December 26, 1998       December 27, 1997
                                                        --------------------    -------------------
                                                                        (In thousands)
<S>                                                       <C>                     <C>           
  Deferred tax assets:
   Allowance for doubtful accounts and returns          $     11,704             $       9,950
   Inventories                                                  -                        1,368
   Property, plant & equipment                                 5,164                        -
   Accrued expenses                                           28,874                    24,450
     Post retirement benefits                                 11,843                    11,746
   Net operating loss carryforwards                          126,519                    87,991
   Other - net                                                  -                          133
                                                        --------------------     ------------------
Total deferred tax assets                                    184,104                   135,638
   Valuation allowance                                      (182,102)                 (133,569)
                                                        --------------------     ------------------
Deferred tax assets, net of valuation allowance                2,002                     2,069

   Deferred tax liabilities:
     Property, plant & equipment                                 290                       397
     Pension contributions                                     1,661                     1,672
   Other - net                                                    51                        -
                                                        --------------------     ------------------
Total deferred tax liabilities                                 2,002                     2,069
                                                        --------------------     ------------------
   Net deferred tax assets/(liabilities)                $        -               $            -
                                                        ====================     ==================
</TABLE>

The IRS has completed its  examination  of the  Company's  consolidated  federal
income tax returns through the years ended January 28, 1995. The Fiscal 1998 and
Fiscal 1997 consolidated  financial statements reflect the net receivable due to
the Company as a result of this examination.


                                      F-33

<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------

16.  Income Taxes (continued)

At  December  26,  1998 the  Company has net  operating  loss  carryforwards  of
approximately  $305.0  million  with  expiration  dates  between  2011 and 2018.
Utilization of such losses in the future could be  significantly  limited should
there have been an ownership change (as defined in Internal Revenue Code Section
382). Further, there are specific modifications which may be required to be made
to the net  operating  loss  carryforwards  of the  Company  as a result  of the
Chapter 11  Bankruptcy  proceedings.  At such time as the Company  emerges  from
Bankruptcy,  it is likely  there will be an  ownership  change for tax  purposes
which would  result in a Section 382  limitation  on future  utilization  of net
operating  losses.  Since there are a number of variables which could affect the
Company's  Bankruptcy  proceedings  (including  the fact that the Joint  Plan of
Reorganization  has not yet been approved by the  Bankruptcy  Court),  it is not
currently  possible  to  determine  whether the  Company's  net  operating  loss
carryforwards will produce tax benefits in the future.  Benefit was not provided
for these loss carryforwards at December 26, 1998.

17.  Pension, Post-retirement and Post-employment Benefits

Golden Books Publishing has a noncontributory  defined benefit  retirement plans
covering substantially all domestic hourly employees. The benefits are generally
based  on  a  unit  amount  at  the  date  of  termination   multiplied  by  the
participant's  credited  service.  The Company's funding policy is to contribute
amounts within the limits which can be deducted for income tax purposes.

The Company adopted SFAS No. 132 during the fourth quarter of 1998. SFAS No. 132
is intended to standardize certain footnote disclosure requirements for pensions
and other retiree benefits. Information concerning the Company's defined benefit
pension plan consists of the following:

<TABLE>
<CAPTION>

Defined Benefit Plans:
                                                      December 26, 1998              December 27, 1997
                                                   -----------------------        -------------------------
                                                                       (In thousands)
<S>                                                <C>                           <C>                  
Change in Plan Assets:
Fair Value of plan assets at beginning of year     $          20,836              $         17,843
Actual return on plan assets                                   3,359                         3,542
Benefits Paid                                                   (764)                         (549)
                                                   -----------------------        -------------------------
Fair value of plan assets at the end of the year   $          23,431              $         20,836
                                                   =======================       ==========================
Changes in Benefit Obligations:
                                                

                                                      December 26, 1998              December 27, 1997
                                                   -----------------------       -------------------------
                                                                       (In thousands)
Benefit obligations at the beginning of the year   $          17,184              $         15,989
Service Cost                                                     368                           455
Interest Cost                                                  1,288                         1,115
Plan Amendments                                                1,296                           --
Other actuarial gains (losses)                                  (449)                          174
Benefits Paid                                                   (764)                         (549)
                                                   -----------------------        -------------------------
Benefits obligations at the end of the year        $          18,923              $         17,184
                                                   =======================       =========================
</TABLE>




                                      F-34

<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------

17.  Pension, Post-retirement and Post-employment Benefits (continued)

Funded Status Reconciliation:                             
<TABLE>
<CAPTION>
                                       December 26, 1998              December 27, 1997
                                     -----------------------        ----------------------
                                                           (In thousands)
<S>                                                   <C>                           <C>                      
Funded Status                            $      4,508                 $         3,653
Unrecognized prior amounts:
  Prior Service Costs                           2,713                           1,843
  Net Gains (losses)                           (3,069)                         (1,314)
                                     -----------------------        ----------------------
Total                                            (356)                            529
                                     -----------------------        ----------------------
Prepaid benefit recognized in
  consolidated balance                   
  sheet at the end of the year           $      4,152                 $         4,182
                                     ========================       ======================
</TABLE>

<TABLE>
<CAPTION>
Components of Net Benefits Expense:
                                           Year Ended            Year Ended           Eleven Months
                                          December 26,          December 27,           December 28,
                                             1998                  1997                   1998
                                         ---------------       -----------------     ----------------
                                                                 (In thousands)
<S>                                          <C>                   <C>                    <C>  
Service cost                             $        368         $          455         $         475
Interest cost                                   1,288                  1,115                 1,030
Expected return on plan assets                 (2,052)                (1,760)               (1,619)
Net amortization:
   Transition (Asset/Obligation)                  --                     (32)                 (108)
   Prior Service Cost                             426                    286                   269
Total                                             426                    254                   161
                                         ---------------      ------------------     ----------------
Net benefits expense for the year        $         30         $           64         $          47
                                         ===============      ==================     ================
</TABLE>

Other Post-retirement Benefit Plans:
<TABLE>
<CAPTION>
                                            December 26,         December 27,    
                                                1998                 1997        
                                         -----------------     ----------------- 
                                                                 (In thousands)
<S>                                                 <C>                   <C>
Benefit obligations at the beginning
   of the year                           $     30,065         $       31,287
Service cost                                      654                    565
Interest cost                                   2,070                  1,981
Plan amendments                                  (186)
Actuarial (gains) losses                          438                 (1,827)
Net retiree benefit payments:
   Benefits payments                           (2,870)                (2,191)
   Retiree contributions                          563                    436
                                         -----------------    ------------------
Total                                          (2,307)                (1,755)
                                         -----------------    ------------------
Benefit obligations at the end of
  the year                               $     30,920         $       30,065
                                         =================    ================== 
</TABLE>

                                      F-35
<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------


17.  Pension, Post-retirement and Post-employment Benefits (continued)


Funded Status Reconciliation:
<TABLE>
<CAPTION>
                                               December 26,           December 27,    
                                                  1998                    1997        
                                             ------------------     ----------------- 
                                                         (In thousands)

<S>                                                 <C>                   <C>              
Funded Status                                $      30,920          $     30,065
Unrecognized amounts:
   Transition asset (obligation)
   Prior service costs                               2,263                 2,499
   Net gains (losses)                               (3,574)               (3,200)
                                             ------------------     -----------------
Total                                               (1,311)                 (701)
                                             ------------------     -----------------
Accrued benefit recognized in the
  consolidated balance sheet at the end
  of the year                                $      29,609          $     29,364
                                             ==================     =================
</TABLE>

Components of Net Benefits Expense:

<TABLE>
<CAPTION>
                                                                                              Eleven Months
                                                  Year Ended            Year Ended               Ended
                                                  December 26,          December 27,           December 28,
                                                    1998                    1997                   1996
                                             ------------------     -----------------       ------------------
                                                          (In thousands)

<S>                                          <C>                    <C>                       <C>        
Service cost                                 $       654            $        565              $       550
Interest cost                                      2,070                   1,981                    1,925
Net amortization
   Transition (asset) obligation                      47                       5
   Prior service cost                               (221)                   (221)
   Prior (gains) losses                              --                      --                       --
                                             ------------------     -----------------       ------------------
Total                                               (174)                   (216)                     --
                                             ------------------     -----------------       ------------------

Net benefit expense for the year             $     2,550            $      2,330              $     2,475
                                             ==================     =================       ==================

Net retire benefit payments                       (2,307)                 (1,755)                  (1,260)

Net balance sheet recognition                        243                     575                    1,215

The weighted  average  actuarial  assumptions  utilized in determining the above
amounts for other benefit plans as of the year were as follows:

                                               December 26,             December 27,
                                                   1998                     1997
                                             ------------------     -----------------
Discount rate                                          7%                      7%
Rate of compensation increase                        1.5%                      5%

</TABLE>
                                                       F-36
<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------


17.  Pension, Post-retirement and Post-employment Benefits (continued)


The weighted  average  actuarial  assumptions  utilized in determining the above
amounts for other post-retirement benefit plans as of the year were as follows:

                                  December 26,          December 27,           
                                      1998                  1997               
                               ------------------     -----------------
Discount rate                          7%                    7%
Rate of compensation increase          4%                    4%

The  Company's  other  post-retirement  benefit plans  identified  above provide
health and life insurance benefits to a number of existing retirees from certain
of  its  operations  under  the  provision  of  a  number  of  different  plans.
Contributions  currently required to be paid by the retirees towards the cost of
such plans  range  from zero to 100%.  The  Company  also has a number of active
employees who might receive such benefits upon retirement. Relative to the above
information,  the  actuarial  valuations  assume a medical  cost trend of 7% for
fiscal 1998,  decreasing linearly to 5% in 2010; and remaining level thereafter.
The  assumed  health  care trend rate has a  significant  effect on the  amounts
reported.  A one-time  percentage-point  change in the assumed health care trend
rate would have the following effects:

<TABLE>
<CAPTION>
                                                                             1%           1%
                                                                          Increase     Decrease
                                                                          --------     --------
<S>                                                                      <C>               <C> 
Effect on the total of service and interest cost for 1998                 $   375      $  (310)
Effect on post retirement benefit obligation as of the end of the year    $ 3,909      $(3,277)
</TABLE>

Pension   expense   charged  to  operations   for  these  plans  and  for  other
multi-employer   plans  in  which  certain  union  employees  of  the  Company's
subsidiaries  participate was approximately $305,000,  $326,000 and $349,000 for
the years ended  December 26, 1998 and December 27, 1997,  and the eleven months
ended December 28, 1996, respectively.

Subsidiaries  of the Company also  maintain  defined  contribution  contributory
retirement  plans for  substantially  all domestic  employee  groups.  Under the
plans, the subsidiaries make contributions based on employee compensation and in
certain cases based upon specified levels of voluntary  employee  contributions.
Golden Books  Publishing  and its  Canadian  subsidiary  also  maintain a profit
sharing  plan for  certain  salaried  employees.  Expense  for  these  plans was
approximately  $0.8  million,  $2.0 million and $2.5 million for the years ended
December 26, 1998 and December 27, 1997 and the eleven months ended December 28,
1996, respectively.

18.  Industry Segments

The Company  adopted SFAS No. 131 during the fourth  quarter of 1998.  Operating
segments  are  defined as  components  of an  enterprise  about  which  separate
financial  information  is available  that is  evaluated  regularly by the chief
operating  decision  maker(s)  in  deciding  how to  allocate  resources  and in
assessing performance.  The Company identifies such segments based on management
responsibility within the United States and geographically for all international
units.

The Company has three operating segments: Consumer Products, Commercial Products
and  Entertainment.  The Company's  Consumer  Products Segment is engaged in the
creation,  publication,  manufacturing,  printing  and  marketing  of story  and
picture books, coloring books and other activity books,  interactive  electronic
books and games, and products for children as well as multimedia "entertainment"
products.  The Company's foreign operations within the Consumer Products Segment
consist of a sales  subsidiary  in Canada and a small sales branch in the United
Kingdom.

                                      F-37

<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------


18.  Industry Segments (continued)

The  Consumer  Product  segment  includes  the  Company's  children's  and adult
publishing  divisions.   The  Commercial  Products  segment  provides  printing,
graphic,   creative  and  distribution  services,  and  printing  business.  The
Company's Entertainment Segment operates as the Golden Books Entertainment Group
division  which was  established  in August 1996,  upon the  acquisition  by the
Company from  Broadway  Video  Entertainment,  L.P. of an  extensive  library of
character-based family entertainment properties.  The Golden Books Entertainment
division's library is comprised of copyrights,  distribution rights,  trademarks
or licenses  relating to characters,  television  programs and motion  pictures,
both animation and live action,  and includes  individual  specials and multiple
episode series.

Identifiable assets are those assets used specifically in the operations of each
operating segment or which are allocated when used jointly. Corporate assets are
principally  comprised of cash and cash  equivalents,  refundable  income taxes,
deferred income taxes, prepaid pension costs and certain other assets.  Domestic
sales to foreign markets were less than 10% of total  consolidated sales for the
years ended  December 26, 1998 and  December 27, 1997 and for the eleven  months
ended December 28, 1996.

The Company evaluates performance based on several factors, of which the primary
measure is operating segment earnings before interest,  taxes,  depreciation and
amortization  ("EBITDA").  The accounting policies of the operating segments are
the same as described in the Summary of  Significant  Accounting  Policies (Note
3).

Information by industry segment is set forth below:

<TABLE>
<CAPTION>
                                                                                         Eleven Months
                                              Year Ended           Year Ended               Ended
                                           December 26, 1998     December 27, 1997     December 28, 1996
                                         --------------------  -------------------   --------------------
                                                        (In millions)
<S>                                           <C>                    <C>                   <C> 
  Consumer Products                      $         150.7       $        171.7           $       208.5
  Commercial Products                               14.5                 42.5                    42.4
  Entertainment                                     29.0                 29.3                     4.1
                                         --------------------  --------------------  --------------------
  Total                                  $         194.2       $        243.5           $       255.0
                                         ====================  ====================  ====================
Gross Profit:
  Consumer                               $           5.9       $         48.2           $        20.9
  Entertainment                                     11.6                 15.6                     0.6
                                         --------------------  --------------------  --------------------
                                                    17.5                 63.8                    21.5
   Commercial Facility Sold                           -                   3.5                     1.7
                                         --------------------  --------------------  --------------------
                                                    17.5                 67.3                    23.2
   Transition Costs                                 (4.4)                  -                       -
                                         --------------------  --------------------  --------------------
     Total                               $          13.1       $         67.3           $        23.2
                                         ====================  ====================  ====================
SG&A
   SG&A before Transition Costs          $          90.5       $         99.9           $       142.7
    Restructuring, Net of (Gains) Losses        
      on Sales of Assets                             6.5                (10.8)                   65.7
   Write-off of assets                              10.6                   -                       -
                                         --------------------  --------------------  --------------------
                                                   107.6                 89.1                   208.4
   Transition Costs                                  7.8                 11.                       -
                                         --------------------  --------------------  --------------------
     Total                               $         115.4       $        100.5           $       208.4
                                         ====================  ====================  ====================
</TABLE>
                                      F-38

<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------


18.  Industry Segments (continued)
<TABLE>
<CAPTION>
                                                                                               Eleven Months
                                                 Year Ended              Year Ended                Ended
                                              December 26, 1998      December 27, 1997      December 28, 1996
                                             --------------------   --------------------  --------------------
                                                                        (In millions)
<S>                                          <C>                    <C>                    <C>            
EBITDA                                        
   Gross Profit before Transition Costs      $         17.5         $         67.3         $          23.2

   SG&A before Transition Costs                       107.6                   89.1                   170.2
                                             --------------------   --------------------  --------------------
     Operating Results before Transition             (90.1)                  (21.8)                 (147.0)
       Costs
     Depreciation and Amortization                    12.6                    11.2                    14.0
                                             --------------------   --------------------  --------------------
        EBITDA before Transition Costs       $       (77.5)         $        (10.6)         $       (133.0)
                                             ====================   ====================  ====================

        Operating Results before
          Transition Costs                   $       (90.1)         $        (21.8)         $       (185.2)
        Transition Cost                               12.2                    11.4                     --
                                             --------------------   --------------------  --------------------
        Operating Loss                       $      (102.3)         $        (33.2)         $       (185.2)
                                             ====================   ====================  ====================


                                                                                               Eleven Months
                                                  Year Ended            Year Ended                Ended
                                              December 26, 1998      December 27, 1997      December 28, 1996
                                             --------------------   --------------------  --------------------
                                                                       (In thousands)

Depreciation of Property, Plant and           
Equipment:
   Consumer Products                         $       6,273          $        2,959          $         9,891
   Commercial Products                                 409                   3,175                    1,550
   Entertainment                                     4,817                   4,591                    1,523
   Corporate                                         1,081                     489                    1,057
                                             ===================    ====================  ====================
      Total Depreciation & Amortization      $      12,580          $       11,214          $        14,021
                                             ===================   =====================  ====================
   Assets:
   Consumer Products                         $     129,467          $      146,969          $       181,256
   Commercial Products                              11,051                  29,846                   25,923
   Entertainment                                   102,217                 113,334                   99,527
   Corporate                                        12,216                  33,015                   60,529
                                             --------------------   --------------------  --------------------
      Total Assets                           $     254,951          $      323,164          $       367,235
                                             ====================   ====================  ====================

Capital Expenditures:
   Consumer Products                         $      11,874          $        5,797          $         3,890
   Commercial Products                               1,422                   4,653                    1,275
   Entertainment                                       --                       50                      116
   Corporate                                           104                   9,886                      458
                                             --------------------   --------------------  --------------------
     Total Capital Expenditures              $      13,400          $       20,386          $         5,739
                                             ====================   ====================  ====================
</TABLE>
                                      F-39
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------

18.  Industry Segments (continued)

For the years ended  December 26, 1998 and  December 27, 1997 and eleven  months
ended December 28, 1996,  revenues from one single  customer did not exceed more
than 10% of the Company's net sales.  The Company's  products are primarily sold
to mass market  retailers  throughout  the United  States and to a lesser degree
Canada and the United Kingdom.

19.  Net Loss Per Basic Common Share

Loss per basic common share was computed as follows:

<TABLE>
<CAPTION>
                                              Year Ended                 Year Ended               Years Ended
                                          December 26, 1998           December 27, 1997        December 28, 1996
                                        --------------------        --------------------      -------------------
                                                      (In thousands except for per share data)
<S>                                     <C>                      <C>                       <C>              
Net loss                                 $        (128,599)         $         (49,680)       $     (197,503)
Preferred dividend requirements                     (5,491)                    (7,849)               (6,136)
                                         --------------------       --------------------      -------------------

Loss applicable to basic common stock             (134,090)         $         (57,529)       $     (203,639)
                                         ====================       ====================      ===================
   Weighted average basic common                                                                          
      shares outstanding                            27,433                     26,357                23,317
                                         ====================       ====================      ===================
   Loss per basic common share           $           (4.89)         $           (2.18)        $       (8.73)
                                         ====================       ====================      ===================
</TABLE>

20.  Related Party Transactions

Georgetown Transaction

Pursuant to a letter agreement (the "Georgetown  Agreement")  dated as of August
1, 1996, The Georgetown Company ("Georgetown"),  a corporation of which Marshall
Rose (a current director of the Company) is the Managing Partner, has acted as a
real estate  advisor to the  Company.  In March 1999 the Company and  Georgetown
agreed to terminate all remaining  obligations  under the Georgetown  agreement.
Pursuant to the  Georgetown  Agreement,  the Company was  obligated  to make the
following payments to Georgetown: (i) $25,000 per month for the period beginning
August 1, 1996 and ending July 1, 1999;  and (ii) an incentive  fee,  payable in
cash or Common Stock,  for each  completed  real estate  transaction  during the
period  beginning  August 1, 1996 and ending July 3, 2000, in an amount equal to
one-half of each commission that would be paid to an outside broker representing
the Company.  To date, the Company has paid to Georgetown (i) $75,000 in respect
of  a  property  located  at  630  Fifth  Avenue,   New  York,  New  York,  (ii)
approximately  $580,000 in respect of a property  located at 888 Seventh Avenue,
New York,  New York,  (iii)  approximately  $131,000  in  respect  of a property
located at 850 Third Avenue, New York, New York, (iv) approximately  $217,000 in
respect  of  a  property  located  in  Fayetteville,  North  Carolina,  and  (v)
approximately $78,000 in respect of a property located in Coffeyville, KS.

Tribeca Transaction

Pursuant to a letter  agreement  (the "Tribeca  Agreement")  dated as of July 1,
1996, the Company was obligated to pay to Tribeca  Technologies LLC ("Tribeca"),
a limited liability company in which Philip E. Rowley (an officer of the Company
through May 1998) was a member,  as compensation  for the loss by Tribeca of the
exclusive  services of Mr. Rowley  following his employment by the Company,  the
sum of $200,000 on each of the following  dates  (provided that Mr. Rowley is in
the  employment  of the  Company at such time);  (i) July 1, 1996;  (ii) July 1,
1997; and (iii) July 1, 1998. In  consideration  for such  payments,  Tribeca is
obligated to pay the Company  one-third of the  aggregate  amount of any and all
distributions otherwise to be made by Tribeca to Mr. Rowley and the President of
Tribeca  on or  before  June  30,  1999 (or such  earlier  time as Mr.  Rowley's
employment with the Company ceases),  provided,  that the maximum amount payable
to the  Company is the  lesser of (i)  $600,000  or (ii) the amount  paid by the
Company to Tribeca pursuant to the

                                      F-40
<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 26, 1998 (CONTINUED)
--------------------------------------------------------------------------------

20.  Related Party Transactions (continued)

Tribeca Transaction (continued)

previous  sentence.  As of December  26,  1998,  the Company has  fulfilled  its
obligation and made payments  totaling  $570,000 as follows:  $200,000 in Fiscal
1996,  $200,000  during June 1997, and $170,000 (paid in advance at a discounted
rate) during November 1997.

Powerhouse Transaction

On  May 8,  1996,  the  Company  and  Powerhouse  Entertainment  Company,  Inc.,
("Powerhouse"),  a corporation affiliated with Richard A. Bernstein,  the former
Chairman and Chief  Executive  Officer of the  Company,  entered into a software
development  agreement (the "Development and Licensing  Agreement")  relating to
the development by Powerhouse of six interactive PC CD-ROM  storybooks under the
Little Golden Books  Interactive name and logo (the  "Powerhouse  Products") and
certain other computer software products.

Under the terms of the Development and Licensing Agreement,  Powerhouse received
a fee in the  amount  of $1.0  million  for the  development  of the  Powerhouse
Products.  All development costs were incurred by Powerhouse with the Powerhouse
Products'  content,  packaging  and design  subject to the  Company's  approval.
Separately, Powerhouse is paid a royalty based upon the net proceeds of sales of
the Powerhouse  Products and such royalty  obligation  continues for the term of
copyright. The Company has paid approximately $75,000 to Powerhouse in royalties
through December 26, 1998.

There is also an agreement of even date between the parties wherein, Powerhouse,
on behalf of Company and at the Company's  sole cost and expense,  performed all
services  relating  to the  manufacturing,  marketing,  distribution,  sales and
licensing  of  the   Powerhouse   Products.   To  date,  the  Company  has  paid
approximately $615,000 to Powerhouse in connection with such services.



                                      F-41

<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.  AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
--------------------------------------------------------------------------------

Condensed Balance Sheets                                                        
(In Thousands)

<TABLE>
<CAPTION>

                                                    December 26, 1998      December 27, 1997
                                                   --------------------   --------------------
<S>                                                       <C>                      <C> 
Assets

Current assets
   Cash                                            $      1,511           $        19,155
   Deposits                                               3,708                       -
   Refundable income taxes                                  637                       637
   Other current assets                                   2,166                     1,375
                                                   --------------------   --------------------
     Total current assets                                 8,022                    21,167

Other assets                                              3,164                     8,963

Property, plant and equipment                                99                     9,985
   Less allowances for depreciation and                                                         
     amortization                                           (69)                     (489)
                                                   --------------------   --------------------
                                                             30                     9,496

Investment and advances in subsidiaries                (184,796)                  (83,335)
                                                   --------------------   --------------------

                                                   $   (173,580)          $       (43,709)
                                                   ====================   ====================

Liabilities and stockholders' equity
Current liabilities
   Accrued compensation and fringe benefits        $         89           $            20
   Other current liabilities                              7,485                     6,671
                                                   --------------------   --------------------
                                                          7,574                     6,691
Deferred compensation                                     7,927                     7,909
Other noncurrent liabilities                                 -                      3,000
                                                   --------------------   --------------------
                                                          7,927                    10,909

Stockholders' deficit
   Convertible preferred stock - series B                65,000                    65,000
   Common stock                                             279                       269
   Additional paid in capital                           128,956                   128,533
   Accumulated deficit                                 (379,390)                 (250,791)
   Cumulative translation adjustment                     (1,104)                   (1,498)
                                                   --------------------   --------------------
                                                       (186,259)                  (58,487)
   Less common stock in treasury                         (2,822)                   (2,822)
                                                   --------------------   --------------------
                                                       (189,081)                  (61,309)
                                                   --------------------   --------------------

                                                   $   (173,580)          $       (43,709)
                                                   ====================   ====================
</TABLE>



                                       S-1

<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
--------------------------------------------------------------------------------


Condensed Statements of Operations
(In thousands)

<TABLE>
<CAPTION>
                                                                                                          Eleven
                                                                                                          Months
                                                              Year Ended            Year Ended            Ended
                                                             December 26,          December 27,         December 28,
                                                                1998                   1997                1996
                                                          ------------------    ------------------   -------------------
<S>                                                           <C>                <C>                  <C>          
Net revenues (principally intercompany interest           
income)                                                   $         10,055      $        8,730       $       8,736 

Costs and expenses:
   Selling, general and administrative                                (346)              1,063              14,335
   Restructuring charges                                                -                  -                 1,072
   Interest expense (primarily intercompany)                           250                 -                 4,143
                                                          ------------------    ------------------   -------------------
   Income (loss) before provision for income taxes                  10,151               7,667             (10,814)
   Provision for income taxes                                           -                   -                  272
                                                          ------------------    ------------------   -------------------
                                                                    10,151               7,667             (11,086)
Deficit in net loss of subsidiary                                 (138,750)            (57,347)           (186,417)
                                                          ------------------    ------------------   -------------------
Net loss                                                  $       (128,599)     $      (49,680)      $    (197,503)
                                                          ==================    ==================   ===================
</TABLE>
                                       S-2

<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
--------------------------------------------------------------------------------

Condensed Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
                                                                                                          Eleven
                                                                    Year                Year               Months
                                                                    Ended               Ended              Ended
                                                                   December           December           December
                                                                   26, 1998           27, 1997           28, 1996
                                                               -----------------  ---------------    ---------------
<S>                                                            <C>                <C>               <C>      
Cash (used in) provided by Operating Activities                $     (18,077)     $      6,254       $       6,366
Investing Activities:
Purchase of property, plant and equipment                                (84)           (9,885)                (99)
Deposits                                                                (211)           (3,497)                 -
                                                               -----------------  ----------------   ---------------
Net cash used in investing activities                                   (295)          (13,382)                (99)

Financing Activities:                                 
Proceeds from issuance of Preferred Stock - Series B                       -                 -              65,000
Issuance costs of Preferred Stock - Series B                               -                 -              (6,248)
Redemption of Preferred Stock - Series A                                   -                 -              (9,985)
Dividends paid on Preferred Stock - Series A                               -                 -                (646)
Proceeds from sale of Common Stock                                         -             1,556              28,886
Proceeds from Municipal Government Grants                                  -             3,000                   -
Net loans to subsidiaries                                                  -           (38,109)            (23,208)
Common Stock Transactions - Other                                        728              (159)                (85)
                                                                 ---------------  -------------      ---------------

Net cash (used in) provided by financing activities                      728          (33,712)              53,714

Net (decrease) increase in cash and cash equivalents                 (17,644)         (40,840)              59,981
Cash and cash equivalents, beginning of period                        19,155           59,995                   14
                                                                 ---------------  -------------      ---------------
Cash and cash equivalents, end of period                          $    1,511      $    19,155         $    59,995
                                                                 ===============  =============      ===============
</TABLE>

Notes to Condensed Financial Statements

Note A - Basis of Presentation

In the Golden Books Family  Entertainment,  Inc. (the "Company")-only  financial
statements,  the  Company's  investment in  subsidiaries  is stated at cost plus
equity in  undistributed  losses of subsidiaries  since the date of acquisition.
Descriptions  of the Company's  long-term  obligations,  mandatory  dividend and
guarantees  of the  Company  have been  separately  disclosed  in the  Company's
consolidated financial statements.  The Company-only financial statements should
be read in conjunction with the Company's consolidated financial statements.


                                       S-3

<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 26, 1998 AND DECEMBER 27, 1997 AND THE ELEVEN MONTHS ENDED
DECEMBER 28, 1996
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                 Allowance            
                                                                 for Sales                 
                                             Allowance           Discounts                    
                                           for Doubtful             and                        
                                             Accounts             Returns               Total
                                         ---------------       -------------      ----------------
<S>                                       <C>                <C>                  <C>           
BALANCES, February 3, 1996               $      2,522          $     4,482        $      7,004

Additions charged to costs and expenses         5,719               21,742              27,461
Deductions - amounts written off               (3,865)              (9,480)            (13,345)
Foreign currency conversion                         3                    3                   6
                                         ---------------       -------------      ----------------

BALANCES, December 28, 1996                     4,379               16,747              21,126

Additions charged to costs and expenses         3,608               13,736              17,344
Deductions - amounts written off                 (776)             (13,426)            (14,202)
Foreign currency conversion                        (3)                 (16)                (19)
                                         ---------------       -------------      ----------------

BALANCES, DECEMBER 27, 1997                     7,208               17,041              24,249

Additions charged to costs and expenses         2,859               35,970              38,829
Deductions - amounts written off               (3,267)             (26,184)            (29,451)
                                         ---------------       -------------      ----------------

BALANCES, DECEMBER 26, 1998              $      6,800          $    26,827        $     33,627
                                         ===============       =============      ================
</TABLE>





                                       S-4