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 period ended December 27 , 1997

                                      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, 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, computed by reference to the closing sales
price as quoted on NASDAQ on March 20 , 1998 , was approximately $ 306,566,646.
As of March 16, 1998 27,099,814 shares of Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for its 1998 annual meeting of
stockholders to be held on May 12 , 1998 are incorporated by reference into
Part III of this Form 10-K.




<PAGE>



           GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

                               DECEMBER 27, 1997

                                     INDEX




<TABLE>
<CAPTION>
PART I
<S>           <C>                                                                                       <C>
Item 1.       Business...................................................................................1
Item 2.       Properties.................................................................................8
Item 3.       Legal Proceedings..........................................................................9
Item 4.       Submission of Matters to a Vote of Security Holders.......................................10

PART II
Item 5.       Market for the Registrant's Common Equity and Related Stockholder Matters.................11
Item 6.       Selected Financial Data...................................................................12
Item 7.       Management's Discussion and Analysis of Financial Condition and
                  Results of Operation..................................................................13
Item 7A       Quantitative and Qualitative Disclosures About Market Risk................................19
Item 8.       Financial Statements and Supplementary Data...............................................20
Item 9.       Changes in and Disagreements with Accountants on Accounting and
                  Financial Disclosure..................................................................20

PART III
Item 10.      Directors and Executive Officers of the Registrant........................................21
Item 11.      Executive Compensation....................................................................21
Item 12.      Security Ownership of Certain Beneficial Owners and Management............................21
Item 13.      Certain Relationships and Related Transactions............................................21

PART IV
Item 14.      Exhibits, Financial Statement Schedules and Reports on Form 8-K...........................21
</TABLE>






<PAGE>


                          FORWARD LOOKING STATEMENTS


This Annual Report on Form 10-K contains forward-looking statements made in
good faith by the Company pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. In connection with these
"safe harbor" provisions, the Company has identified important factors that
could cause actual results to differ materially from those contained in any
forward looking statements made by the Company. Any such statement is
qualified by reference to the following cautionary statements.

The Company's businesses operate in highly competitive markets and are subject
to changes in general economic conditions, intense competition, changes in
consumer preferences, loss of key licenses, adverse changes in relationships
with key retailers and/or wholesalers, the degree of acceptance of new product
introductions, the uncertainties of litigation, as well as other risks and
uncertainties detailed from time to time in the Company's Securities and
Exchange Commission filings.

Developments in any of these areas, which are more fully described elsewhere
in Part I, Item 1-Business, and Item 3-Legal Proceedings, and in Part II,
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, could cause the Company's results to differ materially from
results that have been or may be projected by or on behalf of the Company.

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.

                                   PART I.

ITEM 1. BUSINESS

GENERAL

Golden Books Family Entertainment, Inc. (including its subsidiaries, the
"Company" or "Golden Books"), publishes, produces, licenses and markets an
extensive range of children's and family related entertainment products
throughout all media through its Children's and Adult Publishing, Golden Books
Entertainment Group ("GBEG") and Commercial Printing divisions.

RECENT HISTORY/BUSINESS STRATEGY

On May 8, 1996, Golden Press Holding, L.L.C., an investment vehicle formed by
Warburg, Pincus Ventures, L.P., Richard E. Snyder and Barry Diller, invested
$65 million in the Company. At that time, the Company's name was changed to
Golden Books Family Entertainment, Inc., and Mr. Snyder, the former Chairman
and Chief Executive Officer of Simon & Schuster, Inc., was appointed Chairman
and Chief Executive Officer of the Company. Since such time, and in connection
with the August 20, 1996 acquisition of an extensive library of
character-based properties which constituted substantially all of the family
entertainment assets of Broadway Video Entertainment, L.P. (the "Broadway
Video Acquisition"), Mr. Snyder has assembled a new senior management team to
implement a new business strategy: to build a leading family entertainment
company that publishes, produces, markets and licenses children's and family
related entertainment products, utilizing the strength of the Golden Books
brand, to provide family-oriented content through multiple media. In
furtherance of this goal, the Company took the following strategic actions
during 1997:

o        The Children's Publishing division's sales organization was
         restructured, with a renewed emphasis on strengthening the Company's
         relationships with its customers, including assisting customers with
         sales strategies through category management initiatives, as well as
         a focus on expanding sales efforts into new retail channels;


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<PAGE>

o        The Company launched new publishing initiatives, including an
         agreement to publish R.L. Stine's Fear Street books beginning in
         March 1998, the launch in September 1997 of the Company's Adult
         Publishing list, featuring Stephen Covey's The 7 Habits of Highly
         Effective Families, and the reorganization and relaunching of its
         price competitive value publishing line under the Merrigold Press
         imprint;

o        The Company took steps to strengthen relationships with existing
         licensors, including signing a new, five-year license agreement with
         The Walt Disney Company ("Disney");

o        The GBEG division expanded its library, as well as its television
         production operations, through the acquisition of Shari Lewis
         Enterprises, Inc. (the "Shari Lewis Acquisition"). In addition, GBEG
         expanded its licensing operations through agreements with Eden, LLC
         ("Eden"), a leading creator and manufacturer of infant toys, and
         Swat-Fame, Inc. ("Swat-Fame"), a leading manufacturer of children's
         wear, to manufacture products based on characters from the Company's
         library, including Pat the Bunny and The Poky Little Puppy. The GBEG
         division established a presence in the manufacture, production and
         distribution of children's home video and audio products through its
         strategic alliance with Sony Wonder, a division of Sony Music;

o        Construction began on a new, more efficient manufacturing and
         administrative facility in Racine, Wisconsin in July 1997, pursuant
         to an agreement with a developer which is building the facility to
         the Company's specifications and leasing it to the Company on a
         long-term basis. The Company began manufacturing at the new facility
         in February 1998, and expects the new facility to be fully
         operational by May 1998;

o        The Company continued its disposition of non-core assets with the
         sale of its printing operations in Cambridge, Maryland for
         approximately $20.2 million, as well as the sale of the building
         which had housed its main plant in Racine for approximately $2.4
         million. In addition, in February 1998, in an effort to further
         simplify its supply chain, the Company announced that it would be
         closing its distribution center in Coffeyville, Kansas by June 1998
         and consolidating its distribution facility in Crawfordsville,
         Indiana.

                         BUSINESS SEGMENT INFORMATION

The Company has three business segments, which it operates 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 includes its Golden Books
Entertainment Group division, and Commercial Products, which includes its
Commercial Printing division. For certain information with respect to net
sales, operating profits and identifiable assets attributable to the Company's
business segments, see note 20 to the Company's Consolidated Financial
Statements herein.

CHILDREN'S AND ADULT PUBLISHING

CHILDREN'S PUBLISHING. Golden Books is the largest publisher of children's
books in the North American retail market, and through its Children's
Publishing division, produces storybooks, coloring/activity books, electronic
storybooks, puzzles, educational workbooks, reference books, novelty books,
chapter books and fiction. The Company has published its flagship product
line, "Little Golden Books", for over 50 years. The Company's Children's
Publishing products utilize both owned characters, such as The Poky Little
Puppy and Lassie, and characters licensed by the Company from third parties,
such as Barney and the Muppets. Many of the Company's products, particularly
its coloring/activity books, use licenses from Children's Television Workshop
(Sesame Street), Mattel, Inc. (Barbie), Mercer Mayer (Little Critters) and
Disney. On September 26, 1997, the Company signed a new, five year license
agreement with Disney (the Company's previous main license agreement with
Disney was to have expired on December 31, 1997). The Disney character license
allows the Company to use, in selected product categories, 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 and future releases such as the upcoming Mulan and A Bug's Life.
The Company also had


                                      2
<PAGE>

licensing agreements in connection with the animated feature film Anastasia
and has licensing agreements in connection with the educational television
series Between the Lions, anticipated to debut on PBS in November 1999. In
July, 1997, the Company acquired the right to publish 65 Fear Street books by
R.L. Stine, extending the Company's core age group from 0-7 to 0-14 and
representing the Company's first venture into chapter books aimed at older
children. The Company began publishing the Fear Street series in March, 1998.

Golden Value Books and Special Markets. In July 1997, the Company established
the Golden Value Books and Special Markets business unit within its Children's
Publishing division. The goal of the new business unit is twofold: to develop
more competitively priced value product for all retail channels and to
continue to pursue other specialty publishing opportunities outside of
traditional retail channels, such as premium, book clubs and fairs, continuity
and direct mail, electronic retailing and television shopping. Product in the
Golden Value Books and Special Markets business unit will be published under
the Merrigold Press imprint.

Fear Street Publishing Agreement. In July 1997, the Company extended the core
age group for which its Children's Publishing products are designed from 0-7
to 0-14 by acquiring the right to publish 65 Fear Street books by R.L. Stine,
the Company's first venture into books aimed at older children. The Company
began publishing three Fear Street related series in March 1998, under the
Gold Key imprint: Fear Street, R.L. Stine's original series for young adult
readers (ages 13 and up), Fear Street Sagas, another young adult spin-off and
Ghosts of Fear Street for mid-grade readers (ages 8-12). The Company intends
to publish a young adult series based on its Turok the Dinosaur Hunter
character in the Fall of 1998, and has agreements in principle to publish
Barbie and other young adult, mid-grade and chapter books aimed at younger
readers (ages 5-7).

The Company's Children's Publishing products, which generally are designed to
be appropriate for children up to age seven, fall into four broad categories:
(i) "Classic Format," (ii) electronic storybooks, (iii) education and
reference, and (iv) trade and novelty. Historically, the Company has
distributed its children's publishing products primarily through mass market
channels (which include national discount store chains, such as Wal- Mart, K
Mart, Target and Toys "R" Us), and to a lesser extent, the Company has 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. In 1997, the Children's Publishing division's sales
organization was restructured, with a renewed emphasis on strengthening the
Company's relationships with its customers as well as a focus on expanding
sales efforts into new retail channels. See "--Distribution and Sales."

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 1997, the Company introduced new Classic
Format products with higher price points which were sold through mass market
channels, in bookstores and in specialty retail stores.

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. The Company's storybook products, in particular those
bearing the Golden Books brand, stress "classic" themes such as self-esteem,
friendship, family values and general issues associated with growing up.
Typical storylines involve topics such as dealing with a new school, family
dynamics and the pressures and rewards of friendships.



                                      3
<PAGE>

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.

The Company utilizes selected properties and characters in the GBEG library in
its children's publishing products, in particular in the storybook and
coloring/activity book categories.

ELECTRONIC STORYBOOKS

The Company believes that it was the first to release electronic storybook
products and was at one time the leading manufacturer and distributor of
interactive children's books incorporating electronically produced audio
effects. However, in recent years, the Company's products in this category
have not been cost competitive with those of other manufacturers and the
Company's market share has declined substantially.

The Company's products in the electronic storybook category have a higher
price point than the Company's Classic Format products, with a retail price
between $5.00 and $20.00. Products in this category are sold primarily to mass
market accounts and independent distributors.

EDUCATION AND REFERENCE

The Company's education and reference products consist of workbooks,
flashcards and reference books. The Company's workbook and flashcard products
have price points between $2.00 and $3.50 and its reference 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 intends to increase its product offerings in this category,
marketing workbooks that utilize both licensed and proprietary characters and
that contain enhanced characteristics such as full color interiors. The
Company intends to begin publishing leveled reading series using its existing
characters and titles, as well as licensed characters, in the fall of 1998.

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.
Products in this category are primarily 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's product offerings in this category are at present limited due to
the Company's historical focus on products suitable primarily for mass market
distribution. However, 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. Products in this category that the Company
introduced in 1997 include a number of novelty book and book plus formats with
retail price points under $10.00. The Company believes that significant sales
opportunities for both its existing and proposed trade and novelty products
exist through bookstores, mass market, special market and international
distribution channels.

ADULT BOOKS

In 1997, the Company expanded the Golden Books brand into trade books focusing
primarily on parenting and the family with the launch of the Adult Publishing
division. The Adult Publishing division's first list in


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<PAGE>

September 1997 included Stephen Covey's The 7 Habits of Highly Effect
Families, which hit the New York Times best-seller list. The Adult Publishing
division has published a total of 14 titles through the first quarter of 1998,
including Christina Ferrare's Family Entertaining, a cookbook by the
television personality, and I've Been Rich. I've Been Poor. Rich is Better. by
Judy Resnick, the investment advisor. The Adult Publishing division intends to
publish an additional 17 titles through 1998, including books by Maria Shriver
on discussing death with children and by Richard and Linda Eyre on talking to
your children about sex. Additionally, the Adult Publishing Division expects
to publish The Parents Answer Book, the first title of three planned
co-branded series, comprising a total of 17 books, based on Parents magazine
editorial contents, in the fall of 1998.

The Company distributes its family-oriented adult trade book line primarily
through bookstores, although the line includes books published in formats
suitable for mass market distribution. In February 1998, the Adult Publishing
division signed an agreement with St. Martin's Press, Incorporated to
distribute its books in the United States and Canada.

GOLDEN BOOKS ENTERTAINMENT GROUP DIVISION

The Company's GBEG division was established in August 1996, upon the
acquisition by the Company of an extensive library of character-based family
entertainment properties through the Broadway Video Acquisition. The GBEG
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, 26 half-hour
episodes of Felix the Cat, Underdog, 52 half-hour episodes of Abbott and
Costello, The Lone Ranger and Tennessee Tuxedo.

The Company generates revenues from the GBEG division by licensing properties
from the library to third parties, both domestically and internationally, for
use on television, on home video and in ancillary media. The Company also,
where its rights so permit, licenses specific characters in the GBEG division
library (rather than the entire property) for use in new television programs,
theatrical films and home video. In addition, the GBEG division licenses
merchandising rights in its characters and owned or controlled characters of
the Children's Publishing division for use in a variety of products. In August
1997, GBEG entered into a licensing arrangement with Eden, a leading creator
and manufacturer of infant toys, to develop and market products based on
characters in the Company's library, including a line of soft toys based on
Pat the Bunny which was introduced in December 1997. Additionally, in
September 1997, GBEG announced a licensing arrangement with Swat-Fame, a
leading children's wear manufacturer, to produce apparel featuring Pat the
Bunny, The Poky Little Puppy and Little Lulu, to be introduced in the Spring
of 1998.

The existing licenses granted to third parties in respect of the GBEG
division's properties generally cover a limited time period, usually of two to
three years in duration. 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.

Shari Lewis Acquisition/ Sony Wonder Venture. In July, 1997, the GBEG division
acquired Shari Lewis Enterprises, Inc., expanding its library with the
addition of the Lamb Chop, Charlie Horse and Hush Puppy characters, books,
television specials, films and home video titles. GBEG began distribution of a
new 40-episode series for children by Shari Lewis, The Charlie Horse Music
Pizza, which premiered on PBS in January 1998. In December 1997, the GBEG
division announced the formation of a long-term strategic alliance with Sony
Wonder, a division of Sony Music, for the manufacture, production and
distribution of children's home video and audio products. The Company believes
that the GBEG division's library, combined with the distribution capabilities
of Sony Wonder, will allow the Company to meaningfully compete in the home
video market with Golden Books branded content. Through transactions such as
the Shari Lewis Acquisition and the formation of a joint venture with Sony
Wonder, the GBEG division intends not only to add to its library and enhance
its licensing operations but also to expand its role as not only a licensor of
but also a creator, producer, manufacturer and distributor of children's
related entertainment products.


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<PAGE>




COMMERCIAL PRINTING DIVISION

The Company's manufacturing capabilities as a leading producer of coloring and
activity books, picture books and educational and supplemental materials allow
it to market these capabilities to third parties through its Commercial
Printing Division. In 1997, the Company manufactured products for its
Commercial Printing Division at factories located in Racine, Wisconsin and
Cambridge, Maryland. Customers of the Commercial Printing Division include
educational publishers, religious publishers, brand marketers targeting
children and families, and other juvenile publishers and entertainment
companies. Additionally, the Commercial Printing division engages in commodity
printing (such as tax instruction booklets and tax forms), generally during
periods of excess production capacity.

Cambridge Sale. As part of the Company's effort to streamline its printing
operations in order to focus on its core publishing and entertainment
businesses, the Company sold its commercial printing operations in Cambridge,
Maryland to Mail-Well, Inc. on December 1, 1997 for approximately $20.2
million.

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, 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 1997 were
Wal-Mart, Toys "R" Us, K Mart and Target. To a lesser extent, the Company has
distributed its children's publishing products through other domestic
distribution channels. In 1997, the Children's Publishing division's sales
organization was restructured. The Children's Publishing division's new sales
organization emphasizes strengthening its relationships with its traditional
retail customers, including assisting customers with sales strategies through
new category management and in-store display initiatives, as well as a focus
on expanding sales efforts into new retail channels, such as supermarkets,
drugstores, airports and zoos.

Closing of Coffeyville Distribution Center. In February 1998, the Company
announced that it would be closing its distribution center in Coffeyville,
Kansas by June 1998 and consolidating 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's children's publishing products are marketed in
approximately 80 countries and are published in English, Spanish, Japanese,
Korean and Portuguese. Books produced under subsidiary rights licensing are
issued in 23 languages, including Finnish, Indonesian and Mandarin. The
Company has the largest market share in the children's book category in
Canada. The Company's sales in Canada, and to a lesser extent the United
Kingdom, account for a majority of its international sales revenues.

The Adult Publishing division distributes its book line primarily through
bookstores, although the line also includes books published in formats
suitable for mass market distribution. In February 1998, the Adult Publishing
division signed an agreement with St. Martin's Press, Incorporated to
distribute its books in the United States and Canada.

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.





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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, Publications International, Ltd., in the
electronic storybook category, and School Zone Publishing Co., in the
educational workbook 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.

The market for licenses is also highly competitive and the Company competes
against many other licensees for significant licenses. In recent years,
licensors have fragmented licenses, which has reduced the cost of purchasing a
license. As a result, smaller bidders have been able to enter the market for
licenses, which has resulted in increased competition in this market.

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 which the Company intends to enter each 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, as the division expands its efforts to produce, manufacture and
distribute home video products, it will face 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

During 1997, the Company manufactured the majority of its Children's
Publishing products from its plants in Racine, Wisconsin and Cambridge,
Maryland, with additional components and services obtained from third party
vendors in the United States and abroad. The Company's electronic products
typically contain a higher portion of outsourced content than its printed
products, particularly the software and electrical components. In an effort to
streamline the Company's printing business, the Company sold its printing
operations plant in Cambridge, Maryland on December 1, 1997.

NEW MANUFACTURING FACILITY. The Company had previously announced that it would
continue to manufacture certain of its core children's publishing products in
a new, more efficient manufacturing and administrative facility in Racine,
Wisconsin, and outsource all other printing and manufacturing. Construction
began on the new facility on July 2, 1997, pursuant to an agreement with a
developer which is building the facility to the Company's specifications and
will lease it to the Company on a long-term basis upon completion. The Company
began manufacturing at the new facility in February 1998, and expects the new
facility to be fully operational by May 1998. In connection with its move to
the new facility, on October 31, 1997, the Company sold the building which had
housed its main plant in Racine for net proceeds of approximately $2.4
million.

EMPLOYEES

The Company and its subsidiaries have approximately 1,200 employees,
calculated on a full-time equivalent basis. Approximately 420 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


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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. The Company believes that its relations with its employees
generally are good.

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. Similarly, to
manufacture electronic storybooks, the Company generally outsources tasks such
as electrical design and software programming while retaining artistic
supervision and control.

ITEM 2. PROPERTIES

Certain information as to the significant properties used by the Company in
the conduct of its business is set forth in the following table:

<TABLE>
<CAPTION>
LOCATION                   SQUARE FEET         TYPE OF USE
<S>                        <C>                 <C>
New York, NY               112,000             Corporate offices; publishing offices; sales offices

Racine, WI                 498,300             Printing facilities and administrative offices

Crawfordsville, IN         403,000             Warehousing and distribution

Cambridge, Ontario, Canada 148,000             Corporate offices; sales offices; warehousing and distribution
</TABLE>


In addition to the properties described above, the Company owns or rents
various other properties that are used for administration, sales offices and
warehousing.

Construction began on the Company's new, more efficient manufacturing and
administrative facility in Racine, Wisconsin on July 2, 1997, pursuant to an
agreement with a developer which is building the facility to the Company's
specifications and leasing it to the Company on a long-term basis. The Company
began manufacturing at the new facility in February 1998, and expects the new
facility to be fully operational by May 1998. In connection with its move to
the new facility, on October 31, 1997, the Company sold the building which had
housed its main plant in Racine for approximately $2.4 million, and is leasing
such building until June 1998, as it completes its move to the new facility.

The Company moved into its new, 112,000 square foot corporate headquarters in
New York City in August 1997.

In February, 1998, the Company announced that it would be closing its
distribution center in Coffeyville, Kansas by June 1998 and consolidating into
its distribution facility in Crawfordsville, Indiana. The Company's 547,000
square foot warehouse and distribution center in Coffeyville is classified as
an asset held for sale.

In addition to the foregoing properties, the Company also owns a 702,000
square foot facility in Fayetteville, North Carolina which was primarily used
in connection with the manufacture and distribution of games and puzzles.
During August 1994, the Company sold its game and puzzle operation to Hasbro,
Inc., although this facility was not included in the sale. The Company intends
to accelerate the sale of this facility. This facility currently is classified
as an asset held for sale.

The Company sold its printing operations in Cambridge, Maryland, which
included a 231,000 square foot printing and warehousing facility, in December
1997.




                                      8
<PAGE>

ITEM 3. LEGAL 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.

At the Hertel Landfill in Plattekill, New York, the Company is one of five
PRPs sued by the EPA in 1994 for recovery of past EPA response costs of
approximately $2.5 million. In September 1991, the EPA approved a remedial
action for the Hertel Landfill site that currently is estimated to cost $4.1
million other than groundwater remediation costs, if any are required. One of
the site's non-defendant PRPs has been complying with an EPA unilateral
administrative order requiring investigation and clean-up of the site and is
now seeking contribution towards its cost from the Company and more than 20
other PRPs. At the time the 1991 order was issued, the Company did not comply.
As of June 26, 1996, representatives of the Company reached agreement with the
EPA to come into compliance with the order and pay a penalty of $625,000 for
previous non-compliance. Additionally, during 1997, the Company paid a total
of $1,701,000 for the remediation of the Hertel site, including settlement
payments to other PRPs. The Company, other PRPs and the government have
reached an interm allocation and are in the process of negotiating a consent
decree which will establish the Company's future responsibilities at the site.

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


                                      9
<PAGE>

not exceed $200,000. However, in the event that the contamination has migrated
off the Company's property, these costs could increase.

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.

On December 19, 1997, Contempo Colours, Inc. filed suit against the Company in
the circuit court for the County of Kalamazoo, Michigan, alleging damages
arising out of a dispute between Contempo and the Company relating to the sale
to Contempo of Penn on December 23, 1996. The Company and Contempo entered
into a standstill agreement with respect to the suit on January 7, 1998,
whereby Contempo has agreed to suspend the suit while the parties attempt to
negotiate a settlement of all claims. The Company is adequately reserved with
respect to this matter.

The Company is actively pursuing resolution of the aforementioned matters or,
in the case of environmental matters, is awaiting further government response.
While it is not feasible to predict or determine the outcomes of these
proceedings, it is the opinion of management that these outcomes have been
adequately reserved for and will not have a materially adverse effect on the
Company's financial position or future results of operations.

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.



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

         Not applicable.





                                      10
<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") is
traded over-the-counter and is quoted on the NASDAQ National Market System
(symbol GBFE). Common stockholders of record at December 27, 1997 numbered
approximately 7,000 . 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.

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



FISCAL YEAR ENDED DECEMBER 28, 1996 (1)
-------------------------------------------------------------------------------



                                     High                      Low
First Quarter                       10 7/8                     7 7/8
Second Quarter                      15 1/8                    10 3/8
Third Quarter                       12 1/2                    10 3/8
Fourth Quarter                      12 1/4                    10 3/4

(1)  On November 30, 1996, the Company changed its Fiscal year end so as to
     end on the last Saturday in December. Accordingly, the quarterly range of
     prices has been restated to reflect the Company's revised quarters as
     follows:

                                             1996
                                             ----
                         First Quarter    March 30th
                         Second Quarter   June 29th
                         Third Quarter    September 28th
                         Fourth Quarter   December 28th



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 the its Common Stock and
management does not currently anticipate the payment of cash dividends on the
Common Stock in the foreseeable future. The ability of the Company to pay cash
dividends may be limited by the indenture governing the Company's 7.65% Senior
Notes due 2002, which restricts the ability of Golden Books Publishing to pay
cash dividends or make other cash distributions to the Company. In addition,
the ability of the Company to pay cash dividends may be limited by the
indenture governing the Company's 8 3/4 % Convertible Debentures due 2016
(which Debentures are held by Golden Books Financing Trust, the issuer of the
8 3/4 % Convertible Trust Originated Preferred Securities due 2016), which
restricts, under certain circumstances, the ability of the Company to pay cash
dividends and make other distributions on Common Stock.




                                      11
<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 it's fiscal year end so as
to end on the last Saturday of December in each year. As a result the current
fiscal period ended on December 27, 1997. The Fiscal 1996 results from
operations are not necessarily comparable to other periods as presented. The
earnings per share amounts have been presented as required to comply with
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("Statement 128"). For further discussion of Statement No. 128, see the notes
to the consolidated financial statements beginning on page F-10.



<TABLE>
<CAPTION>
                                                                     YEAR ENDED  ELEVEN MONTHS              YEAR ENDED
                                                                     -----------     ENDED     ------------------------------------
                                                                     DECEMBER 27, DECEMBER 28, FEBRUARY 3,   JANUARY 28, JANUARY 29,
                                                                         1997         1996        1996          1995        1994
                                                                      -------------------------------------------------------------
INCOME STATEMENT DATA:                                                           (In Thousands, Except Per Share Data)
REVENUES
<S>                                                                   <C>          <C>          <C>          <C>          <C>
Net sales                                                             $ 242,481    $ 254,046    $ 369,572    $ 398,354    $ 613,464
Royalties and other income                                                1,080          959        1,722        2,207        2,404
                                                                      -------------------------------------------------------------

Total Revenues                                                          243,561      255,005      371,294      400,561      615,868
                                                                      -------------------------------------------------------------

COSTS AND EXPENSES:
Cost of sales                                                           176,238      231,792      281,392      297,421      432,503
Selling, general and administrative                                     111,307      142,721      129,020      124,128      203,042
Restructuring plan, net of gains on sale of assets                      (10,786)      65,741        6,701      (20,352)           -
Provision for write-down of Division                                          -            -            -       (1,100)      28,180
                                                                      -------------------------------------------------------------

Total costs and expenses                                                276,759      440,254      417,113      400,097      663,725
                                                                      -------------------------------------------------------------

(LOSS) INCOME BEFORE DISTRIBUTIONS ON GUARANTEED
PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S AND
GOLDEN BOOKS PUBLISHING COMPANY, INC.'S CONVERTIBLE DEBENTURES,
INTEREST EXPENSE, PROVISION (BENEFIT) FOR INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                     (33,198)    (185,249)     (45,819)         464      (47,857)

DISTRIBUTIONS ON GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
THE COMPANY'S AND GOLDEN BOOKS PUBLISHING COMPANY, INC.'S
CONVERTIBLE DEBENTURES                                                   10,282        3,597            -            -            -

INTEREST EXPENSE, net of interest income                                  6,163        6,764        9,896       15,573       15,463
                                                                      -------------------------------------------------------------

LOSS BEFORE PROVISION (BENEFIT) FOR INCOME
TAXES AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE                                                    (49,643)    (195,610)     (55,715)     (15,109)     (63,320)

PROVISION (BENEFIT) FOR INCOME TAXES                                         37        1,893       11,332        2,470      (22,295)
                                                                      -------------------------------------------------------------

LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE                                                    (49,680)    (197,503)     (67,047)     (17,579)     (41,025)

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                           -            -            -            -      (14,800)
                                                                      -------------------------------------------------------------

NET LOSS                                                              $ (49,680)   $(197,503)   $ (67,047)   $ (17,579)   $ (55,825)
                                                                      =============================================================

LOSS PER COMMON SHARE - BASIC:
  Before cumulative effect of change in accounting principle          $   (2.18)   $   (8.73)   $   (3.23)   $   (0.88)   $   (1.99)
  Cumulative effect of change in accounting principle                         -            -            -            -        (0.71)
                                                                      -------------------------------------------------------------

  NET LOSS PER COMMON SHARE - BASIC                                   $   (2.18)   $   (8.73)   $   (3.23)   $   (0.88)   $   (2.70)
                                                                      =============================================================

BALANCE SHEET DATA (AT PERIOD END):
  Working Capital                                                     $  95,780    $ 168,210    $ 165,309    $ 228,240    $ 332,979
  Total assets                                                          323,164      367,235      321,965      428,806      505,116
  Long-term debt                                                        149,897      149,862      149,845      149,828      229,812
  Guaranteed preferred beneficial interests in the Company's and
  Golden Books Publishing Company, Inc.'s Convertible Debentures        110,707      110,488            -            -            -
  Convertible Preferred Stock - Series A                                      -            -        9,985        9,985        9,985
  Common stockholders' (deficit) equity                                 (61,309)     (19,637)      74,368      140,794      158,673
</TABLE>




                                      12
<PAGE>





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

As part of the Company's plan to return its core publishing business to
profitability and to re-deploy assets, the Company incurred approximately
$11.5 million in one-time transition costs during 1997 in connection with the
Company's strategic plan, 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. The Company anticipates that it will incur additional one-time
transition costs of approximately $13.0 million in 1998. The Company's return
to profitability is dependent in part on the successful implementation of
management's new strategy. As the Company's new strategy has not yet been
fully implemented, the Company does not expect to generate positive net income
until 1999 at the earliest.

For the year ended December 27, 1997, the Company reported results under three
segments: (i) the Consumer Products Segment, (ii) the Commercial Products
Segment and (iii) Entertainment Segment. Historically, the Company has
reported operating results under two segments: (i) the Consumer Products
Segment and (ii) the Commercial Products Segment. The following discussion has
been revised to reflect these new reporting segments. The Consumer Products
Segment ("Publishing") includes the Children's and Adult Publishing Divisions
and, during the eleven months ended December 28, 1996 and the year ended
February 3, 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 Aquisition, is reported as the Entertainment Segment and includes home
video, television program licensing, merchandising and other character
licensing. In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" ("FAS 131"). FAS 131
changes the way companies report segment information in financial statements.
The Company has not yet determined the impact of the implementation of FAS 131
on the Company's segment reporting but its adoption will not have a material
effect on the Company's statement of position or revenues, only on the
composition of its reportable segments.

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 27, 1997 (Fiscal 1997) is
compared to the eleven months ended December 28, 1996 (Fiscal 1996), and
Fiscal 1996 is compared to the twelve months ended February 3, 1996 (Fiscal
1995). Due to the change in year end, the results of these fiscal periods are
not necessarily comparable. Additionally, certain prior year's amounts have
been reclassified to conform with the current year's presentation.

FISCAL YEAR ENDED DECEMBER 27, 1997 (FISCAL 1997)
COMPARED TO ELEVEN MONTHS ENDED DECEMBER 28, 1996 (FISCAL 1996)

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.



                                      13
<PAGE>

Entertainment Segment revenues increased $25.3 million to $29.4 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
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 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 27.6% 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 53.3% 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 (before consideration of $11.5
million of one time transition costs associated with the redirection of the
Company, which are comprised of consulting costs of $4.5 million, information
systems changeover costs of $3.5 million, costs associated with the move to
the Company's new manufacturing facility in Racine, Wisconsin of $2.4 million,
costs associated with the move of the Company's New York corporate
headquarters of $0.6 million and other costs of $0.5 million), 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 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.

The Company did not incur a significant provision or benefit for income taxes
in the fiscal period ending December 27, 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. Profitable operating results in
subsequent periods will benefit from an income tax rate which will be lower
than the statutory rate due to the reinstatement of deferred tax assets for
which a valuation allowance was established. The provision for Fiscal 1996
pertained principally to anticipated resolution of outstanding issues from
prior years. At December 27, 1997, the


                                      14
<PAGE>

Company had available net operating loss carryforwards of approximately $207.7
million for Federal income tax purposes. In addition the Company had tax
credit carryforwards of approximately $4.3 million.

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 the eleven months ended December 28, 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 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 nonproductive 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.

(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.

As of December 27, 1997, $1.6 million of the facility related costs and $4.2
million of the severance have been paid.







                                      15
<PAGE>


ELEVEN MONTHS ENDED DECEMBER 28, 1996 (FISCAL 1996)
COMPARED TO FISCAL YEAR ENDED FEBRUARY 3, 1996 (FISCAL 1995)

Revenues for Fiscal 1996 decreased $112.9 million (30.4%) to $258.4 million
(before giving effect to a $3.4 million reserve adjustment to resolve
differences with customers with a view towards mending and improving the
Company's relationships with its customers), as compared to $371.3 million for
Fiscal 1995. Consumer Products Segment revenues decreased $96.4 million
(31.3%) to $211.9 million for Fiscal 1996 (before giving effect to the $3.4
million reserve adjustment described above) from $308.3 million for Fiscal
1995. Sales volume declines were experienced across the board with the fourth
quarter decreases being consistent with these in the earlier part of the year.
Electronic storybook products were sold at significantly reduced prices from
Fiscal 1995 resulting in overall price reductions from the prior year.
Excluding the impact of electronic storybooks, sales prices increased by 14.4%
with the largest increases in the activity books and picture books.
Discontinued product lines accounted for $16.0 million in the reduction of
sales. Sales at Penn were down $12.3 million, resulting from the continuing
decline in popularity of licensed characters which had been introduced in
earlier years, the pending loss of the Disney license and increased
competition in the marketplace.

Commercial Products segment revenues, comprised of printing services,
decreased $20.6 million (32.7%) to $42.4 million for Fiscal 1996 from $63.0
million for Fiscal 1995. The decline is largely attributable to the
historically high levels of January revenue which are not included in Fiscal
1996 but were included in Fiscal 1995, and certain reclassifications between
business segments.

The Entertainment Segment revenues were $4.1 million since the date of
acquisition, August 20, 1996.

Gross Profit decreased $38.3 million (42.6%) to $51.6 million for Fiscal 1996
(before giving consideration to $28.4 million of revenue and cost of sales
adjustments described above) from $89.9 million for Fiscal 1995. As a
percentage of revenues, the gross profit margin decreased to 20.0% for Fiscal
1996 (before giving consideration to $28.4 million of revenue and cost of
sales adjustments described above) as compared to 24.2% for Fiscal 1995. In
the Consumer Products Segment, gross profit decreased $34.3 million (42.1%) to
$47.1 million for Fiscal 1996 (before giving consideration to $28.4 million of
revenue and cost of sales adjustments described above) from $81.4 million for
Fiscal 1995. As a percentage of revenues, the Consumer Products Segment gross
profit margin decreased to 22.2% for Fiscal 1996 (before giving consideration
to $28.4 million of revenue and cost of sales adjustments described above)
from 26.4% for Fiscal 1995. The decline in the Consumer Products Segment gross
profit margin is mainly attributable to increased levels of royalty cost
resulting from changes in the sales mix towards the higher royalties
associated with licensed characters' products, and a deterioration in the
gross profit margins at Penn which decreased to 12.0% from 22.1%. The
liquidation of last-in, first-out ("LIFO") inventory resulted in a decrease to
cost of goods sold of $5.2 million which was offset by charges to cost of
goods sold of $4.6 million relating to slow moving and obsolete inventory. The
Commercial Products Segment gross profit decreased $4.6 million (54.1%) to
$3.9 million for Fiscal 1996 from $8.5 million for Fiscal 1995. As a
percentage of revenues, the Commercial Products Segment gross profit margin
decreased to 9.1% for Fiscal 1996 as compared to 13.5% for Fiscal 1995,
primarily due to continuing unfavorable manufacturing variances. The newly
established Entertainment Segment had little impact on the consolidated gross
profit margin during this period. In Fiscal 1996, as a percentage of revenues,
the Entertainment Segment gross profit margin was 15.8%.

Selling, general and administration expenses for Fiscal 1996 decreased $24.4
million (18.9%) to $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 as
described above and $17.7 million of expenses related to the acquisition of an
equity interest by GP Holding) from $129.0 million for Fiscal 1995. These
reductions were primarily attributable to the shorter fiscal period,
reductions in selling expenses due to lower sales levels and the Company's
workforce reduction program.

Interest expense for Fiscal 1996 increased by $1.7 million (including $3.6
million related to the distributions on the Preferred Securities) to $14.6
million as compared to $12.9 million for Fiscal 1995. The increase in interest
expense for Fiscal 1996 was primarily due to higher average debt outstanding,
as the Company completed its private placement of the Preferred Securities on
September 9, 1996. Total average outstanding debt increased to $194.4 million
in Fiscal 1996 from $152.8 million in Fiscal 1995.



                                      16
<PAGE>

The Company's provision for income taxes decreased from $11.3 million to $1.9
million for Fiscal 1996 compared to Fiscal 1995. The provision for Fiscal 1996
pertained principally to anticipated resolution of outstanding issues from
prior years. The Company has established an additional valuation allowance for
the future tax benefits associated with the current year increase in the
deductible temporary difference items since the future realization of such
benefits is uncertain. The Fiscal 1995 provision includes a non-cash charge of
$13.9 million, reflecting an increase in the income tax valuation allowance as
the future realization of existing deductible temporary differences is
uncertain. The effective income tax rates from operations of (1.0%) in Fiscal
1996 and (20.3%) in Fiscal 1995 are significantly below the Federal statutory
rate due to losses incurred during each period for which no tax benefit has
been recognized. Profitable operating results in subsequent years will benefit
from an income tax provision rate which will be lower than the statutory rate
due to the reinstatement of deferred tax assets for which valuation allowances
have been established. At December 28, 1996, the Company had available net
operating loss carryforwards of approximately $138.7 million for Federal
income tax purposes. In addition the Company had tax credit carry forwards of
approximately $4.4 million.

The loss for Fiscal 1996 was $197.5 million, or $(8.73) per basic common share
compared to a net loss of $67.0 million or $(3.23) per basic common share for
fiscal 1995. Results for Fiscal 1996 include restructuring and other charges
of a one time nature aggregating $132.3 million, as discussed above.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

As of December 27, 1997, the Company had approximately $95.8 million in
working capital, including approximately $57.4 million in cash. Based upon
current projections, the continued implementation of management's plan to
return the Company's core publishing business to profitability and to
re-deploy assets during the next twelve months may require financial resources
greater than the Company's current cash position and future cash flow.
Accordingly, the Company is currently seeking additional financing. In
connection therewith, the Company is presently negotiating for a three year
$25 million line of credit ("Line of Credit"), which requires approval from a
majority (over 50%) of the holders of the Company's $150 million 7.65% Senior
Notes. In the alternative, the Company is also presently negotiating an
accounts receivable purchase program for the purchase of up to $30 million of
qualified receivables ("Accounts Receivable Purchase Program") at any one
time. Management believes that it will be successful in obtaining both the
Line of Credit and the Accounts Receivable Purchase Program on acceptable
terms. However, there can be no assurance that either the Line of Credit or
the Accounts Receivable Purchase Program will be obtained by the Company on
acceptable terms. If the Company does not consummate the aforementioned
financing arrangements, it may be required to seek equity or other sources of
financing. To the extent that the Company finances its requirements through
the issuance of additional equity securities, any such issuance would result
in dilution of the Common Stock.


Operations 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, utilized
cash of approximately $82.3 million compared to cash provided of $94.5 million
for Fiscal 1996.

Acquisitions of property, plant and equipment were $20.4 million during Fiscal
1997, as compared to $5.7 million during Fiscal 1996. Additions to the
Company's film library were $6.3 million in Fiscal 1997.

Working capital at December 27, 1997 was $95.8 million, as compared to $168.2
million at December 28, 1996. The decrease resulted primarily from cash
reductions associated with investment in property, plant and equipment,
funding the loss from operations and transition costs associated with the
strategic redirection of the Company during Fiscal 1997.

The Company incurred $11.5 million attributable to transition costs in
connection with the strategic redirection of the Company during 1997. The
Company's plan to change its strategic direction in order to return the core
publishing business to profitability originally anticipated incurring $20.5
million in one time transition costs during 1997. Since this announcement the
Company has made additional decisions (as described below) which made it
impractical for all such transition costs to be incurred during 1997. As a
result, the Company expects that approximately $13.0 million of one time
transition costs will be incurred during 1998. The major factor impacting this
change in timing is management's decision to delay the construction and move
of the Company's main operating facility in Racine, Wisconsin, which it
expects to be fully operational by May 1998. As of December 27, 1997, the
Company maintained sufficient accruals for restructuring costs which are
expected to be paid out during 1998. In connection with its move to the new
facility, on October 31, 1997, the Company sold the building which had housed
its main plant in Racine for net proceeds of approximately $2.4 million.



                                      17
<PAGE>

In connection with the construction of the new manufacturing facility, the
Company was awarded low interest loans and other financial incentives valued
at $5.0 million by the State of Wisconsin and the City and County of Racine,
$3.0 million of which were received during Fiscal 1997.

The Company continued its disposition of non-core assets with the December 1,
1997 sale of its printing operations in Cambridge, Maryland for approximately
$20.2 million, the sale of the Racine plant for $2.4 million (described
above), and the sale of other assets for approximately $0.1 million.

The Company believes that, based on the carrying value of both certain assets
held for sale and inventory to be discontinued or replaced in connection with
the Company's strategic actions, it will realize cash proceeds in excess of
$10.0 million on the sale of such assets. Such proceeds and cash attributable
to the Company's cost savings will be used in connection with the Company's
change in strategic focus and other strategic measures.

On September 26, 1997, the Company signed a new license agreement with Disney
(the "New Disney License Agreement") (the Company's previous main license
agreement with Disney was to have expired on December 31, 1997). The New
Disney License Agreement commenced on October 1, 1997 and runs through
December 31, 2001, and can be extended under certain conditions for an
additional year through December 31, 2002. The book formats covered under the
New Disney License Agreement include: coloring books, activity books, Little
Golden Books, First Little Golden Books, Look/Look Books, Super Shape Books
and Sturdy Shape Books. New formats approved by Disney also may be covered
under the New Disney License Agreement. Properties covered under the New
Disney License Agreement include Disney classic characters as well as
characters from major new Disney branded films released during the term
thereof.

Royalty rates under the New Disney License Agreement vary by product covered.
The New Disney License Agreement contains minimum royalty guarantees of
$7,370,000 for the nine-month period commencing January 1, 1998 and ending
September 30, 1998, $11,670,000 for the second year of the term, $13,340,000
for the third year of the term, $15,340,000 for the fourth year of the term
and $5,280,000 for the period commencing October 1, 2001 and ending December
31, 2001; provided that if the New Disney License Agreement is extended for an
additional year, the minimum royalty guaranty for the year commencing October
1, 2001 shall be $16,670,000, and for the period commencing October 1, 2002
and ending December 31, 2002 shall be $5,610,000. In addition, upon the
execution and delivery thereof, Disney received warrants to purchase 1.1
million shares of the Company's common stock at a per share price of $11.375
(subject to certain adjustments), exercisable beginning on the earlier of i)
90 days after the expiration of the New Disney License Agreement or ii) 30
days after the announcement by either Disney or the Company that they will a)
be entering into a new license agreement or b) that they will not be entering
into a new licensing agreement, and expiring on March 31, 2008.

LEGAL PROCEEDINGS

The Company is currently involved in various litigation as described under
"Item 3. Legal Proceedings". The Company is actively pursuing resolution to
those matters or is awaiting further government response. 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
and will not have a materially adverse effect on the Company's financial
position or future results of operations.

INDENTURE RESTRICTIONS

The indenture governing the 7.65% Senior Note restricts, under certain
circumstances, distributions from Golden Books Publishing to the Company. In
addition, the indenture restricts, with customary exceptions, the ability of
Golden Books Publishing to place liens on its assets.

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded to
accept only two digit entries to represent years. Any computer program that
has date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or other
miscalculation causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. Since early 1997, the Company has been
pursuing a strategy of replacing and updating its information systems in
connection with its change in strategic focus. The Company believes that the
costs of modifying and replacing those systems which are not Year 2000


                                      18
<PAGE>

compliant will be approximately $10.3 million, of which approximately $5.3
million represents new systems development, which will be capitalized, and
approximately $5.0 million represents making existing systems Year 2000
compliant, which will be expensed as incurred. In addition, the Company is
discussing with its vendors and customers the possibility of any interface
difficulties which may affect the Company. The project is estimated to be
completed prior to any anticipated impact on its operating systems. The
Company believes that with a modification and replacement strategy the
Year 2000 issue will not pose significant conversion problems for its computer
systems. However, if this strategy is not completed on a timely basis, the
Year 2000 issue could have a material impact on the operations of the
Company.

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.

EFFECTS OF INFLATION

The Company believes that the relatively moderate rates of inflation over the
last three years have not had a significant impact on the profitability of the
Company. In general, the Company believes the effects of inflation are offset
through increases in sales prices.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"), which is effective for years beginning after December 15, 1997. FAS 130
establishes new rules for the reporting and display of comprehensive income
and its components. FAS 130 requires the Company's foreign currency
translation adjustments, which are currently reported in stockholders'
(deficit) equity, to be included in other comprehensive income and the
disclosure of total comprehensive income. FAS 130 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore,
the Company will adopt the new requirements in 1998. Management has not
completed its review of FAS 130, but does not anticipate that its adoption
will have a material effect on the consolidated financial statements.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("FAS 131"), which is effective for years
beginning after December 15, 1997. FAS 131 establishes standards for the way
that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. FAS 131 is effective for
financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements in 1998. Management has
not yet completed its review of FAS 131 but its adoption will not have a
material effect on the Company's statement of position or revenues, only on
the composition of its reportable segments.

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" ("FAS 132"), which is effective for years
beginning after December 15, 1997. FAS 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. FAS 132 is effective for
financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements in 1998. Management has
not completed its review of FAS 132 but does not anticipate that its adoption
will have a material effect on the consolidated financial statements.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable





                                      19
<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.

CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)




<TABLE>
<CAPTION>
                                                               FIRST       SECOND        THIRD       FOURTH
                                                             QUARTER (1) QUARTER (1)  QUARTER (1)  QUARTER (1)
<S>                                                          <C>          <C>          <C>          <C>
1997
Net sales                                                    $ 65,624     $ 50,445     $ 52,805     $ 73,607
Gross profit                                                   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                                (.41)        (.52)        (.76)        (.51)
Weighted average number of common shares - basic               25,983       26,139       26,489       26,814

1996
Net sales                                                    $ 67,314     $ 72,317     $ 67,308     $ 75,246
Gross profit (loss)                                            20,750       18,749      (11,341)       6,038
Net loss (3)                                                  (10,700)     (24,464)     (96,815)     (70,072)
Net loss per common share - basic                                (.50)       (1.19)       (4.29)       (2.80)
Weighted average number of common shares - basic               21,669       21,980       23,098       25,750
</TABLE>



(1)      On November 30, 1996, the Company changed its Fiscal year end so as
         to end on the last Saturday in December. Accordingly, the
         consolidated quarterly financial information has been restated to
         reflect the Company's revised quarters follows:


                                    1996
                                    ----
                First Quarter    March 30th
                Second Quarter   June 29th
                Third Quarter    September 28th
                Fourth Quarter   December 28th


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

(3)      Includes a total provision for restructuring and closure of
         operations of $65,741, of which $40,680 and $25,061 were recognized
         in the third and fourth quarters, respectively.

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

None noted.





                                      20
<PAGE>

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is included in the Company's definitive
proxy statement for the annual meeting of shareholders to be held on May 12,
1998 and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is included in the Company's definitive
proxy statement for the annual meeting of shareholders to be held on May 12,
1998 and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is included in the Company's definitive
proxy statement for the annual meeting of shareholders to be held on May 12,
1998 and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is included in the Company's definitive
proxy statement for the annual meeting of shareholders to be held on May 12,
1998 and is incorporated herein by reference.


                                    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

3.1*     Restated Certificate of Incorporation of the Registrant dated March
         25, 1998.

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

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

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

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

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

4.5      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")).



                                      21
<PAGE>

4.6      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).

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

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

4.9      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).

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.

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).



                                      22
<PAGE>

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).

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.

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.

10.21*   Industrial Building Lease Agreement dated as of June 23, 1997 between
         Golden Books Family Entertainment, Inc., and First Industrial
         Development Services Group, L.P.

10.22    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).

10.23    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).


21.1*    List of Subsidiaries.

23.1*    Consent of Ernst & Young LLP, Independent Auditors

23.2*    Consent of Deloitte & Touche 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.

(b)      Reports on Form 8-K filed during the last two months ended December
         28, 1996:

Form 8-K, dated October 1, 1997.


                                      23
<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.


March 24, 1998          GOLDEN BOOKS FAMILY ENTERTAINMENT, INC.


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



                          /s/ Philip E. Rowley
                        ---------------------------
                        Philip E. Rowley
                        Executive Vice President and 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.


<TABLE>
<CAPTION>
Name                                  Title                                                  Date
----                                  -----                                                  ----
<S>                                   <C>                                                    <C>
/s/ Richard E. Snyder                 Chairman of the Board and Chief Executive Officer      March 24, 1998
--------------------
Richard E. Snyder



/s/ Eric Ellenbogen                   Executive Vice President and Director                  March 24, 1998
--------------------
Eric Ellenbogen




/s/ Shahara Ahmad-Llewellyn           Director
---------------------------
Shahara Ahmad-Llewellyn                                                                      March 24, 1998




/s/ Linda L. Janklow                  Director                                               March 24, 1998
--------------------
Linda L. Janklow





                                      24
<PAGE>



                                      Director
/s/ Marshall Rose                                                                            March 24, 1998
---------------------------
Marshall Rose




/s/ John L. Vogelstein                Director                                               March 24, 1998
---------------------------
John L. Vogelstein



/s/ David A. Tanner                   Director                                               March 24, 1998
---------------------------
David A. Tanner



/s/ H. Brian Thompson                 Director                                               March 24, 1998
---------------------------
H. Brian Thompson
</TABLE>



                                      25
<PAGE>

              GOLDEN BOOKS FAMILY ENTERTAINMENT AND SUBSIDIARIES
           INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES


<TABLE>
<CAPTION>
                                                                                         Page
                                                                                         ----

<S>                                                                                      <C>
Report of Independent Auditors ........................................................   F-2


Independent Auditors' Report ..........................................................   F-3


Consolidated Financial Statements:

Consolidated Balance Sheets at December 27 , 1997 and December 28, 1996................   F-4

Consolidated Statements of Operations for the year ended December 27, 1997,
the eleven months ended December 28, 1996 and the year ended February 3, 1996..........   F-6

Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the year ended
December 27, 1997, the eleven months ended December 28, 1996 and the year ended
February 3, 1996 ......................................................................   F-7

Consolidated Statements of Cash Flows for the year ended December 27, 1997,
the eleven months ended December 28, 1996 and the year ended February 3, 1996 .........   F-8

Notes to Consolidated Financial Statements ............................................  F-10

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 as of December 27, 1997 and
December 28, 1996, and the consolidated statements of operations,
stockholders' (deficit) equity and cash flows for the year ended December
27, 1997 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 27,
1997 and December 28, 1996, and the consolidated results of their operations
and their cash flows for the year ended December 27, 1997 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.


                                                             ERNST & YOUNG LLP


New York, New York
March 24, 1998


                                     F-2

<PAGE>


Independent Auditors' Report

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

We have audited the consolidated statement of operations, stockholders' equity
(deficit) and cash flows of Golden Books Family Entertainment, Inc. and
Subsidiaries (formerly Western Publishing Group, Inc. and Subsidiaries) for
the year ended February 3, 1996. Our audit also included the financial
statement schedules listed in the Index at Item 14(a). These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules based on our audit.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects results of their operations and their cash flows for the
year ended February 3, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedules, when
considered in relation to the consolidated financial statements taken as a
whole, present fairly in all material respects the information required to be
set forth therein.



                                                         DELOITTE & TOUCHE LLP


Milwaukee, Wisconsin
April 2, 1996



                                      F-3

<PAGE>





GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)



<TABLE>
<CAPTION>
ASSETS
                                                                                 DECEMBER 27, DECEMBER 28,
CURRENT ASSETS                                                                       1997       1996
                                                                                     ----       ----
<S>                                                                               <C>        <C>
Cash and cash equivalents                                                         $ 57,411   $139,686
Accounts receivable                                                                 51,153     41,415
Inventories                                                                         34,659     27,608
Royalty advances                                                                    10,416      5,239
Refundable income taxes                                                              1,781      1,781
Net assets held for sale                                                             9,873     19,779
Other current assets                                                                 5,053      5,365
                                                                                  --------   --------

Total current assets                                                               170,346    240,873
                                                                                  --------   --------

OTHER ASSETS
Deposits                                                                             3,497          -
Accounts receivable - long term                                                      3,207      1,001
Other noncurrent assets                                                             13,629      8,102
                                                                                  --------   --------

Total other assets                                                                  20,333      9,103
                                                                                  --------   --------

PROPERTY PLANT AND EQUIPMENT, net of accumulated depreciation and amortization
of $39,620 as of December 27, 1997 and $40,672 as of December 28, 1996              38,256     27,504



FILM LIBRARY, net of accumulated amortization of $4,364 as of December 27, 1997
and $1,082 as of December 28, 1996                                                  63,638     60,668


GOODWILL, net of accumulated amortization of $1,605 as of December 27, 1997
and $405 as of December 28, 1996                                                    30,591     29,087

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

TOTAL ASSETS                                                                      $323,164   $367,235
                                                                                  ========   ========
</TABLE>






See notes to consolidated financial statements




                                     F-4
<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 27,  DECEMBER 28,
                                                                       1997        1996
                                                                       ----        ----
CURRENT LIABILITIES
<S>                                                                 <C>          <C>
Accounts payable                                                    $  21,454    $  15,655
Accrued compensation and fringe benefits                                5,887        5,787
Other current liabilities                                              47,225       51,221
                                                                    ---------    ---------

Total current liabilities                                              74,566       72,663
                                                                    ---------    ---------

NONCURRENT LIABILITIES
Long term debt                                                        149,897      149,862
Accumulated post-retirement benefit obligation                         29,365       28,787
Deferred compensation and other deferred liabilities                   19,938       25,072
                                                                    ---------    ---------

Total noncurrent liabilities                                          199,200      203,721
                                                                    ---------    ---------

GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN THE COMPANY'S AND GOLDEN BOOKS PUBLISHING
COMPANY, INC.'S CONVERTIBLE DEBENTURES                                110,707      110,488



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,
   26,887,313 and 25,964,711 shares issued as of
   December 27, 1997 and December 28, 1996, respectively                  269          259
  Additional paid in capital                                          128,533      120,376
  Accumulated deficit                                                (250,791)    (201,111)
  Cumulative translation adjustments                                   (1,498)      (1,339)
                                                                    ---------    ---------
                                                                      (58,487)     (16,815)
  Less cost of Common Stock in treasury - 208,800 shares                2,822        2,822
                                                                    ---------    ---------

  Total common stockholders' deficit                                  (61,309)     (19,637)
                                                                    ---------    ---------


  TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                       $ 323,164    $ 367,235
                                                                    =========    =========
</TABLE>



See notes to consolidated financial statements



                                     F-5



<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                  ELEVEN
                                                                  MONTHS
                                                    YEAR ENDED     ENDED      YEAR ENDED
                                                    DECEMBER 27, DECEMBER 28, FEBRUARY 3,
                                                       1997         1996         1996
                                                       ----         ----         ----
<S>                                                  <C>          <C>          <C>
REVENUES:
  Net sales                                          $ 242,481    $ 254,046    $ 369,572
  Royalties and other income                             1,080          959        1,722
                                                     ---------    ---------    ---------

Total revenues                                         243,561      255,005      371,294
                                                     ---------    ---------    ---------

COSTS AND EXPENSES:
  Cost of sales                                        176,238      231,792      281,392
  Selling, general and administrative                  111,307      142,721      129,020
  Restructuring plan, net of gains on sale of assets   (10,786)      65,741        6,701
                                                     ---------    ---------    ---------

  Total costs and expenses                             276,759      440,254      417,113
                                                     ---------    ---------    ---------

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 PROVISION FOR INCOME TAXES              (33,198)    (185,249)     (45,819)






INTEREST INCOME                                          5,579        4,235        2,963

DISTRIBUTIONS ON GUARANTEED PREFERRED
 BENEFICIAL INTERESTS IN THE COMPANY'S
 AND GOLDEN BOOKS PUBLISHING COMPANY,
 INC.'S CONVERTIBLE DEBENTURES                         (10,282)      (3,597)           -




INTEREST EXPENSE                                       (11,742)     (10,999)     (12,859)
                                                     ---------    ---------    ---------

LOSS BEFORE PROVISION FOR INCOME TAXES                 (49,643)    (195,610)     (55,715)

PROVISION FOR INCOME TAXES                                  37        1,893       11,332
                                                     ---------    ---------    ---------

NET LOSS                                             $ (49,680)   $(197,503)   $ (67,047)
                                                     =========    =========    =========


NET LOSS PER BASIC COMMON SHARE                      $   (2.18)   $   (8.73)   $   (3.23)
                                                     =========    =========    =========
</TABLE>





See notes to consolidated financial statements

                   F-6



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


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
TWO YEARS AND ELEVEN MONTHS ENDED DECEMBER 27, 1997
(In Thousands Except for Shares and Per Share Data)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                         CONVERTIBLE
                                                                      COMMON STOCK            PREFERRED STOCK - SERIES B
                                                                 -------------------------- -------------------------------
                                                                  SHARES         AMOUNT      SHARES            AMOUNT
                                                                 -------------- ----------- -------------  ----------------
<S>                                                                 <C>              <C>                               <C>
Balances, January 28, 1995                                          21,232,074       $ 212             -               $ -

Net loss                                                                     -           -             -                 -
Dividends on Preferred Stock - Series A - $42.50 per share                   -           -             -                 -
Exercise of stock options                                               44,000           1             -                 -
Issuance of Common Stock                                               599,465           6             -                 -
Translation adjustments                                                      -           -             -                 -
                                                                 -------------- ----------- -------------  ----------------

Balances, February 3, 1996                                          21,875,539         219             -                 -

Net loss                                                                     -           -             -                 -
Issuance of Preferred Stock - Series B                                       -           -        13,000            65,000
Dividends on Preferred Stock - Series A - $42.50                             -           -             -                 -
Common Stock issued as dividend on Preferred Stock - Series B          390,000           4             -                 -
Exercise of stock options                                              356,599           3             -                 -
Issuance of Common Stock                                             3,342,573          33             -                 -
Translation Adjustment                                                       -           -             -                 -
                                                                 -------------- ----------- -------------  ----------------

Balances, December 28, 1996                                         25,964,711         259        13,000            65,000


Net loss                                                                     -           -             -                 -
Common Stock issued as dividend on Preferred Stock - Series B          780,000           8             -                 -
Exercise of stock options                                              142,602           2             -                 -
Issuance of Warrants                                                         -           -             -                 -
Translation Adjustment                                                       -           -             -                 -
                                                                 -------------- ----------- -------------  ----------------

Balances, December 27, 1997                                         26,887,313       $ 269        13,000          $ 65,000
                                                                 ============== =========== =============  ================
</TABLE>




<PAGE>

                     (RESTUBBED TABLE CONTINUED FROM ABOVE)



<TABLE>
<CAPTION>

                                                                    ADDITIONAL       NOTE RECEIVABLE      RETAINED    CUMULATIVE
                                                                     PAID-IN          FROM SALE OF        EARNINGS    TRANSLATION
                                                                     CAPITAL          COMMON STOCK        (DEFICIT)   ADJUSTMENTS
                                                                 -----------------  ----------------- -------------- -------------
<S>                                                                 <C>                     <C>            <C>           <C>
Balances, January 28, 1995                                               $ 80,914                $ -       $ 64,287      $ (1,797)

Net loss                                                                        -                  -        (67,047)            -
Dividends on Preferred Stock - Series A - $42.50 per share                      -                  -           (848)            -
Exercise of stock options                                                     516                  -              -             -
Issuance of Common Stock                                                    5,614             (4,796)             -             -
Translation adjustments                                                         -                  -              -           128
                                                                 -----------------  ----------------- -------------- -------------

Balances, February 3, 1996                                                 87,044             (4,796)        (3,608)       (1,669)

Net loss                                                                        -                  -       (197,503)
Issuance of Preferred Stock - Series B                                     (6,248)                 -              -             -
Dividends on Preferred Stock - Series A - $42.50                             (221)                 -              -             -
Common Stock issued as dividend on Preferred Stock - Series B                  (4)                 -              -             -
Exercise of stock options                                                   3,883                  -              -             -
Issuance of Common Stock                                                   35,922              4,796              -             -
Translation Adjustment                                                          -                  -              -           330
                                                                 -----------------  ----------------- -------------- -------------

Balances, December 28, 1996                                               120,376                  0       (201,111)       (1,339)


Net loss                                                                        -                  -        (49,680)            -
Common Stock issued as dividend on Preferred Stock - Series B                  (8)                 -              -             -
Exercise of stock options                                                   1,554                  -              -             -
Issuance of Warrants                                                        6,611                  -              -             -
Translation Adjustment                                                          -                  -              -          (159)
                                                                 -----------------  ----------------- -------------- -------------

Balances, December 27, 1997                                             $ 128,533                $ -     $ (250,791)     $ (1,498)
                                                                 =================  ================= ============== =============
</TABLE>



<PAGE>



                    (RESTUBBED TABLE CONTINUED FROM ABOVE)



<TABLE>
<CAPTION>
                                                                  TREASURY STOCK
                                                             ---------------------------
                                                                SHARES        AMOUNT
                                                             -------------- ------------
<S>                                                          <C>                <C>
Balances, January 28, 1995                                         208,800      $ 2,822

Net loss                                                                 -            -
Dividends on Preferred Stock - Series A - $42.50 per share               -            -
Exercise of stock options                                                -            -
Issuance of Common Stock                                                 -            -
Translation adjustments                                                  -            -
                                                             -------------- ------------

Balances, February 3, 1996                                         208,800        2,822

Net loss
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                                                 -            -
Translation Adjustment                                                   -            -
                                                             -------------- ------------

Balances, December 28, 1996                                        208,800        2,822


Net loss                                                                 -            -
Common Stock issued as dividend on Preferred Stock - Series B            -            -
Exercise of stock options                                                -            -
Issuance of Warrants                                                     -            -
Translation Adjustment                                                   -            -
                                                             -------------- ------------

Balances, December 27, 1997                                        208,800      $ 2,822
                                                             ============== ============
</TABLE>






See notes to consolidated financial
statements.





                                     F-7



<PAGE>



GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)




<TABLE>
<CAPTION>
                                                                                                           ELEVEN MONTHS
                                                                              YEAR ENDED       ENDED        YEAR ENDED
                                                                              DECEMBER 27,  DECEMBER 28,    FEBRUARY 3,
                                                                                 1997          1996            1996
                                                                                 ----          ----            ----
<S>                                                                          <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                                  $ (49,680)     $(197,503)     $ (67,047)
   Adjustments to reconcile net loss to net
   cash (used in) provided by operating activities:

     Depreciation and amortization                                               6,732         12,534         13,963
     Amortization of intangibles                                                 4,482          1,487          2,032
     Provision for losses on accounts receivable                                 3,608          5,719          1,440
     Restructuring, net of gains on sale of assets                             (10,786)        63,917            (46)
     Other non-cash charges associated with the
      redirection of the Company                                                     -         39,450              -
     Non-cash compensation expenses                                                  -         14,335              -
     Gains on sale of equipment                                                      -            (98)          (339)
     Other                                                                           -          1,439          2,935
     Changes in assets and liabilities, net
      of effect of acquisition and dispositions:
       (Increase) decrease in accounts receivable                              (15,392)         1,001         20,451
       (Increase) decrease in inventories                                       (7,051)        27,432         22,550
       Decrease in net assets held for sale                                      1,755          1,628              -
       Decrease in refundable income taxes                                           -          1,463          2,614
       (Increase) decrease in other current assets and
        royalty advances                                                        (3,215)        (3,600)         2,125
       Increase (decrease) in accounts payable                                   3,199         (5,916)           539
       Increase (decrease) in accrued compensation and
        fringe benefits                                                            100            143           (696)
       Increase in deferred income taxes                                             -              -         13,886
       Other                                                                   (12,970)        17,149        (13,552)
                                                                             ---------      ---------      ---------

       Net cash (used in) provided by operating
       activities
                                                                               (79,218)       (19,420)           855


CASH FLOWS FROM INVESTING ACTIVITIES:
   Broadway Video acquisition                                                        -        (81,000)             -
   Investment in joint venture                                                       -         (2,250)             -
   Deposits                                                                     (3,497)             -              -
   Acquisitions of property, plant and equipment                               (20,386)        (5,739)       (17,921)
   Additions to Film Library                                                    (6,348)             -              -
   Proceeds from streamlining plan                                                   -            661          8,252
   Proceeds from sale of assets                                                 22,712         14,535              -
   Other                                                                             -            229            916
                                                                             ---------      ---------      ---------

            Net cash used in investing activities                               (7,519)       (73,564)        (8,753)
</TABLE>



                                      F-8



<PAGE>





GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)



<TABLE>
<CAPTION>
                                                                                       ELEVEN MONTHS
                                                                         YEAR ENDED        ENDED
                                                                         DECEMBER 27,    DECEMBER 28,      FEBRUARY 3,
                                                                            1997            1996             1996
                                                                            ----            ----             ----
<S>                                                                      <C>              <C>              <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
   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                                             -           (4,579)               -
   Proceeds from Municipal Government Grants                                3,000                -                -
   Repayments under Credit Agreement                                            -                -          (32,000)
   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              517
   Dividends paid on Preferred Stock - Series A                                 -             (646)               -
   Other                                                                        -              (74)            (768)
                                                                        ---------        ---------        ---------
   Net cash provided by (used in) financing activities                      4,556          187,354          (32,251)
                                                                        ---------        ---------        ---------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                       (94)              93              (34)
                                                                        ---------        ---------        ---------

NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS                                                               (82,275)          94,463          (40,183)


CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                              139,686           45,223           85,406
                                                                        ---------        ---------        ---------

CASH AND CASH EQUIVALENTS, END OF YEAR                                  $  57,411        $ 139,686        $  45,223
                                                                        =========        =========        =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash paid during the year for:
     Interest and distribution on Guaranteed Preferred
     Beneficial Interests in the Company's and
      Golden Books Publishing Company, Inc.'s
      Convertible Debentures                                            $  21,553        $  13,992        $  11,893
                                                                        =========        =========        =========
     Income taxes, net of refunds received                              $    (416)       $    (319)       $  (5,465)
                                                                        =========        =========        =========
   Non-cash activity:
     Issuance of warrants in connection with Disney
        License Agreement                                               $   6,611        $       -        $       -
                                                                        =========        =========        =========
</TABLE>


See notes to consolidated financial statements


                                                   F-9
<PAGE>
GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997




1. Nature of Business and Organization

Golden Books Family Entertainment, Inc. and Subsidiaries (the "Company")
publishes, produces, licenses and markets an extensive range of children's and
family related entertainment products throughout all media through its
Children's and Adult Publishing, Golden Books Entertainment Group and
Commercial Printing Divisions.

The Company, through its Children's and Adult Publishing divisions, creates,
publishes and markets an extensive range of children's and family 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 "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. In connection with the
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 originally issued by the Company (see Note 11).

2. LIQUIDITY

As of December 27, 1997, the Company had approximately $95.8 million in
working capital, including approximately $57.4 million in cash. The continued
implementation of management's plan to return the Company's core publishing
business to profitability and to re-deploy assets (the "Plan") during the next
twelve months may require financial resources greater than the Company's
current cash position and future cash flow. Accordingly, the Company is
currently seeking additional financing. In connection therewith, the Company
is presently negotiating for a three year $25 million line of credit ("Line of
Credit"), which requires approval from 50% of the holders of the Company's
$150 million 7.65% Senior Notes. In the alternative, the Company is also
presently negotiating an accounts receivable purchase program for the purchase
of up to $30 million of receivables ("Accounts Receivable Purchase Program")
at any one time. Management believes that they will be successful in obtaining
both the Line of Credit and the Accounts Receivable Purchase Program. However,
there can be no assurance that the Line of Credit or the Accounts Receivable
Purchase Program will be obtained on acceptable terms. If the Company does not
consummate the aforementioned financing arrangements, it may be required to
seek equity or other sources of financing. To the extent



                                     F-10



<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)


2. Liquidity (cont'd)

that the Company finances its requirements through the issuance of additional
equity securities, any such issuance would result in dilution of the Common
Stock.

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 8 3/4% Guaranteed Preferred Beneficial Interests in the Company's
and Golden Books Publishing's Convertible Debentures (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 12). All material
intercompany items and transactions have been eliminated.

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 27, 1997 and December 28, 1996, and the results of its
operations, stockholders' (deficit) equity and cash flows for the year ended
December 27, 1997, the eleven months ended December 28, 1996 and the year
ended February 3, 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 27 ,
1997 and December 28, 1996, all of the Company's cash equivalents are
classified as held to maturity and their carrying amounts approximate fair
value.

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.


                                     F-11
<PAGE>





GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)




3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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:

CLASSIFICATION                                           ESTIMATED LIFE (YEARS)
--------------                                           ----------------------
Buildings and improvements                                        10 - 40
Machinery and equipment                                            3 - 10

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.

PER SHARE DATA

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


                                     F-12
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)


3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Net loss per common share for the year ended December 27, 1997, the eleven
months ended December 28, 1996 and the year ended February 3, 1996 is 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 21).

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 27, 1997 and December 28, 1996,
approximately 89% and 85%, respectively, of total inventories were valued
under the LIFO method.

DEPOSITS

The Company has placed approximately $3.5 million in Certificates of Deposit
to collateralize lease obligations associated with the Company's new corporate
headquarters located in New York City.

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) equity.

ADVERTISING COSTS

The Company expenses advertising costs related to its publishing operations as
they are incurred. Advertising expenses for the year ended December 27, 1997,
the eleven month period ended December 28, 1996, and the year ended February
3, 1996, amounted to approximately $3.6 million, $1.0 million and $4.1
million, respectively.

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.

GOODWILL AND LONG LIVED ASSETS

Goodwill at December 27, 1997 and December 28, 1996, 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 14).


                                     F-13
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)




3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

REPORTING COMPREHENSIVE INCOME

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"), which is effective for years beginning after December 15, 1997. FAS 130
establishes new rules for the reporting and display of comprehensive income
and its components. FAS 130 requires the Company's foreign currency
translation adjustments, which are currently reported in stockholders'
(deficit) equity, to be included in other comprehensive income and the
disclosure of total comprehensive income. FAS 130 is effective for financial
statements for fiscal years beginning after December 15, 1997, and therefore,
the Company will adopt the new requirements in 1998. Management has not
completed its review of FAS 130, but does not anticipate that its adoption
will have a material effect on the consolidated financial statements.

DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("FAS 131"), which is effective for years
beginning after December 15, 1997. FAS 131 establishes standards for the way
that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. FAS 131 is effective for
financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements in 1998. Management has
not yet completed its review of FAS 131 but its adoption will not have a
material effect on the Company's statement of position or revenues, only on
the composition of its reportable segments.

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" ("FAS 132"), which is effective for years
beginning after December 15, 1997. FAS 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. FAS 132 is effective for
financial statements for fiscal years beginning after December 15, 1997, and
therefore the Company will adopt the new requirements in 1998. Management has
not completed its review of FAS 132 but does not anticipate that its adoption
will have a material effect on the consolidated financial statements.


                                     F-14
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)

4. STRATEGIC DIRECTION OF THE COMPANY

On May 8, 1996, the Company completed the sale of a significant equity
interest to Golden Press Holding LLC ("GP Holding"), a Delaware limited
liability company owned by Richard E. Snyder, Barry Diller and Warburg, Pincus
Ventures, L.P. The Company issued to GP 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 (the "Series B Preferred Stock"),
each of which shares is convertible into shares of the Company's common stock,
par value $.01 per share ("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 "GPH Transaction"). Net
proceeds associated with the transaction were $58.8 million, after giving
effect to $6.2 million of transaction costs. Net proceeds were partially used
to retire approximately $10.0 million of Series A Preferred Stock, no par
value (the "Series A Preferred Stock"), at its face amount plus $0.7 million
of related accrued dividends, in addition to payments of approximately $3.4
million of severance and transition costs.

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 12), the Broadway
Video Acquisition (as hereinafter defined, see Note 14) and the Hallmark
Transaction (as hereinafter defined, see Note 16), 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
subsequently amended whereby Mr. Snyder's annual compensation was increased
and his term of employment was extended to May 8, 2003.

During 1997, the Company continued its disposition of non-core assets with the
sale of 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 to Mail-Well Inc. ("Mail-Well") 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. 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


                                     F-15
<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)

4. STRATEGIC DIRECTION OF THE COMPANY (CONTINUED)

technology department, (iii) $4.5 million in consulting services associated
with implementing the strategic plan, and (iv) $0.4 million in other costs.

As part of management's plan to return the Company's core publishing business
to profitability and to re-deploy assets, new management took a number of
strategic actions and accordingly, made decisions with respect to certain of
the Company's assets, 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 nonproductive 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;
         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.

                                     F-16
<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)

4. STRATEGIC DIRECTION OF THE COMPANY (CONTINUED)


(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;
         o        other one time miscellaneous charges of $1.7 million.

As of December 27, 1997,  $1.6 million of the facility related costs and $4.2
million of the severance have been paid.

5. PRIOR PERIOD'S RESTRUCTURING

During the year ended February 3, 1996, the Company recorded an approximate
$6.7 million provision for restructuring and closure of operations in a
further effort to reduce its operating cost structure and improve future
operating results, and to reflect the costs incurred in connection with the
termination of a previously announced transaction to sell a significant
interest in the Company. The provision includes a non-cash charge of
approximately $2.0 million and consists of the following components:

         o        Severance costs of approximately $3.6 million associated
                  with the Company's previously announced workforce reductions
                  of salaried and hourly personnel. These reductions were
                  completed in the quarter ended February 3, 1996.

         o        Unrecoverable assets and costs of approximately $3.2 million
                  to be incurred in connection with the Company's decision to
                  close certain of its retail store locations.

         o        Transaction costs of approximately $1.9 million resulting
                  from the Company's October 17, 1995 announcement of the
                  termination of its initial agreement in principle to sell a
                  significant interest in the Company to Warburg, Pincus
                  Ventures, L.P. and Richard E. Snyder.

         o        A plan designed to improve the Company's competitive
                  position and reduce its cost structure through the sale,
                  divestiture, consolidation or phase out of certain
                  operations, properties and products, and a workforce
                  reduction were less than originally anticipated. A gain of
                  approximately $2.0 million as certain costs and expenses of
                  the Plan were less than originally anticipated.

6. NET ASSETS HELD FOR SALE AND DISPOSITIONS

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, (ii)
Creative Center, a facility of Golden Books Publishing, and (iii) Coffeyville
Distribution Center, a facility of Golden Books Publishing.

As of December 28, 1996, net assets held for sale totaling approximately $19.8
million included the Company's (i) Fayetteville facility, which was closed in
conjunction with the sale of the Company's game and puzzle business (a $3.0
million revision to the estimated net realizable value of this facility was
recorded in the consolidated statements of operations during the eleven months
ended December 28, 1996), (ii) Cambridge facility, which was a part of the
commercial printing group and was subsequently sold in


                                     F-17
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)

6. NET ASSETS HELD FOR SALE AND DISPOSITIONS (CONTINUED)

December 1997 to Mail-Well, (iii) Fulford Street facility, a facility of Penn
which was not sold to Peacock Papers, Inc. ("Peacock") and (iv) the Creative
Center, a facility of Golden Books Publishing.

During 1997, the Company continued its disposition of non-core assets with the
sale of 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 to Mail-Well 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 (see Note 4). 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, the eleven months ended
December 28, 1996 and the year ended February 3, 1996 were as follows:


<TABLE>
<CAPTION>
                                                    Period from December 29,   Eleven months
                                                   1996 to Decembver 1,1997        Ended                  Year Ended
                                                    (date of disposition)    December 28, 1996         February 3, 1996
                                                    ---------------------    -----------------         ----------------
                                                                                      (In thousands)
<S>                                                        <C>                   <C>                       <C>
Revenues                                                   $ 25,552              $ 26,962                  $34,488
Gross profit                                                  3,656                 1,694                    2,962
     Income (loss) before
       interest expense
       and provision for
       income taxes                                           1,952                  (223)                     993
</TABLE>



During the year ended December 28, 1996, new management 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 17). As a result, on December
23, 1996 Golden Books Publishing sold the stock of Penn to Peacock 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 and the
year ended February 3, 1996 were as follows:


<TABLE>
<CAPTION>
                                                              Period from February 4, 1996
                                                                   to December 23, 1996                     Year Ended
                                                                   (date of disposition)                  February 3, 1996
                                                                   ---------------------                  ----------------
                                                                                          (In thousands)
<S>                                                                        <C>                               <C>
Revenues                                                                   $ 40,660                          $ 52,955
Gross profit                                                                  4,930                            11,733
     Loss before interest expense and provision for income taxes             (7,152)                           (3,395)
</TABLE>



                                     F-18



<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)


7. Accounts Receivable

Accounts receivable consisted of the following:

                                            December 27, December 28,
                                                1997        1996
                                                ----        ----
                                                 (In thousands)
Accounts receivable                           $ 78,609    $ 63,542
Allowance for doubtful accounts                 (7,208)     (4,379)
   Allowance for sales discount and returns
                                               (17,041)    (16,747)
                                              --------    --------
                                                54,360      42,416
Less long term portion                          (3,207)     (1,001)
                                              --------    --------
                                              $ 51,153    $ 41,415
                                              ========    ========


On September 29, 1995, Golden Books Publishing, a wholly owned subsidiary of
the Company entered into an extendible one-year Receivables Purchasing
Agreement, which included a letter of credit facility, with a financial
institution to sell in pools, trade accounts receivable on a revolving basis,
up to a maximum of $62.5 million outstanding at any one time. The pools were
sold on a non-recourse basis for credit losses and were subjected to a
discount fee. During the year ended February 3, 1996, the Company sold
approximately $19.0 million of receivables of which approximately $1.5 million
were outstanding at February 3, 1996. The Company did not sell any receivables
during the eleven month period ending December 28, 1996 and the year ended
December 27, 1997. The proceeds from the sale of receivables are reported as
providing operating cash flow in the accompanying consolidated statements of
cash flows. The costs associated with this program of $505,000 and $571,000
for the eleven months ended December 28, 1996 and the year ended February 3,
1996, respectively, are included as a component of interest expense in the
accompanying consolidated statements of operations. There were no costs
associated with this program for the year ended December 27, 1997. In
accordance with the terms of this agreement, the Receivable Purchasing
Agreement terminated on September 29, 1996.

8. INVENTORIES

Inventories consisted of the following:

                December 27, December 28,
                   1997        1996
                   ----        ----
                    (In thousands)
Raw materials     $ 2,373     $ 2,810
Work-in-process     3,819       1,829
Finished goods     25,121      19,719
Film library        3,346       3,250
                  -------     -------
                  $34,659     $27,608
                  =======     =======


At December 27, 1997 and December 28, 1996, the replacement cost of
inventories valued using LIFO exceeded the net carrying amount of such
inventories by approximately $2.5 million and $3.5 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 27, 1997,
there was no LIFO liquidation and therefore, no impact on the consolidated
financial statements.



                                     F-19
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)


9. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:


                                                     December 27, December 28,
                                                          1997       1996
                                                          ----       ----

                                                            (In thousands)
Land                                                     $    393   $    356
Building and improvements                                  13,393     13,607
Machinery and equipment                                    55,381     54,013
Machinery and equipment in the process of installation      8,709        200
                                                         --------   --------
                                                           77,876     68,176
Less accumulated depreciation and amortization            (39,620)   (40,672)
                                                         --------   --------
                                                         $ 38,256   $ 27,504
                                                         ========   ========





10. OTHER CURRENT LIABILITIES

Other current liabilities consisted of the following:


                                              December 27, December 28,
                                                  1997       1996
                                                  ----       ----
                                                   (In thousands)
Royalties payable                                $12,841   $ 8,789
Accrued interest                                   4,388     4,388
Accrued worker's compensation                      3,221     4,396
Accrued video duplication costs                        -     3,704
Restructuring costs                                4,559     8,538
Other                                             22,216    21,406
                                                 -------   -------
                                                 $47,225   $51,221
                                                 =======   =======


11. LONG TERM DEBT

Long-term debt consisted of the following:
<TABLE>
<CAPTION>

                                                               December 27, December 28,
                                                                  1997          1996
                                                                  ----          ----
                                                                   (In thousands)
<S>                                                              <C>       <C>
7.65% Senior Notes ($150,000,000 face
amount) due 2002                                                $149,897    $   149,862
                                                                ========    ===========
</TABLE>


Golden Books Publishing Company is obligor with respect to $150.0 million of
7.65% Senior Notes, which were originally issued on September 17, 1992 and are
due September 15, 2002. Interest is payable semiannually on March 15th and
September 15th. There is no obligation to redeem, purchase or repay the Senior
Notes prior to maturity.


                                     F-20
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)

11. LONG TERM DEBT (CONTINUED)

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 27, 1997, there were no retained
earnings available to pay dividends on Common Stock.

The Company's 7.65% Senior Notes had a fair value of approximately $147.0
million and $135.0 million at December 27, 1997 and December 28, 1996,
respectively, based on market interest rates.

12. PREFERRED SECURITIES

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). The carrying amount of the Preferred Securities
approximates its fair value. 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 statements of Golden Books Publishing for the year ended
December 27, 1997 and the eleven months ended December 28, 1996 are as follows
(in thousands):



<TABLE>
<CAPTION>
                                               December 27, December 28,
                                                  1997         1996
                                                  ----         ----
<S>                                             <C>          <C>
Current assets                                  $ 150,837    $ 175,387
Non current assets                                134,560      126,253
                                                ---------    ---------
  Total Assets                                  $ 285,397    $ 301,640
                                                =========    =========

Current liabilities                             $ 149,452    $ 104,918
Noncurrent liabilities                            188,290      191,939
                                                ---------    ---------
  Total Liabilities                               337,742      296,857
  Preferred Securities                            110,707      110,488
Stockholders' Deficit                            (163,052)    (105,705)
                                                ---------    ---------
  Total Liabilities and Stockholders' Deficit   $ 285,397    $ 301,640
                                                =========    =========

Revenues                                        $ 243,561    $ 255,005
Gross profit                                       67,323       23,213
Loss before interest expense and
  provision for income taxes                      (32,136)    (169,594)

    Net loss                                      (57,347)    (186,417)
</TABLE>



                                     F-21
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)


12. PREFERRED SECURITIES (CONTINUED)

The Indenture covering the Senior Notes (see Note 11) restricts the ability of
Golden Books Publishing to pay cash dividends or make other cash distributions
to the Company.

13. 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, in connection with the GPH Transaction (see Note 4) the Series
A Convertible Preferred Stock was retired at its face value plus accrued
dividends and the Company issued to GP Holding, for an aggregate purchase
price of $65.0 million, (i) 13,000 shares of the Company's Series B 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 will be exercisable beginning on May 8, 1998, subject
to acceleration upon certain circumstances. The Warrant will be exercisable
until May 8, 2003.

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. At December 27, 1997, the Company had
cumulative preferred dividends payable of 130,000 shares of Common Stock
(approximately $1.4 million). 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.

The holders of the Series B Preferred Stock have the right to receive $5,000
per share, plus accrued and unpaid dividends, in the event of a voluntary or
involuntary liquidation, dissolution or winding up of the Company. Such
liquidation preference shall rank senior to any liquidation rights of the
Company's Common Stock. The merger or sale of the Company or the sale of all
or substantially all its assets shall not be deemed to be a liquidation,
dissolution or winding up of the Company for this purpose.

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 madatorily redeem the Series B Preferred Stock and the Series B
Preferred Stock is not the subject of any sinking fund requirement.


                                     F-22
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)

13. PREFERRED STOCK (CONTINUED)

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.

14. 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. Additionally, the
Company initially recorded approximately $4.1 million in additional costs
associated with the Broadway Video Transaction. 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 (see Note 3). 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.

Unaudited pro forma results from operations for the eleven months ended
December 28, 1996 and the year ended February 3, 1996 assume that the issuance
of the Preferred Securities and the Broadway Video Acquisition had occurred on
January 29, 1995. The pro forma information is not necessarily indicative
either of the results of operations that would have occurred had these
transaction been made on January 29, 1995 or of future results of operations.



<TABLE>
<CAPTION>
                                                         Eleven Months
                                                            Ended                  Year Ended
                                                          December 28,             February 3,
                                                             1996                     1996
                                                         -------------             ----------
                                                        (In thousands, except per share data)
<S>                                                       <C>                      <C>
Revenues                                                  $ 265,324                $ 380,830
Net loss                                                  $(203,400)               $ (69,349)
Net loss per basic common share                           $   (8.78)               $   (3.20)
</TABLE>




                                     F-23
<PAGE>





GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)


15. 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 27, 1997
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, options granted generally become exercisable with
respect to one-half of the options granted two years after the date of grant
and with respect to 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 with respect to one-third of the options granted
on the date of grant, with respect to an additional one-third such options one
year after the date of grant and with respect to 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.


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


<TABLE>
<CAPTION>
                                                                            Option Price                  Weighted Average
                                                    Shares                   Per Share                     Exercise Price
                                           ------------------------    ------------------------     -------------------------------
<S>                                              <C>                        <C>                                <C>
Outstanding at January 28, 1995                  1,376,700
Exercised                                          (44,000)                 $10.00-$11.75
Canceled                                          (539,600)                 $ 9.50-$20.00
Granted                                            771,000                  $ 8.25-$13.50
                                           ------------------------
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
                                           ========================

Weighted average fair value of
options granted during the year                                                                                $ 5.90
</TABLE>



                                     F-24


<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)


15. EMPLOYEE STOCK OPTIONS (CONTINUED)

Options to purchase 1,174,869 shares and 532,636 shares were exercisable at
December 27, 1997 and December 28, 1996, respectively.

<TABLE>
<CAPTION>
                                          Options Outstanding                   Options Exercisable
                           --------------------------------------------------------------------------------

                                                Weighted
                                   Number       Average                        Number
                               Outstanding at   Remaining       Weighted    Exercisable at    Weighted
      Range of Exercise         December 27,   Contractual       Average     December 27,  Average Exercise
           Prices                   1997          Life        Exercise Price    1997           Price
           ------                   ----          ----        --------------    ----           -----
       <S>                       <C>               <C>            <C>        <C>               <C>
       $ 8.50 - $10.00           1,365,721         6.6            $ 9.33        70,672         $ 9.91
       $10.01 - $12.00           1,183,250         5.8            $10.99       425,167         $11.19
       $12.01 - $14.50           1,978,839         5.6            $12.72       624,530         $12.76
       $15.50 - $16.75              54,500         4.2            $15.64        54,500         $15.64
                                 ---------         ---            ------     ---------         ------
                                 4,582,310         6.0            $11.31     1,174,869         $12.15
                                 =========         ===            ======     =========         ======
</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 of that
statement. For purposes of SFAS 123 pro forma 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 net
loss and net loss per basic common share would have been increased by
approximately $10.1 million or $0.38 per basic common share, and $5.3 million
or $.23 per basic common share for the year ended December 27, 1997 and the
eleven months ended December 28, 1996, respectively. If the Company was to
implement SFAS 123, the pro forma net loss and net loss per basic common share
would have been approximately $67.6 million or $2.56 per basic common share,
and $208.9 million or $8.96 per basic common share for the year ended December
27, 1997 and the eleven months ended December 28, 1996, respectively. Because
SFAS 123 is applicable only to options granted subsequent to December 31,
1994, its pro forma effect is not fully reflected until Fiscal 1997.

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 1997 and 1996: risk-free interest rate of 6.5% and
5.12%; expected volatility of 50.1% and 55.8%; no dividend yield; no
forfeiture rate and expected lives of seven to ten 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.



                                     F-25
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)


16. STOCKHOLDERS' (DEFICIT) EQUITY

On September 26, 1997, the Company entered into a new 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 that they will (a) 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.

On May 8, 1996, pursuant to the sale of a significant equity interest in the
Company to GP Holding, and the requisite vote of the stockholders of the
Company, an amendment to increase the authorized number of shares of the
Company's Common Stock, $.01 par value from 40.0 million shares to 60.0
million shares was approved.

In connection with the GPH 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 remits dividends equal to
approximately 195,000 shares of the Company's Common Stock per Fiscal quarter
of the Company.

On January 31, 1996, in accordance with his Interim Employment Agreement, the
Company issued 599,465 shares of Common Stock to Mr. Snyder at a price of
$8.00 per share in exchange for a non-recourse note in the amount of the
purchase price, secured by a pledge of the shares. The non-recourse note was
shown as a separate component of consolidated stockholders' (deficit) equity
at February 3, 1996. During the year ended December 28, 1996, the Company
exchanged another non-recourse note of approximately $1.0 million in connection
with the 84,987 additional shares issued to Mr. Snyder under the antidilution
provisions of his Employment Agreement.

On September 6, 1996, the Company completed the sale to H.C. Crown
Corporation, a wholly owned subsidiary of Hallmark Cards Incorporated
("Hallmark"), of 2,356,198 shares of Common Stock for approximately $25.0
million (the "Hallmark Transaction"). Hallmark and the Company continue to
discuss a strategic relationship between the two companies, premised on the
good faith efforts to develop constructive working relationships across
appropriate lines of business.

As of December 27, 1997, the Company has reserved 24,283,214 shares of common
stock for the conversion of the (i) Series B Preferred Stock (see Note 4),
(ii) warrants issued in connection with the GPH Transaction (see Note 4),
(iii) Preferred Securities (see Note 12), (iv) warrants issued in connection
with the Disney Agreement and (v) the exercise of outstanding options (see
Note 15).


                                     F-26
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)


17. 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
27, 1997 and thereafter are as follows:


                                                    AMOUNT
                                                (IN THOUSANDS)
                                                --------------
                     1998                           $5,467
                     1999                            7,046
                     2000                            6,455
                     2001                            6,378
                     2002                            6,192
                     and thereafter                 64,752




Total rent expense charged to operations was approximately $5.7 million, $4.7
million and $6.1 million for the year ended December 27, 1997, the eleven
months ended December 28, 1996 and for the year ended February 3, 1996,
respectively.

The Company is required to meet certain contractual payments under contracts
in effect at December 27, 1997 and thereafter, as follows:


                                            AMOUNT
                                        (IN THOUSANDS)
                                        --------------
                     1998                   $11,105
                     1999                    14,064
                     2000                    13,856
                     2001                    20,620
                     2002                         -
                     and thereafter               -


Contingencies

Golden Books Publishing and 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. against certain of Penn's environmental
liabilities, including the Cork Street Landfill and Fulford Street Property
discussed herein.


                                     F-27
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)




17. COMMITMENTS AND CONTINGENCIES (CONTINUED)

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 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.

At the Hertel Landfill in Plattekill, New York, Golden Books Publishing is one
of five PRPs sued by the EPA in 1994 for recovery of past EPA response costs
of approximately $2.5 million. In September 1991, the EPA approved a remedial
action for the Hertel Landfill site that currently is estimated to cost $4.1
million other than groundwater remediation costs, if any are required. One of
the site's non-defendant PRPs has been complying with an EPA unilateral
administrative order requiring investigation and clean-up of the site and is
now seeking contribution towards its cost from Golden Books Publishing and
more than 20 other PRPs. At the time the 1991 order was issued, Golden Books
Publishing did not comply. As of June 26, 1996, representatives of Golden
Books Publishing reached agreement with the EPA to come into compliance with
the order and pay a penalty of $625,000 for previous non-compliance.
Additionally, during 1997, Golden Books Publishing paid a total of $1,701,000
for the remediation of the Hertel site, including settlement payments to other
PRPs. The Company, other PRPs and the government have reached an interm
allocation and are in the process of negotiating a consent decree which will
establish the Company's future responsibilities at the site.

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 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 that 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.



                                     F-28
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)




17. COMMITMENTS AND CONTINGENCIES (CONTINUED)

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 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 $6.5 million in the consolidated balance sheet.

On December 19,1997, Contempo Colours, Inc. ("Contempo") filed suit against
Golden Books Publishing in the circuit court for the County of Kalamazoo,
Michigan, alleging damages arising out of a dispute between Contempo and
Golden Books Publishing relating to the sale to Contempo of Penn on December
23, 1996. The Company and Contempo entered into a standstill agreement with
respect to the suit on January 7, 1998, whereby Contempo has agreed to suspend
the suit while the parties attempt to negotiate a settlement of all claims.
The Company is adequately reserved with respect to this matter.

The Company is actively pursuing resolution of the aforementioned matters or,
in the case environmental matters, is awaiting further government response.
While it is not feasible to predict or determine the outcomes of these
proceedings, it is the opinion of management that these outcomes have been
adequately reserved for and will not have a materially adverse effect on the
Company's financial position or future results of operations.

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.

Effective December 1996, the Company entered into a five-year outsourcing
agreement to manage its information technology services department. The amount
of annual service fees will vary with the cost of living adjustment and is
dependent upon the services provided, which services depend upon the Company's
volume of business and system needs.




                                     F-29
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)



18. 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>
                                             Year           Eleven Months       Year
                                             Ended               Ended          Ended
                                           December 27,      December 28,     February 3,
                                             1997                1996            1996
                                             ----                ----            ----
                                                 (In thousands)
<S>                                       <C>                <C>                <C>
Current payable (benefit):
   Federal                                    $ -              $2,051            $(2,092)
   State                                       59                 (53)                78
   Foreign                                    (22)               (105)              (540)
                                       ----------            --------           --------
                                               37               1,893             (2,554)
                                       ----------            --------           --------
Deferred:
   Federal                                      -                   -             11,281
   State                                        -                   -              2,615
   Foreign                                      -                   -                (10)
                                       ----------            --------           --------
                                                -                   -             13,886
                                       ----------            --------           --------
                                              $37              $1,893            $11,332
                                       ==========            ========           ========
</TABLE>


Loss before income tax expense of Golden Books Publishing's Canadian
subsidiary was approximately $(669,000), $(577,000) and $(920,000) for the
year ended December 27, 1997, the eleven months ended December 28, 1996 and
the year ended February 3, 1996, respectively.




                                     F-30
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)


18. 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 Months
                                                            Year Ended          Ended         Year Ended
                                                           December 27,      December 28,      February 3,
                                                               1997             1996             1996
                                                               ----             ----             ----
<S>                                                            <C>              <C>              <C>
Statutory rate                                                 35.0%            35.0%            35.0%
State income taxes, net of Federal benefit                      5.0              4.2              (.2)
     Valuation allowance, net of refundable amounts           (38.5)           (33.7)           (56.8)
     Permanent differences relating to the sale of
       Divisions/Subsidiaries                                  (0.6)            (4.1)               -

     Other - net                                               (1.0)            (2.4)             1.7
                                                              -----            -----              ---
                                                               (0.1)%           (1.0)%          (20.3)%
                                                              =====            =====            =====
</TABLE>



The income tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 27, 1997 and
December 28, 1996 are as follows:




<TABLE>
<CAPTION>
                                                  December 27,  December 28,
                                                     1997         1996
                                                  --------------------------
                                                        (In thousands)
<S>                                               <C>          <C>
Deferred tax assets:
      Allowance for doubtful accounts & returns   $   9,950    $   9,881
      Inventories                                     1,368        2,896
      Property, plant & equipment                         -        4,413
      Accrued expenses                               24,450       24,898
      Post retirement benefits                       11,746       11,515
      Net operating loss carryforwards               87,991       60,015
      Other - net                                       133          561
                                                  ---------    ---------
Total deferred tax assets                           135,638      114,179
      Valuation allowance                          (133,569)    (112,481)
                                                  ---------    ---------
Deferred tax assets, net of valuation
         allowance                                    2,069        1,698
                                                  ---------    ---------

Deferred tax liabilities:

      Property, plant & equipment                       397            -
      Pension contributions                           1,672        1,698
      Other - net                                        -            -
                                                  ---------    ---------
Total deferred tax liabilities                        2,069        1,698
                                                  ---------    ---------
Net deferred tax assets / (liabilities)          $        -   $        -
                                                  =========    =========
</TABLE>


                                     F-31
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)


18. INCOME TAXES (CONTINUED)


The current balance of the total deferred tax assets less total deferred tax
liabilities ("Net Deferred Tax Asset") was $31.2 million and $32.8 million at
December 27, 1997 and December 28, 1996, respectively. The noncurrent
balance of the Net Deferred Tax Asset was $102.4 million and $79.7 million at
December 27, 1997 and December 28, 1996, respectively. The entire Net
Deferred Tax Asset was offset by a valuation allowance at both December 27,
1997 and December 28, 1996, due to the uncertainty of realizing the Federal
and state income tax benefits associated with the Net Deferred Tax Asset .

At December 27, 1997, the Company had available net operating loss
carryforwards of approximately $207.7 million for Federal income tax purposes
of which approximately $71.9 million, $75.4 million and $60.4 million expire
in the years 2011, 2012 and 2013, respectively. The Company has tax credit
carryforwards at December 27, 1997 of approximately $4.3 million.

19. PENSION, POST-RETIREMENT AND POSTEMPLOYMENT BENEFITS

Golden Books Publishing and its Canadian subsidiary have noncontributory
defined benefit retirement plans covering substantially all domestic hourly
and Canadian salaried and 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 following tables set forth the plans' funded status and amounts recognized
in the consolidated financial statements at December 27, 1997 and December 28,
1996, and for the year ended December 27, 1997, the eleven months ended
December 28, 1996 and the year ended February 3, 1996 :



<TABLE>
<CAPTION>
                                                                             December 27, 1997     December 28, 1996
                                                                             -----------------     -----------------
                                                                                          (In thousands)
     <S>                                                                         <C>                     <C>
     Actuarial present value of benefit obligations:
     Accumulated benefit obligations, including vested
       benefits of $17,097 and $15,937 in 1997 and 1996,
       respectively                                                               $17,224                $16,109
                                                                                =========               ========
     Projected benefit obligations for services rendered                          $17,735                $16,656
     Plan assets at fair value (primarily U.S. government
     securities, corporate bonds and equity mutual funds)                          21,721                 18,684
                                                                                ---------               --------
     Projected benefit obligations less than plan assets                            3,986                  2,028
     Unrecognized net (gain)/loss                                                  (1,648)                   120
     Unrecognized prior service cost                                                1,843                  2,129
     Unamortized portion of unrecognized net asset at January 31, 1987                  -                    (32)
                                                                                ---------               --------
     Prepaid pension costs recognized in accompanying consolidated
      balance sheets                                                             $  4,181               $  4,245
                                                                                =========               ========
</TABLE>





                                     F-32



<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)

19. PENSION, POST-RETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)



<TABLE>
<CAPTION>
                                                                         Year Ended   Eleven Months Ended      Year Ended
                                                                         December 27,     December 28,         February 3,
                                                                             1997             1996                1996
                                                                             ----             ----                ----
                                                                                         (In thousands)
<S>                                                                       <C>              <C>                 <C>
Net pension (income) expense, included in the following components:
     Service cost - benefits earned during the period                     $    490         $     498           $    441
     Interest cost on projected benefit obligations
                                                                             1,164             1,084              1,054
     Actual return on plan assets                                           (3,803)           (2,268)            (3,437)
     Net amortization and deferral                                           2,213               734              2,070
     Net settlement gain                                                         -                 -                 (3)
                                                                          --------         ---------           --------
     Net pension expense                                                  $     64         $      48           $    125
                                                                          ========         =========           ========
</TABLE>



The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligations was 7.0% for both the year ended
December 27, 1997 and the eleven months ended December 28, 1996. The expected
long-term rate of return on assets was 10%.

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 $326,000, $349,000 and $503,000 for
the year ended December 27, 1997, the eleven months ended December 28, 1996
and for the year ended February 3, 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 $2.0 million, $2.5 million and $3.1 million for
the year ended December 27, 1997, the eleven months ended December 28, 1996
and the year ended February 3, 1996, respectively.

Post-retirement Benefits

Golden Books Publishing provides certain health care and life insurance
benefits for substantially all of its retired employees. The Company accrues
the estimated cost of retiree benefit payments during the years the employee
provides services.


                                     F-33
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)


19. PENSION, POST-RETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)

The post-retirement benefit obligation recorded in the consolidated balance
sheets consisted of the following amounts:



<TABLE>
<CAPTION>
                                                              December 27,             December 28,
                                                                  1997                     1996
                                                                  ----                     ----
                                                                           (In thousands)
<S>                                                             <C>                        <C>
Retirees currently receiving benefits                           $17,865                    $18,487
Current employees eligible to receive benefits                    4,200                      4,500
Current employees not yet eligible to receive benefits            8,000                      8,300
Unrecognized net gain from past experience                       (3,200)                    (5,800)
Unrecognized prior service cost                                   2,500                      3,300
                                                            ------------               ------------
                                                                $29,365                    $28,787
                                                            ============               ============
</TABLE>


The net post-retirement benefit cost, which is not currently funded, consisted
of the following components:

<TABLE>
<CAPTION>
                                                                                   Eleven Months Ended
                                                                    Year Ended         Year Ended
                                                                    December 27,       December 28,      February 3,
                                                                       1997                1996             1996
                                                                       ----                ----             ----
                                                                                      (In thousands)
<S>                                                                 <C>                 <C>              <C>
Service cost - benefits earned during the year                      $   560             $   550          $   500
Interest cost on accumulated post-retirement
  benefit obligation                                                  1,980               1,925            2,000
Net amortization and deferral of unrecognized amounts                  (210)                  -             (100)
                                                                    -------             -------          -------
Net post-retirement benefit expense                                 $ 2,330             $ 2,475          $ 2,400
                                                                    =======             =======          =======
</TABLE>



The assumed health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation as of January 1, 1997 was 7.5% for 1997
decreasing linearly to 5% in 2010; and remaining level thereafter.

If the healthcare cost trend rate were increased one percentage point in each
year, the accumulated post-retirement benefit obligation as of January 1, 1998
and the net post-retirement cost would have been increased by approximately
9.8 %. The weighted average discount rate used in determining the accumulated
post-retirement benefit obligation as of December 27, 1997 and January 1,
1997 was 7.0%.



                                     F-34
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)

20. INDUSTRY SEGMENTS

The Company has three industry 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,
interactive electronic books and games, coloring books and other activity
books and products for children as well as multimedia "edutainment" products.
The Company's foreign operations within the Consumer Products Segment consist
of a marketing subsidiary in Canada and a marketing branch in the United
Kingdom.

The Company's Commercial Products Segment provides printing, graphic, creative
and distribution services.

The Company's Entertainment Segment includes the Golden Books Entertainment
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.

Operating profit represents income before income taxes, interest expense and
general corporate income and expense. Identifiable assets are those assets
used specifically in the operations of each industry 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 year ended
December 27, 1997, the eleven months ended December 28, 1996 and the year
ended February 3, 1996.



Information by industry segment is set forth below:


<TABLE>
<CAPTION>
                                                 Year Ended         Eleven Months Ended       Year Ended
                                            December 27, 1997       December 28, 1996         February 3, 1996
                                            -------------------     --------------------      -----------------
                                                                      (In thousands)
<S>                                            <C>                      <C>                      <C>
     Net sales:
     Consumer Products                         $   170,637              $    207,590             $  306,543
     Commercial Products                            42,446                    42,404                 63,029
     Entertainment                                  29,398                     4,052                      -
                                              ------------             -------------             ----------
                                               $   242,481              $    254,046             $  369,572
                                              ============             =============             ==========

     Operating income/(loss):
     Consumer Products                         $   (23,994)             $    (66,114)            $  (23,887)
     Commercial Products                            (2,848)                  (18,051)                   805
     Entertainment                                   4,422                    (4,930)                     -
                                              ------------             -------------             ----------
                                                   (22,420)                  (89,095)               (23,082)

     Interest and other income                       5,579                     4,235                  3,386
     General corporate expense                     (21,564)                  (30,413)               (16,459)
     Restructuring plan                             10,786                   (65,741)                (6,701)
</TABLE>



                                     F-35
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)



20. INDUSTRY SEGMENTS  (CONTINUED)

<TABLE>
<CAPTION>
<S>                                                   <C>                <C>               <C>
Interest expense and distributions on
  Guaranteed Preferred Beneficial
  Interests in the Company's and
  Golden Books Publishing
  Convertible Debentures                              (22,024)           (14,596)          (12,859)
                                                     --------          ---------          --------

Loss before income taxes                             $(49,643)         $(195,610)         $(55,715)
                                                     ========          =========          ========
</TABLE>

<TABLE>
<CAPTION>
                                                     Consumer          Commercial
                                                     Products          Products         Entertainment     Corporate       Total
                                                     --------          ----------       -------------     ---------       -----
                                                                                       (In thousands)
<S>                                                  <C>                <C>                <C>             <C>           <C>
Identifiable assets:
       Year ended December 27, 1997                  $146,969           $29,846            $113,334        $33,015       $323,164
       Eleven months ended December 28, 1996          181,256            25,923              99,527         60,529        367,235
       Year ended February 3, 1996                    213,792            33,521                   -         74,652        321,965

Depreciation and amortization:
       Year ended December 27, 1997                     2,959             3,175               4,591            489         11,214
       Eleven months ended December                     9,891             1,550               1,523          1,057         14,021
        28, 1996
       Year ended February 3, 1996                     12,816             1,734                   -          1,445         15,995

Capital expenditures:
       Year ended December 27, 1997                     5,797             4,653                  50          9,886         20,386
       Eleven months ended December 28, 1996            3,890             1,275                 116            458          5,739
       Year ended February 3, 1996                     12,540             5,202                   -            179         17,921
</TABLE>


For the year ended 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. For the year ended February 3, 1996, revenues from the
Company's two largest customers, Wal-Mart Stores, Inc. and Toys 'R' Us, Inc.
totaled approximately $78.4 million or 21% of net sales. The Company's
products are primarily sold to mass market retailers throughout the United
States, Canada and the United Kingdom.


                                     F-36
<PAGE>

GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)





21. NET LOSS PER BASIC COMMON SHARE

Loss per basic common share was computed as follows:

<TABLE>
<CAPTION>

                                                                                   Eleven Months
                                                              Year Ended              Ended          Year Ended
                                                              December 27,         December 28,      February 3,
                                                                  1997                 1996             1996
                                                                  ----                 ----             ----
                                                                 (In thousands except for per share data)

<S>                                                        <C>                     <C>               <C>
Net loss                                                    $     (49,680)          $   (197,503)     $  (67,047)
Preferred dividend requirements                                    (7,849)                (6,136)           (848)
                                                           -------------------   ----------------------------------

Loss applicable to basic common stock                       $     (57,529)          $   (203,639)     $  (67,895)
                                                           ===================   =================== =================

Weighted average basic common shares outstanding                   26,357                 23,317          21,047
                                                           ===================   =================== =================

Loss per basic common share                                 $      (2.18)          $      (8.73)     $    (3.23)
                                                           ===================   =================== =================

</TABLE>



22. 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 director of the Company) is the Managing Partner, has acted
as a real estate advisor to the Company. Pursuant to the Georgetown Agreement,
the Company is 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 $108,000 in respect of a property located at 850 Third Avenue,
New York, New York, and (iv) approximately $217,000 in respect of a property
located in Fayetteville, North Carolina.

TRIBECA TRANSACTION

Pursuant to a letter agreement (the "Tribeca Agreement") dated as of July 1,
1996, the Company agreed to pay to Tribeca Technologies LLC ("Tribeca"),
a limited liability company in which Philip E. Rowley (an officer of the
Company) is 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
employ of the Company at such time); (1) July 1, 1996; (ii) July 1, 1997; and
(iii) July 1, 1998. In consideration for such payments, Tribeca agreed
to pay the Company one-third of the aggregate amount of any


                                      F-37


<PAGE>


GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 1997 (CONTINUED)


22. RELATED PARTY TRANSACTIONS (CONTINUED)

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 27, 1997, 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.
On November 25, 1997, the Company and Tribeca entered into a settlement
agreement and release whereby the Company paid $170,000 in advance at a
discount rate as final payment for all obligations of the Company to Tribeca.

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. To date, the Company has paid approximately $75,000 to
Powerhouse in royalties.

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,
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-38


<PAGE>




GOLDEN BOOKS FAMILY ENTERTAINMENT, INC. AND SUBSIDIARIES

SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                         December 27, 1997       December 28, 1996
                                                                         -----------------       -----------------
ASSETS

CURRENT ASSETS
<S>                                                                        <C>                          <C>
   Cash                                                                    $ 19,155                     $ 59,995
   Refundable income taxes                                                      637                          637
   Other current assets                                                       1,375                            -
                                                                          ---------                    ---------
   Total current assets                                                      21,167                       60,632

OTHER ASSETS                                                                  8,963                           10

PROPERTY, PLANT AND EQUIPMENT                                                 9,985                           99
   Less allowances for depreciation and amortization                           (489)                           -
                                                                          ---------                    ---------
                                                                              9,496                           99

INVESTMENT AND ADVANCES IN SUBSIDIARIES                                     (83,335)                     (64,097)
                                                                          ---------                    ---------
                                                                          $ (43,709)                    $ (3,356)
                                                                          =========                   ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
   Accrued compensation and fringe benefits                                    $ 20                        $ 299
   Other current liabilities                                                  6,671                        8,023
                                                                              -----                      -------
                                                                              6,691                        8,322

DEFERRED COMPENSATION                                                         7,909                        7,759
OTHER NONCURRENT LIABILITIES                                                  3,000                          200
                                                                              -----                          ---
                                                                             10,909                        7,959

STOCKHOLDERS' DEFICIT
   Convertible preferred stock - series B                                    65,000                       65,000
   Common stock                                                                 269                          259
   Additional paid in capital                                               128,533                      120,376
   Accumulated deficit                                                     (250,791)                    (201,111)
   Cumulative translation adjustment                                         (1,498)                      (1,339)
                                                                            -------                     --------
                                                                            (58,487)                     (16,815)
   Less common stock in treasury                                             (2,822)                      (2,822)
                                                                            -------                      -------
                                                                            (61,309)                     (19,637)
                                                                          ---------                     --------

                                                                           $(43,709)                     $(3,356)
                                                                          =========                     ========

</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
                                                                 YEAR ENDED        ENDED               ENDED
                                                                DECEMBER 27,     DECEMBER 28,        FEBRUARY 3,
                                                                    1997            1996                1996
                                                               ---------------------------------------------------------
<S>                                                             <C>              <C>              <C>
NET REVENUES (PRINCIPALLY INTERCOMPANY INTEREST INCOME)         $     8,730      $  8,736         $   27,473


COSTS AND EXPENSES:

     Selling, general and administrative                              1,063        14,335                 -
     Restructuring charges                                             -            1,072              1,870
     Interest expense (primarily intercompany)                         -            4,143             12,494
                                                               -----------------------------------------------------
   (LOSS) INCOME BEFORE PROVISION (BENEFIT) FOR INCOME TAXES
                                                                      7,667       (10,814)            13,109

   PROVISION (BENEFIT) FOR INCOME TAXES                                -              272               (431)
                                                               -----------------------------------------------------
                                                                      7,667       (11,086)            13,540
   DEFICIT IN NET LOSS OF SUBSIDIARY                                (57,347)     (186,417)           (80,587)
                                                               -----------------------------------------------------
   NET LOSS                                                     $   (49,680)  $  (197,503)       $   (67,047)
                                                               =====================================================
</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
                                                                                   MONTHS               YEAR
                                                                 YEAR ENDED        ENDED               ENDED
                                                                DECEMBER 27,     DECEMBER 28,        FEBRUARY 3,
                                                                    1997            1996                1996
                                                               ---------------------------------------------------------
<S>                                                            <C>              <C>              <C>
CASH PROVIDED BY OPERATING ACTIVITIES                          $     6,254      $      6,366      $     10,596


INVESTING ACTIVITIES:

     Purchase of property, plant and equipment                      (9,885)              (99)              (19)
     Deposits                                                       (3,497)                -                 -
                                                             -------------------------------------------------------
   NET CASH USED IN INVESTING ACTIVITIES                           (13,383)              (99)              (19)

   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               517
     Proceeds from Municipal Government Grants                       3,000                 -                 -
     Net decrease in borrowings of revolving credit facility             -                 -           (32,000)

     Net loans to subsidiaries                                     (38,109)          (23,208)           17,905
     Other                                                            (159)              (85)             (509)
                                                             -------------------------------------------------------
   NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES             (33,712)           53,714           (14,087)

   NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS            (40,840)           59,981            (3,510)
   CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                   59,995                14             3,524
                                                             -------------------------------------------------------
   CASH AND CASH EQUIVALENTS, END OF PERIOD                    $    19,155      $     59,995       $        14
                                                             =======================================================

</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
YEAR ENDED DECEMBER 27, 1997, THE ELEVEN MONTHS ENDED DECEMBER 28, 1996
AND THE YEAR ENDED JANUARY 3, 1996 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                 ALLOWANCE
                                                     ALLOWANCE FOR DOUBTFUL  FOR SALES DISCOUNTS
                                                            ACCOUNTS            AND RETURNS                TOTAL
                                                     ----------------------  -------------------   -----------------------
<S>                                                      <C>                     <C>                      <C>
BALANCES, JANUARY 28, 1995                          $         4,067         $         7,472         $       11,539

    Additions charged to costs and expenses                   1,440                  16,712                 18,152
    Deductions - amounts written off                         (2,989)                (19,708)               (22,697)
    Foreign currency conversion                                   4                       6                     10
                                                    -----------------------  -------------------   -----------------------

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
                                                    ======================= =====================   =======================

</TABLE>



                                     S-4