SECURITIES AND EXCHANGE COMMISSION
                        WASHINGTON, D.C. 20549

                               FORM 10-K

(MARK ONE)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended     JUNE 30, 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: 1-10781
                   LANCIT MEDIA ENTERTAINMENT, LTD.
        (Exact name of registrant as specified in its charter)

            New York
                13-3019470
(State or other jurisdiction of
                          (I.R.S. Employer Identification No.)
incorporation or organization)

601 West 50th Street, New York, New York                            10019
    (Address of principal executive offices)           (Zip Code)
Registrant's telephone number, including area code:  (212) 977-9100
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 $.001 per share
                            (Title of Class)
      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  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes: x No:

      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 definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

      Aggregate  market value of voting and  non-voting  common  equity
held by non-affiliates: $24,050,968 on October 3, 1997.

      Indicate  the  number of shares  outstanding  of each of the  registrant's
classes of common stock, as of the latest practicable date:  6,634,750 shares of
Common Stock, par value $.001 per share, outstanding on October 3, 1997.

                   DOCUMENTS INCORPORATED BY REFERENCE
                                 None





                           TABLE OF CONTENTS
                      ANNUAL REPORT ON FORM 10-K
                FOR THE FISCAL YEAR ENDED JUNE 30, 1997
                   LANCIT MEDIA ENTERTAINMENT, LTD.


                                 Part I
Item No.                                                    Page
----------------------------------------------------------------
      1              Business                                   I-1
      2              Properties                                 I-11
      3              Legal Proceedings                          I-11
      4              Submission of Matters to a Vote of
                     Security Holders                           I-11

                                Part II
      5              Market for Registrant's Common Equity and
                     Related Stockholder Matters                II-1
      6              Selected Financial Data                    II-2
      7              Management's Discussion and Analysis of
                       Financial Condition and Results of
                                 Operations II-3
      7A             Quantitative and Qualitative Disclosure
                     About Market Risk                          II-8
      8              Financial Statements and Supplementary
                     Data                                       II-8
      9              Changes in and Disagreements with
                     Accountants on Accounting and Financial
                                 Disclosure II-8

                               Part III
     10              Directors and Officers of the Registrant   III-1
     11              Executive Compensation                     III-5
     12              Security Ownership of Certain Beneficial Owners
                     and Management                             III-12
     13              Certain Relationships and Related
                     Transactions                               III-13

                                Part IV
     14              Exhibits, Financial Statement Schedules
                     and Reports on Form 8-K                    IV-1
                     Signatures                                 S-1

<PAGE>


                                PART I

Item 1.    Business

Introduction

      Lancit  Media  Entertainment,  Ltd.  (the  "Company")  creates,  acquires,
develops  and  produces   high-quality   children's   "edutainment"  and  family
programming,   including  the  11-time  Emmy  Award-winning  Reading  Rainbow(R)
(including 1997 and 1996's Emmys for "Outstanding Children's Series"),  which is
now entering its fifteenth year on the Public Broadcasting  Service ("PBS"), and
The  Puzzle  Place(R),  the  award-winning   children's  program,   produced  in
cooperation with  KCET/Southern  California  ("KCET"),  now in its third year on
PBS.  The Puzzle Place has received  over 20  broadcast  awards,  plus four Emmy
Award nominations,  including one for 1997's "Outstanding  Children's  Preschool
Series".   The  Company  seeks  to  reach  consumers  for  its  productions  via
traditional commercial and public broadcast television, cable television, motion
pictures, home video, and interactive media products.

      The  Company  was  formed  in  New  York  on  June  11,  1979  and  became
publicly-traded  in June 1991 (NASDAQ:  LNCT). The Company includes Lancit Media
Entertainment,  Ltd.  ("Lancit"),  which is an entity engaged in the acquisition
and development  and/or production of properties for television  series,  motion
pictures,   home  videos  and  interactive   media  products  for  children  and
family-oriented  audiences;  Frame  Accurate,  Inc.  ("Frame"),  a  wholly-owned
subsidiary  of Lancit,  which  provides  post-production  services  that include
personnel,  facilities,  graphics,  and  dubbing,  as well as other  editing and
finishing services; Lancit Copyright Corp. ("LCC"), a wholly-owned subsidiary of
Lancit,  which holds copyrights and other intellectual  property rights; and The
Strategy Licensing  Company,  Inc.  ("Strategy"),  a wholly- owned subsidiary of
Lancit,  which is a merchandise  licensing and promotions  company that performs
licensing  agent  functions and is a 50.1% partner in The Puzzle Place Marketing
Company joint venture ("PPMC").

      The Company has its principal  executive  offices at 601 West 50th Street,
New York,  New York  10019  (212-977-9100).  As used in this  report,  the terms
"Company"  and  "Lancit"  refer to  Lancit  Media  Entertainment,  Ltd.  and its
subsidiaries unless the context otherwise indicates.

Overview of Business

      The Company either creates or seeks out and identifies  properties that it
believes to be suited to become television series or motion pictures, either for
television  or  theatrical  release.  Properties  targeted  by the  Company  for
acquisition are sometimes books or characters  developed in another medium. Upon
identification  of such  properties,  the  Company  negotiates  with the current
holder of the property's rights to obtain an option to develop the property as a
series or motion picture.

      Once the  concept  has been  created or rights to the  property  have been
secured,  the  property  enters a  development  period.  Development  activities
include   determining  the  best  medium  for   exploitation  of  the  property,
determining a budget for the project, creating the stories and characters,  and,
where appropriate,  scripting. Once the property has been developed, the Company
seeks to negotiate with various  distribution  venues which would be appropriate
for the property (i.e., broadcast television, cable, theatrical release).

      Based on the outcome of these negotiations, the Company determines whether
it will,  in fact,  go into  production  of the property and, if so, the type of
funding  required to complete  the  production.  The  Company  seeks  production
funding  from  several  sources,  including  underwriting  grants and  corporate
funding/sponsorship,  broadcast  license fees,  producer  fees,  royalties,  and
licensing and  distribution  advances.  In certain cases, the Company's costs of
production  exceed the production  funding  available,  requiring the Company to
deficit-finance  a portion of these production costs, if it elects to go forward
with production.

      After production funding has been obtained and primary production has been
completed,  the project goes into post-production,  which may include editing of
the project,  the addition of graphics and effects,  opening and closing credits
and other improvements to the original production materials.

      Additional  revenue  opportunities  may  come  from  international  sales,
publishing  tie-ins and, in the case of successful  series,  licensing  fees and
royalties  related to sales of merchandise and other consumer  items.  Rights in
and revenues  from these various  revenue  streams are  typically  shared,  in a
significant  fashion,  with  talent,  distributors  and others.  There can be no
assurance, once the Company has developed, produced and sold a property, that it
will be a success or, if it is a success,  that it will generate  income for the
Company.

      The Company has a number of properties in development  that it believes to
be well-suited for the growing  children's  programming  market (see "Business -
Development" and "Business - Areas of Proposed Growth", below). However, even if
the Company successfully develops,  produces and sells these properties, it will
be some time, if at all, before they can become income-producing properties. The
Company  requires  substantial  additional  funding  in  order to  continue  its
operations  and to place  these and or other  properties  into  production.  The
Company is actively  exploring a number of  alternatives to obtain such funding.
The Company is also actively seeking guaranteed distribution  arrangements which
would reduce the risk of funding such new programming.

Strategic Restructuring

      In the  fiscal  year  ended  June 30,  1997,  the  Company  determined  to
implement a strategic restructuring plan, the initial phase of which included an
extensive and systematic review of the Company's operations,  cost structure and
balance sheet.  As part of this process and the Company's  continuing  analysis,
the Company  reviewed the  anticipated  future  revenue  streams  related to its
projects and recorded a charge of  approximately  $5.5  million.  This  non-cash
charge related to film and program costs,  of which  approximately  $2.1 million
related to The Puzzle Place and  approximately  $3.3 million related to Backyard
Safari(R).  The charge reflected the Company's revision of each of its estimated
future  royalty  streams with  respect to The Puzzle  Place and its  anticipated
production  funding  sources and its  estimated  future net royalty  stream with
respect to Backyard  Safari.  In both cases,  the Company  accrued for estimated
remaining project costs.

      As part of this restructuring  program,  management  anticipates  focusing
more of the Company's  time and  resources on  properties  that are currently in
development  which may have more  revenue-producing  potential  to the  Company,
including a new series currently called Putt Putt 'n Pals, based upon characters
developed by Humongous Entertainment,  programming for Discovery Communications,
Inc. ("DCI") to fill a minimum of one-sixth of the programming on Discovery Kids
(see  "Business  -  Development",  below),  and other  commercial  broadcasters.
Additionally,  the Company has, and,  where  appropriate,  will continue to take
steps to  minimize  its  operating  expenses  and  continues  to seek  strategic
partners (see "Business Capital Requirements", below).





Strategic Programming Alliance With Discovery Communications, Inc.

      In September 1996, DCI entered into a non-exclusive  strategic programming
alliance with Lancit and invested $5 million for an initial 6.6% equity stake in
the Company. DCI is a large privately-held, diversified media company which owns
cable  television's The Discovery Channel and The Learning  Channel,  as well as
the national retailing chain, The Nature Company.

      In May  1997,  the  Company  entered  into a  two-year  production  output
agreement  with DCI,  under  which the Company  will  provide  one-sixth  of the
Discovery  Channel's  Discovery Kids block of programming,  which will expand as
the  programming  block  expands.  Discovery  Kids is currently a 3-hour  weekly
block. Pursuant to the May 1997 agreement, DCI also agreed to fund 13 half-hours
of programming for each of the 1997-98 and 1998-99 seasons.  No Really is a show
which  was  already  produced  and  aired  under  the  original  September  1996
arrangement,  as were the "Discovery Kids" promotional spots. In the fiscal year
ended June 30, 1997,  DCI  accounted  for 64% of the  Company's  production  and
royalty revenues.

      The Company and DCI have agreed that Outward Bound,  scheduled to debut in
Fall  1998,  will  be  the  first  program  produced  under  the  new  May  1997
arrangement.

Capital Requirements

      Notwithstanding the Company's  significant cash position at June 30, 1997,
the Company  believes that  additional  funding will be necessary to sustain the
Company's  operations  through the fourth quarter of fiscal 1998. The Company is
actively seeking  additional funding and has retained an investment banking firm
to assist it in this effort.  Among the  alternatives  being  considered  by the
Company are a sale of an interest in the Company, an acquisition of the Company,
and/or  strategic  alliances with industry  partners.  The Company  continues to
pursue  marketing  efforts  to  generate  cash  from  production  and  licensing
activities  and,  where  appropriate,  may  explore  turning to account  certain
non-strategic assets. While there can be no assurance that any such transactions
will be  available to the Company or, if  available,  that they will be on terms
favorable  to  the  Company  or  its  shareholders,   the  Company  is  devoting
considerable management and other resources to these efforts.

      The  Company  also has  taken  steps to  reduce,  where  appropriate,  its
operating expenses.  These steps include relocating Strategy,  its merchandising
and licensing agent subsidiary, from Westport,  Connecticut to the Company's New
York City offices, and certain staff reductions.

Productions

      In  addition  to Reading  Rainbow  and The  Puzzle  Place,  the  Company's
television  productions include Outward Bound, an original series that follows a
group of young teenagers on Outward Bound wilderness  adventure trips,  which is
scheduled to air on Discovery Kids in Fall 1998, and Backyard  Safari, a natural
science series for 4-to-8 year olds,  featuring  Crinkleroot(C),  a 3-D animated
character  featured in Jim Arnosky's  popular  series of nature books,  which is
scheduled to air on public television stations commencing in November 1997.

      Reading Rainbow

      Lancit is the  co-creator  of and has  produced  130  episodes  of Reading
Rainbow, the award-winning daily children's series,  hosted by LeVar Burton, now
entering its fifteenth broadcast season on over 300 PBS stations nationwide. The
series was the winner of the 1996 and 1997 Daytime  Emmy Award for  "Outstanding
Children's Series". Each episode centers on a television adaptation of a picture
book appropriate for beginning readers.

      The episodes were  produced  pursuant to contracts  with GPN/NETV  Network
("GPN") on behalf of itself and WNED-TV,  Buffalo  ("WNED").  Reading Rainbow is
owned by GPN and  WNED,  which  control  all  rights  to the  series,  including
merchandising  and  distribution.  Lancit and Frame are paid fees for producing,
directing  and  providing  post-production  services  to this  series.  Revenues
related  to the  series  accounted  for  approximately  30%,  35% and 14% of the
Company's production and royalty revenues during the fiscal years ended June 30,
1997, 1996 and 1995, respectively. Funding for Reading Rainbow has been provided
by PBS, The Corporation for Public  Broadcasting  ("CPB"),  the National Science
Foundation  and  others.  A  commitment  for a portion of the funding for future
episodes has been received,  and the Company has recently engaged in discussions
with  GPN and WNED  regarding  potential  opportunities  related  to  additional
funding of the series.  There can be no assurance that these discussions will be
successful.

      In August  1997,  the Company  became the  exclusive  licensing  agent for
Reading Rainbow for a term of up to ten years,  subject to meeting certain sales
goals. The Company will receive a customary  license fee based on the percentage
of  sales  of  products  and  merchandise  bearing  the  Reading  Rainbow  brand
(excluding sales of existing  products sold to the school and library  markets).
The Company, as licensing agent for Reading Rainbow,  (see "Business - Licensing
Agent Activities") will seek to expand the merchandising  activities relating to
the  Reading  Rainbow  brand,  and,  as a means  to  accomplish  this  goal,  is
developing  plans for brand  expansion  both  domestically  and  internationally
focusing  on  publishing,   merchandising,   foreign   television,   promotions,
multi-media, home video and learning systems marketed to parents.

      The Puzzle Place

      In November  1991,  CPB awarded  Lancit and KCET a $4.5  million  grant to
develop and produce The Puzzle  Place,  designed to be the first new major daily
preschool  series  created for public  television  since the premiere of "Sesame
Street" in 1969.  The series  premiered  on January  16, 1995 with an initial 40
episodes  delivered to PBS.  Episodes 41 through 65, produced between March 1995
and December 1995, began airing in February 1996.

      In June 1997,  the Company and KCET entered  into an  agreement  with PBS,
pursuant to which PBS would  reimburse  the Company and KCET up to $1 million in
actual  costs of  securing  additional  releases of episodes 1 through 65 of the
series in return for domestic  broadcast  rights to the series through  December
1998. In addition, if the Company and KCET deliver ten new episodes on or before
November 1, 1998 for airing on or before  January 1, 1999, PBS will reimburse up
to  $688,000,  plus any unused  portion of the  previous  $1 million in funding,
toward  securing  additional  releases of the first 65 episodes in exchange  for
domestic broadcast rights to the series through June 30, 2000.

      The Company and KCET share equal ownership in all ancillary  rights to the
series. CPB is entitled to receive a 19% profit participation in ancillary sales
of the project but has  committed to invest  proceeds  which would  otherwise be
received under this participation, through June 30, 1997, towards the production
funding shortfall on the first 65 episodes.

      As of June 30,  1997,  Lancit  had  received  all but  approximately  $0.1
million  of  the  full  amount  of  the  project   grants  and  had   recognized
substantially all of the revenues related to them over a four year period ending
June 30, 1997. As of June 30, 1997, the remaining promotion and outreach efforts
required under the CPB grant for the series are still continuing. Production and
royalty  revenues  related to The Puzzle Place accounted for less than 1% of the
Company's  production and royalty revenues during the fiscal year ended June 30,
1997 and  approximately  48% and 83% of the  Company's  production  and  royalty
revenues during the fiscal years ended June 30, 1996 and 1995, respectively.
<PAGE>

     Lancit and KCET have been actively  seeking funding from various sources to
support the production of ten new episodes.  International Home Foods, Inc./Chef
Jr. has agreed to provide  funding in the amount of $1.25  million over the next
three years and CPB has committed to an additional $1.0 million in funding.  The
Company  and  KCET  intend  to begin  the  production  of the ten new  episodes,
required to be delivered to PBS by November 1, 1998, in early 1998. The expected
budget of $3.2  million for the ten new  episodes  includes  approximately  $1.0
million of which  approximately  $0.5 million from Carnegie  Corporation  of New
York,  the Surdna  Foundation and the Ford  Foundation is already in place,  for
outreach and promotion  activities.  The Company is currently in negotiations to
acquire the additional financing necessary to fund the production of the ten new
episodes.  There can be no  assurance  that the Company  will be able to acquire
such financing on terms  satisfactory  to the Company or, if the Company obtains
such financing, that the ten new episodes will be completed by November 1, 1998.

      During the fiscal year ended June 30, 1994, the Company, through Strategy,
established  PPMC, a joint venture with KCET to manage the  exploitation  of the
various  ancillary  rights  associated  with The Puzzle  Place.  The Company has
recognized  revenues of $741,420,  $1,325,868 and  $1,351,007  during the fiscal
years ended June 30, 1997, 1996 and 1995, respectively,  resulting from its role
in the joint  venture.  PPMC  continues  to service  The Puzzle  Place  licensee
accounts and generates fees from such activities.  However, the Company believes
that early  licensee and retailer  expectations  for sales of licensed  products
related to the property were excessively high and that the product introduction,
shortly  after the show began  airing,  into an unusually  weak  overall  retail
climate led to disappointing retail sales in a number of product categories. The
Company,  with KCET, has agreed to  restructure  royalty  payment  schedules and
license  terms with  certain  licensees  in order to more  closely  reflect  the
anticipated  future royalty stream expected to be generated by those  particular
categories.  There can be no  assurance  that the Company will not effect such a
restructuring again in the future.

      During the fiscal year ended June 30, 1997,  the Company  determined  that
the  licensing  relaunch  plan  developed  by the  Company in early 1997 did not
appear to have the revenue  generating  capabilities that the Company previously
anticipated,  particularly in the short-term. In addition, unexploited licensing
categories  previously  identified  by the  Company  have not met  expectations.
Further,  internationally,  the Company is finding it to be a greater  challenge
than anticipated to distribute the television program,  leading to delays in the
building of an  international  licensing  campaign.  As a result of all of these
factors,  the Company  recorded a non-cash charge in the amount of approximately
$2.1 million for the fiscal year ended June 30, 1997,  which included an accrual
for the estimated  remaining  program  cost.  For the fiscal year ended June 30,
1996, the Company  recorded a non-cash charge of  approximately  $2.5 million to
reflect its reduced royalty expectations.

      Based on the  history of certain  other well  established  PBS  children's
series, consumer awareness levels appear to reach their peak several years after
a show's debut.  Although there can be no assurance that the same will hold true
with The Puzzle Place,  the Company will seek to work closely with licensees and
potential retail partners to heighten the retail popularity of the property.
<PAGE>

      Outward Bound

      Outward  Bound is the first series under  Lancit's new output  arrangement
with  DCI  (see  "Business  -  Strategic  Programming  Alliance  with  Discovery
Communications,  Inc.").  The Company has signed a  co-production  deal with the
wilderness  adventure  company Outward Bound, Inc. for a series that follows the
experiences of a group of young  teenagers on Outward Bound  adventure  trips. A
distribution  arrangement with DCI is in place,  pursuant to which an initial 13
episodes are on order for airing in Fall 1998 (with DCI having  options to order
additional  episodes).  With respect to the series,  the Company,  together with
Outward Bound,  Inc., will retain copyright and control of all foreign broadcast
rights  (except those for Latin  America) and all other rights,  including  home
video and all other ancillary  rights.  The Company and Outward Bound, Inc. also
retain the copyright and control of the domestic  television  rights  subject to
the five year (three years for Latin America) DCI license.  Should Outward Bound
decide to begin a licensing and  merchandising  effort,  the Company will be the
exclusive licensing agent of these rights.

      No Really

      Under the  September  1996  agreement  with DCI,  the Company  produced No
Really for the  Discovery  Kids  programming  block.  DCI funded the cost of the
production  of  the  series,  which  represented  26%  of  the  Company's  total
production  and royalty  revenues for the fiscal year ended June 30,  1997.  The
series  debuted in April 1997,  and the six  half-hour  episodes  produced  have
already  aired.  Under the terms of the  agreement  with DCI, the Company is not
entitled to any further revenues from the series.

      "Discovery Kids" Promotional Spots

      Under the September 1996 agreement with DCI, the Company produced a series
of promotional  identity spots for the "Discovery Kids"  programming  block. DCI
funded  the  project,  and the  Company  received a producer  fee.  The  project
accounted for 38% of the Company's total production and royalty revenues for the
fiscal year ended June 30, 1997.  Under the terms of the agreement with DCI, the
Company is not entitled to any further revenues from the series.

      Backyard Safari

      The Company has completed  production and  post-production  on the initial
season of 13 half-hour episodes of Backyard Safari, a natural science television
series for young children that is scheduled to premiere on public  television in
November  1997. In addition,  the Company has entered into an agreement with GPN
for  distribution  of Backyard Safari to the national school and library market.
The show  combines live action field trips with "3-D"  performance  animation to
explore the wonders of nature.  In 1993,  Backyard Safari was the recipient of a
$1.69  million  underwriting  grant from the National  Science  Foundation,  the
primary  grantor  of  the  project,  and  the  project  has  been  developed  in
cooperation with the American Museum of Natural History.

      In June 1994,  the Company and  Manhattan/Transfer  Edit  entered  into an
agreement under which the Company utilized the technology of  Manhattan/Transfer
Edit's digital animation stage to create the motion capture effects for Backyard
Safari's   animated   co-host,   Crinkleroot.   As   part   of  the   agreement,
Manhattan/Transfer Edit received a profit participation in the series.

      The  Company  continues  to work  toward  securing  additional  production
funding from potential  sources of underwriting.  Management  believes that such
efforts may be enhanced  when the series  begins  airing.  In the event that the
Company were to receive no amounts from sources of outside  production  funding,
the Company  estimates that its remaining cash outlay  required for this project
beyond June 30, 1997 would be less than $0.5 million.

      Because the program is expected to be aired on a limited  basis,  at least
initially,   the  Company  has  reduced  its  projected   production   revenues.
Furthermore,  negotiations  with certain venues that were expected to help drive
merchandise  sales  were  not  successful,   which  further  reduced  previously
estimated  licensing  revenues.  Also,  as the  program has only  recently  been
cleared  domestically,  international  exploitation  of this property,  at least
initially, is no longer expected to be significant.  As a result of all of these
factors,  the Company recorded a non-cash charge of  approximately  $3.3 million
during  the fiscal  year ended June 30,  1997,  which  included  an accrual  for
estimated remaining project costs.
<PAGE>

      The Company  currently  owns all rights to the Backyard  Safari series and
related  products  as well as the  exclusive  right to license  the  Crinkleroot
character  as part of the  series  licensing  effort.  The  Company  will act as
exclusive licensing agent for the series in a wide range of product categories.

Development

     The Company has numerous projects in development. However, as is typical in
the  television  and film  industry,  only a  relatively  small  number  of such
projects are ultimately  produced.  There can be no assurance that the Company's
efforts in developing or acquiring potential new programs,  including any of the
projects in development described below, will lead to production  commitments or
that any programs that are ultimately produced will be successful.

      Series in Development

      The Company has a number of television projects in development, including:
Missing  Links,  a  half-hour  game  show  which is being  co-produced  with the
Smithsonian  Institution and H. Beale and Company (the late Brandon  Tartikoff's
production  company);  Danger  Guys,  an  action-adventure  series  based on the
popular children's books;  SEEKERS,  an  action/adventure  series in partnership
with  The  Smithsonian  Institution;  A.F.R.I.C.A.,  an  animated  series  about
children who can  communicate  with animals and use their special powers to help
solve the problems  which arise when the world of humans  clashes with the world
of nature;  Humongous's  Putt-Putt(R)  & Pals  (Freddi  Fish & Pajama  Sam),  an
original  treatment  for an animated  series based on Humongous  Entertainment's
award-winning,  best-selling  CD-ROMs;  Lemmings(R),  a game  show  based on the
computer  game of the same name;  The Zack Files  based on the  Grosset & Dunlap
book  series by Dan  Greenburg;  Pink and Say,  based on the book by  children's
author Patricia Polacco;  The Saddle Club, based on the popular  sixty-five book
series of the same title;  and Royal Pain,  based on author Ellen Conford's book
of the same name. The Company also has television  and  merchandising  rights to
many other projects, including Broderbund Software's KID PIX.

      Feature Films in Development

      Lancit  is  currently  developing  a  number  of  feature  film  projects,
including:  The Giver, a best-selling children's fiction book, as a feature with
Jeff Bridges' AsIs Productions; The Watsons Go to Birmingham - 1963, with Whoopi
Goldberg and her  company,  One Ho  Productions;  Fenwick's  Suit,  based on the
Farrar,  Straus & Giroux  picture book of the same name by David Small, a comedy
currently in development with Fox 2000; The Adventures of Taxi Dog, based on the
popular Dial Press book series by Sal and Debra  Baracca;  Groucho Marx Story, a
biographical  picture;  and A Christmas  Crime,  an original  screenplay by Adam
Kulakow  and Simon  Kelton.  Should any of these films go into  production,  the
Company would seek to recoup its development costs,  receive producer fees and a
participation in the film's revenue and would not be required to incur any other
future costs in association with these projects.  There can be no assurance that
any of these films will go into production or that, if any of them do, that they
will ultimately be successful.

<PAGE>



      Other

      The Company is developing  several of its properties as television  movies
and/or  direct-to-home  videos,  including:  The 13th Floor, a supernatural time
travel  adventure  story;  and Dry Fire,  a police  story  told from the  female
perspective.  The  Company  also has  rights to develop  and  produce a slate of
biographical  films,  including a motion  picture  based upon the life of Ingrid
Bergman.  Other film properties include The Greyhound Project,  Sleepless Beauty
and Coming of Age with Elephants.

Licensing Agent Activities

      In September  1997, the Company became the exclusive  licensing  agent for
Reading Rainbow for all product  categories other than existing products sold to
the school and library markets for a term of up to ten years, subject to meeting
certain sales goals. The Company,  as licensing agent for Reading Rainbow,  will
seek to expand the  merchandising  activities  relating to the  Reading  Rainbow
brand. Reading Rainbow has established brand recognition with children, parents,
teachers,  educators,  publishers  and  librarians.  The  Company is  developing
extensive  plans for brand  expansion  both  domestically  and  internationally,
focusing  on  publishing,   merchandising,   foreign   television,   promotions,
multi-media,  home video and learning systems marketed to parents.  There can be
no assurance that any or all of these expansion plans will come to fruition.

      The Company, through Strategy, a merchandising,  licensing, and promotions
company,  performs licensing agent functions for properties and characters owned
by Lancit,  as well as for outside  clients,  including  Sega of  America,  Sony
Interactive, Humongous Entertainment and Broderbund Software. Revenues typically
are  derived  from fees  based upon the  royalties  and  advances  earned by its
clients from the sale of licensed consumer  products and promotions  through the
use of a client's copyrights, trademarks and trade names.

     Strategy  acts as  merchandising  agent  for some  well  known  interactive
properties,  including  Putt-Putt,  Freddi  Fish,  and Pajama Sam for  Humongous
Entertainment; Lemmings for Sony Interactive;  KID PIX for Broderbund  Software;
and Sonic the  Hedgehog(TM)  for Sega of America.  Strategy  continues to handle
licensing  and  promotion  activities  for The Puzzle  Place,  Backyard  Safari,
SEEKERS, and Danger Guys.

      In October  1997,  the Company  entered into an  agreement  with Arlene J.
Scanlan,  pursuant  to which  the  Company  acquired  the  remaining  15% of the
outstanding shares of the capital stock of Strategy held by her (see Item 13).

Post Production Services

      Frame   provides   post-production   services   that  include   personnel,
facilities,  graphics,  and  dubbing,  as well as other  editing  and  finishing
services.

      Frame occupies  approximately  20% of the Company's  17,000 square feet of
production/office  space in New York City, and provides various  post-production
services for the Company's own productions.  Post-production  activities include
off-line  analog  and  random  access  editing,  creation  of  special  effects,
computer-generated  3-D  and  digitized  graphics,  and  on-line  mastering  and
duplication  subsequent to the  completion  of  production of a project.  Random
access  Avid(TM)  editing  systems,  as  well as  other  computer  hardware  and
software,  have been purchased over the last few years to enhance  Frame's range
of services.  Frame makes facilities  available for post-production  services to
outside producers, when the facilities are not being used on Company projects.
<PAGE>

Trademarks, Service Marks and Copyrights

      LCC was formed to own and  administer  various  copyrights  created by the
Company and currently  administers all of the music  publishing  interests which
the Company  retains  with respect to the music sound tracks for both The Puzzle
Place and  Backyard  Safari,  as well as for other  productions  created  by the
Company.

      The Company owns  various  United  States  trademarks,  service  marks and
copyrights,  including  The  Puzzle  Place  and  Backyard  Safari.  The  Company
endeavors  to take  commercially  reasonable  actions to  protect  the marks and
copyrights  created  and  acquired  in its  business.  Certain of the  Company's
trademarks,  service  marks and  copyrights  may be  considered  material to the
Company's business.

      The Company's  ability to obtain the rights to subject matter  appropriate
for  children's  and family  programming  is a factor  that  contributes  to the
Company's  ability to develop and market  such  programming  and to  efficiently
produce and distribute its products.  The Company endeavors to obtain rights for
merchandising  and licensing and home video in order to enhance the value of the
properties.

Areas of Proposed Growth

      The Company  continues to evaluate  potential  business  opportunities  in
several markets which it believes present natural tie-ins to its core production
and licensing  businesses.  These markets include  specialty and  school-related
children's products, book publishing,  animation,  direct-to-consumer  sales and
providing content to on-line computer service network providers. The Company may
consider entering one or more of these business areas in partnership with larger
media  companies,  and intends to explore  such  opportunities  with its current
distributors as well as with other potential strategic alliance candidates.

      The Company will seek to benefit from  anticipated  increasing  demand for
children's and educational  programming  over the next several years, as well as
from positive  demographic trends.  Three principal sources are expected to spur
this demand:  1) the pursuit by emerging  domestic cable channels of advertising
dollars aimed at children; 2) the proliferation of cable and satellite-delivered
children's  channels   internationally;   and  3)  the  Federal   Communications
Commission's mandate that each broadcast television station carry three hours of
educational children's programming weekly.

      The Company believes that there are also revenue opportunities in the area
of children's characters,  which hold long-term commercial potential on a global
basis.  Characters may be created by the Company or acquired from other sources.
Acquired  characters   typically  are  derived  from  properties   exploited  in
publishing or other forms of distribution.

      Additionally,   the  Company   believes   that  there  is   potential   in
international  licensing,  including  foreign  broadcast  sales, and publishing,
which the Company  will seek to exploit.  For  example,  in Latin  America,  the
number of children's channels increased from zero to seven within a twelve-month
period and The Puzzle Place can now be seen in Brazil,  Mexico,  and Panama,  in
addition to appearing on The  Discovery/Learning  Channel Latin America which is
distributed throughout the Latin American continent.

      In  order  to  position   itself  to  take   advantage  of  these  growing
opportunities,  the  Company  intends  to  focus  on  increasing  its  strategic
alliances  with  business  partners  which can deliver  additional  distribution
outlets, on-air, on-line, and at retail, for the Company's creative assets. This
strategy  is  intended to increase  the  Company's  profitability  and allow its
properties to be enjoyed by a broader base of viewers,  readers,  and consumers.
There  can be no  assurance,  however,  that  the  Company  will be able to take
advantage  of any of these  opportunities  or that the Company  will achieve any
commercial success as a result thereof.

Competition

      Competition in the television  production,  distribution,  and syndication
industries is intense,  with many  companies  competing  for available  literary
properties,  creative  personnel,  talent,  production  personnel,  distribution
channels and financing, which are essential to create, acquire, develop, produce
and  distribute  product.  The  Company's  competitors  include  motion  picture
studios,  television networks,  and independent television production companies,
which have become  increasingly  active in children's  programming,  and many of
which have substantially greater financial and other resources than the Company.
The Company competes for broadcast commitments and production funding for public
television  projects with  Children's  Television  Workshop,  other  independent
production companies, and projects produced by local public television stations.
As the  Company  attempts  to expand  into  other  areas,  including  commercial
television,  it will face more intense  competition from other, larger entities,
which have substantially greater financial and other resources than the Company,
such as The Walt  Disney  Company,  Fox,  Nickelodeon,  Jim Henson  Productions,
Scholastic Productions,  Cinar, and certain television  syndicators,  production
companies,  and  networks  which  also  seek to  attract  the  children's/family
audience segments with their programming.  In addition,  there is a strong trend
toward  vertical  integration  in  the  business,   with  more  networks  owning
productions, making it more difficult for smaller, independent companies such as
the Company to obtain favorable production financing and distribution terms.

      In  the  licensing  industry,  there  is  strong  competition  from  other
independent  licensing  agencies  and from the in-house  licensing  divisions of
other production companies and motion picture and television studios.

      With respect to its post-production  activities for third parties, if any,
Frame  faces  significant  competition  from many other  independent,  and other
in-house, post-production facilities.

Employees

      As of October 3, 1997, the Company had 40 full-time employees,  20 of whom
are  engaged  in  production  and  related  activities,  and 20 of  whom  are in
administration.   The  Company  has  an  in-house  staff  of  experienced,  core
production personnel as well as researchers and designers.  In order to meet the
staffing  requirements  of a production,  the Company will augment its full-time
creative  staff by  contracting  with  writers,  directors,  technical and other
production  personnel known to the Company,  generally through paymaster service
or loanout companies.

      The Company is party to collective bargaining agreements with the American
Federation of Television and Radio Artists (with respect to The Puzzle Place and
Backyard  Safari)  and the  Writer's  Guild of  America.  Some of the  Company's
current and proposed  business  activities  may be affected by the  existence of
certain collective bargaining agreements with the Directors Guild of America and
the Screen Actors Guild, as many of the performing artists,  writers,  technical
and other  production  personnel  that the  Company may call upon are members of
such unions and/or guilds.


Item 2.     Properties

       The  Company's  principal  production  offices  and  its  post-production
service facility, as well as its executive offices, are located at 601 West 50th
Street,  New York, New York 10019 pursuant to two leases with the same unrelated
party.  The combined  leases  cover  approximately  17,000  square feet and both
expire in  September  1998.  The  aggregate  annual  base rent is  approximately
$217,660 through September 1998.

       The Company  maintains  development  offices at 9454 Wilshire  Boulevard,
Beverly Hills,  California 90212,  pursuant to a lease,  expiring in April 1998,
with an  unrelated  party,  for  approximately  930 square feet at an  aggregate
annual rental of approximately $24,000.

       Strategy's   licensing   activities,   previously   based  in   Westport,
Connecticut  have been  moved  into the  Company's  New York City  offices.  The
Company  is  seeking  to  sublet  the  Westport  offices  or  to  terminate  its
obligations under this lease on terms mutually  agreeable to the Company and the
landlord.  These  premises are currently  subject to a lease,  expiring in March
1999,  with  an  unrelated  party  for  approximately  3,500  square  feet at an
aggregate  annual base rental of approximately  $68,000 plus certain  escalation
clauses. There can be no assurance that the Company will be able to sublet these
offices or to terminate the lease.

       The Company believes that the facilities mentioned above will be adequate
for its needs for the foreseeable future.

Item 3.     Legal Proceedings

       None

Item 4.     Submission of Matters to a Vote of Security Holders

       No matter was submitted to a vote of security  holders  during the fourth
quarter of the fiscal year covered by this report.

<PAGE>

                                 PART II

Item 5.     Market  For   Registrant's   Common   Equity  and   Related
Stockholder Matters

       The  Company's  Common  Stock,  par value  $0.001 per share (the  "Common
Stock"),  is traded in the  over-the-counter  market and quoted on the  National
Association of Securities  Dealers,  Inc.  Automated  Quotation  System National
Market ("NASDAQ") and listed under the symbol "LNCT".

       The table set forth below shows, for the period  indicated,  the high and
low bid  quotations  on NASDAQ for the  Company's  Common  Stock.  These amounts
represent  inter-dealer  prices without retail mark-up,  mark-down or commission
and may not necessarily represent actual transactions.

                                                                             Bid
      Quarter Ended           Type of Security
                                                       High        Low
September 30, 1995            Common Stock            $16.75     $12.50
December 31, 1995             Common Stock            $13.38     $10.63
March 31, 1996                Common Stock            $13.00      $8.88
June 30, 1996                 Common Stock            $14.00      $9.50

September 30, 1996            Common Stock            $12.88      $9.25


December 31, 1996             Common Stock            $10.50      $4.25


March 31, 1997                Common Stock             $7.13      $4.63

June 30, 1997                 Common Stock             $5.13      $2.69



      The Company has not paid any dividends in the two most recent fiscal years
and has no present intention to declare or pay dividends.

       The  Company  estimates  that,  as of  September  24,  1997,  there  were
approximately 201 holders of record of its Common Stock.

       As of April 29, 1997, as amended June 20, 1997, the Company  entered into
an agreement with Robinson Lerer  Montgomery,  LLC ("RLM") pursuant to which RLM
agreed  to  perform  certain  public  relations  and  shareholder  communication
services  to the Company  for a term of one year in  consideration  of a monthly
retainer and warrants to purchase up to 122,093  shares of the Company's  Common
Stock at an exercise price of $3.625 per share,  which warrants are  exercisable
for a period of four years.

      As  of  September  10,  1997,  the  Company  issued  to  Allen  &  Company
Incorporated ("Allen") warrants to purchase up to 100,000 shares of Common Stock
at an exercise price of $3.00 per share,  which warrants are  exercisable  for a
period of five years.  Such warrants were issued in partial  payment for Allen's
fee for  investment  banking  services in  connection  with the  September  1996
investment by DCI in the Company.

      The Company relied on the exemption from registration  provided by Section
4(2) of the Securities Act of 1933, as amended, in effecting these transactions.



Item 6.     Selected Financial Data

       The  selected  consolidated  financial  data with  respect to each of the
Company's fiscal years ended June 30, 1997, 1996, 1995, 1994 and 1993 is derived
from the Company's audited consolidated  financial  statements.  The information
below should be read in conjunction with the consolidated  financial  statements
and related notes thereto, set forth in Item 14 of this Report.

                                Fiscal Year Ended June 30,
                -----------------------------------------------------------
                    1997         1996          1995         1994        1993
Statement of
  Operations
Data:
Revenues       $  3,152,057  $ 9,061,213  $ 17,882,479  $ 8,914,698  $3,670,990
Income (loss)
from
continuing     $(10,078,908) $(3,700,713) $  1,247,499  $    34,874  $ (996,823)
operations (1)
Income (loss)
from
continuing
operations per
common share   $      (1.54) $      (.60) $        .20  $       .01  $     (.25)
(1)
Weighted
average shares
used in           6,538,851    6,177,051     6,365,741    6,154,223   3,944,010
computation
Balance Sheet
  Data:
Total assets   $  9,199,313  $14,388,166  $ 22,395,858  $16,926,998  $5,494,714



(1) Loss  from  continuing  operations  for  fiscal  1997  includes  a charge of
$5,456,180,  or $0.83 per share, for a non-cash  write-down  related to projects
and, for fiscal 1996, includes a charge of $2,650,000, or $0.43 per share, for a
non-cash  write-down  related to a project and a restructuring  charge.  See the
consolidated financial statements and related notes thereto.





<PAGE>

Item 7.    Management's  Discussion and Analysis of Financial Condition
and Results of Operations

      Fiscal 1997 as compared to Fiscal 1996

      Production  and royalty  revenues  for the fiscal year ended June 30, 1997
decreased to $1,943,807 from $6,812,975 for the fiscal year ended June 30, 1996.
This  decrease  is  primarily  the result of  significantly  reduced  production
activity on The Puzzle Place,  Backyard Safari and Reading Rainbow, all of which
was partially  offset by production  activity  beginning in the third quarter of
fiscal  1997 on No Really and a series of  promotional  spots for the  Discovery
Kids programming block.

      Licensing  agent fee  revenues  for the fiscal  year  ended June 30,  1997
decreased to $1,208,250  from $2,248,238 in the fiscal year ended June 30, 1996.
This decrease is primarily the result of reduced revenue  recognition  resulting
from the adjustment of the licensing  terms for several  licensees on The Puzzle
Place and reduced royalties on Sonic The Hedgehog.

      Production  and royalty  expenses  for the fiscal year ended June 30, 1997
decreased to $3,026,577  from  $6,580,666 in the fiscal year ended June 30, 1996
reflecting  primarily  decreased  production and royalty  activity on The Puzzle
Place and reduced  production  activity on Reading Rainbow and Backyard  Safari,
all of which was partially offset by production  activity beginning in the third
quarter of fiscal  1997 on No Really and a series of  promotional  spots for the
Discovery Kids programming block as well as additional development expenses.

      Direct costs of licensing agent  activities for the fiscal year ended June
30, 1997 decreased to $809,823 from $1,175,699 in the fiscal year ended June 30,
1996 primarily as a result of reduced  personnel,  professional fees, travel and
marketing costs.

      General  and  administrative  expenses  for the fiscal year ended June 30,
1997 increased to $4,073,089  from  $2,438,471 in the fiscal year ended June 30,
1996.  This  increase  is  principally  due to  personnel  costs  (approximately
$451,000),  a severance  charge  (approximately  $126,000) and  professional fee
costs  (approximately  $422,000)  as well as a reduction  in project  activities
resulting in costs (approximately $398,000) being reflected as overhead expenses
rather  than  being  absorbed  as part of  project  activities.  Of the  overall
increase,  approximately  $768,000  represents  what the  Company  expects to be
non-recurring  items, and as previously mentioned above, an additional amount of
approximately $398,000 represents costs typically absorbed by projects.

      A non-cash  write-down  related to film and program costs was taken during
the fiscal year ended June 30, 1997  amounting to  approximately  $5.5  million.
This non-cash charge, of which  approximately $2.1 million relates to The Puzzle
Place and  approximately  $3.3 million relates to Backyard Safari,  reflects the
Company's  revision of its estimated  future net royalty  stream with respect to
The  Puzzle  Place and the  Company's  revision  of its  anticipated  production
funding  sources and its  estimated  future net royalty  stream with  respect to
Backyard  Safari.  In both cases,  the Company  accrued for estimated  remaining
project costs.

      With  respect  to The  Puzzle  Place,  the  Company  determined  that  the
licensing relaunch plan developed by the Company in early 1997 did not appear to
have  the  revenue   generating   capabilities   that  the  Company   previously
anticipated,  particularly in the short-term. In addition, unexploited licensing
categories previously identified by the Company with respect to The Puzzle Place
have not met expectations.  Further, internationally,  the Company is finding it
to be a greater challenge than anticipated to distribute the television program,
leading to delays in the building of a licensing campaign.

      With respect to Backyard Safari,  the Company has an airing commitment for
Fall 1997 which does not include an initial license fee.  Because the program is
expected to be aired on a limited  basis,  at least  initially,  the Company has
reduced its expected production revenues. Furthermore, negotiations with certain
venues that were expected to help drive  merchandise sales were not successfully
completed which further reduced previously estimated licensing revenues. Because
the  program  has  only  recently  been  cleared   domestically,   international
exploitation of this property,  at least initially,  is no longer expected to be
significant.

      A write-down  related to a project and a  restructuring  charge during the
fiscal year ended June 30, 1996 amounted to $2,650,000. A project-related charge
in the amount of  $2,500,000  primarily  reflected  revisions  in the  Company's
future  anticipated net royalty stream on The Puzzle Place project and an effort
to  adjust  the  amortization  of film and  program  costs to those  anticipated
revenue  streams.  Additionally,  a downsizing  of staff  involved  with certain
projects resulted in a restructuring  charge of $150,000 including severance and
other benefits paid to terminated employees.

      Management  anticipates  focusing more of the Company's time and resources
on properties  which are currently on the development  slate which may have more
financial  benefit to the Company.  These include  Humongous and programming for
DCI to fill a minimum of one-sixth of the programming on Discovery Kids.

      Interest income,  net for the fiscal year ended June 30, 1997 decreased to
$255,508 from $276,570 in the fiscal year ended June 30, 1996.  This decrease is
primarily  due to a reduced  level of cash  invested  during the current  fiscal
year,  resulting  from  the  Company's   utilization  of  cash  for  production,
development and corporate needs.

      Provision  for income tax was  $19,500  for state and local  taxes for the
fiscal year ended June 30, 1997 compared to $87,900 for state and local taxes in
the fiscal year ended June 30, 1996.

      Minority  interest in the Company's  licensing  activities  for the fiscal
year ended June 30,  1997 was  $101,304  compared to $105,760 in the fiscal year
ended June 30, 1996.

      Net loss for the fiscal  year ended June 30, 1997 was  $10,078,908  ($1.54
per share)  compared  to net loss of  $3,700,713  ($.60 per share) in the fiscal
year ended June 30, 1996 primarily as a result of the combination of all factors
discussed above.  Weighted average shares  outstanding for the fiscal year ended
June 30, 1997  increased  to 6,538,851  from  6,177,051 in the fiscal year ended
June 30, 1996  primarily as a result of the issuance of shares  related to DCI's
purchase of its 6.6% equity stake in the  Company.  Net loss for the fiscal year
ended June 30, 1997 included a charge of $5,456,180,  or $0.83 per share,  for a
non-cash  write-down related to projects and, for the fiscal year ended June 30,
1996,  included  a charge of  $2,650,000,  or $0.43 per  share,  for a  non-cash
write-down related to a project and a restructuring charge.

      Fiscal 1996 as compared to Fiscal 1995

      Production and royalty  related revenue for the fiscal year ended June 30,
1996 decreased to $6,812,975 from  $15,532,607 in the fiscal year ended June 30,
1995 primarily as a result of reduced royalty  revenue,  and to a lesser extent,
lower levels of production  activity  related to The Puzzle Place project during
fiscal  1996.  In fiscal  1995,  revenues  included  over $7  million of initial
copyright holder royalties from licensees of this project.  As of June 30, 1996,
substantially  all of these  licensees  were still in the  process of  recouping
initial  royalty  commitments  from  product  sales.  The Company is not able to
record additional revenues, as copyright holder, until individual licensees have
recouped the royalties previously recognized by the Company.

      Licensing  agent fees for the fiscal  year  ended June 30,  1996  remained
relatively  constant at  $2,248,238  compared to  $2,349,872  in the fiscal year
ended June 30, 1995.

      Production and royalty related expenses for the fiscal year ended June 30,
1996 decreased to $6,580,666 from  $13,550,150 in the fiscal year ended June 30,
1995 primarily related to the decreased level of royalty and production activity
for The Puzzle Place series.  However,  such expenses  represented  an unusually
high  percentage of related  revenues in fiscal 1996  primarily due to copyright
holder expenses on The Puzzle Place project remaining relatively high during the
fiscal 1996 period of licensee recoupment on the project.

      Direct  costs of licensing  activities  for the fiscal year ended June 30,
1996 remained  relatively  constant at $1,175,699  compared to $1,184,345 in the
fiscal year ended June 30, 1995. During fiscal 1996,  increased  personnel costs
were offset by reduced travel costs.

      General  and  administrative  expenses  for the fiscal year ended June 30,
1996 increased to $2,438,471  from  $2,168,827 in the fiscal year ended June 30,
1995. This increase is primarily the result of the hiring of more personnel,  as
well  as  higher  facilities  and  insurance  costs  in  addition  to  increased
depreciation and amortization expense.

      A write-down  related to a project and a  restructuring  charge during the
fiscal year ended June 30, 1996 amounted to $2,650,000.  The Company's  decision
to  record  a  non-cash  project-related  charge  in the  amount  of  $2,500,000
primarily  reflects  revisions in the Company's  future  anticipated net royalty
stream on The Puzzle Place project and an effort to adjust the  amortization  of
film and program costs to those anticipated  revenue streams.  Additionally,  an
overall  decrease in production  activity  during the fiscal year ended June 30,
1996  resulted in a downsizing  of staff  involved  with certain  projects and a
resulting  restructuring  charge  of  $150,000  including  severance  and  other
benefits paid to terminated employees.

      Interest  income for the fiscal  year ended  June 30,  1996  decreased  to
$276,570 from $506,316 in the fiscal year ended June 30, 1995.  This decrease is
primarily  the result of cash being used during the year which  reduced the cash
available for investment during the year.

      Provision  for income  taxes - current  for the fiscal year ended June 30,
1996  increased  to $87,900 from $38,000 in the fiscal year ended June 30, 1995.
This  increase  is  primarily  due to state and  local  income  tax  liabilities
associated with the Company's licensing subsidiary.

      Minority  interest in the  Company's  licensing  activities  decreased  to
$105,760  for the fiscal year ended June 30, 1996 from  $199,974  for the fiscal
year ended June 30, 1995.  This change is the direct result of the change in the
profitability of the licensing activities from year to year.

      Net loss for the fiscal year ended June 30, 1996 was $3,700,713,  or $0.60
per share (which includes the  above-mentioned  write-down  related to a project
and restructuring charge amounting to $2,650,000, or $.43 per share) compared to
net income of $1,247,499,  or $0.20 per share, in the fiscal year ended June 30,
1995 as a result of the  combination of the factors  described  above.  Weighted
average shares  outstanding for the fiscal year ended June 30, 1996 decreased to
6,177,051  from  6,365,741  in the fiscal  year ended  June 30,  1995  primarily
reflecting the exclusion of outstanding  anti-dilutive  stock options during the
fiscal 1996 loss period.

      Liquidity and Capital Resources

      The  Company  had  cash  and  cash  equivalents  as of  June  30,  1997 of
approximately $4.5 million, and no long-term debt. Notwithstanding the Company's
cash position at June 30, 1997 the Company believes that additional funding will
be necessary to sustain the Company's  operations  through the fourth quarter of
fiscal 1998. The Company is actively seeking additional funding and has retained
an investment  banking firm to assist it in this effort.  Among the alternatives
being  considered  by the Company are a sale of an interest in the  Company,  an
acquisition of the Company,  and/or strategic  alliances with industry partners.
The  Company  continues  to  pursue  marketing  efforts  to  generate  cash from
production and other licensing  activities and, where  appropriate,  may explore
turning to account certain non-strategic assets. While there can be no assurance
that any such  transactions  will be available to the Company or, if  available,
that they will be on terms  favorable  to the Company or its  shareholders,  the
Company  is  devoting  considerable  management  and  other  resources  to these
efforts.

      The  Company  also has  taken  steps to  reduce,  where  appropriate,  its
operating expenses.  These steps include relocating Strategy,  its merchandising
and licensing agent subsidiary, from Westport,  Connecticut to the Company's New
York City offices, and certain staff reductions.

      Cash used in operating  activities was approximately  $3.6 million for the
fiscal year ended June 30, 1997,  compared to approximately $3.9 million for the
fiscal year ended June 30, 1996. A net loss of  approximately  $10.1 million for
the fiscal year ended June 30, 1997, including a non-cash write down on projects
of  approximately  $5.5  million  and  depreciation  and other  amortization  of
approximately  $0.4  million,  net  additions  to  film  and  program  costs  of
approximately  $1.6 million,  a decrease in deferred  revenues of  approximately
$1.2  million and a decrease in  participations  payable of  approximately  $0.4
million,  which were  partially  offset by a decrease in accounts  receivable of
approximately $2.2 million, an increase in accounts payable and accrued expenses
of  approximately  $1.4  million  comprises  the  majority  of the cash  used in
operating activities.

      Cash used in investing activities was approximately $55,000 for the fiscal
year ended June 30, 1997, compared to approximately $163,000 for the fiscal year
ended June 30,  1996.  The Company  made  improvements  to its office  space and
purchased computer equipment in the fourth quarter of fiscal 1997.

      Cash provided from financing activities was approximately $4.7 million for
the fiscal  year ended June 30,  1997  compared  to $13,126  for the fiscal year
ended June 30, 1996.  In  September  1996,  DCI  invested $5 million,  which was
partially  offset by costs  relating  to the  transaction,  in return for a 6.6%
equity stake in the Company, and the right to purchase what currently represents
an additional  6.2% equity stake in the Company through the exercise of warrants
at $13 per share.

      As of June  30,  1997,  the  Company  is  continuing  with  the  outreach,
publicity and television rights renewals for the first 65 episodes of The Puzzle
Place.  All the remaining  outreach and publicity  costs and  television  rights
renewal costs through June 30, 1997 were accrued and included in the calculation
of the film and program cost  write-down  related to the  property.  The Company
estimates  that,  after it  receives  the balance of the monies due from CPB and
KCET,  the  Company's  remaining  funding  requirement  will  be  no  more  than
approximately  $0.1 million.  With respect to The Puzzle Place licensing effort,
the Company and KCET have agreed to, and may in the future, adjust the licensing
terms for certain licensees.

      The  Company has  completed  post-production  on the initial  season of 13
episodes of Backyard  Safari which was  partially  funded  through a major grant
from the National Science  Foundation.  The Company estimates that its remaining
funding  requirement  for this  project is  approximately  $0.5 million to cover
primarily outreach and promotion  activities.  All of these remaining costs were
accrued  for and  included  in the  calculation  of the  film and  program  cost
write-down related to the property.

      Management does not expect  inflation to have a significant  impact on the
Company's business.
<PAGE>

CAUTIONARY  STATEMENT FOR PURPOSES OF THE "SAFE  HARBOR"  PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

      The Company  desires to take advantage of the "safe harbor"  provisions of
the Private  Securities  Litigation  Reform Act of 1995 and advises readers that
this report includes  forward-looking  statements that involve known and unknown
risks and uncertainties which may cause the Company's  development and financial
performance in future periods to differ materially from anticipated developments
and  performance  expressed  in any  forward-looking  statements  made by, or on
behalf of, the Company. These risk factors include, among others:

         The  ability of the Company to secure  timely  production
        funding and additional capital financing;

         Risks generally  associated with the production of a television  series
        and other entertainment products, including, without limitation, (a) the
        availability  of  appropriate  time  slots  for  children's  and  family
        entertainment programming;  (b) a serious strike threat that could delay
        production   schedules;   (c)  availability  of  a  star  or  other  key
        individual(s)  associated  with  production of a series,  movie or other
        project;

         Network  and  studio   acceptance  of  television  and  motion  picture
        projects; pricing, purchasing, financing,  operational,  advertising and
        promotional decisions by intermediaries in the distribution channel; and
        the  effects  of  vertical  integration  of  companies  in the media and
        entertainment  industry,  the  effects  of which  could be to reduce the
        opportunities for the Company and independent  producers,  suppliers and
        distributors as a whole;

         The ability of the  Company to  successfully  negotiate  and enter into
        agreements to acquire rights,  develop,  produce,  market and distribute
        entertainment and licensing projects;

         Difficulties or delays in the development,  production and marketing of
        entertainment  projects and/or  licensed  products,  including,  but not
        limited  to, a failure  to  complete  production  of new  projects  when
        anticipated  and  failures  related  to  another  party's  inability  to
        perform,  which could,  for example,  affect the  licensees'  ability to
        manufacture, or consumer demand for, licensed products;

         Less than anticipated consumer acceptance of entertainment  projects or
        licensed  products,  which  could  negatively  affect  the life cycle of
        entertainment projects and licensed products;

         The  effects  of, and changes in,  consumer  tastes,  economic  and tax
        policies,  social and  economic  conditions,  and laws and  regulations,
        including   governmental   action  or  legal  proceedings   relating  to
        intellectual  property rights and intellectual property licenses and the
        adoption of new, or changes in, accounting policies

         Non-renewal of annual  contracts with  production-related
        customers; and

         Underutilization of the Company's post-production  facilities resulting
        from, among other things, production slowdowns or inefficiencies.






        Item 7A. Quantitative and Qualitative  Disclosures about Market
Risk

       Not applicable

Item 8.     Financial Statements and Supplementary Data

       See the consolidated  financial  statements and related notes thereto set
       forth in Item 14 of this Report.

Item 9.     Changes in and Disagreements with Accountants on
Accounting and Financial   Disclosure

       See Current Report on Form 8-K,  filed May 8, 1997  (reporting the change
       in the Company's certifying accountants).


<PAGE>

                               PART III

Item 10.    Directors and Executive Officers of the Registrant

       The following table sets forth  information with respect to the directors
and executive officers of Lancit as of September 26, 1997:

Name               Age   Position
Susan L. Solomon   46    Chairman of the Board of Directors, Chief
                         Executive Officer
Cecily Truett      48    Co-President and Director
Laurence A. Lancit 49    Co-President and Director
Orly  Wiseman      39    Senior Vice President - Production
Gary  Appelbaum    39    Senior Vice President, Chief Financial
                         Officer and Treasurer
Jane M. Abernethy  40    Senior Vice President - Legal and Business
                         Affairs
Noel Resnick       46    Senior Vice President - Development
David Michaels     34    Senior Vice President - Motion Pictures
Irene V. Minett    50    Senior Vice President - Marketing
Marc L. Bailin     45    Secretary and Director
Joseph Kling       66    Director
John R. Costantino 51    Director
Roger C. Faxon     49    Director
A. Robert Towbin   62    Director

       Each of the  directors  serves from the date of  election  until the next
annual meeting of  shareholders  and until a successor is elected and qualified.
Each of the officers serves at the discretion of the Board of Directors from the
date of  election  until the next  annual  meeting of  shareholders  and until a
successor is elected and qualified.

      SUSAN L. SOLOMON,  Chairman and Chief Executive  Officer,  joined
the  Company in April 1997.  In August  1996,  Ms.  Solomon was named a
Senior Vice  President for Corporate  Development  of Sony  Corporation
of America.  Ms.  Solomon  joined Sony in January  1994 to oversee that
company's  investments  in  satellite  and cable radio and to assist in
the  development  of  worldwide  music  video  channels.   Ms.  Solomon
served  as Chief  Executive  Officer,  President  and  founder  of Sony
Worldwide  Networks,  from its  inception  in March 1994.  From October
1992 to  January  1994,  she  served as  Executive  Vice  President  of
McAndrews  and Forbes'  media  holding  subsidiary  The Andrews  Group.
Prior  to  that,  Ms.  Solomon  held  a  number  of  senior   executive
positions  in the media and  entertainment  industry,  including  being
affiliated  with  MMG  Patricof  & Co.  as a senior  investment  banker
specializing in  entertainment  and media.  Ms. Solomon received a B.A.
from New York  University in 1975,  and a J.D.  degree from Rutgers Law
School in 1978,  where she was an editor for the Law  Review.  She is a
member  of the New York  Bar,  and  serves on the Board of the New York
Chapter of the Juvenile Diabetes Foundation.

       CECILY  TRUETT is  co-founder  of the  Company and has served as
Co-President   of  the  Company  since  April  1997.  From  March  1989
through  March 1997,  she served as Chairman of the Board of  Directors
and  Chief  Executive  Officer  of  the  Company.  From  the  Company's
inception in 1979 through  March 1989,  Ms.  Truett served as Executive
Vice  President  of the  Company.  From 1978 to 1979,  Ms.  Truett  was
Project   Director  of  Books  and   Broadcasting   For  Children,   an
international  symposium in  children's  media.  Between 1974 and 1978,
she was an associate  producer/producer  for South Carolina Educational
Television  Network  ("SCETV").  Ms. Truett has served as a Blue Ribbon
panelist  for the  Emmy  Awards  and as a judge  at the  Prix  Jeunesse
International  Awards  for  children's  programs.  Ms.  Truett has also
written an Emmy  Award-winning  episode of Reading Rainbow.  Ms. Truett
is the wife of Laurence A. Lancit.

       LAURENCE  A.  LANCIT  is  co-founder  of the  Company  and has  served as
Co-President  of the  Company  since  April  1997 and as a  Director  since  the
Company's  inception.  He served as President and Chief Operating Officer of the
Company  from its  inception in 1979  through  March 1997,  as well as Treasurer
through June 1995. From 1977 to 1979, he was a producer/director for the Network
for Continuing  Medical  Education,  a major distributor of medical  information
productions  to  hospitals  nationwide.  From  1971 to 1977,  Mr.  Lancit  was a
producer/director  for SCETV, a PBS affiliate.  During this period,  his credits
included Director of "Lowell Thomas  Remembers",  a series of 44 half hours, and
"10 Years of Firing Line" with William F. Buckley Jr. In June 1992,  Mr.  Lancit
received a 1992 Daytime Emmy Award as Best  Director In A Children's  Series for
his efforts on Reading Rainbow. Mr. Lancit is the husband of Cecily Truett.

       ORLY WISEMAN has been supervising  producer of Reading Rainbow since 1982
and in April 1993 was  promoted to Senior Vice  President  Production  from Vice
President - Production.  During her tenure, the series has been the recipient of
every major award in  children's  programming,  including  nine Emmys,  the Prix
Jeunesse  International  and the  Peabody.  Prior to joining  the  Company,  Ms.
Wiseman  served as a producer for  Hearst/ABC  Cable and a variety of commercial
television projects.

       GARY  APPELBAUM,  who joined the Company as Vice President and Controller
in October 1992,  became a Senior Vice President and the Chief Financial Officer
in October 1993. In June 1995,  he became the Treasurer as well.  Mr.  Appelbaum
worked  for  Madison  Square  Garden  Corporation  from  1989 to 1992,  first as
Assistant  Controller and then as Vice President and Controller.  Prior to that,
Mr. Appelbaum worked for Four M Manufacturing as Corporate  Controller from 1988
to  1989.   Mr.   Appelbaum  is  a  CPA  and  received  a  Masters  in  Business
Administration from New York University in 1987.

       JANE M.  ABERNETHY  joined the Company as Vice President - Legal
& Business  Affairs in October  1995 and became  Senior Vice  President
- Legal &  Business  Affairs  in  August  1997.  Ms.  Abernethy  was an
associate with the entertainment law firm of Frankfurt,  Garbus,  Klein
& Selz,  P.C. from April 1991 through  September  1995.  From September
1986 through March 1991, Ms.  Abernethy was a corporate  associate with
the firm of  Kramer,  Levin,  Naftalis & Frankel.  Ms.  Abernethy  is a
graduate  of New York  University  School of Law (J.D.)  and  Princeton
University  (A.B.).  She  serves  on the  Board of  Directors  of Cause
Effective,  Inc., a non-profit  technical  assistance provider to other
non-profit corporations.

       NOEL RESNICK joined the Company in February 1996 as Senior Vice President
-  Development.  Ms. Resnick has been an award winning  independent  producer of
children's  and family  entertainment  since 1986. In addition to developing and
producing  both  live  action  and  animation  programs  for  network  and cable
television,  she produced the critically  acclaimed  film The Little  Kidnappers
(1990 -  recipient  of the Banff  Television  Festival  "Rockie"  Award for Best
Children's  Program  of 1991) as well as the highly  rated  trilogy of Not Quite
Human movies  (1987,  1989,  1992) for Disney.  Ms.  Resnick's  other  executive
producing  credits  include the  animated  ABC  Weekend  Special The Magic Flute
(1994),  ABC  Afterschool   Special  Magical  Makeover  (1994),  CBS  Storybreak
wraparounds  (1993) and the CBS Schoolbreak  Special But He Loves Me (1991). Her
production  of the 100th ABC  Afterschool  Special The Gift of Amazing Grace was
awarded  the 1987 NAACP Image Award for Best  Children's  Special.  From 1976 to
1986,  she  served in  several  executive  positions  at ABC  Television  in the
children's  and  family  programming  arena  where she was  responsible  for the
development  and production of ABC's  Afterschool  Specials,  Weekend  Specials,
primetime family specials and Saturday morning series.

       DAVID MICHAELS,  who joined the Company in March 1996 as Vice President -
Motion  Pictures,  became Senior Vice President - Motion Pictures in March 1997.
From 1994 through February 1996, Mr. Michaels  developed motion picture projects
for Le Bad,  Incorporated,  the production  company for director Russell Mulcahy
(Highlander,  Ricochet,  The Shadow).  Concurrently,  as an independent producer
through his own company,  Good Medicine Films,  Inc., Mr.  Michaels  produced or
executive produced a number of projects including  Ringside,  Not Even Trees and
The Reunion.  From 1992 through 1994, Mr. Michaels  worked as a  writer/producer
with Media,  Incorporated,  a television and commercial  production  company. In
addition, during 1991 to 1995, Mr. Michaels worked as a freelance editor for the
New York Times creating  advertorial  sections for the paper. Prior to that, Mr.
Michaels was a story editor for several series produced by Lorimar-Telepictures.

      IRENE V. MINETT,  who joined the Company in April 1997 as Vice President -
Marketing, became Senior Vice President - Marketing in August 1997. From 1994 to
April  1997,  Ms.  Minett  was  Vice  President  Entertainment  Programming  and
Marketing,  for Sony  Worldwide  Networks,  the radio  division of Sony Corp. of
America,  where she produced  and  marketed a series of live concert  simulcasts
with  the  Arts  &  Entertainment  cable  television  network  and  successfully
developed,   executed  and  managed  the  Entertainment  &  Music  News  Network
programming.  From  1987 to 1994,  Ms.  Minett  was  Director  of  Entertainment
Programming  and Marketing at ABC Radio  Networks where she created and executed
marketing and promotional campaigns as well as image enhancing programming.  She
negotiated, produced and marketed a variety of concert broadcast and promotional
events including the Rolling Stones' 1989 Steel Wheels Tour, the American Top 40
Concert Tour and the series ABC In Concert.

       MARC L. BAILIN has served as  Secretary  and as a Director of the Company
since the Company's inception in 1979. He is a senior partner of Rubin,  Bailin,
Ortoli,  Mayer,  Baker & Fry  LLP  and  has  been  engaged  in the  practice  of
entertainment  and corporate law in New York and California for nineteen  years.
Mr. Bailin has served as the line  production  attorney for the Reading  Rainbow
series since its  creation and has served as Executive  Producer of nine feature
length  action  motion  pictures.  Mr.  Bailin is also a Director and founder of
Virtu Management Group,  Ltd., a business  management and financial affairs firm
for a variety of leading  motion  picture,  prime-time  television  and  daytime
television personalities. Mr. Bailin attended The New York University and Boston
University Schools of Law (J.D.) as well as Columbia  University Graduate School
of Business (M.B.A.)
and Yale College (B.A.).

       JOSEPH  KLING has served as a Director  of the Company  since 1993.  From
1985 to 1989,  Mr. Kling was Vice  Chairman  and  President of View Master Ideal
Group.  From 1989 to 1991,  he was  President  of  Sharon  Industries,  Inc.,  a
manufacturer and distributor of toy products.  Since 1991, he has been President
of PAMSCO Inc., a consulting company.  Mr. Kling is on the Board of Directors of
Russ Berrie & Co., a New York Stock  Exchange-listed  designer  and  marketer of
gift products worldwide.

       JOHN R.  COSTANTINO  has served as a Director  of the  Company  since May
1995. From 1978 to 1984, Mr.  Costantino was a Senior Tax Partner at Touche Ross
& Co. where he served as Managing  Tax Partner of the firm's New York  practice.
From  1984 to  1985,  he was  President  and  Managing  Director  of  Integrated
Acquisition  Corporation.  From  1985 to  1987,  he was  Senior  Executive  Vice
President and Chief Operating Officer of Conair  Corporation.  Since 1987 he has
been a private investor and is presently a principal of Walden Partners Ltd., an
investment partnership.  Mr. Costantino is a member of the Board of Directors of
Brooklyn Bancorp Inc. (the holding company for Crossland  Federal Savings Bank),
a  Trustee  of the  General  Electric  Company's  family  of funds and is also a
director of a number of domestic and international  companies. He is an attorney
and certified public accountant admitted to practice in New York State.

       ROGER C.  FAXON has served as a Director  of the  Company  since
January  1997.  Mr.  Faxon was named  Senior Vice  President - Business
Development   and   Strategy   of  EMI  Music  in  April  1994  and  is
responsible for EMI's  world-wide  planning  process and development of
market  strategies  for  over  seventy  countries.  In June  1990,  Mr.
Faxon was  appointed  Executive  Vice  President  of Sotheby's in North
and South  America and in September  1991 was named  Managing  Director
of  Sotheby's  Europe.  Mr.  Faxon  has a B.A.  degree  from the  Johns
Hopkins University of Baltimore, Maryland.

       A. ROBERT  TOWBIN has served as a Director of the Company  since
May 1997.  Mr. Towbin was named Managing  Director of Unterberg  Harris
in  September  1995.  In  January  1987,  Mr.  Towbin  joined  Shearson
Lehman Hutton,  Inc., now Lehman Brothers,  as a Managing Director.  In
January 1994,  Mr. Towbin was appointed  President and Chief  Executive
Officer of the  Russian-American  Enterprise  Fund.  Mr.  Towbin serves
as  a  Corporate   Director  of  Bradley  Real  Estate,   Inc.,  Gerber
Scientific,   Inc.,   Columbus  New  Millennium   Fund  (London),   K&F
Industries, Inc. and Globalstar Telecommunications.

Section 16(a) Beneficial Ownership Reporting Compliance

      Section  16(a)  of the  Securities  Exchange  Act  of  1934  requires  the
Company's  directors,  executive  officers and persons who own beneficially more
than ten percent of the Company's  outstanding Common Stock to file with the SEC
initial  reports of  beneficial  ownership  and reports of changes in beneficial
ownership of Common Stock and other  securities of the Company on Forms 3, 4 and
5, and to furnish the Company with copies of all such forms they file.  Based on
a review of copies of such reports  furnished to it, the Company  believes  that
all of the Company's  directors and officers  timely filed all reports  required
during the fiscal year ended June 30, 1997,  except that the Forms 3 for each of
Mr.  Faxon,  Ms.  Minett and Mr.  Towbin  were filed more than 10 days after the
occurrence of the events that required their filing;  Mr. Appelbaum filed a late
Form 4 reporting the exercise of an employee  stock option;  and the Forms 5 for
each of Mr. Towbin and Ms.  Scanlan,  reporting only exempt  transactions,  were
filed late.

<PAGE>

Item 11.    Executive Compensation

       The  following  table sets forth the  aggregate  compensation  earned for
services  rendered  during the three fiscal years ended June 30, 1997,  1996 and
1995 to the  Company's  chief  executive  officer and the four other most highly
compensated  executive  officers other than the chief executive  officer to whom
aggregate   annual   compensation   (salary   and   bonus)   exceeded   $100,000
(collectively, the "Named Executive Officers").

                       SUMMARY COMPENSATION TABLE

                               Annual Compensation
                                       Other        Securities         All
                                      Annual        Underlying        Other
Name and  Year     Salary    Bonus  Compensation  Options/SARs(1)  Compensation
Principal Ended      ($)       ($)      ($)          (#)               ($)
Position  June 30,

Susan L.    1997  $108,814 $150,000(2) $49,755(3)   750,000(4)/      $5,625(12)
Solomon                                             255,000(5)
Chief       1996      -        -          -            -               -
Executive   1995      -        -          -            -               -
Officer
and
Chairman
of the
Board of
Directors*

Cecily      1997   $150,000     -       $ 9,661(7)   45,000/0(8)    $10,159(13)
Truett      1996   $146,600 $ 2,000(6)  $19,803(7)     -            $ 6,247(13)
Co-President**1995 $133,300 $10,665(6)  $34,829(7)     -            $ 8,528(13)

Laurence    1997   $150,000     -       $16,870(9)   45,000/0(8)    $12,785(14)
A. Lancit   1996   $146,600 $ 2,000(6)  $28,587(9)     -            $ 7,988(14)
Co-President***1995$133,300 $10,665(6)  $11,750(9)     -            $11,994(14)

Arlene J.   1997   $125,000 $ 1,000(6)     -         15,000/0(11)   $ 3,780(15)
Scanlan     1996   $125,000 $ 2,000(6)     -           -            $ 4,070(15)
President   1995   $125,000 $10,665(6)     -          5,000/0(11)   $ 3,810(15)
of
Strategy****

Noel        1997  $127,083      750(6)  $ 7,200(10)    -            $ 2,898(16)
Resnick     1996  $ 46,875       -      $ 2,700(10)  33,000/0(11)      -
Senior      1995      -          -          -          -               -
Vice
President
Development


*   Became Chief Executive Officer and Chairman of the Board commencing April 1,
    1997.
**  Was  Chief  Executive  Officer  and  Chairman  of the  Board  until
March 31, 1997.
***   Was President and Chief Operating Officer until March 31, 1997.
**** Terminated, effective September 23, 1997
(1)  All options  listed were  granted  pursuant to either the 1990 Stock Option
     Plan (as  amended,  the "1990 Plan") or the 1997 Stock  Incentive  Plan (as
     amended, the "1997 Plan"), as indicated. Stock appreciation rights ("SARs")
     were granted under the Company's 1997 Value Incentive Bonus Program. Option
     exercise  prices and SAR  measuring  values are at or above the fair market
     value of the  Company's  Common  Stock as reported on NASDAQ on the date of
     grant (see  "Executive  Compensation  -  Option/SAR  Grants In Last  Fiscal
     Year", below).
(2)  Ms.   Solomon   earned  a  signing  bonus  of  $150,000  upon  her
     hiring.
(3)  Ms. Solomon received other annual compensation in the form of paid advisory
     services along with a tax  equalization  for  negotiation of her employment
     contract totaling $49,755.
(4)  Consists of (i) options to purchase  255,000 shares of the Company's Common
     Stock granted  pursuant to the 1997 Plan (the "1997 Plan Option"),  subject
     to approval of such plan or such options by the Company's shareholders; and
     (ii)  options to purchase  495,000  shares of the  Company's  Common  Stock
     granted pursuant to the 1990 Plan.
(5)  SARs  are  subject  to   cancellation   upon   approval  by  the  Company's
     shareholders  of either  the 1997 Plan or the 1997  Plan  Option.  Does not
     include  700,000  SARs which were granted on March 31, 1997 and canceled on
     June 20, 1997.
(6)  Officers,  as a group,  under an incentive  bonus plan (the "Bonus  Plan"),
     receive a bonus of 5% of pre-tax income (before bonus),  for a fiscal year,
     provided that (i) pretax income  (before  bonus) for such fiscal year is at
     least $250,000, (ii) net income for such fiscal year exceeds net income for
     the prior  fiscal  year,  and (iii) net  income is at least  $.05 per share
     (adjusted for stock splits and stock dividends),  on a fully diluted basis.
     No amounts  were  accrued  under the Bonus  Plan for fiscal  1997 or fiscal
     1996.  $77,987  was  accrued  under the Bonus Plan for fiscal 1995 and each
     eligible  individual  received $8,665 which was paid in fiscal 1996.  Other
     bonus  amounts  shown are  holiday  bonuses  for which  all  employees  are
     eligible.  The amounts of these bonuses are determined at the discretion of
     management.
(7)  Ms.  Truett  received  other  annual  compensation  in the form of  royalty
     payments as one of the creators of The Puzzle Place of $9,661,  $19,803 and
     $34,830 in fiscal 1997, 1996 and 1995, respectively.
(8)  Granted  pursuant to the 1997 Plan.  Stock  options  granted under the 1997
     Plan are generally exercisable for a period of up to 10 years from the date
     of grant at an exercise  price which is not less than the fair market value
     of the Company's  Common Stock on the date of grant.  Stock options granted
     under the 1997 Plan  generally  vest on or before the first  anniversary of
     the date of grant.  The 1997 Plan is subject to approval  by the  Company's
     shareholders.
(9)  Mr. Lancit  received  other annual  compensation  as follows:  auto expense
     allowance of $16,871,  $15,280 and $11,750 in fiscal  1997,  1996 and 1995,
     respectively; and fees for his services as a director of Reading Rainbow in
     the amount of $13,307 in fiscal 1996.
(10) Ms. Resnick  received other annual  compensation  as follows:  auto expense
     allowance of $7,200 and $2,700 in fiscal 1997 and 1996, respectively.
(11) Granted  pursuant to the 1990 Plan.  Stock  options  granted under the 1990
     Plan are generally exercisable for a period of up to 10 years from the date
     of grant at an exercise  price which is not less than the fair market value
     of the Common  Stock on the date of the grant,  except  that the term of an
     incentive stock option granted under the 1990 Plan to a shareholder  owning
     more than 10% of the outstanding Common Stock may not exceed five years and
     its  exercise  price may not be less than 110% of the fair market  value of
     the Common Stock on the date of the grant.  Stock options granted under the
     1990 Plan generally vest on or before the first  anniversary of the date of
     grant.
(12) Ms. Solomon received other compensation as follows: an automobile allowance
     of $5,625.
(13) Ms. Truett  received other annual  compensation  as follows:  employer paid
     life insurance of $5,660, $1,590, and $4,339 in fiscal 1997, 1996 and 1995,
     respectively; employer 401(k) contributions of $4,500, $4,658 and $4,189 in
     fiscal 1997, 1996 and 1995, respectively.
(14) Mr.  Lancit  received  other  compensation  as follows:  employer paid life
     insurance  of  $8,285,  $3,330 and  $7,362 in fiscal  1997,  1996 and 1995,
     respectively; employer 401(k) contributions of $4,500, $4,657 and $4,632 in
     fiscal 1997, 1996 and 1995, respectively.
(15) Ms.  Scanlan  received  other  compensation  as  follows:  employer  401(k)
     contributions  of $3,780,  $4,070 and $3,810 in fiscal 1997, 1996 and 1995,
     respectively.
(16) Ms.  Resnick  received  other  compensation  as  follows:  employer  401(k)
     contributions of $2,898 in fiscal 1997.

Employment Contracts

      On April 1, 1997,  the Company  entered into an employment  agreement with
Susan L. Solomon in connection with her appointment as Chairman of the Board and
Chief  Executive  Officer,  which  employment  agreement was amended on June 20,
1997.  The agreement has a three-year  term and is subject to renewal such that,
unless and until terminated by either party, the remaining term thereof is never
less than two years.  Annual  base salary  thereunder  is  $350,000,  subject to
increase from year to year by a minimum  amount based on the annual  increase in
the  consumer  price  index,  with  the  actual  amount  of the  increase  being
determined by the Board of Directors.  In addition,  the agreement calls for Ms.
Solomon to  receive,  on an annual  basis,  a  performance  bonus equal to a set
percentage of certain  established,  annually increasing levels of the Company's
pretax income, and additional bonus payments in the event of certain third-party
investments  in the Company.  Ms. Solomon is also entitled to participate in the
Bonus  Plan.  If her  employment  agreement  were  terminated  by  either  party
following  a change in  control,  as defined in the  employment  agreement,  Ms.
Solomon  would be entitled to her base salary and bonus payable  throughout  the
remaining  term of the  agreement.  Pursuant to her  employment  agreement,  Ms.
Solomon also received certain stock options and stock  appreciation  rights (see
"Executive Compensation - Option/SAR Grants in Last Fiscal Year" below).

      In October 1995, the Company entered into employment agreements,  covering
the term from October 1, 1995 to October 1, 1998, with each of Cecily Truett and
Laurence A. Lancit. Each agreement provides for a base annual salary starting at
$150,000 for the first year,  subject to increases in each of the  remaining two
years in a minimum  amount based on the annual  increase in the  consumer  price
index,  with the actual amount of the increase being  determined by the Board of
Directors.  Each of Ms. Truett and Mr. Lancit is eligible to  participate in the
Bonus  Plan.  Following a change in control of the  Company,  as defined in each
such  agreement,  each of Ms. Truett and Mr.  Lancit could  terminate her or his
employment  with the Company for any reason  within one year after the change in
control and certain  provisions of the employment  agreement  relating to future
employment  would  not  apply.  Additionally,  in the  event  that  the  Company
terminates the employment of either of Ms. Truett or Mr. Lancit,  other than for
cause,  within one year  following a change in control,  Ms.  Truett  and/or Mr.
Lancit,  as the case may be, would receive  payment in the amount of the greater
of (i) her or his then existing annual base salary or (ii) the balance of her or
his base salary due for the remaining term of the employment agreement.

      In September  1997,  the Company and Noel Resnick  executed an  employment
agreement,  covering the term from  February 16, 1996 to February 16, 1998.  The
agreement  provides  for an annual base salary of $125,000 in the first year and
at least  $130,000 in the second year. Ms. Resnick is eligible to participate in
the Bonus Plan.


      The  following  table  sets forth all  grants of stock  options  and stock
appreciation  rights  during  the fiscal  year ended June 30,  1997 to the Named
Executive Officers.

                 OPTION/SAR GRANTS IN LAST FISCAL YEAR
                          (Individual Grants)


                                               Potential Realizable Value at
                    Individual Grants             Assumed Annual Rates of
                                               Stock Price Appreciation for
                                                      Option Term(5)

             Number of  % of
             Securities Total
             Underlying Options/
              Options/  SARs     Exercise
             SARs       Granted  or      Expiration
    Name     Granted    to       Base      Date    0%($)    5%($)    10%($)
               (#)(1)   Employees Price
                        in       ($/Sh)(1)
                        Fiscal
                        Year(4)

Susan L.    495,000(2),(9)  41.8%   3.15625 03-31-07     -  1,296,745  5,921,282
Solomon,    255,000(8),(10) 21.6%   3.15625 03-31-07(6)  -    668,020  3,050,358
Chief       255,000(3),(11) 21.6%   3.15625 03-31-07(7)  -    668,020  3,050,358
Executive
Officer
and
Chairman
of the
Board*

Cecily
Truett,     45,000(3),(12)   3.8%   3.15625  06-20-07    -     117,886   538,298
Co-President**

Laurence
A. Lancit,  45,000(3),(12)   3.8%   3.15625  06-20-07    -     117,886   538,298
Co-President***

Arlene J.
Scanlan,    15,000(2),(13)   1.3%   3.15625  12-23-97(13)-      39,295   179,432
President,
The
Strategy
Licensing
Company,
Inc.****

Noel
Resnick,    33,000(2),(14)   2.8%    3.15625  06-20-07   -      86,450   394,752
Senior
Vice
President-Development

*   Became Chief Executive Officer and Chairman of the Board commencing April 1,
    1997.
**  Was Chief Executive Officer and Chairman of the Board until March 31, 1997.
*** Was President and Chief Operating Officer until March 31, 1997.
**** Terminated, effective September 23, 1997
(1) All options  listed were  granted  pursuant to either the 1990 Plan
    or the 1997 Plan,  as indicated.  Stock  appreciation  rights  ("SARs") were
    granted under the  Company's  1997 Value  Incentive  Bonus  Program.  Option
    exercise prices and SAR measuring  values are at the average of the last bid
    and the last ask prices of the Company's  Common Stock as reported on NASDAQ
    on the date of grant.
(2) Granted pursuant to the 1990 Plan. Stock options granted under the 1990 Plan
    are  generally  exercisable  for a period of up to 10 years from the date of
    grant at an exercise  price which is not less than the fair market  value of
    the  Common  Stock  on the  date of the  grant,  except  that the term of an
    incentive  stock option granted under the 1990 Plan to a shareholder  owning
    more than 10% of the outstanding  Common Stock of the Company may not exceed
    five  years  and its  exercise  price  may not be less than 110% of the fair
    market  value of the Common  Stock on the date of the grant.  Stock  options
    granted  under  the  1990  Plan  generally  vest  on  or  before  the  first
    anniversary  of the date of grant.  The 1990 Plan  provides for  accelerated
    vesting upon the occurrence of certain  transactions  which would  otherwise
    cause such options to be extinguished.
(3) Granted pursuant to the 1997 Plan. Stock options granted under the 1997 Plan
    are  generally  exercisable  for a period of up to 10 years from the date of
    grant at an exercise  price which is not less than the fair market  value of
    the Company's Common Stock on the date of grant. Stock options granted under
    the 1997 Plan generally vest on or before the first  anniversary of the date
    of  grant.  Options  granted  under the 1997 Plan  provide  for  accelerated
    vesting upon the occurrence of certain  transactions  which would  otherwise
    extinguish  such  options.  The 1997  Plan is  subject  to  approval  by the
    Company's shareholders.
(4) Based on the total number of stock options and SARs granted to all employees
    and  directors of the Company under the  Company's  various stock  incentive
    plans  during the fiscal year ended June 30,  1997,  or a total of 1,182,350
    rights.  Excludes (i) 255,000 rights granted to Ms.  Solomon,  as either the
    255,000  SARs or the  1997  Plan  Option  will be  canceled  on or  prior to
    December 31, 1997 (see Notes 6 and 7 below) and (ii) 700,000 SARs which were
    granted to Ms. Solomon on March 31, 1997 and were canceled on June 20, 1997.
(5) The dollar amounts shown under these columns are the results of calculations
    at 0% and at the 5% and 10% rates set by the SEC for the maximum option term
    and are not intended to, and may not  accurately,  forecast  possible future
    appreciation, if any, in the price of the Company's Common Stock.
(6) Subject to  cancellation  if either the 1997 Plan Option or the 1997 Plan is
    approved by the  shareholders  of the  Company on or prior to  December  31,
    1997.
(7) Subject  to  cancellation  if the 1997  Plan  Option or the 1997 Plan is not
    approved by the  shareholders  of the  Company on or prior to  December  31,
    1997.
(8) SARs granted  pursuant to the Company's 1997 Value  Incentive  Bonus Program
    (as amended,  the  "Program").  SARs granted under the Program are generally
    convertible  for a  period  of up to 10  years  from  the date of grant at a
    measuring price equal to the fair market value of the Company's Common Stock
    on the date of grant.
 (9)Options  become  exercisable on the earlier to occur of (i) October 1, 1997,
    or (ii) a change in  control  of the  Company.  Options  granted  in partial
    replacement of the cancellation of 700,000 SARs (see Note 10 below).
(10)SARs become payable upon  conversion in cash or common stock,  at the option
    of the  Company,  upon the  earliest  to occur  of (i) a  meeting,  which is
    required to be held no later than  December 31, 1997, at which the Company's
    shareholders  decline  to  approve  or ratify the 1997 Plan or the 1997 Plan
    Option, (ii) December 31, 1997, or (iii) a change in control of the Company.
    Upon approval or ratification by the  shareholders on or before December 31,
    1997 of  either  the 1997  Plan or the 1997 Plan  Option,  the SARs  granted
    pursuant to the Program  will be  canceled.  SARs remain  convertible  until
    March 31, 2007, unless earlier canceled in accordance with their terms. Does
    not include 700,000 SARs which were granted to Ms. Solomon on March 31, 1997
    and canceled on June 20, 1997
(11)Options  become  exercisable on the later to occur of (i) October 1, 1997 or
    (ii) the date the 1997 Plan or the 1997 Plan  Option is approved or ratified
    by the  Company's  shareholders  at the meeting  described in Note 10 above;
    provided  that if the 1997 Plan Option or the 1997 Plan has been approved or
    ratified by the  Company's  shareholders  and if the 1997 Plan Option is not
    already exercisable in accordance with its terms, the 1997 Plan Option shall
    become exercisable upon a change in control of the Company.
(12)22,500  options  became  exercisable  on the date of  grant;  the  remaining
    22,500 options become exercisable on June 20, 1998.
(13)Granted  in  connection  with  the  Company's  stock  option  "rejuvenation"
    program  (the  "Rejuvenation"),  pursuant  to  which  each  employee  of the
    Company,  including  executive  officers,  could  elect to forfeit the stock
    options  held by him or her which were  previously  granted  pursuant to the
    1990 Plan,  in  exchange  for an option to purchase  one-half  the number of
    shares of Common Stock of the Company as was  represented  by the options so
    forfeited.  In each instance,  the vesting  schedule of the forfeited option
    was retained, but a new exercise price equal to the fair market value of the
    Company's  Common  Stock on June 20,  1997 and a new  expiration  date of 10
    years from June 20, 1997 was assigned.  Options  became  exercisable  on the
    date of grant. Due to Ms. Scanlan's  termination,  these options will expire
    on December 23, 1997.
(14)Granted pursuant to the Rejuvenation.  15,000 options became  exercisable on
    the date of grant;  7,500 become  exercisable  on February  15, 1998;  3,500
    options  become  exercisable  on the  earlier  to occur  of (i) the  Company
    meeting certain  performance  goals or (ii) January 17, 2006;  7,500 options
    become  exercisable  on the  earlier  to  occur of (i) the  Company  meeting
    certain performance goals or (ii) February 9, 2007.

      The  following  table  sets  forth  information  with  respect  to options
exercised by each of the Named  Executive  Officers during the fiscal year ended
June 30,  1997 and the number and value of their  unexercised  options and stock
appreciation rights as of June 30, 1997.

          AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                 AND FISCAL YEAR-END OPTION/SAR VALUES

                               Number of Securities       Value of
                                    Underlying           Unexercised
                                   Unexercised          in-the-Money
                                 Options/SARs at        Options/SARs
                               Fiscal Year End (#)     at Fiscal Year
                                                         End ($)(1)



              Shares   Value
              Acquired Realized                                          Unexer-
    Name      on        ($)   Exercisable  Unexercisable  Exercisable    cisable
              Exercise
                (#)

Susan L.         --      -- 495,000/255,000  255,000/0            --        --
Solomon,                           --
Chief
Executive
Officer and
Chairman of
the Board*

Cecily           --      --  22,500/0         22,500/0            --        --
Truett,
Co-President**

Laurence A.      --      --  22,500/0         22,500/0            --        --
Lancit,
Co-President***

Arlene J.        --      --  15,000/0            --               --        --
Scanlan,
President,
The Strategy
Licensing
Company,
Inc.****

Noel             --      --  15,000/0          18,000/0           --        --
Resnick,
Senior Vice
President-Development

*     Became  Chief  Executive   Officer  and  Chairman  of  the  Board
   commencing April 1, 1997.
** Was Chief Executive Officer and Chairman of the Board until March 31, 1997.
***   Was President and Chief Operating Officer until March 31, 1997.
**** Terminated, effective September 23, 1997.
(1)    There  were  no  "in-the-money"  options/SARs  at the  Company's
    fiscal year-end, based on the closing price of the Company's Common Stock on
    NASDAQ on June 30,  1997,  the last day of trading in the  Company's  fiscal
    year ended June 30, 1997, or $3.125.

Compensation Committee Interlocks and Insider Participation

         Laurence A. Lancit served on the Compensation  Advisory Committee which
administered the 1990 Plan through October 1996, who, during that period was the
Company's  President and Chief Operating  Officer.  Each of Cecily Truett,  who,
during that period, was the Company's Chairman of the Board, and Marc L. Bailin,
the Company's Secretary, also served on the Compensation Advisory Committee. Mr.
Bailin also served on the Compensation  Committee.  No executive  officer of the
Company served on the board of directors or compensation committee of any entity
which has one or more  executive  officers  serving as a member of the Company's
Board of Directors, Compensation Committee or Compensation Advisory Committee.




Compensation of Directors

      Directors  who are not also  employed  by the  Company  presently  receive
$1,500 semi-annually, as compensation for serving on the Board.

      In addition,  in December 1994, the Company adopted the 1994  Non-Employee
Director   Non-Qualified  Stock  Option  Plan  (as  amended,  the  "1994  Plan")
authorizing  the issuance of options for the purchase of a total of up to 45,000
shares of the Company's Common Stock. Only non-employee directors of the Company
are eligible to  participate  in the 1994 Plan. The 1994 Plan provides that each
non-employee  director shall be granted  options to purchase 3,000 shares of the
Company's Common Stock on the day of his or her initial appointment to the Board
of Directors and annually  thereafter on the day of his or her re-election.  The
exercise price per share for each option granted is the fair market value of the
Company's Common Stock on the date of grant.  Each option is exercisable in full
one year from the date of grant and  expires  no later  than ten (10) years from
the date of grant.  The 1994 Plan  provides  for  accelerated  vesting  upon the
occurrence of certain  transactions  which would otherwise cause such options to
be extinguished.

      In addition to the options  automatically  granted under the 1994 Plan, on
June 20,  1997,  each of Messrs.  Bailin,  Costantino,  Faxon,  Kling and Towbin
received an option to purchase 5,000 shares of the Company's  Common Stock at an
exercise price of $3.15625 under the Company's 1997 Plan, subject to approval of
the 1997 Plan by the Company's shareholders.  Each option is exercisable in full
one year from the date of grant and  expires  no later  than ten (10) years from
the date of grant.  Options  granted under the 1997 Plan provide for accelerated
vesting upon the occurrence of certain  transactions which would otherwise cause
such options to be extinguished.




<PAGE>

Item 12.    Security   Ownership  of  Certain   Beneficial  Owners  and
Management

       The  following  table sets forth,  as of October 3, 1997 the ownership of
the Company's  Common Stock held by (i) each person who owns of record or who is
known by the Company to own beneficially  more than 5% of such stock,  (ii) each
of the directors of the Company,  (iii) each of the Named Executive Officers and
(iv) all of the Company's  directors and  executive  officers as a group.  As of
such  date,  the  Company  had  6,634,750  shares of  Common  Stock  issued  and
outstanding.  The number of shares and the percentage of the class  beneficially
owned by the  persons  named in the table  and by all  directors  and  executive
officers as a group is presented in accordance with Rule 13d-3 of the Securities
Exchange Act of 1934, as amended,  and includes,  in addition to shares actually
issued and  outstanding,  unissued  shares  which are subject to  issuance  upon
exercise of options or warrants which are or will become  exercisable  within 60
days.  Except as otherwise  indicated,  the persons named in the table have sole
voting and dispositive power with respect to all securities listed.


SECURITY OWNERSHIP
                                                                         Percent
                                                 Amount and Nature  of Class
                                                   of Beneficial       (%)
                                                     Ownership
Name and Address of Beneficial Owners
Discovery Communications, Inc.
7700 Wisconsin Avenue
Bethesda, Maryland                                                     11.9%
20814............................................876,232.(1)...

Directors and Executive Officers (2)
Laurence A. Lancit............................                          7.8%
                                                 575,613 (3)
Cecily Truett.................................                          7.8%
                                                 575,613 (3)
Susan L. Solomon..............................
                                                 495,000 (4)            6.7%
Arlene J. Scanlan**...........................                           *
                                                 55,000 (5)
Noel Resnick..................................                           *
                                                 15,000 (6)
John R. Costantino............................                           *
                                                 29,400 (7)
Marc L. Bailin................................                           *
                                                 27,000 (8)
Joseph Kling..................................                           *
                                                 6,000 (9)
Roger C.                                                                 *
Faxon............................................-.(10)........................
A. Robert                                                                *
Towbin...........................................-.(11)......................
All Directors and Executive Officers as a Group                        25.4%
(16 persons)..................................   1,876,906 (12)

*     Less than 1%
**    Terminated, effective September 23, 1997
(1)   Includes 438,116 shares which Discovery Communications, Inc. has the right
      to acquire  upon the  exercise  of  currently  exercisable  warrants.  The
      foregoing  information  is derived  from the  Statement on Schedule 13D of
      Discovery Communications, Inc., filed with the SEC on September 27, 1996.
(2)   The address for each of the directors and executive officers is c/o Lancit
      Media Entertainment, Ltd., 601 West 50th Street, New
      York, New York 10019.
(3)   Laurence A. Lancit and Cecily  Truett are husband and wife.  The number of
      shares shown for each of them includes (i) 553,113  shares of Common Stock
      held by each of them individually,  and (ii) 22,500 shares of Common Stock
      which are the subject of currently  exercisable stock options.  The number
      of  shares  shown  for  each of them  excludes  (i)  2,932  held by  their
      children,  as to which each disclaims  beneficial  ownership,  (ii) 40,080
      shares held by a trust for the benefit of their children, as to which each
      disclaims beneficial  ownership,  and (iii) 553,113 shares of Common Stock
      held by  each  other's  spouse,  as to  which  each  disclaims  beneficial
      ownership, and (iv) 22,500 shares of Common Stock which are the subject of
      options  which  are  not  currently   exercisable   and  will  not  become
      exercisable within 60 days.
(4)   Includes  495,000  shares which are the subject of options  granted to Ms.
      Solomon which are currently exercisable.  Excludes (i)255,000 shares which
      are the subject of options  granted to Ms. Solomon which are not currently
      exercisable and will not become exercisable within 60 days and are subject
      to ratification by the Company's  shareholders,  and (ii) any shares which
      may be issuable,  at the option of the  Company,  upon the  conversion  of
      certain stock appreciation rights which were granted to Ms. Solomon.
(5)   Includes  15,000  shares of Common  Stock which are the subject of options
      granted to Ms. Scanlan which are currently exercisable.
(6)   Includes  15,000  shares of Common  Stock which are the subject of options
      granted to Ms. Resnick which are currently  exercisable.  Excludes  18,000
      shares of Common  Stock  which are the  subject of options  granted to Ms.
      Resnick  which  are  not  currently   exercisable   and  will  not  become
      exercisable within 60 days.
(7)   Includes  (i) 13,400  shares  which  Walden  Partners  Ltd.,  of which Mr.
      Costantino is a vice president,  director and principal,  has the right to
      acquire upon the exercise of currently exercisable stock options, and (ii)
      6,000  shares  which  Mr.  Costantino  has the right to  acquire  upon the
      exercise of currently exercisable stock options.  Excludes 8,000 shares of
      Common  Stock which are the subject of options  granted to Mr.  Costantino
      which are not currently exercisable and will not become exercisable within
      60 days.
(8)   Includes  6,000 shares which Mr.  Bailin has the right to acquire upon the
      exercise of  currently  exercisable  stock  options.  Excludes  (i) 15,000
      shares owned by Marie Valdes, M.D., wife of Mr. Bailin, as to which shares
      Mr. Bailin  disclaims any  beneficial  interest,  and (ii) 8,000 shares of
      Common Stock which are the subject of options  granted to Mr. Bailin which
      are not currently  exercisable and will not become  exercisable  within 60
      days.
(9)   Includes  6,000  shares of Common  Stock which Mr.  Kling has the right to
      acquire upon the exercise of currently exercisable stock options. Excludes
      8,000 shares of Common  Stock which are the subject of options  granted to
      Mr.  Kling  which  are not  currently  exercisable  and  will  not  become
      exercisable within 60 days.
(10)  Excludes  8,000  shares of Common  Stock  which are the subject of options
      granted to Mr.  Faxon  which are not  currently  exercisable  and will not
      become exercisable within 60 days.
(11)  Excludes  8,000  shares of Common  Stock  which are the subject of options
      granted to Mr.  Towbin which are not  currently  exercisable  and will not
      become exercisable within 60 days.
(12)  Includes  an  aggregate  of  733,400  shares  of  Common  Stock  which the
      executive  officers  and  directors  have the  right to  acquire  upon the
      exercise of currently  exercisable  stock  options or stock  options which
      become exercisable within 60 days, including 15,000 shares of Common Stock
      subject  to  stock  options  held by Ms.  Scanlan,  whose  employment  was
      terminated  effective September 23, 1997. Excludes an aggregate of 888,500
      shares which are the subject of options granted to the executive  officers
      and  directors  which are not  currently  exercisable  and will not become
      exercisable within 60 days.

Item 13.    Certain Relationships and Related Transactions

       The Company's corporate secretary,  Marc L. Bailin, is a partner in Rubin
Bailin  Ortoli  Mayer Baker & Fry LLP.  The Company paid legal fees of $195,040,
$121,157,  and  $135,140 to Rubin  Bailin  Ortoli  Mayer Baker & Fry LLP and its
predecessor  firm,  for the fiscal  years ended June 30, 1997,  1996,  and 1995,
respectively.

       The Company had entered into an arrangement  with Walden  Partners,  Ltd.
("Walden"),  pursuant to which  Walden  provided  the Company  with  regular and
customary consulting advice involving matters relating to the Company's internal
operations,  corporate transactions and financial markets. The arrangement had a
term  commencing  October 20, 1995 and ending October 31, 1996.  Pursuant to the
arrangement, the Company paid Walden a monthly fee of $833 and granted Walden an
option  under the 1990 Plan to purchase  13,400  shares of Common  Stock with an
exercise  price  equal to the fair  market  value of the  Common  Stock on,  and
expiring  five  years  from,  the date of grant.  John R.  Costantino  is a vice
president, director and principal of Walden.

      Simultaneously  with the equity purchase  transaction  between DCI and the
Company  on  September  25,  1996,  the  Company  entered  into a  non-exclusive
Production  Output  Agreement  pursuant  to which the Company  will  develop and
produce  children's  programming for Discovery  Channel's new Sunday  children's
block.  A new  agreement  was  entered  into in May 1997,  pursuant to which the
Company  will own the  copyright  for and expects to derive  licensing  revenues
from,  programming  it  produces  for DCI (a minimum of  one-sixth  of the total
"Discovery Kids"  programming  block).  The value of the agreement may vary on a
case-by-case basis.

      In March 1997, the Company entered into an employment agreement with David
Michaels,  pursuant to which Mr.  Michaels  would serve as the Company's  Senior
Vice President - Motion Pictures.  Mr. Michaels currently has, and will continue
to have,  a  significant  ownership  interest  in the motion  picture/television
production  company Good  Medicine  Films,  Inc.  ("GMF") Under the terms of the
employment agreement,  GMF granted to the Company first negotiation and matching
rights with respect to certain  projects  under  development by GMF. The Company
has acquired options to certain properties held by GMF. The dollar value of such
rights may vary on a case-by-case basis.

      In October  1997,  the Company  entered into an  agreement  with Arlene J.
Scanlan,  pursuant  to which  the  Company  acquired  the  remaining  15% of the
outstanding  shares of the capital stock of Strategy held by her.  Additionally,
Ms.  Scanlan's  employment  with  Strategy  and the Company was  terminated.  In
consideration  of the  foregoing,  the Company paid Ms.  Scanlan an aggregate of
$30,788 and has released Ms.  Scanlan from certain  restrictions  contained in a
covenant  not to compete  with respect to  specified  properties  and  entities.
<PAGE>

                                PART IV

Item 14. Exhibits,  Financial  Statement  Schedules and Reports on Form
8-K

(a)(1)
Financial Statements                                          Page

         Report of Independent Auditors                       F-2

         Report of Predecessor Independent Auditors           F-2a

         Consolidated Balance Sheets - June 30, 1997 and 1996 F-3

         Consolidated Statements of Operations - Years Ended
           June 30, 1997, 1996 and 1995                       F-4

         Consolidated  Statements  of  Stockholders'  Equity Period from July 1,
           1994 through June 30, 1997 F-5

         Consolidated Statements of Cash Flows - Years Ended
           June 30, 1997, 1996 and 1995                       F-6

         Notes to Consolidated Financial Statements           F-7

(a)(2)   Financial Statement Schedules

         Report of Independent Auditors                       F-19

         Schedule II - Valuation and Qualifying Accounts      F-20

(a)(3)   Exhibits

 3.1     Certificate   of   Incorporation   of  the   Registrant,   as   amended
         (incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly
         Report on Form 10-Q for the fiscal quarter ended December 31, 1995)

 3.2     By-Laws  of  the  Registrant,  as  amended (filed herewith)

 4.1     Specimen Certificate evidencing shares of Common Stock (incorporated by
         reference to Exhibit 4.1 of the Registrant's  Registration Statement on
         Form S-18 (File No. 33-40701-NY))

 4.2     Form of Warrant  issued to Robinson  Lerer &  Montgomery,  LLC
         (filed herewith)

 4.3     Form of  Warrant  issued  to  Allen  &  Company,  Inc.  (filed
         herewith)

 4.4     Form of Stock Purchase Warrant issued to Discovery Communications, Inc.
         (see Exhibit A to Stock Purchase  Agreement,  dated as of September 25,
         1996, between the Registrant and Discovery Communications,  Inc., filed
         as Exhibit 10.19 to this Annual Report on Form 10-K)

 10.1    Employment  Agreement,  dated  as  of  October  1,  1995,  between  the
         Registrant and Laurence A. Lancit (incorporated by reference to Exhibit
         10.1 to the Registrant's Annual Report on Form 10-K for the fiscal year
         ended June 30, 1996)

 10.2    Employment  Agreement,  dated  as  of  October  1,  1995,  between  the
         Registrant and Cecily Truett (incorporated by reference to Exhibit 10.2
         to the  Registrant's  Annual  Report on Form 10-K for the  fiscal  year
         ended June 30, 1996)

 10.3    Employment  Agreement,   dated  as  of  March  31,  1997,  between  the
         Registrant  and Susan  Solomon  (incorporated  by  reference to Exhibit
         10.19 to the Registrant's  Quarterly Report on Form 10-Q for the fiscal
         quarter ended March 31, 1997)

 10.4    Amendment No. 1, dated as of June 20, 1997, to the  Employment
         Agreement,  dated as of March 31, 1997, between the Registrant
         and Susan Solomon (filed herewith)

 10.5    Employment  Agreement,  dated as of  February  16,  1996,  between  the
         Registrant and Noel Resnick (filed herewith)

 10.6    Employment  Agreement,  dated as of  February  25,  1997,  between  the
         Registrant  and David  Michaels  (incorporated  by reference to Exhibit
         10.20 to the Registrant's  Quarterly Report on Form 10-Q for the fiscal
         quarter ended March 31, 1997)

 10.7    Employment Agreement, dated as of June 16, 1997, between the Registrant
         and Jane M. Abernethy (filed herewith)

 10.8    Employment  Agreement,   dated  as  of  April  14,  1997,  between  the
         Registrant and Irene V. Minett (filed herewith)

 10.9    Executive  Stock  Option Plan  (incorporated  by  reference to
         Exhibit  4(a) to the  Registrant's  Registration  Statement on
         Form S-8 (File No. 33-95582))

 10.10   1990 Stock  Option  Plan,  as amended  (incorporated  by  reference  to
         Exhibit 10.12 of the Registrant's Quarterly Report on From 10-Q for the
         fiscal quarter ended December 31, 1995)

 10.11   1994 Non-Employee Director  Non-Qualified Stock Option Plan, as amended
         (incorporated  by  reference  to  Exhibit  10.13  of  the  Registrant's
         Quarterly Report on From 10-Q for the fiscal quarter ended December 31,
         1995)

 10.12   Incentive Bonus Plan (see the description thereof appearing in Footnote
         (6) to the Summary Compensation Table)

 10.13   1997 Incentive Stock Plan (filed herewith)

 10.14   1997  Value  Incentive  Bonus  Program  (see  the  description  thereof
         appearing in Schedule A to Amendment  No. 1, dated as of June 20, 1997,
         to the Employment  Agreement,  dated as of March 31, 1997,  between the
         Registrant  and Susan  Solomon,  filed as Exhibit  10.4 to this  Annual
         Report on Form 10-K)

 10.15   Leases  for  premises  at 601 West  50th  Street,  New  York,  New York
         (incorporated   by  reference  to  Exhibit  10.1  of  the  Registrant's
         Registration Statement on Form S-18 (File No.
         33-40701-NY))

 10.16   Fifth  Amendment  of  Lease  for  premises  at 601  West  50th
         Street, New York, New York (filed herewith)

 10.17   Agreement,   dated  as  of  October  10,  1997,  among  Arlene
         Scanlan,  the Registrant,  and The Strategy Licensing Company,
         Inc. (filed herewith).

 10.18   Mutual Separation Agreement, dated May 20, 1997, between the Registrant
         and  Britten & Stone  and Gary  Stein  (incorporated  by  reference  to
         Exhibit 10.21 to the Registrant's Quarterly Report on Form 10-Q for the
         fiscal quarter ended March 31, 1997)

 10.19   Stock Purchase  Agreement,  dated as of September 25, 1996, between the
         Registrant  and  Discovery   Communications,   Inc.   (incorporated  by
         reference to Exhibit  10.19 to the  Registrant's  Annual Report on Form
         10-K/A for the fiscal year ended June 30, 1996)

 10.20   Distribution  Agreement,  dated  May  19,  1997,  between  the
         Registrant and Discovery Communications, Inc. (filed herewith)(Portions
         of this exhibit have been omitted pursuant to a request for 
         confidential treatment.)

 11      Computation of Earnings Per Share (filed herewith)

 21      Subsidiaries of the Registrant (incorporated by reference to Exhibit 21
         of the  Registrant's  Annual  Report on Form 10-K for the  fiscal  year
         ended June 30, 1995)

 23.1    Consent of Feldman Radin & Co., P.C. (filed herewith)

 23.2    Consent of Ernst & Young LLP (filed herewith)

 27      Financial Data Schedule (electronic filing only)

(b)      Reports on Form 8-K

         Current Report on Form 8-K, filed May 8, 1997  (reporting the change in
         the Company's certifying accountants)

<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.

Dated:  October 14, 1997
                                       LANCIT MEDIA ENTERTAINMENT, LTD.

                             By: /s/ GARY APPELBAUM
                                                      Gary Appelbaum
                                                      Senior Vice
President, Chief
                                                      Financial
Officer and Treasurer

   Pursuant to the  requirements  of the Securities  Exchange Act of 1934,  this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant in the capacities and on the date indicated.

        Name                     Title(s)                   Date
----------------------  ----------------------------  ------------------
                        Chairman of the Board,
                        Chief Executive Officer
                        and Director                  October 14, 1997
                        (Principal Executive
 /s/ SUSAN L. SOLOMON   Officer)
----------------------
Susan L. Solomon
 /s/ LAURENCE A. LANCIT Co-President and Director     October 14, 1997
----------------------
Laurence A. Lancit
 /s/ CECILY TRUETT      Co-President and Director     October 14, 1997
----------------------
Cecily Truett

                        Senior Vice President,        October 14, 1997
                        Chief Financial Officer
                        and Treasurer (Principal
                        Financial and Accounting
/s/ GARY APPELBAUM      Officer)
----------------------
Gary Appelbaum
 /s/ MARC L. BAILIN     Secretary and Director        October 14, 1997
----------------------
Marc L. Bailin
 /s/ JOSEPH KLING       Director                      October 14, 1997
----------------------
Joseph Kling
/s/ JOHN R. COSTANTINO  Director                      October 14, 1997
----------------------
John R. Costantino
/s/ ROGER C. FAXON      Director                      October 14, 1997
----------------------
Roger C. Faxon
/s/ A. ROBERT TOWBIN    Director                      October 14, 1997
----------------------
A. Robert Towbin
<PAGE>





                                                           Exhibit 23.1











           CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


   We hereby  consent  to the  incorporation  by  reference  in (i) the
Registration  Statement  on Form S-3, as amended  (File No.  33-70856),
(ii) the  Registration  Statement  on Form  S-1  (File  No.  33-48236),
(iii) the  Registration  Statement  on Form S-8  (File  No.  33-53472),
(iv) the Registration  Statement on Form S-8 (File No.  33-77834),  (v)
the Registration  Statement on Form S-8 (File No.  33-90506),  (vi) the
Registration  Statement on Form S-8 (File No. 33-80447),  and (vii) the
Registration  Statement  on Form S-8  (File  No.  33-80449)  of  Lancit
Media  Entertainment,   Ltd.  (the  "Registrant")  F/K/A  Lancit  Media
Productions,  Ltd. of our report  dated  August 28, 1996  appearing  in
this Annual Report on Form 10-K of the  Registrant  for the fiscal year
ended June 30, 1996 and 1995.




 /s/ FELDMAN RADIN AND CO., P.C.

Feldman Radin & Co,, PC

Certified Public Accountants


New York, New York
October 7, 1997

<PAGE>





                                                           Exhibit 23.2








                    Consent of Independent Auditors



      We  hereby  consent  to  the   incorporation   by  reference  in  (i)  the
Registration  Statement on Form S-3, as amended  (File No.  33-70856),  (ii) the
Registration  Statement on Form S-1 (File No. 33-48236),  (iii) the Registration
Statements on Form S-8 (File Nos.  33-53472,  33-77834,  33-90506,  33-80447 and
33-80449) of Lancit Media Entertainment,  Ltd. (the "Registrant") of our reports
dated October 13, 1997, with respect to the  consolidated  financial  statements
and schedule of the  Registrant  included in this Annual  Report (Form 10-K) for
the year ended June 30, 1997.



/s/ ERNST & YOUNG, LLP

Ernst & Young, LLP

Certified Public Accountants




New York, New York
October 13, 1997



<PAGE>


           LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES

              INDEX TO CONSOLIDATED FINANCIAL STATEMENTS






                                                                            PAGE
                                                            NUMBER

REPORT OF INDEPENDENT AUDITORS                                F-2

REPORT OF PREDECESSOR INDEPENDENT AUDITORS                    F-2a

CONSOLIDATED BALANCE SHEETS                                   F-3

CONSOLIDATED STATEMENTS OF OPERATIONS                         F-4

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY               F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS                         F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                  F-7-18

REPORT OF INDEPENDENT AUDITORS                                F-19

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS               F-20

<PAGE>

                    Report of Independent Auditors



The Board of Directors and Stockholders
Lancit Media Entertainment, Ltd.


      We have  audited the  accompanying  consolidated  balance  sheet of Lancit
Media Entertainment,  Ltd. and Subsidiaries (the "Company") as of June 30, 1997,
and the related consolidated statements of operations,  stockholders' equity and
cash  flows  for  the  year  then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audit.

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

      In our opinion, the financial statements referred to above present fairly,
in all material  respects,  the consolidated  financial position of Lancit Media
Entertainment,  Ltd. and  Subsidiaries  at June 30, 1997,  and the  consolidated
results of its  operations  and cash flows for the year then ended in conformity
with generally accepted accounting principles.

      The accompanying financial statements have been prepared assuming that the
Company will  continue as a going  concern.  The Company has incurred  losses in
each of the last two  fiscal  years and as more fully  described  in Note 2, the
Company  anticipates  that  additional  funding will be necessary to sustain the
Company's  operations  through  the fiscal  year  ending  June 30,  1998.  These
conditions raise  substantial doubt about the Company's ability to continue as a
going concern.  Management's plans in regard to these matters are also described
in Note 2. The financial  statements do not include any  adjustments  that might
result from the outcome of this uncertainty.


                                          /s/ ERNST & YOUNG, LLP
                                          Ernst & Young LLP
                                          Certified Public Accountants



New York, New York
October 13, 1997
<PAGE>


                   INDEPENDENT AUDITORS' REPORT


To The Stockholders and
   Board of Directors of
Lancit Media Productions, Ltd.


     We have audited the accompanying consolidated balance sheet of Lancit Media
Productions,  Ltd.  and  Subsidiaries  as of  June  30,  1996  and  the  related
statements  of  operations,  stockholders'  equity  and cash flows for the years
ended June 30, 1996 and 1995. These financial  statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these financial statements based on our 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 financial position of Lancit Media
Productions,  Ltd. and  Subsidiaries  as of June 30, 1996 and the results of its
operations  and cash flows for each of the years ended June 30, 1996 and 1995 in
conformity with generally accepted accounting principles.




                                      /s/  FELDMAN  RADIN  & CO., P.C.
                                    Certified Public Accountants

New York, New York
August 28, 1996




<PAGE>



                       

               LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                                            June 30,
                                                  ------------------------------
                                                      1997             1996
                                                  --------------   -------------

                                     ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                     $     4,461,627  $    3,358,230
  Accounts receivable, net of allowance               1,698,250       2,683,433
  Film and program costs, net                         1,718,526       5,527,106
  Prepaid expenses                                      270,215         268,175
                                                  --------------   -------------

TOTAL CURRENT ASSETS                                  8,148,618      11,836,944

ACCOUNTS RECEIVABLE - NON-CURRENT                       211,500       1,378,078

FIXED ASSETS, NET                                       525,530         832,606

GOODWILL, NET                                           263,302         279,754

DEPOSITS                                                 50,363          60,784
                                                  --------------   -------------

TOTAL ASSETS                                    $     9,199,313  $   14,388,166
                                                  ==============   =============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable and accrued expenses         $     2,116,028  $      732,158
  Participations payable                              1,342,702       1,199,991
  Deferred revenue                                    1,009,413       1,651,279
                                                  --------------   -------------

TOTAL CURRENT LIABILITIES                             4,468,143       3,583,428

PARTICIPATIONS PAYABLE - NON-CURRENT                     88,009         598,461

DEFERRED REVENUE - NON-CURRENT                          317,620         828,713

COMMITMENTS AND CONTINGENCIES

MINORITY INTEREST                                       195,360          94,056

STOCKHOLDERS' EQUITY:
  Common stock, $.001 par value, authorized -
    15,000,000 shares; issued and outstanding -
      6,634,750 shares at June 30, 1997 and
      6,187,634 shares at June 30, 1996                   6,635           6,188
  Additional paid-in capital                         17,504,536      12,579,402
  Accumulated deficit                               (13,380,990)     (3,302,082)
                                                  --------------   -------------

TOTAL STOCKHOLDERS' EQUITY                            4,130,181       9,283,508
                                                  --------------   -------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY      $     9,199,313  $   14,388,166
                                                  ==============   =============

                See notes to consolidated financial statements.

                                      F - 3
<PAGE>
               LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS




                                                    Year ended June 30,
                                            ------------------------------------
                                                1997         1996         1995
                                            -----------   ----------  ----------
REVENUES:
  Production and royalties                $  1,943,807  $ 6,812,975 $15,532,607
  Licensing agent fees                       1,208,250    2,248,238   2,349,872
                                            -----------  ----------   ----------

                                             3,152,057    9,061,213  17,882,479
                                            -----------  ----------   ----------

OPERATING EXPENSES:
  Production and royalties                   3,026,577    6,580,666  13,550,150
  Licensing agent - direct costs               809,823    1,175,699   1,184,345
  General and administrative                 4,073,089    2,438,471   2,168,827
  Write-down related to projects and
    restructuring charge                     5,456,180    2,650,000         --
                                            -----------  ----------   ----------

                                            13,365,669   12,844,836  16,903,322
                                            -----------  ----------   ----------

INCOME (LOSS) FROM OPERATIONS              (10,213,612)  (3,783,623)    979,157

INTEREST INCOME - NET                          255,508      276,570     506,316
                                            -----------  ----------   ----------

INCOME (LOSS) BEFORE PROVISION FOR
   INCOME TAXES AND MINORITY INTEREST       (9,958,104)  (3,507,053)  1,485,473

PROVISION FOR INCOME TAXES - CURRENT           (19,500)     (87,900)    (38,000)

MINORITY INTEREST                             (101,304)    (105,760)   (199,974)
                                            -----------   ----------  ----------

NET INCOME (LOSS)                         $(10,078,908) $(3,700,713) $1,247,499
                                            ===========   ==========  ==========

NET INCOME (LOSS) PER SHARE               $      (1.54) $     (0.60) $     0.20
                                            ===========   ==========  ==========

WEIGHTED AVERAGE SHARES OUTSTANDING          6,538,851    6,177,051   6,365,741
                                            ===========   ==========  ==========












                See notes to consolidated financial statements.

                                      F - 4

<PAGE>


                 LANCIT MEDIA PRODUCTIONS, LTD. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY






                                Common Stock                 Retained
                              ------------------             Earnings   Total
                                                  Additional (Accum-    Stock-
                                                  Paid-in    ulated     holders'
                              Shares    Amount    Capital    Deficit)   Equity
                             --------- -------  ---------- ---------- ----------

BALANCE - June 30, 1994      6,101,634  6,102  12,401,247  (848,868) 11,558,481

    Shares issued in connec-
      tion with exercise of
      options and warrants
      (net of expenses)         56,000     56     165,059        --     165,115
    Net income                      --     --          --  1,247,499  1,247,499
                             --------- ------- ---------- ---------- ----------

BALANCE - June 30, 1995      6,157,634  6,158  12,566,306    398,631 12,971,095

    Shares issued in connec-
      tion with exercise of
      options (net of
      expenses)                 30,000     30      13,096         --     13,126
    Net loss                      --      --         --   (3,700,713)(3,700,713)
                             --------- ------- ---------  ----------  ---------

BALANCE - June 30, 1996      6,187,634  6,188  12,579,402 (3,302,082) 9,283,508

    Shares issued in connec-
      tion with exercise of
      options (net
      of expenses)               9,000      9      16,241         --     16,250
    Shares issued in connec-
      tion with investment by
      Discovery Communications,
      Inc. (net of expenses)   438,116    438   4,698,893         --  4,699,331
    Warrants issued in
       exchange for
       consulting services
       rendered                     --     --     210,000         --    210,000
    Net loss                        --     --       --  (10,078,908)(10,078,908)
                             --------- ------- ---------- ---------- ----------

BALANCE - June 30, 1997      6,634,750  6,635  17,504,536 (13,380,990)4,130,181
                             ========= ======= ==========  ========== =========

















                 See notes to consolidated financial statements.

                                      F - 5
<PAGE>

                LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                      Year ended June 30,
                                                --------------------------------
                                                     1997       1996       1995
                                                ---------- ---------- ----------

CASH FLOW FROM OPERATING ACTIVITIES:
  Net income (loss)                          $(10,078,908)(3,700,713) 1,247,499
                                                ---------- ---------- ----------

  Adjustments to reconcile  net income  (loss) to net cash provided by (used in)
    operating activities:
      Amortization of film and program costs    1,465,831  3,869,945  6,334,297
      Write-down related to projects            5,456,180  2,500,000          -
      Depreciation and other amortization         378,281    407,313    348,615
      Minority interest                           101,304    105,760    199,974
     Grant of warrants in exchange for services   210,000          -          -

  Changes in operating assets and liabilities:
   Accounts receivable - current                  985,183  3,128,355 (3,796,488)
   Accounts receivable - non-current            1,166,578  1,227,792 (3,105,670)
   Film and program costs                      (3,113,431)(7,076,993)(8,557,597)
   Prepaid expenses                                (2,040)  (186,308)   (24,491)
   Deposits receivable                             10,421    (17,056)     2,185
   Accounts payable and accrued expenses        1,383,870    320,501      6,440
   Participations payable - current               142,711    293,628    906,363
   Participations payable - non-current          (510,452)  (341,462) 1,220,148
   Deferred revenue - current                    (641,866) (3,479,961)1,611,401
   Deferred revenue - non-current                (511,093)  (938,346)   111,921
                                                ---------- ---------- ----------
                                                6,521,477   (186,832)(4,742,902)
                                                ---------- ---------- ----------

CASH USED IN OPERATING ACTIVITIES              (3,557,431)(3,887,545)(3,495,403)
                                                ---------- ---------- ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment              (54,753)  (162,589)  (334,680)
                                                ---------- ---------- ----------

CASH USED IN INVESTING ACTIVITIES                 (54,753)  (162,589)  (334,680)
                                                ---------- ---------- ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Issuance of common stock in connection
    with DCI agreement                          4,699,331          -          -
  Issuance of common stock in connection with
  exercise of options                              16,250     13,126    165,115
                                                ---------- ---------- ----------

CASH PROVIDED BY FINANCING ACTIVITIES           4,715,581     13,126    165,115
                                                ---------- ---------- ----------

NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                   1,103,397 (4,037,008)(3,664,968)

CASH AND CASH EQUIVALENTS - beginning of year   3,358,230  7,395,238  11,060,206
                                                ---------- ---------- ----------

CASH AND CASH EQUIVALENTS - end of year       $ 4,461,627  3,358,230  7,395,238
                                                ========== ========== ==========

CASH PAID DURING THE YEAR FOR:
  Income taxes                                $    52,058     35,867     14,684
                                                ========== ========== ==========




                 See notes to consolidated financial statements.

                                      F - 6
<PAGE>


        LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Lancit   Media   Entertainment,   Ltd.  and   Subsidiaries   (the
"Company") includes Lancit Media Entertainment,  Ltd. ("Lancit"),
its wholly-owned  subsidiaries  Frame Accurate,  Inc.  ("Frame"),
Lancit  Copyright  Corp.  ("LCC"),  and  The  Strategy  Licensing
Company, Inc. ("Strategy") (see Note 13).

Lancit  creates,   acquires,   develops  and  produces  high-quality  children's
"edutainment" and family programming.

Frame  is a  provider  of  post-production  services  which  include  personnel,
facilities,  graphics  and  dubbing,  as well as  other  editing  and  finishing
services.

LCC was formed to own and administer  various  copyrights created by the Company
and  currently  administers  all of the  music  publishing  interests  which the
Company retains with respect to the music sound tracks for both The Puzzle Place
and Backyard Safari, as well as for other productions created by the Company.

Strategy  is a  merchandise  licensing  and  promotions  company  that  performs
licensing  agent  functions  for  properties  and  characters  owned by  various
copyright  holders,  including  Strategy  affiliates.  Strategy is the  majority
partner in The Puzzle Place  Marketing  Company,  a joint venture with Community
Television of Southern California ("KCET").

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      A. Basis of Presentation - The consolidated  financial  statements include
      the accounts of Lancit, Frame, LCC and Strategy. All material intercompany
      accounts and transactions have been eliminated.

      B.  Cash  and  Cash  Equivalents  -  The  Company  considers  to  be  cash
      equivalents all highly liquid  temporary cash investments with an original
      maturity of three months or less when purchased.

      C. Accounts Receivable - Accounts receivable consists primarily of amounts
      to  be  received  from  minimum  contractual  royalties  and  underwriting
      agreements.  Amounts to be received  from  minimum  contractual  royalties
      result from the copyright  holder  entering into agreements with licensees
      whereby the Company has licensed the right,  during a specified  term,  to
      utilize the copyright  holder's  copyright.  Such amounts are due no later
      than the conclusion of specified  time periods  which,  for the most part,
      occur within the next twenty-four months after entering into an agreement.
      Amounts to be  received  from  existing  underwriting  agreements  are due
      mostly within the next fiscal year.

      D. Film and Program  Costs - Film and  program  costs  ("project  costs"),
      which include  acquisition  and  development  costs (such as story rights,
      scenarios and scripts),  production costs (including salaries and costs of
      talent),  production overhead and post-production costs, are stated at the
      lower of cost less  accumulated  amortization or net realizable  value and
      are deferred and amortized under the "individual  film forecast method" as
      required by Statement of Financial Accounting Standards No. 53, "Financial
      Reporting by Producers and  Distributors  of Motion  Picture Films" ("SFAS
      53").  Project costs are  amortized in relation to the revenue  recognized
      from each project,  and  amortization is calculated  based on management's
      latest  estimate of the  project's  gross profit margin over its remaining
      life.  Film and program  costs are  re-evaluated  periodically  and,  when
      necessary, are written down to net realizable value (See Note 12).

      E.  Fixed  Assets - Fixed  assets  are  stated  at cost.  Depreciation  on
      production  and office  equipment is provided for using the  straight-line
      method over the  estimated  useful life of the  related  asset.  Leasehold
      improvements are amortized using the straight-line method over the shorter
      of the lease term or estimated useful life of the asset.

      F. Goodwill - Goodwill resulting from business acquisitions represents the
      remaining  unamortized  value of the excess of the acquisition  costs over
      the fair value of the net assets of the  business  acquired.  Goodwill  is
      amortized on the straight-line basis over a period not to exceed 20 years.
      The Company periodically  reviews the recoverability of its goodwill.  Any
      impairment  is  charged  to  expense  when  such  determination  is  made.
      Accumulated  amortization  at June  30,  1997 and  1996  was  $64,496  and
      $48,044, respectively.

      G.  Participations  Payable - Participations  payable represent the amount
      due for profit participations and residuals. The participation amounts are
      recorded  when the  revenue  which  gives rise to such  participations  is
      recognized.  Participants  are paid when the actual cash is  received  and
      when the entitled payees have been identified.

      H. Deferred  Revenue - Deferred  revenue  consists of licensing agent fees
      remaining  to be  recognized  based on  guaranteed  royalties,  as well as
      production  funding  received but not yet  recognized as revenues based on
      percentage  of  completion.   The  fees  from  guaranteed   royalties  are
      recognized  as revenue  over a period  which is no longer than the term of
      each  individual  license  agreement.  In  addition,  any royalty  amounts
      received as advances by the Company as  copyright  holder are deferred and
      recognized as revenues when all  obligations  and  commitments  associated
      with such contracts have been met.

      I. Net Income  (Loss) Per Share - Net income per share is  computed on the
      basis of the  weighted  average  number of common  shares and common share
      equivalents   outstanding   for  the  respective   period.   Common  share
      equivalents include dilutive stock options and warrants,  and are included
      in the calculation using the treasury stock method.  Net loss per share is
      computed on the basis of only the weighted average number of common shares
      outstanding  for the  period  as all  common  share  equivalents  would be
      anti-dilutive.

      J. Revenue Recognition - Revenues are primarily derived from the following
      sources:

           (a)  (i)  Production - Revenues from such  activities,
                when  performed  for a  third  party  contracting
                entity such as a grantor,  are  recognized  using
                the percentage of completion method,  recognizing
                revenue  relative to the  proportionate  progress
                on  such  contracts.  When  producing  a  project
                subject   to  a   commercial   network   presale,
                revenues  are  recorded in  accordance  with SFAS
                53.  (ii)  Royalties  - On many  of the  original
                projects it  produces,  the Company  retains,  in
                varying degrees,  ownership in such projects, and
                derives  royalties  from  their  exploitation  in
                both  primary and  secondary  markets  worldwide.
                Such revenues are recognized  when firm sales are
                reported  to  the  Company  by  designated  sales
                representatives  in each  market area or upon the
                Company  meeting all  commitments and obligations
                (which are primarily  broadcast-oriented) related
                to the minimum  contractual  royalties  under the
                licensing  agreement.  Such agreements  generally
                range  from two to four  years.  Typically,  on a
                licensing  contract,  the Company  does not begin
                to recognize additional  copyright-holder related
                royalty  revenues beyond any previously  recorded
                minimum  contractual  royalty  amounts until such
                time  as the  licensee  has  recouped  that  full
                amount.  Depending  on  the  particular  licensee
                category and on the initial  sales success of the
                products  in  that  category,   such   recoupment
                period  may  range  anywhere  from  one  year  to
                several  years.  The nature of the primary market
                and the order of market  exploitation varies from
                project  to  project,  as does the length of each
                project's  revenue   producing  cycle.   However,
                such revenue cycles  typically  range from two to
                six years.

           (b)  Licensing   agent  fees  -  Revenues   from  such
                activities   are   derived   from  a   negotiated
                percentage,   with  the  copyright   holder,   of
                overall  royalty  revenue  in a wide  variety  of
                categories.  Licensing  agent fees  derived  from
                minimum  contractual  royalty  commitments to the
                copyright  holder  are  recognized  over a period
                which is no longer than the term  covered by each
                individual  license.  Once royalties generated on
                sales of  licensed  product  exceed  the  minimum
                contractual   royalties   provided  for  in  such
                agreements,  the licensing agent will record,  as
                revenue,  its  entitled  share  of all  royalties
                generated from that point  forward,  upon knowing
                the  royalties  have been earned  which may be at
                the time of receipt.

      K. Income Taxes - The Company  accounts for income taxes by the  liability
      method as required by Statement of Financial Accounting Standards No. 109,
      "Accounting  for Income Taxes" ("SFAS 109").  Under this method,  deferred
      tax assets and  liabilities  are recognized with respect to the future tax
      consequences  attributable to differences  between the financial statement
      carrying  values  and tax bases of  existing  assets and  liabilities  and
      operating  loss  carryforwards.  Deferred tax assets and  liabilities  are
      measured  using enacted tax rates  expected to apply to taxable  income in
      the  years  in  which  those  temporary  differences  are  expected  to be
      recovered or settled. The effect on deferred tax assets and liabilities of
      a change  in tax rates is  recognized  in the  period  that  includes  the
      enactment date.

      L.   Compensation   Expense   Associated  with  Stock  Options  and  Stock
      Appreciation   Rights  ("SARs")  -  The  Company's  policy  is  to  record
      compensation expense when stock options or SARs are granted at an exercise
      price which is less than the fair  market  value of the  Company's  common
      stock  on the date of the  grant.  The  amount  recorded  as  compensation
      expense  is equal to the  difference  between  the  exercise  price or the
      measuring  value,  and the fair market value of the Company's common stock
      on the date of grant. In October 1995, the Financial  Accounting Standards
      Board ("FASB") issued Statement of Financial Accounting Standards No. 123,
      "Accounting  for  Stock-Based   Compensation"   ("SFAS  123").   SFAS  123
      prescribes   accounting  and  reporting   standards  for  all  stock-based
      compensation  plans  and  stock  appreciation  rights  and  requires  that
      compensation  expense be recorded  (i) using the new fair value  method or
      (ii) using existing  accounting rules prescribed by Accounting  Principles
      Board Opinion No. 25,  "Accounting  for Stock Issued to  Employees"  ("APB
      25") and related  interpretations  with pro forma  disclosure  of what net
      income  (loss) and  earnings  per share  would  have been had the  Company
      adopted the new fair value method. Effective July 1, 1996, the Company has
      adopted SFAS 123 and, as allowed by the statement,  intends to continue to
      account for its  stock-based  compensation  plans in  accordance  with the
      provisions of APB 25.

      M.  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 amounts
      reported in the financial  statements  and the footnotes  thereto.  Actual
      results could differ from those estimates.

      N. Impact of Recently Issued Accounting  Standards  Statement of Financial
      Accounting  Standards No. 128 "Earnings per Share" ("SFAS 128") was issued
      in February  1997.  The Company will be required to adopt the new standard
      for the quarter ending December 31, 1997.  Early adoption of this standard
      is  not  permitted.  The  primary  elements  of  this  standard  are:  (i)
      replacement  of primary  earnings per share with basic earnings per share,
      which eliminates the dilutive effect of options and warrants;  (ii) use of
      an average share price in applying the treasury method to compute dilution
      for  options  and  warrants  for  diluted  earnings  per share;  and (iii)
      disclosure reconciling the numerator and denominator of earnings per share
      calculations.  The Company  plans to adopt SFAS 128 in the quarter  ending
      December  31,  1997 and  does not  anticipate  that  SFAS 128 will  have a
      material impact on the calculation of net income (loss) per share.

2.    CAPITAL REQUIREMENTS

           Notwithstanding  the Company's  cash  position at June 30, 1997,  the
      Company believes that additional  funding will be necessary to sustain the
      Company's  operations  through  the  fourth  quarter of fiscal  1998.  The
      Company  is  actively  seeking  additional  funding  and has  retained  an
      investment  banking  firm  to  assist  it  in  these  efforts.  Among  the
      alternatives  being considered by the Company are a sale of an interest in
      the Company,  an acquisition of the Company,  and/or  strategic  alliances
      with industry partners.  The Company continues to pursue marketing efforts
      to generate cash from  production  and  licensing  activities  and,  where
      appropriate,  may explore turning to account certain non-strategic assets.
      While  there  can be no  assurance  that  any  such  transactions  will be
      available  to the  Company  or, if  available,  that they will be on terms
      favorable  to the  Company or its  shareholders,  the  Company is devoting
      considerable management and other resources to these efforts.

           The Company also has taken steps to reduce,  where  appropriate,  its
      operating  expenses.   These  steps  include  relocating   Strategy,   its
      merchandising and licensing agent subsidiary,  from Westport,  Connecticut
      to the Company's New York City offices, and certain staff reductions.

3.    ACCOUNTS RECEIVABLE

      The allowance for doubtful  accounts was $530,052 and $448,175 at June 30,
      1997 and 1996, respectively.

4.    FIXED ASSETS

      Fixed assets consists of the following:

                                             June 30,
                                 -----------------------
                                    1997        1996
                                 ----------- -----------

Production and office equipment  $ 1,858,191 $ 1,826,639
Leasehold Improvements              413,928     390,727
                                 ----------- -----------
                                  2,272,119   2,217,366
Less accumulated depreciation
      and amortization           (1,746,589) (1,384,760)
                                 ----------- -----------

Fixed assets, net                 $ 525,530   $ 832,606
                                 =========== ===========

5.    COMMITMENTS AND CONTINGENCIES

      A.   Leases

      The Company  leases  facilities  and office  equipment  under the terms of
      several  operating  leases.  The major portion of these  operating  leases
      relate to the Company's  four leases  covering its  facilities.  One lease
      expires in April 1998, two expire in September 1998 and the fourth expires
      in February 1999.

      The  following is a schedule of minimum  future lease  payments  under all
      operating leases at June 30, 1997:

Year Ending June 30,                                Total
----------------------                            -----------
        1998                                       $ 315,000
        1999                                         107,000
                                                  -----------

                                                   $ 422,000
                                                  ===========

      Rent  expense was  approximately  $299,000,  $296,000 and $355,000 for the
      years ended June 30, 1997, 1996 and 1995,  respectively.  Facility leases,
      in some cases,  also  provide for  escalations  based on increases in real
      estate taxes and maintenance charges.

      B.   Employment Agreements

      The Company has employment agreements with seven individuals,  all of whom
      are officers of Lancit.  The  agreements  expire at various  times through
      March 2000. Remaining  commitments under the terms of these agreements are
      approximately $2,019,000.

      C.   Bonus Plans

      Officers as a group,  under an  incentive  bonus plan (the "Bonus  Plan"),
      receive a bonus of 5% of pretax income (before bonus),  for a fiscal year,
      provided that (i) pretax income  (before bonus) for such fiscal year is at
      least  $250,000,  (ii) net income for such fiscal year  exceeds net income
      for the prior  fiscal year and (iii) net income is at least $.05 per share
      (adjusted for stock splits and stock  dividends),  on a diluted basis.  No
      amounts were  accrued  under the Bonus Plan for fiscal 1997 or fiscal 1996
      and $78,000 was accrued under the Bonus Plan for fiscal 1995.

      D.   Production Funding

      In fiscal 1997, the Company substantially completed production on episodes
      41-65 of The Puzzle  Place.  After  taking into account the portion of the
      project  funding  expected to be  contributed  via  existing  underwriting
      agreements  and the Company's  partner on the project,  KCET,  the Company
      estimates  less than $0.1 million  will  ultimately  be required  from the
      Company to meet the current budget needs of the project.

      The Company  also  substantially  completed  production  on the initial 13
      episodes of Backyard  Safari,  which has been funded  partially  through a
      grant from the National Science Foundation.  In the event the Company were
      to receive no outside production  funding,  the Company estimates that the
      remaining  cash outlay  required for this project  would be less than $0.5
      million.



           E.                   Consulting Agreements

      The Company entered into several consulting agreements and entered into an
      agreement terminating its relationship with a previous consultant,  during
      the fiscal year ended June 30,  1997.  The term of the ongoing  agreements
      are month-to-month,  with cancellation  notices required from one to three
      months in advance, with fees ranging from $5,000 to $10,000 per month. The
      minimum commitment under the terms of these agreements,  in the aggregate,
      is approximately $206,000.

6.    MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

      For the fiscal year ended June 30, 1997,  two customers  accounted for 64%
      and 30% of total revenues from  production and royalties and two customers
      accounted  for 34% and 13% of  licensing  agent fees.  For the fiscal year
      ended June 30,  1996,  two  customers  accounted  for 35% and 24% of total
      revenues from production and royalties and three  customers  accounted for
      36%, 10% and 10% of licensing  agent fees.  For the fiscal year ended June
      30, 1995,  four  customers  accounted  for 14%,  12%, 12% and 10% of total
      revenues from production and royalties and two customers accounted for 40%
      and 20% of licensing agent fees.

      Financial   instruments   which   potentially   subject   the  Company  to
      concentrations   of  credit  risk  consist  primarily  of  temporary  cash
      investments and trade receivables.  The Company restricts placement of its
      temporary  cash  investments  to financial  institutions  with high credit
      ratings and limits the amount of credit  exposure  with any one  financial
      institution.  At June 30, 1997,  amounts  receivable  from three different
      entities  accounted for 37%, 16% and 12% of the Company's  total  accounts
      receivable.  At June 30, 1996,  amounts  receivable  from three  different
      entities  accounted for 33%, 20% and 15% of the Company's  total  accounts
      receivable.  Allowances are  maintained,  as necessary,  for any potential
      credit losses.

7.    FILM AND PROGRAM COSTS

      Components  of film and program  costs (net of  accumulated  amortization)
      consist of the following:
                                        June 30,
                             --------------------------------
                                1997                1996
                             ------------       -------------

Productions completed and
 released                      $ 828,905         $ 2,329,015
Productions completed and
 not released                    376,165                   -
Productions in progress          110,340           2,851,378
Story rights and scenarios       403,116             346,713
                             ------------       -------------

Total film and program
costs, net                   $ 1,718,526         $ 5,527,106
                             ============       =============

      Film  and  program  costs  are   substantially   made  up  of  capitalized
      television, production, and development costs incurred by the Company. The
      Company capitalizes such costs and amortizes them to expense in accordance
      with SFAS 53, which requires the Company to use estimates to determine the
      future  revenue-generating  potential of its project which is subject to a
      variety  of risk  factors.  Revenues  generated  by  television  and movie
      programming  and related  ancillary  products  depend in part upon general
      economic  conditions,  but are more  directly  affected  by the viewer and
      retail  response  to  the  entertainment  product  made  available  to the
      marketplace.  The estimates used are re-evaluated  periodically,  and such
      re-evaluations have, in the past, and may, in the future, require that the
      Company write down unamortized capitalized amounts (See Note 12).

8.    STOCK OPTIONS  AND STOCK APPRECIATION RIGHTS

      In July 1990,  the Company  adopted a stock option plan (as  amended,  the
      "1990 Plan")  authorizing the issuance of options  covering 200,000 shares
      of the Company's common stock, which, over the years has been increased to
      cover the  issuance  of up to  1,000,000  shares of the  Company's  common
      stock.  Officers,  directors,  consultants  and  employees are eligible to
      participate  in the 1990  Plan and to  receive  non-qualified  or,  to the
      extent  allowable,  incentive  stock  options  pursuant  to the 1990 Plan.
      Options  granted under the Plan are  exercisable  for a period of not more
      than  ten  years  from  the  date of  grant.  Selection  of  participants,
      allotment of shares,  determination of exercise price and other conditions
      of the granting of options is determined by the Company. Additionally, the
      1990 Plan  provides  that no options  may be issued at an  exercise  price
      which is less than the fair market value of the Company's  common stock on
      the date of grant.  In June 1997,  the Company  initiated  a stock  option
      rejuvenation  program in which options with an exercise price considerably
      higher than current market value could be exchanged for a lesser number of
      shares at an exercise  price that was  reflective of current market value.
      The effective  date of the  cancellation  of the existing  options and the
      issuance of the new options was June 20, 1997.

      The Company has outstanding stock options under the 1990 Plan as follows:

                                            Weighted
                                                          Average
                                  Exercise Price       Exercise Price
                                  Per Share              Per Share
                        Options      ($)                    ($)
                        --------- ---------------          -----

Outstanding at June
  30, 1994               181,500    1.67 - 16.29           12.02
    Options granted      154,000   11.69 - 16.13           12.70
    Options exercised     (7,000)       3.75                3.75
                        --------- --------------          ------
Outstanding at June
  30, 1995               328,500    1.67 - 16.29           12.61
    Options granted      383,200    9.31 - 15.50           10.79
    Options exercised    (10,000)    1.67 - 3.75            2.92
    Options cancelled    (28,500)  10.44 - 15.94           12.64
                        --------- --------------          ------
Outstanding at June
  30, 1996               673,200    1.67 - 16.29           11.72
    Options granted      797,350    3.16 - 11.75            3.42
    Options exercised     (8,000)    1.67 - 3.65            3.39
    Options cancelled   (645,300)   5.06 - 16.29           10.94
                        --------- --------------          ------
Outstanding at June
  30, 1997               817,250    3.16 - 15.50            4.31
                        ========= ==============          ======


      At June  30,  1997,  762,750  options  were  exercisable  with an  average
      remaining term of 9.32 years.  The weighted average exercise price of such
      options is $4.45. At June 30, 1997, 3,750 options  remained  available for
      grant.

      In April 1991,  the  Company  adopted  the Stock  Performance  Based Stock
      Option Plan (as  amended,  the "1991  Plan")  authorizing  the issuance of
      options covering  250,000 shares of the Company's common stock.  Executive
      management  in place at the time of the  adoption  of the 1991  Plan,  was
      eligible  to  participate  in the 1991 Plan and to  receive  non-qualified
      options pursuant to the 1991 Plan at an exercise price of $0.01 per share.
      Options  granted under the 1991 Plan became  exercisable at any time after
      the  second  anniversary  of the  effective  date  of the  initial  public
      offering of the  Company's  common stock upon the  Company's  common stock
      meeting certain performance levels.

      The Company had outstanding stock options under the 1991 Plan as follows:

                                                                Weighted Average
                                             Exercise Price     Exercise Price
                                              Per Share            Per Share
                        Options                   ($)                 ($)
                        -------              -------------       -------------

Outstanding at June
  30, 1994              195,000                  0.01                 0.01
    Options exercised   (15,000)                 0.01                 0.01
                        -------              -------------       -------------
Outstanding at June
  30, 1995              180,000                  0.01                 0.01
    Options exercised   (20,000)                 0.01                 0.01
    Options cancelled  (160,000)                0.01                 0.01
                        -------              -------------       -------------
Outstanding at June
  30, 1996 and 1997         -                      -                     -
                        =======              =============        =============
      In December 1994, the Company adopted the 1994 Non-Employee  Director Non-
      Qualified Stock Option Plan (as amended,  the "1994 Plan") authorizing the
      issuance of options  covering 45,000 shares of the Company's common stock.
      Non-employee  directors of the Company are eligible to  participate in the
      1994 Plan. Each non-employee  director is granted 3,000 options on the day
      of his or her initial  appointment  and annually  thereafter on the day of
      his or her  re-election.  The  exercise  price per  share for each  option
      granted is the fair market value of the Company's common stock on the date
      of grant.  Each option is exercisable  one year from the date of grant and
      expires no later than ten years from the date of grant.

      The Company has outstanding stock options under the 1994 Plan as follows:

                                                            Weighted Average
                                        Exercise Price       Exercise Price
                                          Per Share             Per Share
                       Options              ($)                   ($)
                       -------          -------------         ------------

Outstanding at July
  1, 1994                 -                  -                       -
    Options granted     9,000           13.19 - 13.69              13.35
                       -------          -------------         ------------
Outstanding at June
  30, 1995              9,000           13.19 - 13.69              13.35
    Options granted     9,000                13.13                 13.13
                       -------          -------------         ------------
Outstanding at June
  30, 1996             18,000           13.13 - 13.69              13.24
    Options granted    15,000             3.50 - 6.25               5.44
                       -------          -------------         ------------
Outstanding at June
  30, 1997             33,000            3.50 - 13.69              9.69
                       =======          =============         ============
      At June  30,  1997,  18,000  options  were  exercisable  with  an  average
      remaining term of 8.7 years.  The weighted  average exercise price of such
      options is $13.24. At June 30, 1997, 12,000 options remained available for
      grant.

      In June 1997, the Company adopted the 1997 Incentive Stock Option Plan (as
      amended,  the "1997 Plan")  authorizing  the issuance of options and other
      awards covering 650,000 shares of the Company's common stock, and the 1997
      Value Incentive Bonus Program (as amended,  the "1997 Incentive Program").
      Any officer, key employee, directors who are also officers and consultants
      are eligible to participate in the 1997 Plan and receive non-qualified or,
      to the extent  allowable,  incentive  stock  options  pursuant to the 1997
      Plan.  Options granted under the 1997 Plan are exercisable for a period of
      not more than ten years from the date of the grant.  With the exception of
      grants  to two  officers/directors,  of  which a  portion  is  immediately
      exercisable, grants which have been made are exercisable one year from the
      date of the grant. The exercise price per share for each option granted is
      the fair market  value of the  Company's  common  stock on the date of the
      grant. The 1997 Plan is subject to approval by the Company's shareholders.

      The Company has outstanding stock options under the 1997 Plan as follows:
                                                                Weighted Average
                                             Exercise Price     Exercise Price
                                             Per Share             Per Share
                          Options               ($)                   ($)
                         --------            ------------        -------------

Outstanding at July
  1, 1996                     -                    -                    -
    Options granted      370,000                 3.16                 3.16
                         --------            ------------        -------------
Outstanding at June
  30, 1997               370,000                 3.16                 3.16
                         ========            ============        =============

      At June  30,  1997,  45,000  options  were  exercisable  with  an  average
      remaining term of 10 years.  The weighted  average  exercise price of such
      options is $3.16.  At June 30, 1997,  280,000  options are  available  for
      grant.

      The  Company  has  outstanding  SARs under the 1997  Incentive  Program as
      follows:

                                                                Weighted Average
                                             Exercise Price      Exercise Price
                                             Per Share              Per Share
                         SARs                ($)                      ($)
                      ------------           -------------       ------------

Outstanding at July
  1, 1996                     -                       -                  -
    SARs granted          255,000                   $3.16              $3.16
                      ------------            -------------      ------------

Outstanding at June
  30, 1997                255,000                   $3.16              $3.16
                      ============            =============      ============
      These SARs are subject to  cancellation  upon approval of the 1997 Plan by
      the Company's shareholders on or prior to December 31, 1997.

      The  Company's  other  various  options/warrants,  not under any form of a
      plan, covering shares of the Company's common stock are as follows:

                                                                Weighted Average
                                             Exercise Price      Exercise Price
                              Options/        Per Share             Per Share
                              Warrants            ($)                 ($)
                              --------       -------------        -------------

Outstanding at June 30, 1994    5,000             3.75                  3.75
    Options exercised          (4,000)            3.75                  3.75
                              --------       -------------        -------------
Outstanding at June 30, 1995
  and 1996                      1,000             3.75                  3.75
    Warrants Issued           560,209        3.62 - 13.00              10.96
    Options Exercised          (1,000)            3.75                  3.75
                              --------       -------------        -------------
Outstanding at June 30, 1997  560,209        3.62 - 13.00              10.96
                              ========       =============        =============

      The  remaining  warrants  outstanding  at June 30, 1997  covering  560,209
      shares of common stock were exercisable with a weighted average  remaining
      term of 4.0 years. The weighted average exercise price of such warrants is
      $10.96

      Pro forma information  regarding net income (loss) and earnings (loss) per
      share is required by SFAS 123, and has been  determined  as if the Company
      had  accounted  for its  employees'  stock options and SARs under the fair
      value  method  provided  by that  Statement.  The fair  value of the stock
      options  and  SARs  was   estimated   at  the  date  of  grant  using  the
      Black-Scholes  option  pricing  model with the following  assumptions  for
      vested and non-vested options and SARs:

                   Assumptions               June 30,   June 30,
                                               1997       1996
       Risk-Free Interest Rate                6.82%      5.56%
       Dividend Yield                           0%         0%
       Volatility  factor  of the  expected
       market price of the                    0.678      0.431
            Company's Common Stock
       Average Life                          5 years    5 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,  option valuation
      models require the input of highly  subjective  assumptions  including the
      expected  stock price  volatility.  Because the Company's  employee  stock
      options have characteristics  significantly different from those of traded
      options,  and because  changes in the  subjective  input  assumptions  can
      materially affect the fair value estimate,  in management's  opinion,  the
      existing  models do not  necessarily  provide a reliable single measure of
      the fair value of its employee stock options and SARs.

      For purposes of pro forma  disclosures,  the  estimated  fair value of the
      options  under SFAS 123 is amortized to expense over the options'  vesting
      period. For the year ended June 30, 1997, pro forma net loss and pro forma
      net loss per share would have  increased  under SFAS 123 by  approximately
      $3,248,000 and $0.49, respectively.  For the year ended June 30, 1996, pro
      forma net loss and pro forma net loss per share would have increased under
      SFAS 123 by approximately $1,548,000 and $0.25, respectively.

9.        401(k) AND PROFIT SHARING PLAN

      Effective  as of January 1, 1994,  the Company  adopted a combined  401(k)
      Savings and Profit Sharing Plan (as amended,  the "Retirement  Plan"). The
      Retirement  Plan provides for immediate  eligibility  for all employees of
      the Company as of January 1, 1994 and eligibility  after completion of six
      months of service for all employees of the Company  employed after January
      1, 1994. The 401(k) Savings portion of the Retirement Plan provides for an
      employer match which is determined on an annual basis.  The Profit Sharing
      portion of the  Retirement  Plan  provides  for an employer  discretionary
      contribution  which is  determined on an annual basis and which is reduced
      by any 401(k) employer match already received.  Amounts expensed under the
      Retirement Plan were  approximately  $85,000,  $72,000 and $70,000 for the
      fiscal years ended June 30, 1997, 1996 and 1995, respectively.

10.   RELATED PARTY TRANSACTIONS

Legal fees incurred to one of the Company's law firms, where a principal of that
      law firm is the  Corporate  Secretary  and Director of the  Company,  were
      $195,040,  $121,157 and $135,140 for the fiscal years ended June 30, 1997,
      1996 and 1995, respectively.

      Consulting fees incurred to one of the Company's consulting firms, where a
      principal  of that firm is a  director  of the  Company  were  $5,000  and
      $13,054 for the fiscal  years ended June 30, 1997 and 1996,  respectively.
      In addition,  that  consulting  firm, in October  1995,  was granted stock
      options covering 13,400 shares of the Company's common stock,  exercisable
      at $12.25 per share and expiring in October 2000.

11.   INCOME TAXES

      The following  table  illustrates  the sources and status of the Company's
      major deferred tax asset and (liability) items at June 30, 1997 and 1996:
                                                   June 30,
                                               1997         1996

      Tax  benefit of net  operating  loss
      carryforward                         $6,534,068     $2,349,000
      Royalty revenue not yet collected      (229,347)      (154,000)

      Excess of tax over book depreciation   (158,989)       (73,000)

      Other                                    62,952         48,000

      Net deferred tax asset                6,208,684      2,170,000
      Valuation allowance                  (6,208,684)    (2,170,000)
      Net deferred tax asset recorded      $    -         $     -



      The  provision  for  income  taxes  differs  from the amount  computed  by
      applying the  statutory  Federal  income tax rate to income  (loss) before
      provision for income taxes and minority interest as follows:
                                                     June 30,
                                        -----------------------------------
                                            1997        1996        1995
                                        -----------  ----------  ----------

Income tax provision (benefit)
  computed at the statutory rate        $(3,528,000) $(1,265,000) $ 450,000
Income tax benefit of disqualifying
  dispositions                               -          (110,000)  (127,000)
Net tax effect of other permanent
  differences                                20,000       34,000    (39,000)
Tax effect of temporary differences          -            33,000   (369,000)
Income tax benefit not recognized         3,508,000    1,308,000     85,000
Provision for state income taxes             19,500       87,900     38,000
                                         -----------  ----------  ----------
Income tax provision                       $ 19,500     $ 87,900   $ 38,000
                                         ===========  ==========  ==========
      The Company has net operating loss carryforwards for tax purposes totaling
      approximately  $14,850,000  at June 30, 1997 that expire in the years 2006
      to 2012.

      Certain of the Company's  subsidiaries file state income tax returns on an
      unconsolidated  basis, and as such,  losses may not be available to offset
      income in all states.

12.       WRITE-DOWNS RELATED TO PROJECTS AND RESTRUCTURING

      The  write-down of film and program costs amounted to  approximately  $5.5
      million and $2.5 million in fiscal 1997 and 1996,  respectively,  of which
      approximately  $2.1 million and $2.5  million  relates to The Puzzle Place
      for fiscal 1997 and 1996,  respectively,  and  approximately  $3.3 million
      relates to Backyard Safari for fiscal 1997.  Such write-down  reflects the
      Company's revision of its estimated future net royalty stream with respect
      to The  Puzzle  Place  and  the  Company's  revision  of  its  anticipated
      production  funding  sources and its estimated  future net royalty  stream
      with respect to Backyard  Safari.  As part of the fiscal 1997 charge,  the
      Company accrued for estimated remaining costs on these projects.

      Also,  in fiscal  1996,  the Company  recorded a  restructuring  charge of
      $150,000  which  included  severance and other benefits paid to terminated
      employees due to reduced production activity.

13.   SUBSEQUENT EVENT

      In October  1997,  the Company  entered into an  agreement  with Arlene J.
      Scanlan,  pursuant to which the Company  acquired the remaining 15% of the
      outstanding  shares  of  the  capital  stock  of  Strategy  held  by  her.
      Additionally,  Ms. Scanlan's  employment with Strategy and the Company was
      terminated.  In  consideration  of the  foregoing,  the  Company  paid Ms.
      Scanlan an aggregate of $30,788 and has released Ms.  Scanlan from certain
      restrictions  contained  in a  covenant  not to  compete  with  respect to
      specified properties and entities.

<PAGE>

                Report of Independent Auditors



The Board of Directors and Stockholders
Lancit Media Entertainment, Ltd.


      We have  audited the  consolidated  financial  statements  of Lancit Media
Entertainment,  Ltd. and  Subsidiaries as of June 30, 1997 and for the year then
ended,  and have issued our report  thereon  dated  October  13, 1997  (included
elsewhere in this Form 10-K).  Our audit also included the  financial  statement
schedule   listed  in  Item  14  of  this  Form  10-K.   This  schedule  is  the
responsibility of the Company's management.  Our responsibility is to express an
opinion based on our audit.

      In our opinion,  the financial  statement schedule referred to above, when
considered  in  relation  to the basic  financial  statements  taken as a whole,
presents fairly in all material respects, the information set forth therein.

      The  financial  statement  schedule  does not include any  adjustments  to
reflect the possible future effects on the  recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of the  uncertainty  regarding  the  Company's  ability to continue as a
going concern.


                                          /s/ ERNST & YOUNG, LLP
                                          Ernst & Young
                                          Certified Public Accountants


New York, New York
October 13, 1997
<PAGE>
                         Report of Independent Auditors



The Board of Directors and Stockholders
Lancit Media Productions, Ltd.

     We have  audited the  consolidated  financial  statements  of Lancit  Media
Productions,  Ltd. and Subsidiaries as of June 30, 1996 and the years ended June
30, 1996 and 1995,  and have  issued our report  thereon  dated  August 28, 1996
(included  elsewhere  in this  10-K).  Our audit  also  included  the  financial
statement  schedule listed in this 10-K. This schedule is the  responsibility of
the Company's  management.  Our responsibility is to express an opinion based on
our audits.

     In our opinion,  the financial  statement  schedule referred to above, when
considered  in  relation  to the basic  financial  statements  taken as a whole,
presents fairly, in all material respects, the information set forth therein for
the periods stated above.



                                     /s/ FELDMAN RADIN & CO., P.C.
                                      Feldman Radin & Co., P.C.


New York, New York
August 28, 1996

<PAGE>

        LANCIT MEDIA ENTERTAINMENT, LTD. AND SUBSIDIARIES
         SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

        Column A         Column B Column C Column D  Column E


                                    Additions
                         Balance     Charged
                          at           to                           Balance
                         Beginning    Costs                          at End
                         of            and            (a)              of
   Description           Period      Expenses      Deductions        Period
Year ended June 30, 1995
Allowances deducted
from assets
  to which they apply:
      Allowance for      $111,182    $128,869        $94,483       $145,568
      doubtful
      accounts


Year ended June 30, 1996
Allowances deducted
  from assets to which
  they apply:
  Allowance for
  doubtful              $145,568     $411,787      $ 109,180        $448,175
  accounts

Year ended June 30, 1997
Allowances deducted
  from assets to which
  they apply:
  Allowance for
  doubtful              $448,175     $143,112       $ 61,235        $530,052
  accounts

(a) Uncollectible receivables written off