<PAGE>
 

                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                                   FORM 10-K


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

                For the fiscal year ended January 31, 1998, or

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES 
                             EXCHANGE ACT OF 1934

                        Commission File Number 0-20835

                             THE LEAP GROUP, INC.
            (Exact name of registrant as specified in its charter)

           Delaware                                      36-4079500
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

                    22 W. Hubbard Street, Chicago, IL 60610
          (Address of  principal executive office, including zip code)

                                (312) 494-0300
             (Registrant's telephone number, including area code)
                                        
     Securities registered pursuant to Section 12(b) of the Act:

                                                           Name of each exchange
Title of each Class                                        on which registered
-------------------                                        ---------------------
       None                                                        None

     Securities registered pursuant to Section 12(g) of the Act:

                    Common Stock (Par Value $.01 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 a definitive proxy statement or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_]

The aggregate market value of Common Stock, $.01 par value, held by non-
affiliates of the Registrant, as of April 3, 1998 was $6,690,474 (based upon the
closing sale price of the Common Stock on the Nasdaq National Market on April 3,
1998, and, for the purpose of this calculation only, assuming that all of the
Registrant's directors and officers are affiliates.) There were 13,586,866
shares of Registrant's Common Stock, $.01 par value, outstanding as of April 3,
1998.

                      DOCUMENTS INCORPORATED BY REFERENCE

(1)  Portions of the Registrant's Annual Report to Stockholders for the fiscal
     year ended January 31, 1998 ("the 1998 Annual Report") (Parts II and IV).

(2)  Portions of the Registrant's Notice of Annual Meeting and Proxy Statement
     issued in connection with the Annual Meeting of Stockholders to be held on
     June 9, 1998 (the "1998 Proxy Statement") (Part III).
<PAGE>
 

                             THE LEAP GROUP, INC.
                                        
                                   FORM 10-K
                           For The Fiscal Year Ended
                               January 31, 1998

<TABLE>
<CAPTION>
                                     INDEX

PART I

Item                                                                        Page
----                                                                        ----
<S>                                                                         <C>
 1.  Business..............................................................    3
 2.  Properties............................................................    6
 3.  Legal Proceedings.....................................................    6
 4.  Submission of Matters to a Vote of Security Holders...................    7

PART II

 5.  Market for Registrant's Common Equity and Related Stockholder Matters.    7
 6.  Selected Financial and Operating Data.................................    8
 7.  Management's Discussion and Analysis of Financial Condition and
       Results of Operations...............................................    8
 8.  Financial Statements and Supplementary Data...........................   16
 9.  Changes in and Disagreements with Accountants on Accounting and
       Financial Disclosure................................................   35

PART III

10.  Directors and Executive Officers of the Registrant....................   36
11.  Executive Compensation................................................   36
12.  Security Ownership of Certain Beneficial Owners and Management........   36
13.  Certain Relationships and Related Transactions........................   36

PART IV

14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.......   36

Signatures.................................................................   39
</TABLE>

                                       2
<PAGE>
 

PART I

Item 1. Business.

The Company

The Leap Group, Inc. ("Leap" or "the Company") is a creatively focused 
advertising holding company providing innovative consumer marketing,
advertising and Internet related services and products to 
market-leading companies. The Company's marketing and communications services
include comprehensive strategic brand marketing, award-winning creative,
digital strategy and design and global strategy. Leap's mission is to
offer clients diversified services in traditional advertising, new media and
technology and global brand development.

Leap is a Delaware corporation that was incorporated in March 1996 to act as the
parent company for The Leap Partnership, Inc. ("Leap Partnership"), an Illinois
corporation established in September, 1993. The Leap Partnership is a new
generation advertising agency designed to deliver intelligent brand strategies,
high-end creative, innovative business building ideas and nimble, proactive
service. The Leap Partnership includes among its clients Anheuser-Busch, 
Rockwell Semiconductor Systems, Daewoo Motor America, One-On-One Sports, 
Ameritech, Armour Golf, Leiner Health Products and The University of Notre Dame.

In December 1996, the Company formed a new wholly-owned subsidiary--Quantum Leap
Communications, Inc. ("QLC"), a Delaware corporation. QLC is focused on
developing distribution systems and producing content that will help advertisers
communicate more effectively with targeted consumers in non-traditional ways
primarily using new media over the Internet. Quantum Leap Communications' client
list includes American Airlines, MSNBC, R.R. Donnelley, FTD and Coolsville 
Records.

In April 1997, the Company acquired the assets and assumed certain liabilities
of YAR Communications, Inc. ("YAR"). YAR employs more than 175 multicultural
specialists under one roof allowing clients the ability to communicate brand
messages with one voice across more than 80 languages and 100 countries. YAR is
the largest U.S.-based, full-service advertising agency that targets Western and
Eastern European and Middle Eastern consumers. YAR's top clients include AT&T,
L.L. Bean, EDS, CNN, General Electric, and Johnson & Johnson.

In November 1997, the Company, through its wholly owned subsidiary One World
Communications, Inc. ("OWC"), acquired certain property and equipment and the
ongoing business of Kang & Lee Advertising, Inc. and K&L West Advertising, Inc.
(jointly referred to as "Kang & Lee"). Kang & Lee is the largest U.S.-based 
full-service advertising agency specializing in marketing to Asian consumer
target groups including Chinese, Korean, Japanese, Vietnamese, Filipino and
Asian-Indian. Kang & Lee's clients include AT&T, Sears Roebuck and Co., Bank of
America, Oxford Health Plans, Seagrams, Shiseido Cosmetics America, Ltd., and
Hong Kong Bank.

Leap is headquartered in Chicago with offices in New York, Los Angeles and San
Francisco. Its executive offices are located at 22 W. Hubbard Street, Chicago,
Illinois, 60610. The Company's telephone number at that address is (312) 494-
0300. The Company's Internet address is: http://www.leapgroup.com. Information
contained on the Company's Internet site shall not be deemed part of this
Report.

The Company's common stock is traded on the NASDAQ National Market under the
symbol LEAP.

                                       3

<PAGE>
 

Leap's Core Strengths

Leap's central mission is to build brand equity for its clients by designing and
implementing creatively-focused, strategic brand marketing plans and
comprehensive advertising campaigns through traditional media and via the
Internet. Management believes that certain core strengths have been and will
continue to be integral to Leap's success in achieving this goal.

Multiple Revenue Streams. During fiscal 1998, the Company diversified its
services both by establishing a new media subsidiary and through acquisition. In
addition to the strategic and creative services provided by The Leap
Partnership, the Company started Quantum Leap Communications, a new media and
technology subsidiary, and launched One World Communications by acquiring two
leading agencies in the multicultural advertising sector--YAR and Kang & Lee.
Management believes that expanding the services offered clients greatly enhances
the company's ability to attract, service and retain clients.

Roster of Marquee Clients. Leap Group companies continue to successfully compete
for and service major accounts. The Leap Partnership includes among its clients
Anheuser-Busch, Rockwell Semiconductor Systems, Daewoo Motor America, One-On-One
Sports, Ameritech, Armour Golf, Leiner Health Products and The University of
Notre Dame. Quantum Leap Communications' client list includes American Airlines,
MSNBC, R.R. Donnelley, FTD and Coolsville Records. YAR and Kang & Lee are
working with numerous Fortune 500 clients including AT&T, Sears Roebuck and Co.,
L.L. Bean, Bank of America, Johnson & Johnson, EDS, Westin Hotels, Western
Union, Turner Broadcasting and General Electric. The Company attributes its
success in attracting such clients to the reputations of the companies and their
senior management, as well as its other core strengths, and believes that these
factors, coupled with the client roster itself, will enhance the Company's
ability to attract additional clients of national and international scope.

Strategic Orientation. The Company specializes in the strategic positioning of
brands. Beginning with a thorough assessment of the needs, wants, impressions
and opinions of the client's customers and the position of the client's brand in
its marketplace, the Company develops a distinct identity for the brand that can
be communicated through and integrated package of marketing solutions. Fusing
the brand strategy with the client goals, objectives and information, Leap then
develops a strategic platform that serves as the grounding for all brand
messages across all media.

Talent and Creative Distinction. The Company maintains a multidisciplinary
talent strategy as one of its core principles. Recognizing that the best
strategic platform is useless without creative executions that inform, engage
and entertain consumers, the Company's management places heavy emphasis on
creativity in the selection and training of personnel. The Company believes that
its success in attracting such talented creative and strategic thinkers is in
part attributable to the reputations of Frederick Smith, George Gier, Joseph A.
Sciarrotta, Thomas R. Sharbaugh, Yuri Radzievsky, Anna Radzievsky and Eliot
Kang.

The Company's employees include experienced writers, art directors, television
and radio producers, print production specialists, strategic planners, account
managers, media planners, translators, Web designers, producers, programmers,
digital strategists, multicultural language management specialists and cultural
analysts. The Company's talent strategy targets skilled individuals who, in
addition to being creative, are adept marketers attuned to the brand strategy
and business objectives of clients.

Integrated Services Approach. The Company provides a full range of strategic,
creative, interactive, production and multicultural services for both
traditional and new media assignments. The Company's strategies are designed to
integrate the most effective and beneficial aspects of a wide array of media.
Creative executions may include television, print, outdoor, radio and Internet
advertisements, as well as promotions, direct mail, package design, logo design.
The Company also develops other digitally-based interactive solutions including
World Wide Web sites, CD-ROMs and interactive presentations.

Technological Sophistication and Expertise. Management believes that the Company
is in the forefront in the application of new marketing communications
technology. The Company develops and maintains sites on the

                                       4
<PAGE>
 

Internet's World Wide Web, is engaged in database marketing, is developing
successful Internet promotions, is placing online media, and is developing
proprietary technology for the use of The Company and its clients. The Company's
new media partners include skilled programmers, Web designers, digital
strategists, Internet media planners and buyers and Web promotions specialists.

With the creation of Quantum Leap Communications, the Company has added a
strategic focus on developing proprietary content and new distribution systems
that allow clients to communicate more effectively in non-traditional ways.
During fiscal 1998, Quantum Leap developed three proprietary technologies--
Quantum Objects, a customizable Internet publishing application; The Ambassador,
a laptop multimedia presentation system; and Quantum Banners, a Java-based
banner that delivers instantaneous information. In April 1998, Quantum Leap was 
awarded the prestigious Gold Pencil in the first One Show Interactive
competition for the innovative breaking news banner it developed for MSNBC.
Management believes it will realize additional opportunities for new clients, as
well as revenue, from the marketing of these and other technologies in
development.

Leap's Strategy

Growth Through Diversification. Management will continue, as it did last year,
to diversify revenue streams by acquiring and integrating companies that provide
additional complementary services to those already offered by the Company. The
Company expects to pursue acquisitions of, or alliances with businesses that
extend or complement the Company's business. The Company may explore
acquisitions to obtain additional top level talent, to supplement its scope of
services and technology or to add to its client roster. To assist the Company in
attracting and servicing international clients, the Company intends to seek out
and establish strategic alliances with international partners who share or
expand The Company's core strengths and services.

Internal Growth. To grow internally the Company will continue to employ two key
strategies--target market-leaders as clients and expand scope of business with
existing clients. In terms of attracting new clients, Leap intends to focus on a
limited number of marquee clients, with businesses of national or global scope,
that seek to develop long-term marketing partnerships. Many of the Company's
current clients are, and future targets are expected to be, market leaders with
aggressive plans for growth and multi-faceted communications needs. With a
portfolio of diversified services to offer, the Company's three subsidiaries
will be able to cross-sell services in order to expand the overall partnership
with any given client.

Competition

The markets for the Company's services are highly competitive. Clients may
change their marketing and communications advisors with relative ease or perform
these functions internally. Clients may also reduce or eliminate their
expenditures on advertising and marketing at any time for any reason. The
Company faces competition from a number of sources, all striving to attract new
clients or additional assignments or accounts from existing clients. The Leap
Partnership competes with national and regional full-service and specialty
advertising agencies as well as specialized and integrated marketing
communications firms. The Leap Partnership could also be viewed as competing
with large entertainment, technology and/or marketing companies. Quantum Leap
Communications competes with other new media specialty agencies, new media
divisions of large agency holding companies and software development companies.
One World Communications competes with ethnic specialty agencies in, for
example, the Hispanic or Asian consumer target groups, or large multi-national
agencies with offices around the world. Many of the Company's competitors or
potential competitors have longer operating histories, longer client
relationships and significantly greater financial, management, technology,
development, sales, marketing and other resources than the Company.

The Company believes that the principal competitive factors in its markets are
the abilities to understand the client's business and develop strategically
sound interactive solutions, present unique creative concepts, demonstrate
breadth and depth of technical and new media expertise, develop strong consumer
relationships and produce high quality products with speed and efficiency, and
at a competitive price. The Company believes that it competes favorably with
respect to each of these factors, however there can be no assurance that the
Company will continue

                                       5
<PAGE>
 
to compete successfully. To the extent that the Company's competitors are
perceived as providing superior products, services or terms, or to the extent
that the Company's clients are dissatisfied with the Company's products,
services or terms, the Company's business, operating results and financial
condition could be materially adversely affected.

Creative Partners

As of January 31, 1998, Leap employed a total of 351 employees, 332 of whom were
full-time and 19 part-time. Of these, 284 were engaged in servicing clients and
67 were involved in finance and administration. With the two acquisitions during
the fiscal year, the Company includes 188 YAR and 81 Kang & Lee employees within
the total number. None of the Company's employees are represented by a labor
union, and the Company believes that its relations with its employees are good.

Intellectual Property Rights

Leap generally relies on a combination of trade secrets, copyright laws and
contractual rights to establish and protect its proprietary rights to
intellectual property. The Company may, where appropriate, take actions to
further protect certain proprietary rights through software or other patents.
The Company does not believe that the legal protections afforded to its
intellectual property rights are material to its business, financial condition
or results of operations.

Item 2.   Properties.

The Company is headquartered in Chicago and has offices in New York, Los Angeles
and San Francisco. The Company's headquarters are located at 22 W. Hubbard
Street, Chicago, Illinois, 60610. The Company's telephone number at that address
is (312) 494-0300.

The Company owns its main office building in Chicago which is a 12,400 square
foot two-story facility. The Company also leases approximately 2,000 square feet
of additional space in Chicago to provide office space for QLC and for
administrative offices.

In May 1997, The Leap Partnership, purchased a commercial office building for $2
million to provide facilities for its Los Angeles office. A term note for $1.4
million was financed by the seller over a one year term at 9% and is
collateralized by the L.A. office building. The agreement also contains an
option to extend the note for one additional year and management intends to
exercise this extension.

With the acquisition of YAR in April 1997, the Company added the following
leased offices: New York City--approximately 26,300 square feet and San
Francisco--approximately 3,100 square feet.

In November 1997, the Company also acquired Kang & Lee which has 22,500 square
feet of leased office space in New York and 20,000 square feet of leased office
space in Los Angeles.
                    
Item 3.   Legal Proceedings.

In September, 1995, the Spin Doctors (also known as Modigliani, Inc.), a
recording and performing group, and Mow B'Jow Music, Inc., their music
publisher, filed a lawsuit against Leap, the Miller Brewing Company and

                                       6
<PAGE>
 
Trivers/Myers Music (collectively "the defendants") in the United States
District Court, Central District of California. On May 21, 1997, the lawsuit was
settled within the limits of the Company's insurance policy. On May 23, 1997,
the case was formally dismissed by the court pursuant to the settlement
agreement.

On or about November 4, 1997, a former employee of the Company filed a lawsuit 
against The Leap Partnership, Inc. On February 28, 1998, a settlement agreement 
was signed and this case has been dismissed.

In February 1998, Venture Direct Worldwide, Inc. filed a lawsuit in the Supreme
Court of New York against an employee of Quantum Leap Communications (QLC), the
Company and QLC. The complaint alleges that the employee's e-mail response to an
e-mail communication from the plaintiff caused damage to the plaintiff. The
Company has received from the plaintiff a settlement proposal that does not
involve a monetary payment. The Company intends to vigorously defend the suit
and believes that the employee's actions were outside the scope of employment.
The complaint alleges six causes of action, each seeking ten million dollars
plus punitive damages. Management does not believe that the claims have any
merit or that the ultimate outcome of this matter will have a material adverse
impact on the company's financial position or results of operations.

There are no other significant claims or lawsuits against the Company.

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

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.

PART II

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

COMMON STOCK INFORMATION

The Company's common stock is traded on the Nasdaq National Market under the
symbol LEAP. On April 22, 1998, there were 112 holders of record of the
Company's stock. The Company estimates that as of March 27, 1998 there are
approximately 1,361 beneficial owners of the company's stock. The Company's high
and low common stock prices for the last six quarters since the Company's
Initial Public Offering are:

<TABLE>
<CAPTION>
           Fiscal 1998                         High    Low
           -------------------------------------------------
<S>                                           <C>     <C>
           1st  Quarter                       $8.125  $ 4.00
           2nd Quarter                        $ 5.00  $1.125
           3rd Quarter                        $2.875  $1.625
           4th  Quarter                       $ 2.00  $0.875
 
           Fiscal 1997                        High    Low
           -------------------------------------------------
           3rd Quarter (from September 27)    $10.50  $ 6.00
           4th  Quarter                       $ 7.63  $ 5.25
</TABLE>

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its Common Stock and
does not anticipate paying cash dividends in the foreseeable future, but intends
to retain future earnings, if any, for reinvestment in the future operation and
expansion of the Company's business and related development activities. Any
future determination to pay cash dividends will be at the discretion of the
Board of Directors and will be dependent upon the Company's

                                       7
<PAGE>
 
financial condition, results of operations, capital requirements and such other
factors as the Board of Directors deems relevant, as well as the terms of any
financing arrangements.

Item 6.   Selected Financial and Operating Data.

Reference is made to "Financial Highlights" on page 1 and "Selected Financial
Data" on page 33 of the 1998 Annual Report (hereby incorporated by reference)
for this information. This referenced section should be read in conjunction with
the Consolidated Financial Statements and Notes thereto contained herein.

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

The following presentation of management's discussion and analysis of the
Company's financial condition and results of operations should be read in
conjunction with the Company's consolidated financial statements, accompanying
notes thereto and other financial information appearing elsewhere herein.

In reviewing the Company's consolidated financial statements and the discussion
of the Results of Operations that appears below, the following should be taken
into consideration.

In April 1997, the Company acquired YAR Communications, Inc. ("YAR") and in
November 1997, the Company also acquired Kang & Lee Advertising, Inc. and K&L
West Advertising, Inc. (jointly referred to as "Kang & Lee"). Both business
combinations were accounted for using the purchase accounting method. In
accordance with the purchase accounting method, YAR's and Kang & Lee's results
have been included within the Company's results since their respective
acquisition dates of April 1, 1997 and November 1, 1997.


OVERVIEW

The Company

The Leap Group, Inc. ("Leap" or "the Company") is a creatively-focused
advertising holding company providing innovative consumer marketing, advertising
and Internet related services and products to market-leading companies. The
Company's marketing and communications services include comprehensive strategic
brand marketing, award-winning creative, digital strategy and design and global
strategy. Leap's mission is to offer clients diversified services in traditional
advertising, new media and technology and global brand development.

Leap is a Delaware corporation that was incorporated in March 1996 to act as the
parent company for The Leap Partnership, Inc. ("Leap Partnership"), an Illinois
corporation established in September, 1993. The Leap Partnership is a new
generation advertising agency designed to deliver intelligent brand strategies,
high-end creative, innovative business building ideas and nimble, proactive
service. The Leap Partnership includes among its clients Anheuser-Busch, 
Rockwell Semiconductor Systems, Daewoo Motor America, One-On-One Sports, 
Ameritech, Armour Golf, Leiner Health Products and The University of Notre Dame.

In December 1996, the Company formed a new wholly owned subsidiary is focused on
Quantum Leap Communications, Inc. ("QLC"), a Delaware corporation. QLC was
developing distribution systems and producing content that will help advertisers
communicate more effectively with targeted consumers in non-traditional ways
primarily using new media over the Internet. Quantum Leap Communications' client
list includes American Airlines, MSNBC, R.R. Donnelley, FTD and Coolsville 
Records.

In April 1997, the Company acquired the assets and assumed certain liabilities
of YAR. YAR employs more than 175 multicultural specialists under one roof
allowing clients the ability to communicate brand messages with one voice across
more than 80 languages and 100 countries. YAR is the largest U.S.-based, 
full-service advertising 

                                       8
<PAGE>
 
agency that targets Western and Eastern European and Middle Eastern consumers.
YAR's clients include AT&T, L.L. Bean, EDS, CNN, General Electric and Johnson &
Johnson.

In November 1997, the Company, through its wholly owned subsidiary One World
Communications, Inc. ("OWC"), acquired certain property and equipment and the
ongoing business of Kang & Lee. Kang & Lee is the largest U.S.-based full-
service advertising agency specializing in marketing to Asian consumer target
groups including Chinese, Korean, Japanese, Vietnamese, Filipino and Asian-
Indian. Kang & Lee's clients include AT&T, Sears Roebuck and Co., Bank of
America, Oxford Health Plans, Seagrams, Shiseido Cosmetics America, Ltd. and
Hong Kong Bank.

The Company is headquartered in Chicago with offices in New York, Los Angeles
and San Francisco. The Company's executive offices are located at 22 W. Hubbard
Street, Chicago, Illinois, 60610. The Company's telephone number at that address
is (312) 494-0300. The Company's Internet address is: http://www.leapgroup.com.
Information contained on the Company's Internet site shall not be deemed part of
this Report.

The Company's common stock is traded on the NASDAQ National Market under the
symbol LEAP.

REVENUES

The Company generates its revenues from a variety of sources: fees and retainers
for strategic marketing and creative services, which may include fees based upon
the airing or publication of Company-created material on various media;
production revenues for creative executions, including the communication of
messages through a variety of new media; and fixed fees for specific project
assignments.

Fees and retainers are established by the Company taking into consideration the
Company's resources and skills which will be applied to generate relevant
strategic solutions for the client's marketing and communication concerns, the
value of Leap's strategic thinking and Leap's ability to produce memorable,
entertaining and effective advertising. The Company structures its compensation
arrangements with clients in several ways to provide for retainers or fees that
integrate such an added-value approach, as well as fees based on a percentage of
media charges or other fixed methodologies. However, certain assignments covered
by fees and retainers have been based upon traditional methodologies which have
included either an estimate of the amount and level of professional expertise
provided by the Company and other committed resources needed to execute a
particular client's engagement or have included an estimate of the client's
advertising expenditures over certain periods.

The term of written agreements between the Company and its clients generally is
a minimum of six months. However, written agreements typically are terminable by
either the client or the Company on short notice, often 90 days, and in certain
instances less. The Company at times performs services at the client's request
prior to the execution of written agreements. Revenues, whether predominantly
retainer- or project-based, can vary materially from period to period. The
Company's strategy is to focus on providing expanding ranges and amounts of
services to a relatively limited number of nationally recognized clients. The
Company's results of operations will therefore, by design, be dependent upon the
Company's ability to maintain its relationships with its key clients or to
replace clients quickly should the Company or the client desire to reduce or
terminate a relationship. There can be no assurance that period-to-period
fluctuations in operating results will not occur.

The Company has developed proprietary software that the Company can license over
extended periods of time. The Company is currently working on developing
additional proprietary content and software that can potentially generate
recurring licensing and other revenues. The Company has not yet generated
significant revenues from this type of billing arrangement and no assurance can
be given by the Company that significant revenue streams will be generated in
the future.

The Company has experienced fluctuations in its revenues since inception, which
are to a significant degree a function of establishing or terminating client
relationships and to a lesser degree a reflection of its mix of fees and
production revenues. In addition, revenues have fluctuated due to unanticipated
changes in the spending levels of clients and uncontrollable or unforeseen
delays by clients to execute assignments and strategies. Revenue mix has also
been affected by the Company's recent acquisitions. The Company has a limited

                                       9
<PAGE>
 
operating history upon which an evaluation of the Company and its prospects may
be based, and the Company has not identified any particular quarterly or
seasonal trends with respect to its historic revenues.

Revenues from fixed fee arrangements, typically in the form of monthly
retainers, are recognized over the period in which services are rendered.
Revenues from production services are recognized as the services are completed.
Outside production costs are initially recorded as costs in excess of billings
and are expensed as direct costs and related expenses at the completion of such
services. Commissions earned from fees based upon third-party media placements
are recognized as revenues when the Company-created materials appear on various
media in accordance with industry practice. Salaries and other related general
and administrative costs are expensed as incurred. Billings in excess of costs
are typically payments received in advance of work to be performed. This
deferred revenue will be recognized as income when services are provided.

RESULTS OF OPERATIONS

The following table sets forth, as a percentage of revenues, operating expenses
and certain other items which are included in the Company's statements of
operations for the fiscal years reflected below. Operating results for any
period are not necessarily indicative of results for any future periods.

<TABLE>
<CAPTION>

          Fiscal Year Ended January 31,           1998     1997    1996
     ------------------------------------------------------------------
<S>                                              <C>      <C>     <C>
     Revenues                                    100.0%   100.0%  100.0%
     Operating expenses:
          Direct costs and related expenses       37.4     55.0    44.1
          Salaries and related expenses           59.9     26.4    27.4
          General and administrative expenses     30.8     10.0    12.0
          Restructuring expenses                   2.5        -       -
     ------------------------------------------------------------------
          Total operating expenses               130.6     91.4    83.5
     ------------------------------------------------------------------
     Operating income/(loss)                     (30.6)     8.6    16.5
          Other income and (expenses), net         0.9      2.8    (2.0)
     ------------------------------------------------------------------
     Income/(loss) before income taxes           (29.7)    11.4    14.5
          Income tax (expense)/benefit            11.4     (3.3)   (6.0)
     ------------------------------------------------------------------
     Net income/(loss)                           (18.3%)    8.1%    8.5%
     ==================================================================
</TABLE>

Fiscal Year Ended January 31, 1998 Compared to Fiscal Year Ended January 31,
1997

Revenues increased to $30.7 million for fiscal 1998 from $16.1 million for
fiscal 1997, an increase of $14.6 million, or 90.7%. The increase is primarily
due to the addition of YAR revenues of approximately $16.9 million during the
ten months since the acquisition and the addition of Kang & Lee revenues of
approximately $2.6 million during the three months since the acquisition.
Revenues are offset by a $4.9 million decrease in revenues from The Leap
Partnership during the year which was primarily due to the loss of two key
clients, as described below under Dependence on Key Clients and Projects, and
decreased spending levels by certain clients when compared to the prior year.

Direct costs and related expenses generally consist of production costs which
include services such as filming, animation, editing, special effects,
photography and illustrations, artwork, computer design and various related
production services which are generally outsourced, along with contract labor,
talent and other costs related to creative executions which may include
traditional media as well as new technologies and multimedia. Direct costs and
related expenses increased to $11.5 million for fiscal 1998 from $8.8 million
for fiscal 1997, an increase of $2.6 million or 29.5%. The increase was
primarily attributable to the addition of YAR direct expenses of approximately
$4.7 million since the YAR acquisition and the addition of Kang & Lee's direct
expenses of approximately $600,000 since the Kang & Lee acquisition. This was
offset by a general decrease in production activities by The

                                      10
<PAGE>
 
Leap Partnership of approximately $2.7 million over the prior year. As a
percentage of revenues, total direct costs and related expenses decreased to
37.4% for the fiscal year ended January 31, 1998, due to a change in the mix of
services performed during the period, from 55% for the prior fiscal year ended
January 31, 1997.

Salaries and related expenses consist primarily of salaries and wages for
employees, related payroll tax expenses, group medical and dental insurance
coverages and recruiting expenses. Salaries and related expenses increased to
$18.4 million for fiscal 1998 from $4.3 million for fiscal 1997, an increase of
$14.1 million, or 327.9%. The increase in expense reflects in part the addition
of approximately 175 new employees from YAR which represents $8.1 million of
salaries expense for the ten months since the acquisition and the addition of
approximately 75 new employees from Kang & Lee which represents $1.0 million of
salaries expense for the three months since the acquisition. The remaining
increase of $5 million in salaries expense during the year was primarily related
to the addition of new employees at The Leap Partnership and Quantum Leap
Communications to service new clients and to strengthen the Company's creative
and management team.

As further described in Note 7 to the Company's Financial Statements, the
Company announced a restructuring plan for the L.A. office of The Leap
Partnership. A restructuring charge of approximately $770,000 was recorded
during fiscal 1998 primarily for employee termination and severance costs and
other related expenses, including legal fees. Additionally, during the third and
fourth quarters, the Company reduced salaries and wages throughout the Company
by working to eliminate redundancies within the Company, by reducing executive
compensation and by decreasing Leap Partnership's staff by approximately 40%.
The Company estimates that the L.A. restructuring and the Company-wide cost
containment efforts should result in a reduction of approximately $3.1 million
in salaries and related expenses.

General and administrative expenses include space and facilities expenses,
corporate expenses, depreciation and amortization, insurance, legal and
accounting fees and management information system expenses. General and
administrative expenses increased to $9.4 million for fiscal 1998 from $1.6
million for fiscal 1997, an increase of $7.8 million or 487.5%. The increase is
primarily due to additional general and administrative expenses of $3.6 million
incurred by The Leap Partnership and QLC to support the Company's growth
activities through increased occupancy costs, depreciation, amortization and
expenses related to the Company being a public entity for the full fiscal year.
The balance of fiscal 1998's increase was attributable to the addition of YAR's
general and administrative expenses of $3.7 million for ten months since its
acquisition and the addition of Kang & Lee's general and administrative expenses
of $506,000 for three months since its acquisition.

Interest income totaled $1,313,000 and $619,000 for fiscal 1998 and fiscal 1997,
respectively. The interest income was offset by interest expense of $1,044,000
in fiscal 1998, and $163,000 in fiscal 1997, resulting in net interest income of
$269,000 and $456,000 for the respective periods. As a result of the Company's
initial public offering in late September 1996, the Company raised $35.7 million
in cash, net of related costs. The proceeds were invested in short-term U.S.
Treasury Notes and Bills, a certificate of deposit and a money market fund for
the remaining four months of the 1997 fiscal year. The increase in interest
income during fiscal 1998 was primarily the result of the offering proceeds
earning interest income for a longer period. The increase in interest expense
during fiscal 1998 was primarily due to the cost of borrowed funds related to
the acquisition of YAR in April 1997. On September 30, 1997, the Company retired
$23.3 million of notes payable to a bank related to the acquisition of YAR.
Also, interest expense increased during the fourth quarter fiscal 1998,
primarily as a result of financing the acquisition of Kang & Lee through a bank
line of credit in the amount of $1.3 million in November 1997. Interest expense
during the year resulted from financing related to real estate and other capital
expenditures and daily working capital requirements.

Overall during fiscal 1998, the Company realized an operating loss of $9.4
million, as compared to operating income of $1.4 million during fiscal 1997. In
summary, the primary reasons for the loss related to the loss of two key
clients, the establishment of an office in Los Angeles, an overall increase in
staffing levels to support anticipated new business, and other increases in the
Company's infrastructure. In response to these issues, management has endeavored
to secure new clients and new business from existing clients; has restructured
the Los Angeles operation resulting in anticipated annual savings of
approximately $3.5 million; has decreased its staffing levels to better match
the current revenue base, resulting in anticipated annual savings of
approximately $1.4 million; reduced executive compensation levels, resulting in
anticipated annual savings of approximately $1.0 million; and made focused cost-
cutting efforts in other aspects of the business.

Management plans to stay focused on cost controls and to maintain a philosophy
of matching staffing levels to the existing revenue base. Management will
continue to explore profitable business opportunities and other strategic
alternatives. In management's opinion, the decisions made and actions executed
will assist in returning the Company to profitability during fiscal 1999,
although there can be no assurances that this will occur.

The combined effective federal and state income tax rates were 38.5% and 29.1%
for fiscal 1998 and 1997, respectively. The higher effective tax in fiscal 1998
is due to higher local tax rates. During fiscal 1998 and fiscal 1997, taxes were
offset by exclusion of tax-exempt interest income from state taxable income. In
fiscal 1998, the amount of tax-exempt interest earned by the Company was
approximately $988,000 for the year. Due to the net operating loss in fiscal
1998, the Company recognized $3.5 million in net operating loss tax benefits
compared to the $536,000 income tax expense recorded in fiscal 1997. Since the
Company's inception on September 20, 1993,

                                      11
<PAGE>
 
through January 31, 1995, the Company had generated net operating losses of
approximately $1.6 million which subsequently offset taxable income in fiscal
years 1996 and 1997. As of January 31, 1997, the Company's balance of net
operating losses was approximately $112,000.

As of January 31, 1998, the Company's balance of net operating losses is
approximately $6.6 million for federal purposes and $8.7 million for state
purposes, which can be utilized over 15 years. At January 31, 1998, no valuation
reserve has been provided against deferred tax assets since, in management's
opinion, it is more likely than not that those tax assets will be realized based
on available tax operating loss carrybacks, expected reversals of taxable
temporary differences, and estimates of future taxable income.

The Company's estimates of future taxable income are based on projections which
include a number of assumptions related to revenues and expenses. These
projections anticipate an overall return to profitability during fiscal 1999,
based primarily on anticipated taxable income from YAR and Kang & Lee and the
impact of significant cost reductions implemented at The Leap Partnership. The
projections beyond fiscal 1999 assume increased revenues from new business, of
which there can be no assurances that such new business will be generated. If
the assumed revenue increases do not occur, management intends to make any
additional cost-cutting efforts as deemed necessary to maintain overall Company-
wide profitability. Management will continue to evaluate the realizability of
the deferred tax asset and, if adverse changes occur in the Company's business,
it is possible that a valuation reserve could be provided against some or all of
the deferred tax asset in a future period. Such a reserve would result in a
charge to the Company's income tax provision which could be material to the
operating results of that period.

Fiscal Year Ended January 31, 1997 Compared to Fiscal Year Ended January 31,
1996

Revenues increased to $16.1 million for fiscal 1997 from $8.2 million for fiscal
1996, an increase of $7.9 million, or 96.0%. The increase is primarily
attributable to a significant increase in fees earned from new and existing
clients during fiscal 1997, despite the Company's resignation from the Miller
Brewing Company account during fiscal 1996. Miller represented approximately
66.4% of the Company's total revenues for fiscal 1996. Excluding Miller,
revenues increased from $2.8 million in fiscal 1996 to $16.1 million in fiscal
1997, an increase of $13.3 million or 475%.

Direct costs and related expenses increased to $8.8 million for fiscal 1997 from
$3.6 million for fiscal 1996, an increase of $5.2 million or 144.3%. This
increase was attributable to increased production activities. Revenues specific
to production activities, however, increased 91.6% as compared to the increase
in total revenues of 96.0% during fiscal 1997. As a percentage of production
revenues, direct costs and related expenses decreased by approximately 1.2%, as
a result of increased efficiencies and improved margins.

Salaries and related expenses increased to $4.3 million for fiscal 1997 from
$2.2 million for fiscal 1996, an increase of just over $2 million, or 89.2%.
Salaries and related expenses, however, declined as a percentage of revenues
from 27.4% to 26.4%. The increased expenses reflected the addition, in fiscal
1997, of 44 new employees.

General and administrative expenses increased to $1.6 million for fiscal 1997
from $985,000 for fiscal 1996, an increase of $618,000. The increase is
primarily due to additional expenses associated with increased occupancy costs,
depreciation expense and increased staffing in administrative functions. As a
percentage of revenues, general and administrative expenses declined from 12.0%
in fiscal 1996 to 10.0% in fiscal 1997.

Other income included interest income of $619,000 for the year ended January 31,
1997. The interest income was offset in part by interest expense of $163,000,
resulting in net interest income of $456,000. For the year ended January 31,
1996, there was no significant interest income; interest expense totaled
$161,000. The difference in other income and expense for the two periods
resulted from the Company's retirement of debt and investment of the net
proceeds from the Offering in September 1996, offset in part by increased
borrowings prior to receipt of the proceeds.

The combined effective federal and state income tax rates were 29.1% and 41.4%
for fiscal 1997 and 1996, respectively. Income tax expense of $536,000 and
$494,000 is reflected for fiscal 1997 and 1996, respectively, as a result of the
Company generating taxable income during those years. During fiscal 1997, the
Company realized tax benefits from the exclusion of tax-exempt investment income
from state taxable income. Also, the Company generated a net operating loss from
its inception, September 20, 1993, through January 31, 1995 of approximately
$1.6 million. The net operating loss subsequently offset taxable income in both
fiscal 1996 and 1997. The balance of the net operating loss as of January 31,
1996, of approximately $260,000, had been fully reserved, primarily due to the
Company's history of operating losses. As a result of the Company's continued
growth of revenue, earnings and capital resources during fiscal 1997, the
Company reversed the tax valuation allowance. As of January 31, 1997, the
Company's balance of net operating losses is approximately $112,000, which
pursuant to the tax law can be utilized ratably over the next five years.

                                      12
<PAGE>
 

Fiscal Year Ended January 31, 1996 Compared to Fiscal Year Ended January 31,
1995

Revenues increased to $8.2 million for fiscal 1996 from $4.7 million for fiscal
1995, an increase of $3.5 million, or 74.5%. The increase is primarily
attributable to a significant increase in fees earned from Miller during fiscal
1996, and the remainder is attributable to services provided to new clients and
increased demand for services by existing clients. Miller represented
approximately 66.4% and 63.7% of the Company's total revenues for fiscal 1996
and 1995, respectively. Excluding Miller, revenues increased from $1.7 million
in fiscal 1995 to $2.8 million in fiscal 1996, an increase of $1.1 million or
64.7%.

Direct costs and related expenses decreased to $3.6 million for fiscal 1996 from
$3.7 million for fiscal 1995, a decrease of $100,000 or 2.7%. Approximately
$375,000, or 10.0%, of the direct costs in fiscal 1995 were incurred in
connection with business development activities for which no corresponding
revenues were generated by the Company. Exclusive of these costs, direct costs
increased by approximately $250,000, or 7.4%, from fiscal 1995 to fiscal 1996.
This increase was attributable to an increase in production activities. Revenues
specific to production activities increased approximately 24% in fiscal 1996. As
a percentage of production revenues, direct costs decreased by approximately
11%, as a result of increased efficiencies and improved margins.

Salaries and related expenses increased to $2.2 million for fiscal 1996 from
$1.6 million for fiscal 1995, an increase of $600,000, but declined as a
percentage of revenues from 34.2% to 27.4%. The increased expenses reflected the
addition, in fiscal 1996, of 11 new employees.

General and administrative expenses increased to $985,000 for fiscal 1996 from
$722,000 for fiscal 1995, an increase of $263,000. The increase is primarily due
to additional expenses associated with increased occupancy costs and increased
staffing in administrative functions. As a percentage of revenues, general and
administrative expenses declined from 15.4% in fiscal 1995 to 12.0% in fiscal
1996.

Interest expense increased to $161,000 for fiscal 1996 from $103,000 for fiscal
1995, an increase of $58,000 or 56.3%. The increase is primarily attributable to
increased borrowings from available bank lines of credit in order to fund the
Company's growth and operations. Interest rates remained relatively constant for
both fiscal 1996 and 1995.

Combined effective federal and state income tax rates were 41.4% and 28.6% for
fiscal 1996 and 1995, respectively. Income tax expense of $494,000 is reflected
for fiscal 1996, as a result of the Company's taxable income during the year. An
income tax benefit of $427,000 is reflected for fiscal 1995, as a result of the
Company's net operating loss during the period. The Company generated a net
operating loss from its inception, September 20, 1993, through January 31, 1995
of approximately $1.6 million. The net operating loss offsets the taxable income
generated in fiscal 1996. The balance of the net operating loss of approximately
$260,000 was fully reserved at January 31, 1996, primarily due to the Company's
history of operating losses.

LIQUIDITY & CAPITAL RESOURCES

Since its inception, the Company has primarily financed its operations and
investments in property and equipment through cash generated from bank
borrowings, proceeds from the Company's initial public offering, loans from a
Company officer and equipment leases.

At January 31, 1998 the Company had $820,000 of working capital, inclusive of
$7.2 million in cash and cash equivalents, compared to working capital of $34.7
million at January 31, 1997. Cash and cash equivalents decreased $25.1 million
during fiscal 1998 and increased $32.3 million during fiscal 1997. The decrease
in cash during fiscal 1998 was primarily attributable to: (1) $24.1 million for
the acquisitions of YAR in April 1997 and Kang & Lee in November 1997; (2) $1.9
million in capital expenditures for

                                      13
<PAGE>

property additions; (3) $2.2 million net cash used in operating activities as a
result of the Company's net operating loss during the year; (4) $1.8 million
loaned to strategic partner; and offset by a (5) $5.6 million increase in cash
borrowed. During fiscal 1997, the increase in cash and cash equivalents is
primarily due to the $34.4 million received in net proceeds from the Offering
after repayment of substantially all of the Company's debt. 

In February 1997, the Company obtained an additional line of credit from a bank
to provide working capital financing and funds for other general corporate
purposes of the Company. The line of credit is secured by the accounts
receivable, equipment and general intangibles of the Company, and provides for
borrowings up to a maximum principal amount of $8 million. The interest rate on
the line is equal to LIBOR plus 2%. On January 30, 1998, the line of credit
agreement was modified and the outstanding balance was converted into a fixed
note due, along with any accrued interest, on June 30, 1998. The loan
modification also requires that the Company pledge 100% of the stock in One
World Communications and provide the bank with a junior mortgage on the office
building that the Company owns. Additionally, the Company must maintain a
minimum net worth (as defined) of $30.5 million at the end of each quarter
commencing on January 31, 1998 through June 30, 1998. As of January 31, 1998,
the outstanding balance on this line of credit was $4,173,000.

In May 1997, the Company borrowed $543,000 against a line of credit to
finance the purchase of the Los Angeles office building. At January 31, 1998,
$565,000 was outstanding including accrued interest. This amount was
subsequently paid in full and the obligation was retired on March 18, 1998.

In November 1997, one of the Company's wholly owned subsidiaries obtained an
additional line of credit from a bank to provide working capital financing and
funds for other general corporate purposes of the subsidiary. The line of credit
is secured by substantially all the assets of the subsidiary, and provides for
borrowing up to a maximum principal amount of $5 million. The interest rate on
the line is equal to the prime rate. At January 31, 1998, $1,475,000 was
outstanding on this line of credit, of which $1.3 million was used for the
acquisition of Kang & Lee.

On April 30, 1998, in connection with the YAR acquisition, the Company received 
$3 million in cash due to the release of the escrowed funds.  The funds will 
reduce the purchase price of the acquisition and the amount of recorded 
goodwill.

The Company believes that the existing and future credit facilities, funds from
capital markets, funds from operations, and the cash received in connection with
the escrow release discussed above will be sufficient to meet the Company's cash
requirements for at least the next twelve months. The Company's capital
requirements will depend on numerous factors, including the rates at which the
Company grows, expands its personnel and infrastructure to accommodate growth
and invests in new technologies. The Company has various ongoing needs for
capital, including working capital for operations, project development costs and
capital expenditures to maintain and expand its operations. In addition, as part
of its strategy, the Company evaluates potential acquisitions of, or alliances
with, businesses that extend or complement the Company's business. The Company
may in the future consummate acquisitions or alliances which may require the
Company to make additional capital expenditures, and such expenditures may be
significant. Future acquisitions and alliances may be funded with available cash
from seller financing, institutional financing, issuance of common stock of the
Company and/or additional equity or debt offerings. There can be no assurance
that the Company will be able to raise any additional required capital on
favorable terms, or at all.

SEASONALITY

Depending upon its client mix at any time, the Company could experience
seasonality in its business. Such seasonality arises from the timing of product
introductions and business cycles of the Company's clients and could be material
to the Company's interim results. Such cycles vary from client to client, and
the overall impact on the Company's results of operations cannot be reasonably
predicted. In addition, the advertising industry as a whole exhibits
seasonality. Typically, advertising expenditures are highest in the fourth
calendar quarter and lowest in the first calendar quarter, particularly in
January. Although the Company has too limited an operating history to exhibit
any discernible seasonal trend, as the Company matures, Management believes that
the business and results of operations could be affected by the overall
seasonality of the industry.

DEPENDENCE ON KEY CLIENTS AND PROJECTS

An important part of the Company's strategy is to develop in-depth, long term
relationships with a select group of clients in a variety of industries.
Consistent with such a strategy, a large portion of the Company's revenues has

                                      14
<PAGE>

been, and is expected to continue to be, concentrated among a relatively limited
number of nationally recognized clients. For the year ended January 31, 1998,
one client accounted for 36.3% of consolidated revenues. Three clients accounted
for 25.1%, 23.4%, and 18.9%, respectively, of consolidated revenues during
fiscal 1997, and one client accounted for 66.4% of consolidated revenues during
fiscal 1996 (refer to Note 3 to the Company's Financial Statements).

Due to the nature of the advertising business, any of the Company's clients
could at any time in the future, and for any reason, reduce its marketing
budget, alter the timing of projects, engage another entity or take in-house all
or part of the business performed by the Company. Even though the Company has
taken steps to add new accounts, diversify its client base, negotiate a greater
percentage of retainer and fixed fee arrangements with clients and develop new
potential revenue streams from licensing of proprietary software and other
content, these steps may not fully mitigate the impact that the loss of any
significant account may have on the Company's operations.

In December 1995, the Company voluntarily resigned a client which accounted for
66.4% of the Company's revenues for the year ended January 31, 1996. In the
second half of fiscal 1996, this client began to reduce its advertising
expenditures on campaigns in which the Company was involved, which resulted in a
significant decline in Leap's revenues during such period. The Company's
management viewed an expansion of the client's advertising budget for such
campaigns as unlikely and determined that Leap's resources could be better used
pursuing other opportunities. The Company therefore resigned the account in
December 1995 in order to pursue other assignments.

During fiscal 1997, the Company fully offset the loss of this client's revenues
and grew by 96%. Excluding revenue attributable to this client, revenue from
other existing clients and new business increased $13.3 million or 475% during
fiscal 1997 as compared to fiscal 1996.

In March 1997, the Company received notice from a client that it was reassigning
its account to another agency. The account had accounted for 3.1% and 25.1% of
consolidated revenues for the years ending January 31, 1998 and 1997,
respectively.

In October 1997, the Company received notice from a client that it was
consolidating its advertising accounts and reassigning its account to another
agency. This client accounted for 5.5% and 23.4% of consolidated revenues for
the years ending January 31, 1998 and 1997, respectively.

Another client is currently undergoing marketing plan adjustments which could
impact future operations of the Company. A major client of both YAR
Communications and Kang & Lee, has recently made across the board reductions in
its marketing programs for calendar 1998 to reduce costs, and it has indicated
that such cost control pressures are likely to continue in the future. This
client accounted for 36.3% of the Company's consolidated revenues for the year
ending January 31, 1998.

Management believes that the loss of any key client and varying effects of
seasonality, as described above, could have an impact on the Company's
operations, particularly in the short term. The Company intends to mitigate such
losses through new business development and other strategic initiatives. There
can be, however, no assurances that the Company will be able to manage the
acquisitions successfully or generate additional revenues in the near term, and
any inability to do so may have a materially adverse effect on the Company's
business, financial condition and operating results.

NOTE REGARDING FORWARD LOOKING STATEMENTS

This report contains forward-looking statements (within the meaning of the
Private Securities Litigation Reform Act of 1995) that involve risks and
uncertainties. When used in this report, the words "anticipate," "believe,"
"estimate," "expect" and similar expressions as they relate to the Company or
its Management are intended to identify such forward-looking

                                      15
<PAGE>
 

statements. A number of important factors could cause the Company's actual
results, performance or achievements for fiscal 1999 and beyond to differ
materially from that expressed in such forward-looking statements. These factors
are set forth in the Company's Registration Statement on Form S-1 (File No. 
333-05051) under the heading "Risk Factors" and include, without limitation,
material changes in economic conditions in the markets served by the Company's
clients; competition in the Company's industry; uncertainties relating to the
developing market for new media; changing technologies; seasonality; costs and
uncertainties relating to establishing new offices and bringing them to
profitability; costs and uncertainties relating to YAR Communications and Kang &
Lee acquisitions and other acquisitions, including Leap's ability to
successfully manage and integrate the acquired companies; and the Company's
dependence on key clients and projects (as discussed above under "Dependence on
Key Clients and Projects") and key personnel.

Item 8. Financial Statements and Supplementary Data.

<TABLE>
<CAPTION>
                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<S>                                                                          <C>
     Report of Arthur Andersen LLP, Independent Public Accountants            17
                                                                           
     Consolidated Balance Sheets as of January 31, 1998 and 1997              18
                                                                           
     Consolidated Statements of Operations for the Fiscal Years Ended      
     January 31, 1998, 1997, and 1996                                         20
                                                                           
     Consolidated Statements of Stockholders' Equity for the Fiscal Years  
     Ended January 31, 1998, 1997, and 1996                                   21
                                                                           
     Consolidated Statements of Cash Flows for the Fiscal Years Ended      
     January 31, 1998, 1997 and 1996                                          22
                                                                           
     Notes to Consolidated Financial Statements                               23
</TABLE>

                                      16
<PAGE>
 

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                                        

To the Board of Directors and Stockholders of The Leap Group, Inc.:

We have audited the accompanying consolidated balance sheets of The Leap Group,
Inc. (a Delaware corporation) and subsidiaries as of January 31, 1997 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended January 31, 1998.
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 The Leap Group, Inc.
and subsidiaries as of January 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1998, in conformity with generally accepted accounting principles.



ARTHUR ANDERSEN LLP


Chicago, Illinois
March 5, 1998
(except with respect to the
second paragraph of Note 15,
as to which the date is 
April 30, 1998.)

                                      17
<PAGE>
 
The Leap Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
                                                                January 31,
                                                              --------------
ASSETS                                                     1998           1997
                                                        -----------    ----------- 
<S>                                                     <C>            <C>
CURRENT ASSETS
   Cash and cash equivalents                            $ 7,214,261    $32,312,749
   Accounts receivable (net of allowance of $859,611
      and $30,000, respectively)                          6,348,071      4,793,937
   Costs in excess of billings (net of allowance of
      $85,374 and $40,000, respectively)                    951,214        218,721
   Prepaid expenses                                         249,203        215,174
   Refundable income taxes                                  320,000              -
   Deferred income tax asset                                530,000              -
                                                        -----------    -----------
       Total current assets                              15,612,749     37,540,581
 
PROPERTY AND EQUIPMENT
   Land                                                     158,921        158,921
   Building and building improvements                       504,472        471,291
   Leasehold improvements                                 1,255,062         20,609
   Computer equipment                                     3,606,318        804,534
   Furniture and equipment                                1,197,926        259,074
                                                        -----------    -----------
                                                          6,722,699      1,714,429
   Less accumulated depreciation                         (1,528,867)      (525,068)
                                                        -----------    -----------
       Net property and equipment                         5,193,832      1,189,361
 
OTHER ASSETS
   Building held for sale                                 2,321,689              -
   Intangible assets                                     17,596,464              -
   Deferred income tax asset                              2,430,061         64,622
   Other assets                                           2,899,426      1,065,048
                                                        -----------    -----------
       Total other assets                                25,247,640      1,129,670
 
TOTAL ASSETS                                            $46,054,221    $39,859,612
                                                        ===========    ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
                           part of these balance sheets.

                                      18
<PAGE>
 
<TABLE>
<CAPTION>
                                                                        January 31,
                                                                      ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY                               1998           1997
                                                                -----------    -----------
<S>                                                            <C>            <C>
CURRENT LIABILITIES
   Accounts payable                                             $ 4,579,435    $ 1,834,331
   Accrued expenses                                               1,207,237        809,939
   Accrued restructuring costs                                      630,000              -
   Billings in excess of costs                                      394,760        214,264
   Notes payable                                                  7,613,478              -
   Current portion of capital lease obligations                     368,006         52,066
                                                                -----------    -----------
      Total current liabilities                                  14,792,916      2,910,600

LONG-TERM LIABILITIES
   Deferred income tax liability                                          -        294,326
   Capital lease obligations                                        420,591         71,999
                                                                -----------    -----------
      Total long-term liabilities                                   420,591        366,325

TOTAL LIABILITIES                                               $15,213,507    $ 3,276,925
                                                                -----------    -----------

COMMITMENTS AND CONTINGENCIES (NOTE 11)

STOCKHOLDERS' EQUITY
   Preferred Stock, $.01 par value; 20,000,000 shares
      authorized, no shares issued or outstanding                         -              -
   Common Stock, $.01 par value; 100,000,000 shares
      authorized, 13,636,866 and 13,600,000 shares
      issued and outstanding as of January 31, 1998
      and 1997, respectively                                        136,369        136,000
   Additional paid in capital                                    35,600,964     35,581,344
   Retained earnings (accumulated deficit)                       (4,745,489)       865,343
   Less cost of common stock held in treasury (50,000 shares
      of January 31, 1998)                                         (151,130)             -
                                                                -----------    -----------
      Total stockholders' equity                                 30,840,714     36,582,687

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                      $46,054,221    $39,859,612
                                                                ===========    ===========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
                           part of these balance sheets.

                                      19
<PAGE>
 
The Leap Group, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
                                                FISCAL YEAR ENDED JANUARY 31,
                                          ----------------------------------------
                                             1998           1997           1996
                                          -----------    -----------    ----------
<S>                                       <C>            <C>            <C>
Revenues                                  $30,660,039    $16,087,986    $8,209,622

Operating expenses:
   Direct costs and related expenses       11,451,736      8,847,323     3,622,016
   Salaries and related expenses           18,390,286      4,252,019     2,246,963
   General and administrative expenses      9,440,915      1,602,644       984,966
   Restructuring expenses                     767,323              -             -
                                          -----------    -----------    ----------
      Total operating expenses             40,050,260     14,701,986     6,853,945

Operating income/(loss)                    (9,390,221)     1,386,000     1,355,677
   Other income and (expense), net            269,024        456,293      (161,194)
                                          -----------    -----------    ----------
Income/(loss) before income taxes          (9,121,197)     1,842,293     1,194,483
   Income tax (expense)/benefit             3,510,365       (536,362)     (494,023)
                                          -----------    -----------    ----------
Net income/(loss)                         $(5,610,832)   $ 1,305,931    $  700,460
                                          ===========    ===========    ==========
Net income/(loss) per share
   Basic                                  $     (0.41)   $      0.12    $     0.07
   Diluted                                $     (0.41)   $      0.12    $     0.07

</TABLE>
The accompanying notes to the consolidated financial statements are an integral
                           part of these statements.

                                      20
<PAGE>
 
The Leap Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
                                            Common Stock         Additional   Retained Earnings/                     Total
                                       ---------------------       Paid In       Accumulated        Treasury      Shareholders'
                                        Shares       Amounts       Capital         Deficit)          Shares      (Deficit)/Equity
---------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>          <C>           <C>          <C>                   <C>          <C>
Balance as of January 31, 1995         9,600,000     $ 96,000       ($95,000)     ($1,141,048)              -      ($1,140,048)

   Net income                                  -            -              -             700,460               -          700,460
--------------------------------------------------------------------------------------------------------------------------------
Balance as of January 31, 1996         9,600,000       96,000        (95,000)        (440,588)              -         (439,588)

   Issuance of additional shares
   for the initial public offering     4,000,000       40,000     35,676,344                -               -       35,716,344

   Net income                                  -            -              -           1,305,931               -        1,305,931
--------------------------------------------------------------------------------------------------------------------------------
Balance as of January 31, 1997        13,600,000      136,000     35,581,344          865,343               -       36,582,687
   Direct offering expenses                    -            -        (45,545)               -               -          (45,545)
   Issuance of additional shares for:
      Stock option exercises              14,667          147         43,854                -               -           44,001
      Stock purchase plan purchase        22,199          222         21,311                -               -           21,533

   Repurchase of shares                        -            -              -                -        (151,130)        (151,130)

   Net loss                                    -            -              -       (5,610,832)              -       (5,610,832)
--------------------------------------------------------------------------------------------------------------------------------
Balance as of January 31, 1998        13,636,866     $136,369    $35,600,964       (4,745,489)      ($151,130)    $ 30,840,714
</TABLE>

The accompanying notes to the consolidated financial statements are an integral
                           part of these statements.

                                      21
<PAGE>
 
The Leap Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                     FISCAL YEAR ENDED JANUARY 31,
                                                              ------------------------------------------
                                                                   1998           1997          1996
                                                              -------------  -------------  ------------
<S>                                                           <C>            <C>            <C>
Cash Flows from Operating Activities:
Net income/(loss)                                             ($ 5,610,832)   $ 1,305,931   $   700,460
Adjustments to reconcile net income to net
cash provided by operating activities:
  Depreciation and amortization                                  2,173,733        322,531       169,598
  Deferred income taxes                                         (3,189,765)       229,704       477,793
  Changes in operating assets and liabilities:
     Accounts receivable                                         1,895,750     (4,431,549)      286,369
     Costs in excess of billings                                   181,158        400,939       (28,397)
     Prepaid expenses                                              (40,367)      (172,973)      (23,916)
     Refundable income taxes                                      (320,000)             -             -
     Other assets                                                   93,092       (208,775)      (27,795)
     Accounts payable                                            2,592,916        936,198    (1,102,426)
     Accrued expenses                                             (502,702)       578,987       (34,958)
     Accrued restructuring expenses                                630,000              -             -
     Billings in excess of costs                                  (129,504)       214,264             -
     Income tax payable                                                  -              -       (16,230)
--------------------------------------------------------------------------    -----------   -----------
           Net Cash (Used in)/Provided by Operating 
             Activities                                         (2,226,521)      (824,743)      400,498

Cash Flows from Investing Activities:
  Acquisitions, net of cash                                    (24,057,470)             -             -
  Capital expenditures                                          (1,891,636)      (488,566)     (241,947)
  Capitalized software development costs                          (531,569)      (825,000)            -
  Issuance of notes receivable                                  (1,819,770)             -             -
--------------------------------------------------------------------------    -----------   -----------
           Net Cash Used in Investing Activities               (28,300,445)    (1,313,566)     (241,947)

Cash Flows from Financing Activities:
  Net proceeds from issuance of common stock                        19,989     35,716,344             -
  Payments for treasury stock                                     (151,130)             -             -
  Net borrowings/(repayments) on:
     Line of credit                                                      -       (218,356)     (722,517)
     Notes payable                                               5,648,000       (241,022)      241,022
     Mortgage payable                                                    -       (418,214)      (35,790)
     Note payable to officer                                             -       (400,000)      400,000
     Capital lease obligations                                     (88,381)       (35,675)            -
--------------------------------------------------------------------------    -----------   -----------
           Net Cash Provided by/(Used in) Financing 
             Activities                                          5,428,478     34,403,077      (117,285)

Net Increase/(Decrease) in cash and cash equivalents           (25,098,488)    32,264,768        41,266
Cash and cash equivalents, at beginning of period               32,312,749         47,981         6,715
--------------------------------------------------------------------------    -----------   -----------
Cash and cash equivalents, at end of period                    $ 7,214,261    $32,312,749   $    47,981

Supplementary disclosure of cash paid during the period:      
  Interest paid                                                $   999,316    $   163,109   $   166,898
  Income taxes paid                                            $    15,063    $   400,056             -
Supplementary disclosure of noncash investing and 
  financing activities:                                       
  Property purchased and financed with notes payable           $ 1,965,478              -             -
  Equipment purchased under capital lease obligations                    -    $    74,035   $    85,704

The accompanying notes to the consolidated financial statements are an integral part of these statements.
</TABLE>

                                      22
<PAGE>
 
The Leap Group, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements


NOTE 1 - DESCRIPTION OF BUSINESS

The Leap Group, Inc. ("the Company") is a creatively-focused advertising holding
company providing innovative consumer marketing, advertising and Internet
related services and products to market-leading companies.

The Leap Group, Inc. is a Delaware corporation which was incorporated in March
1996 to act as the parent company for The Leap Partnership, Inc. ("Leap
Partnership"), an Illinois corporation established in September 1993.

In October 1996, the Company completed its Initial Public Offering (the
"Offering") and issued 4,000,000 shares of its common stock at $10.00 per share.
The Company received proceeds of approximately $35.7 million in cash, net of
underwriting commissions and other Offering costs.

In December 1996, the Company formed a new wholly owned subsidiary, Quantum Leap
Communications, Inc. ("QLC"), a Delaware corporation. QLC was formed to develop
distribution systems and to produce content that will help advertisers to
communicate more effectively with targeted consumers in non-traditional ways
primarily using new media over the Internet.

In April 1997, the Company acquired the assets and assumed certain liabilities
of YAR Communications, Inc. ("YAR"). YAR employs more than 175 multicultural
specialists under one roof allowing clients the ability to communicate brand
messages with one voice across more than 80 languages in 100 countries. YAR
provides culturally relevant marketing and advertising for global clients and
for all major U.S. ethnic and global markets.

In November 1997, the Company created a wholly owned subsidiary, One World
Communications, Inc. ("OWC"). This new subsidiary in turn acquired certain
property and equipment and the ongoing business of Kang & Lee Advertising, Inc.
and K&L West Advertising, Inc. (jointly referred to as "Kang & Lee"). Kang & Lee
is a U.S. based, full-service advertising agency specializing in marketing to
Asian consumer target groups including the Chinese, Korean, Japanese, Filipino
and Asian-Indian nationalities and cultures.

In launching OWC, the Company brings YAR and Kang & Lee, the two leading 
agencies specializing in multicultural marketing and advertising, together.

NOTE 2 - MANAGEMENT'S PLANS

During fiscal 1998, the Company experienced an operating loss of approximately
$9.4 million, as compared to operating income of $1.4 million during fiscal
1997. The loss is attributable to a number of matters:
 
  1) The loss of two clients which had accounted for $2.7 million in fee revenue
     and $5.1 million in production revenue during fiscal 1997. During fiscal
     1998, these two clients accounted for $1.4 million in fee revenue and $1.1
     million in production revenue.

  2) The establishment of an office in Los Angeles in anticipation of new
     business opportunities. This office incurred an operating loss of $4.3
     million during fiscal 1998 and was restructured as discussed in Note 7.

  3) Continued investment in new media business development, resulting in an
     operating loss for Quantum Leap of $2.1 million for fiscal 1998.

  4) An overall increase in staffing levels and infrastructure in order to
     support anticipated new business.

                                      23
<PAGE>
 
In response to the loss incurred during fiscal 1998, management's plans include
the following:

  1) Continued pursuit of profitable new client relationships and additional
     business from existing clients.

  2) The restructured Los Angeles office is expected to realize savings of at
     least $3.5 million during fiscal 1999, absent any revenues generated by the
     office, which would serve to further improve overall operating results.

  3) With an increased revenue base and certain infrastructure reductions,
     the Company has seen Quantum Leap become a break-even business unit by the
     fourth quarter of fiscal 1998. Management will continue to identify new
     revenue opportunities while maintaining its expense structure.

  4) As a general response to the lost clients and significant operating losses
     in the fall of fiscal 1998, management reduced its expense structure. This
     resulted in anticipated annual savings of approximately $1.4 million in
     salary and related expenses. Further, certain executives voluntarily agreed
     to reduce their salaries, resulting in anticipated savings of approximately
     $1.0 million during fiscal 1999.

  5) Management will focus on maintaining the profitability of each operating
     unit and will continue to examine the cost structure to enhance operating
     efficiencies.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying Consolidated Financial Statements present all the entities
which now comprise the Company as if they were combined at their inception or at
the time of acquisition pursuant to the purchase method of accounting. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

Cash and Cash Equivalents

Cash and cash equivalents generally consist of cash, certificates of deposit,
U.S. Treasury Notes and Bills, and other money market instruments with short-
term maturities. These investments are stated at cost, which approximates fair
value, and are also considered cash equivalents for the purposes of reporting
cash flows.

Disclosures About Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of
each class of financial instrument held by the Company:

   --Cash and cash equivalents, trade receivables and trade payables: the
     carrying amounts approximate fair value because of the short maturity of
     these items.

   --Notes payable to banks and mortgage payable: due to the floating interest
     rate on these obligations, the carrying amounts approximate fair value.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Company
policy provides for capitalization of all major expenditures for renewal and
improvements and for current charges to income for repairs and maintenance. The
provision for depreciation has been calculated using straight-line and
accelerated methods over the estimated economic lives of the related assets as
follows:

                    Building and building improvements               39 years
                    Computer equipment                            3 - 7 years
                    Furniture and equipment                       5 - 7 years

                                      24
<PAGE>
 
Leasehold improvements are amortized over the lesser of their useful lives or
the remaining term of the related lease.

Building Held for Sale

During the year, the Company purchased a building to house its Los Angeles
operation. As a result of the restructuring discussed in Note 7, the building is
not currently fully utilized. As such, the Company intends to sell the building.
It is classified as "Building Held for Sale" on the accompanying Balance Sheet.

Purchased Software Costs

Software that is purchased for use by the Company and has an expected life
greater than one year is capitalized and classified within Other Assets. The
Company has adopted a policy to depreciate these costs over a two-year period
using the straight-line method.

Research and Development Costs

Research and development costs are charged to expense as incurred. However, the
costs incurred for the development of computer software that will be licensed,
sold, leased or otherwise marketed are capitalized once technological
feasibility has been established. These capitalized costs are subject to an
ongoing assessment of recoverability based upon anticipated future revenues and
changes in hardware and software technologies. Costs that are capitalized
include contracted outside labor, direct labor and related overhead.

Amortization of capitalized software development costs begins when the product
is available for general release. Amortization is provided on a product-by-
product basis using the straight-line method over periods not exceeding three
years. Unamortized capitalized software development costs determined to be in
excess of net realizable value of the product are expensed immediately.

Revenue Recognition

Retainers from fixed fee arrangements, typically in the form of monthly
retainers, are recognized over the period in which services are rendered.
Revenues from production services are recognized as the services are completed.
Outside production costs are initially recorded as costs in excess of billings
and are expensed as direct costs and related expenses at completion of such
services. Commissions earned from fees based upon third-party media placements
are recognized as revenues when the Company-created materials appear on various
media in accordance with industry practice. Salaries and other related general
and administrative costs are expensed as incurred. Billings in excess of costs
are typically payments received in advance of work to be performed. This
deferred revenue will be recognized as income when services are provided.

Concentration of Credit and Other Risk

SFAS No. 105, Disclosure of Information about Financial Instruments with Off-
Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk,
requires disclosure of any significant off-balance sheet and credit risk
concentrations. The Company has no significant off-balance sheet items. The
Company attempts to limit its concentration of credit risk by securing clients
which are well-established and credit-worthy advertisers of consumer and
industrial goods and services.

While the Company typically enters into written agreements with its clients, at
times it performs services prior to the execution of such agreements, and
written contracts are typically terminable by either party on short notice,
often 90 days and in certain instances less. Management considers the
relationships with existing clients to be good; however, the loss of any one or
more of the Company's significant clients could have a materially adverse effect
on the Company's business, financial condition and results of operations.

For the year ended January 31, 1998, one client accounted for 36.3% of
consolidated revenues. Three clients accounted for 25.1%, 23.4% and 18.9%,
respectively, of consolidated revenues during fiscal 1997 and one client
accounted for 66.4% of consolidated revenues during fiscal 1996.

                                      25
<PAGE>
 
Income Taxes

The Company accounts for income taxes under SFAS No. 109, Accounting for Income
Taxes, which requires recognition of deferred tax assets and liabilities for the
expected future effects of all deductible temporary differences, loss
carryforwards, and tax credit carryforwards. If deemed necessary, deferred tax
assets are reduced by a valuation allowance for the amount of any tax benefits
which are not expected to be realized.

Per Share Data

In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share. SFAS No. 128 changed the methodology of calculating earnings
per share and requires the disclosure of basic earnings per share and diluted
earnings per share. The calculation of basic earnings per share excludes
dilutive common stock equivalents and convertible securities (such as stock
options, warrants and convertible preferred stock) which are included in the
diluted earnings per share calculation under the treasury method. The Company
adopted SFAS No. 128 in fiscal 1998 and has retroactively restated all periods
presented. The weighted average number of common shares used in determining
basic and diluted income (loss) per share attributable to common stockholders
for the years ended January 31, 1998, 1997 and 1996 is as follows (in
thousands):

<TABLE>
<CAPTION>

      For the years ended January 31,           1998    1997   1996
--------------------------------------------------------------------
<S>                                            <C>     <C>     <C>
          Common shares outstanding (basic)    13,615  10,933  9,600
          Common stock equivalents                 --     193     --
                                               ------  ------  -----
          Diluted                              13,615  11,126  9,600 
</TABLE>

Management's Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.

Recently Issued Accounting Standards

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which established standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. SFAS No. 130
is effective for financial statements for periods beginning after December 15,
1997 and requires comparative information for earlier years to be restated.
Because of the recent issuance of this standard, management has been unable to
fully evaluate the impact, if any, the standard may have on future financial
statement disclosures. Results of operations and financial position, however,
will be unaffected by implementation of this standard.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
establishes standards for the way that public companies report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997 and requires comparative information
for earlier years to be restated. Because of the recent issuance of this
standard, management has been unable to fully evaluate the impact it may have on
future financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of this standard.

Reclassifications

Certain amounts as previously reported have been reclassified to conform to
current year classifications.

                                      26
<PAGE>
 
NOTE 4 - ACQUISITIONS

In April 1997, the Company acquired the assets and assumed certain liabilities
of YAR. The acquisition was accounted for as a purchase and the results of YAR's
operations since April 1, 1997, are included in the Company's Statement of
Operations for fiscal year 1998.

The total purchase price was approximately $23.4 million, including
approximately $275,000 of acquisition-related costs. Additionally, the purchase
agreement provides for contingent consideration which is payable if YAR meets
certain net income and revenue thresholds during calendar years 1997, 1998 and
1999. Specifically, contingent consideration equal to 50% of the excess of
annual net income targets is payable if and only if YAR also achieves annual
revenue targets, as defined. These thresholds are as follows:

<TABLE>
<CAPTION>
 
                            Annual Net           Annual Net  
          Year            Income Target        Revenue Target
          ---------------------------------------------------
<S>                       <C>                  <C>           
          1997            $   3,937,500        $   22,500,000
          1998            $   4,725,000        $   27,000,000
          1999            $   5,670,000        $   32,400,000 
</TABLE> 

There was no contingent consideration earned for calendar 1997.
 
The purchase price was allocated to the net assets acquired, as follows:

<TABLE> 
<CAPTION> 
          
          <S>                                            <C> 
          Fair value of tangible net assets              $ 6,230,000
          Goodwill                                       $17,212,000
                                                         -----------
                                                         $23,442,000
</TABLE>

The goodwill is being amortized on a straight-line basis over twenty years. The
purchase price allocation is still considered preliminary and will be finalized
during fiscal 1999. Upon final determination of the purchase price allocation,
any subsequent adjustments will affect goodwill. (See Note 15)

In November 1997, the Company acquired certain property and equipment and the
ongoing business of Kang & Lee. The acquisition was accounted for as a purchase
and the results of Kang & Lee's operations since November 1, 1997 are included
in the Company's Statement of Operations for fiscal 1998.

The purchase price was approximately $1.4 million, including approximately
$80,000 of acquisition-related costs. Additionally, the purchase agreement
provides for contingent considerations equal to 40% of Kang & Lee's pre-tax
income for each of the next three years, as defined.

The purchase price was allocated to the net assets acquired, as follows:

<TABLE> 
<CAPTION> 

<S>                                                    <C>   
          Fair value of tangible net assets            $  315,000
          Goodwill                                     $1,074,000
                                                       ----------
                                                       $1,389,000
</TABLE> 

The goodwill is being amortized on a straight-line basis over twenty years.

The following unaudited pro forma results of operations data gives effect to the
acquisitions of YAR and Kang & Lee as if they had occurred on February 1, 1996:

<TABLE>
<CAPTION>
                                                             Fiscal year
                                                   -----------------------------
                                                        1998             1997
                                                   -----------------------------
<S>                                                <C>               <C>
          Revenues                                 $ 45,902,442      $47,290,932
          Net Income/(Loss)                        $ (1,994,905)     $ 3,037,952
          Net Income/(Loss) per share -- Basic     $       (.15)     $       .28
          Net Income/(Loss) per share -- Diluted   $       (.15)     $       .27
</TABLE>

The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the YAR and Kang & Lee
acquisitions been consummated as of February 1, 1996, nor are they necessarily
indicative of future operating results.

                                      27
<PAGE>
 
NOTE 5 - OTHER ASSETS

As of January 31, 1998 and 1997, Other Assets includes approximately $1,315,000
and $825,000, respectively, of capitalized software development costs. These
costs are being amortized over a three-year period commencing when the product
was available for general release. Amortization expense related to capitalized
software development costs totaled $370,000 and $22,000 for fiscal years 1998
and 1997, respectively.

As of January 31, 1998 and 1997, Other Assets also includes approximately
$255,000 and $214,000, respectively, of purchased software costs. It is the
Company's policy to amortize purchased software costs over a two-year period.
Amortization expense related to the purchased software was approximately $80,000
and $58,000 for fiscal years 1998 and 1997, respectively.

In February 1997, the Company loaned $1 million to Vivid Publishing, Inc.
("VPI"), an Internet production house in exchange for a note receivable. The
note is convertible into 10% of the common stock of VPI and is secured by a
pledge of VPI's common stock. Under the note, the Company may at its option loan
up to an additional $1.0 million on substantially the same terms. In March 1997,
the Company exercised this option and has loaned an additional $714,000 to VPI.
The loans to VPI bear interest at the prime rate plus 2% per annum, with
interest paid semiannually. The $1.7 million note receivable and $105,770 of
accrued interest on the loans is included in Other Assets and $164,065 of
Interest Income has been recognized through January 31, 1998.

In connection with the acquisition of YAR in April 1997 and Kang & Lee in
November 1997, the Company recorded goodwill of approximately $17,212,000 and
$1,074,000 respectively. The Company is amortizing these costs over twenty years
commencing on the respective acquisition dates. Goodwill amortization related to
YAR and Kang & Lee totaled approximately $690,000 for fiscal year 1998.

NOTE 6 - NOTES PAYABLE

On March 9, 1994, the Company secured a loan for $480,000 to purchase the
building in which the Company's current principal offices are located. The 
three-year balloon note bore interest at the rate of 8.5%, payable in monthly
principal and interest installments of $5,995 through March 9, 1997, and was
collateralized by a mortgage on the Company's offices. This loan was refinanced
on May 30, 1996. The new loan, which was in the amount of $596,000, bore an
interest rate of prime plus 1%, and was payable in monthly principal and
interest installments of $7,794 through May 2001, with a balloon payment of
approximately $360,000 due in June 2001. The loan was also secured by a mortgage
on the building in which the Company's current principal offices are located. In
October 1996, this loan was repaid with proceeds from the Offering.

On October 4, 1995, the Company obtained an additional line of credit for up to
$500,000 to purchase computer and office equipment. The note was secured by all
the computer equipment of the Company and was guaranteed by certain stockholders
of the Company. In October 1996, the debt was retired with proceeds from the
Offering.

On October 4, 1995, the Company obtained a line of credit with a bank for up to
$1,500,000 with interest at 9.5% per annum. On July 5, 1996, the agreement
expired and was subsequently extended through October 31, 1996. The line was
collateralized by substantially all of the Company's general business assets and
by the guarantees of certain stockholders of the Company. In October 1996, the
outstanding balance on this line of credit was repaid with proceeds from the
Offering.

In October 1996, the Company obtained a new line of credit from a bank secured
by collateral cash balances, money market and other cash equivalent instruments
of the Company. The line provides for borrowings up to the lesser of

                                      28
<PAGE>
 
(i) $24 million or (ii) 90 to 95% of the Company's available cash and cash
equivalent balances, to fund working capital requirements and for other general
corporate purposes of the Company. The interest rate on the loan was at LIBOR
plus 0.5%. In April 1997 and July 1997, the Company borrowed an aggregate of
$22.7 million to fund the acquisition of YAR. On September 30, 1997, the entire
balance and accrued interest was repaid with the proceeds from maturing U.S.
Treasury Securities and this line of credit was retired.

In February 1997, the Company obtained a new line of credit from a bank to
provide working capital financing and funds for other general corporate purposes
of the Company. The line of credit is secured by certain assets of the Company,
including accounts receivable, equipment and general intangibles, and provides
for borrowings up to a maximum principal amount of $8 million. The interest on
the line is equal to LIBOR plus 2%. On January 30, 1998, the line of credit
agreement was modified and the outstanding balance was converted into a fixed
note due on June 30, 1998. The loan modification also requires that the Company
pledge 100% of the stock in One World Communications and provide the bank with a
junior mortgage on the office building that the Company owns. Additionally, the
Company must maintain a minimum net worth (as defined) of $30.5 million at the
end of each quarter commencing on January 31, 1998 through June 30, 1998. As of
January 31, 1998, the outstanding balance on this line of credit was $4,173,000.

In May 1997, the Company purchased a commercial office building for $2 million
to provide facilities for its Los Angeles office. A term note for $1.4 million
was financed by the seller over a one-year term at 9% and is collateralized by
the L.A. office building. The agreement also contains an option to extend the
note for one additional year and management intends to exercise this extension.
In May 1997, the Company also obtained a new line of credit from a bank to fund
the purchase of the new office building. The line originally provided for
borrowings of $543,000 and bore interest at 6.5%, and was secured by cash funds
of the Company held by the bank. On November 12, 1997, the agreement expired,
was subsequently extended for an additional month and was increased to $562,000,
bearing interest at 6.19%. In December 1997, the agreement was again extended to
March 18, 1998, and increased to $565,000 with interest at 6.4%. At January 31,
1998, $565,000 was outstanding on this line of credit. On March 18, 1998, this
outstanding balance was repaid with the proceeds from maturing U.S. Treasury
Securities and this obligation was retired.

On July 9, 1997, the Company borrowed $2.7 million from a bank in connection
with the acquisition of YAR. On September 30, 1997, the balance was repaid with
the proceeds from maturing U.S. Treasury Securities and this obligation was
retired.

In November 1997, one of the Company's wholly-owned subsidiaries obtained a new
line of credit from a bank to provide working capital financing and funds for
other general corporate purposes. The line of credit is secured by substantially
by all the assets of the subsidiary, including accounts receivable, equipment
and general intangibles, and provides for borrowings up to a maximum principal
amount of $5 million. The interest rate on the line is equal to the prime rate.
At January 31, 1998, $1,475,000 was outstanding on this line of credit, of which
$1.3 million was used for the acquisition of Kang & Lee.

NOTE 7 - RESTRUCTURING PLAN

During the third quarter ended October 31, 1997, the Company implemented a plan
to restructure the operations at the Los Angeles office of the Company's wholly-
owned subsidiary, The Leap Partnership, Inc. due to continued losses at the
office. The cost of the plan was accounted for in accordance with the guidance
set forth in Emerging Issues Task Force issue 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)".

                                      29
<PAGE>
 
A pretax charge of approximately $767,323 was recorded during the fiscal year
representing employee termination, severance costs and other related costs that
are anticipated to be incurred as a direct result of the plan. As of January 31,
1998, approximately $137,000 had been paid and all remaining costs are expected
to be paid out within a year of the plan's inception.

NOTE 8 - CAPITAL STOCK

Incorporation

On September 20, 1993, The Leap Partnership, Inc. was incorporated in Illinois.
Subsequently, on March 11, 1996, the Company was formed and became the parent to
the wholly owned subsidiaries, Leap Partnership, Lilypad, and Tadpole. In
connection with the formation of the Company, each of the four founding
stockholders of Leap Partnership exchanged their 25 shares of Leap Partnership
common stock for 2,400,000 shares of the Company's common stock. Common stock
and per share amounts have been retroactively restated in the accompanying
financial statements to reflect the effect of the reorganization. The combined
entities have been under common control since inception and have been included
in the consolidated financial statements at historical cost since their
respective dates of inception in a manner similar to a pooling of interests.

The initial certificate of incorporation of the Company authorized 40,000,000
shares of common stock with $.01 par value and 10,000,000 shares of preferred
stock with $.01 par value. On May 29, 1996, the Board of Directors and
Stockholders of the Company approved an amendment to the certificate of
incorporation which increased the total number of authorized shares of common
stock to 100,000,000 and preferred stock to 20,000,000.

Stock Repurchase Program

On June 2, 1997, the Company's Board of Directors approved a Stock Repurchase
Program by which the Company may repurchase up to 1,000,000 shares of the
Company's outstanding common stock from time to time. The total cost of the
program cannot exceed $3,000,000. Company stock may be repurchased on the open
market or in negotiated transactions, depending upon the stock price, market
conditions and other factors. The repurchased shares will be held as treasury
shares and will be available for general corporate purposes. As of January 31,
1998, the Company has purchased 50,000 shares at an aggregate cost of $151,130.
As of January 31, 1998, the Company has remaining authorization under the Stock
Repurchase Program to acquire up to an additional 950,000 shares at a cost not
to exceed $2,848,870.

NOTE 9 - STOCK COMPENSATION PLANS

1996 Stock Option Plan

On January 3, 1996, the Board of Directors and Stockholders of The Leap
Partnership, Inc. adopted the 1996 Stock Option Plan (the "1996 Stock Option
Plan"), which was subsequently amended and restated on March 12, 1996, by the
Board of Directors and Stockholders of the Company, whereby certain eligible
employees may be granted options. The 1996 Stock Option Plan allows issuance of
incentive stock options and nonqualified options. The 1996 Stock Option Plan is
administered by the Stock Option Committee of the Board of Directors. The
exercise price of incentive stock options shall not be less than the stock's
intrinsic fair market value on the date of grant. No more shares were available
for grant under this plan as of January 31, 1997. However, due to current year
cancellations, 7,333 are available for grant as of January 31, 1998.

Employee Incentive Compensation Plan

Effective May 29, 1996, the Company adopted the Employee Incentive Compensation
Plan (the "Incentive Plan"), which permits grants of incentive stock options,
nonqualified stock options, stock appreciation rights, performance shares,
restricted stock, deferred stock and other stock-based awards. The Incentive
Plan authorizes the issuance of up to 2,000,000 shares of Common Stock in
connection with such awards. During fiscal 1998, because of the recent
acquisitions of the Company, 1,500,000 of additional shares were authorized by
shareholders for grant and were reserved under this plan, so that a total of 
3,500,000 shares are reserved under this plan. Directors, officers,


                                      30
<PAGE>
 
employees and consultants of the Company are eligible to receive grants under
the Incentive Plan. At January 31, 1998, 1,787,000 shares were available for
grant under this plan.

Employee Stock Purchase Plan

Effective May 29, 1996, the Company's Board of Directors adopted the Employee
Stock Purchase Plan (the "Stock Purchase Plan"), which provides for the
issuance of a maximum of 500,000 shares of Common Stock. Under Section 423 of
the Internal Revenue Code (the "Code"), eligible employees can have earnings
withheld to be used to purchase shares of the Common Stock on specified dates
determined by the Board of Directors up to a maximum of $25,000 per year. The
price of the Common Stock purchased under the Stock Purchase Plan will be equal
to 85% of the lower of the fair market value of the Common Stock on the
commencement date of each offering period or the specified purchase date (in
each case, averaged over the prior ten trading days). On December 31, 1997,
participating employees purchased 22,199 shares of Company stock. At January 31,
1998, 477,801 shares were available for purchase under the plan.

Non-Employee Director's Stock Option Plan

On May 29, 1996, the Board of Directors adopted the 1996 Non-Employee Directors'
Stock Option Plan (the "Directors' Plan"). The Directors' Plan provides for the
issuance of up to 200,000 nonstatutory stock options to non-employee directors
of the Company. On the effective date of the Offering, each of the three non-
employee directors were granted immediately exercisable options to purchase
20,000 shares of Common Stock at an exercise price equal to the Initial Public
Offering price. Each person who becomes a non-employee director of the Company
after the date of the Offering will automatically be granted nonstatutory
options to purchase 5,000 shares of Common Stock on the date of such directors'
initial election or appointment to the Board of Directors and on each
anniversary of the initial grant date. Such options shall become exercisable one
year after the date of grant or earlier if so provided in the agreement granting
the option to the non-employee director at an exercise price equal to the
intrinsic fair market value of the Common Stock on the date of grant. All
options granted under the Directors' Plan will have a five-year term. At January
31, 1998, 175,000 shares were available for grant under this plan.

Pro Forma Stock-Based Compensation Disclosures

Under various plans, the Company may grant stock options and other awards to key
executives, directors, management and creative personnel. Transactions under the
various stock option plans for the periods indicated were as follows:

<TABLE>
<CAPTION>
                                                                Weighted Average
STOCK OPTIONS OUTSTANDING AT:                      Shares        Exercise Price 
--------------------------------------------------------------------------------
     January 31, 1995                                 -                     
--------------------------------------------------------------------------------
<S>                                              <C>            <C>         
          Granted                                  504,000             $3.00
          Exercised                                   -                  -  
          Canceled                                    -                  -  
--------------------------------------------------------------------------------
     January 31, 1996                              504,000             $3.00
--------------------------------------------------------------------------------
          Granted                                2,086,000             $7.40
          Exercised                                   -                  -
          Canceled                                    -                  -
--------------------------------------------------------------------------------
     January 31, 1997                            2,590,000             $5.96
--------------------------------------------------------------------------------
          Granted                                1,719,000             $3.57
          Exercised                                 14,667             $3.00
          Canceled                                 274,333             $7.00
--------------------------------------------------------------------------------
     January 31, 1998                            4,020,000             $5.26
--------------------------------------------------------------------------------
</TABLE>

                                      31
<PAGE>
 

The following table summarizes information about stock options outstanding at
January 31, 1998:

<TABLE>
<CAPTION>
                                   OUTSTANDING OPTIONS                         EXERCISABLE OPTIONS
                    -------------------------------------------------      ---------------------------
                                  Weighted Average   Weighted Average                       Weighted
Exercise Price        Shares       Exercise Price     Remaining Term         Shares      Average Price
------------------------------------------------------------------------------------------------------
<S>                 <C>           <C>                <C>                   <C>           <C>
$1.92-$2.75           543,000          $1.96               4.72              177,667         $1.96
$3.00-$4.75         1,552,000          $3.83               8.39              752,000         $3.41
$7.00-$10.00        1,925,000          $7.34               8.11            1,580,167         $7.32
------------------------------------------------------------------------------------------------------
                    4,020,000          $5.26               7.76            2,509,834         $5.77
</TABLE>

The Company applies APB Opinion 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its plans.

If the compensation expense for the Company's stock-based compensation plans had
been determined based on the fair value at the grant date consistent with the
requirements of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation, then the Company's pro forma net income (loss) and
pro forma net income (loss) per share would have been as indicated below:

<TABLE>
<CAPTION>
                                 FISCAL 1998     FISCAL 1997    FISCAL 1996
---------------------------------------------------------------------------
<S>                              <C>            <C>             <C>
Net income (loss)
     As reported                 ($5,610,832)   $  1,305,931      $700,460
     Pro forma                   ($6,395,506)    ($4,511,769)     $450,995
---------------------------------------------------------------------------
Net income (loss) per share
     As reported                    ($0.41)         $0.12           $0.07
     Pro forma                      ($0.47)        ($0.41)          $0.05
---------------------------------------------------------------------------
</TABLE>

The fair value of each stock option grant has been estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions:

<TABLE>
<CAPTION>
                                 FISCAL 1998     FISCAL 1997    FISCAL 1996
---------------------------------------------------------------------------
<S>                              <C>             <C>            <C>
Risk-free interest rate          5.34%-5.55%         6.78%         6.78%
Expected life                     1-5 years       5-10 years      10 years
Expected volatility                  57%              75%           75%
Expected dividend yield               0%               0%            0%
----------------------------------------------------------------------------
</TABLE>


NOTE 10 - EMPLOYEE RETIREMENT PLANS

Effective January 1, 1997, the Company adopted a defined contribution plan
established pursuant to Section 401(k) of the Internal Revenue Code. Employees
contribute a percentage of their salaries to the plan, subject to the maximum
IRS prescribed deferral percentage and dollar limitation. The terms of the plan
call for discretionary profit sharing contributions by the Company as determined
annually by the Board of Directors. There were no Company contributions made to
the plan through January 31, 1998.

The Company has no other obligations for post-retirement benefits.


NOTE 11 - COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases office space, telephones, copiers and other equipment under
operating leases and computer equipment under capital leases. Minimum future
lease payments under these leases are as follows:


                                      32
<PAGE>
 
<TABLE>
<CAPTION>
                                                               Operating      Capital
Fiscal Year ending January 31,                                   leases        leases        Totals
-----------------------------------------------------------------------------------------------------
<S>                                                           <C>            <C>           <C>
     1999                                                     $1,322,039     $ 428,877     $1,750,916
     2000                                                      1,236,336       389,230      1,625,566
     2001                                                      1,122,967        43,802      1,166,769
     2002                                                      1,132,782             -      1,132,782
     2003                                                        980,924             -        980,924
     Thereafter                                                1,958,100             -      1,958,100
-----------------------------------------------------------------------------------------------------
     Total future minimum lease payments                      $7,753,148     $ 861,909     $8,615,057
          Less amount representing interest                                    (73,312)
                                                                             ---------
     Obligations under capital leases                                        $ 788,597
          Less current portion of capital lease obligation                    (368,006)
                                                                             ---------
     Non-current portion of capital lease obligation                         $ 420,591
                                                                             =========
</TABLE>


Litigation

In February 1998, Venture Direct Worldwide, Inc. filed a lawsuit in the Supreme
Court of New York against an employee of Quantum Leap Communications, the
Company and QLC. The complaint alleges that the employee's e-mail response to an
e-mail communication from the plaintiff caused damage to the plaintiff. The
Company has received from the plaintiff a settlement proposal that does not
involve a monetary payment. The Company intends to vigorously defend the suit
and believes that the employee's actions were outside the scope of employment.
The complaint alleges six causes of action, each seeking ten million dollars
plus punitive damages. Management does not believe that the claims have any
merit or the ultimate outcome of this matter will have a material adverse impact
on the Company's financial position or results of operations.

There are no other significant claims or lawsuits against the Company.

Employment Agreements

The Company has entered into employment agreements with seven key executives
providing for annual salaries ranging from $200,000 to $300,000, which expire at
various dates ranging from March 1999 through November 2000. Mr. Lutterbach's
employment with the Company terminated in April 1998. Certain key executives
have agreed to voluntarily reduce their annual salary for fiscal 1999 to
$52,000.

NOTE 12 - OTHER INCOME AND EXPENSE

Included in Other Income and Expense for the years ended January 31, 1998, 1997
and 1996, is interest income of $1,313,365, $619,000 and $0, and interest
expense of $1,044,341, $163,000 and $161,000, respectively.

NOTE 13 - INCOME TAXES

Income tax expense is calculated according to the provisions of Financial
Accounting Standards Board Statement No. 109, Accounting for Income Taxes, which
requires the liability method as described in Note 3.


                                      33
<PAGE>
 
The income tax provisions (benefits) charged to net income are summarized as
follows:

<TABLE>
<CAPTION>
                                  FISCAL YEAR ENDED JANUARY 31,
                                 --------------------------------
                                     1998        1997      1996
-----------------------------------------------------------------
<S>                              <C>           <C>       <C>
Federal:
  Current                          ($290,000)  $292,229  $ 16,230
  Deferred                        (2,516,314)   188,475   406,125
-----------------------------------------------------------------
                                 ($2,806,314)   480,704  $422,355
State:
  Current                           ($30,000)  $ 14,429         -
  Deferred                          (674,051)    41,229    71,668
-----------------------------------------------------------------
                                   ($704,051)  $ 55,658  $ 71,668
-----------------------------------------------------------------
Total Tax Provision (Benefit)    ($3,510,365)  $536,362  $494,023
 
</TABLE>
The statutory federal income tax rate is reconciled to the 
Company's effective income tax rate below:
<TABLE>
<CAPTION>

                                                      FISCAL YEAR ENDED JANUARY 31,
                                                      -----------------------------
                                                       1998        1997       1996
-----------------------------------------------------------------------------------
<S>                                                   <C>          <C>        <C>
Statutory rate                                        (34.0)%      34.0%      34.0%
State, net of Federal tax benefit                      (3.9)        4.8        4.9
Interest income, exempt from State income taxes        (0.8)       (2.2)         -
Change in valuation allowance                             -        (9.7)       1.3
Other                                                   0.2         2.2        1.2
-----------------------------------------------------------------------------------
Effective rate                                        (38.5)%      29.1%      41.4%
</TABLE>
Deferred income taxes arise from temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.

The components of the net current deferred income tax asset are as follows:
<TABLE>
<CAPTION>
 
                                        FISCAL YEAR ENDED JANUARY 31,
                                       -------------------------------
                                           1998             1997
-----------------------------------------------------------------
<S>                                     <C>              <C>
Net operating loss carryforward         $      -         $  8,698
Alternative minimum tax credit                 -               -
Compensation accruals                       41,925         16,536
Bad debt reserves                          244,431         27,300
Accrued restructuring costs                240,386             -
Other reserves                               3,258         12,088
-----------------------------------------------------------------
Net current deferred income tax asset   $  530,000       $ 64,622
 
The components of the net long-term deferred income tax asset 
(liability) are as follows:
 
                                        FISCAL YEAR ENDED JANUARY 31,
                                       -------------------------------
                                           1998             1997
-----------------------------------------------------------------
<S>                                     <C>             <C>
Net operating loss carryforward         $2,930,067       $ 34,792
Property and Equipment                     (12,217)        34,158
Capitalized software costs                (364,130)      (363,276)
Goodwill                                  (104,217)             -
Other                                      (19,442)             -
-----------------------------------------------------------------
Net long-term deferred income tax 
asset/(liability)                       $2,430,061      ($294,326)
</TABLE>

                                       34
<PAGE>
 
The Company has net operating loss carryforwards for federal and state income
tax purposes of approximately $6.6 million and $8.7 million, respectively. These
carryforwards begin to expire in the fiscal year 2013.

At January 31, 1998, no valuation reserve has been provided against deferred tax
assets since, in management's opinion, it is more likely than not that those tax
assets will be realized based on available tax operating loss carrybacks,
expected reversals of taxable temporary differences, and estimates of future
taxable income.

The Company's estimates of future taxable income are based on projections which
include a number of assumptions related to revenues and expenses. These
projections anticipate an overall return to profitability during fiscal 1999,
based primarily on anticipated taxable income from YAR and Kang & Lee and the
impact of significant cost reductions implemented at The Leap Partnership. The
projections beyond fiscal 1999 assume increased revenues from new business, of
which there can be no assurances that such new business will be generated. If
the assumed revenue increases do not occur, management intends to make any
additional cost-cutting efforts as deemed necessary to maintain overall Company-
wide profitability. Management will continue to evaluate the realizability of
the deferred tax asset and, if adverse changes occur in the Company's business,
it is possible that a valuation reserve could be provided against some or all of
the deferred tax asset in a future period. Such a reserve would result in a
charge to the Company's income tax provision which could be material to the
operating results of that period.

NOTE 14 - LOSS OF SIGNIFICANT CLIENTS

In prior years, revenues from one major client represented approximately 66.4%
of the Company's total revenues in fiscal 1996. In December 1995, the Company
resigned the account of this client in order to pursue other assignments.

In March 1997, a client representing approximately 3.1%, 25.1% and 5.5% of
revenues during the years ended January 31, 1998, 1997 and 1996, respectively,
gave the Company a notice of termination effective June 10, 1997.

In October, 1997, a client representing 5.5%, 23.4% and 0.04% of revenues during
the years ended January 31, 1998, 1997 and 1996, respectively, gave the Company
notice of termination effective December 31, 1997.

NOTE 15 - SUBSEQUENT EVENTS

Line of Credit

On February 2, 1998, the Company received proceeds from a loan for $665,000 from
a bank. The three-year balloon note bears interest at the rate of 9%, payable in
monthly principal and interest installments of $5992 through December 2, 2001,
with a balloon payment of approximately $184,000 in January 2002. The loan is
secured by a mortgage on the building in which the Company's current principal
offices are located and is personally guaranteed by an officer of the Company.

Acquisition

In connection with the YAR acquisition, a final determination on the acquisition
escrow balance has been made. The Company received $3 million of cash on April
30, 1998, which will reduce the purchase price of the acquisition and the amount
of recorded goodwill.

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

There have been no changes in or disagreements with independent auditors on
accounting and financial disclosure.

                                      35

<PAGE>
 
PART III


Item 10. Directors and Executive Officers of the Registrant.

Reference is made to the 1998 Proxy Statement under the headings "Election of
Directors" and "Executive Compensation and Certain Transactions--Other Executive
Officers" (hereby incorporated by reference) for this information.


Item 11. Executive Compensation.

Reference is made to the 1998 Proxy Statement under the heading "Executive
Compensation and Certain Transactions" (hereby incorporated by reference) for
this information.


Item 12. Security Ownership of Certain Beneficial Owners and Management.

Reference is made to the 1998 Proxy Statement under the headings "Security
Ownership of Management and Certain Beneficial Owners" (hereby incorporated by
reference) for this information.


Item 13. Certain Relationships and Related Transactions.

Reference is made to the 1998 Proxy Statement under the heading "Executive
Compensation and Certain Transactions" (hereby incorporated by reference) for
this information.


PART IV

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

(a) 1. Consolidated Financial Statements--

     The following Consolidated Financial Statements and related Notes and
     Report of Independent Public Accountants appearing in the 1998 Annual
     Report, are contained herein in Part II, Item 8.

     Report of Arthur Andersen LLP, Independent Public Accountants
 
     Consolidated Balance Sheets as of January 31, 1998 and 1997
 
     Consolidated Statements of Operations for the Fiscal Years Ended January
     31, 1998, 1997 and 1996
 
     Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended
     January 31, 1998, 1997 and 1996
 
     Consolidated Statements of Cash Flows for the Fiscal Years Ended January
     31, 1998, 1997 and 1996
 
     Notes to Consolidated Financial Statements

                                      36
<PAGE>
 
2. Financial Statement Schedules--

Are not submitted because they are not required or because the required
information is included in the Consolidated Financial Statements or Notes
thereto.


3. Exhibits--

The following exhibits are filed with this Report or incorporated by reference
as set forth below.

<TABLE> 
<CAPTION> 
Exhibit Number    Exhibits
--------------    --------
<C>               <S>  
          *3.1    Amended and Restated Certificate of Incorporation of the
                  Registrant.
 
          *3.2    Amended and Restated Bylaws of the Registrant.
 
          *4.1    Specimen Stock Certificate Representing Common Stock.
 
      ****10.1    Line of Credit Agreement, dated November 5, 1997, between
                  YAR Communications, Inc. and The Chase Manhattan Bank (a.k.a.
                  The Chemical Bank)
 
          10.2    Mortgage Agreement, dated January 27, 1998, between The Leap
                  Partnership, Inc. and Alliance Banking Company.
 
         *10.3    Revolving Credit Agreement, dated October 7, 1996, by and
                  between the Company and the Union Bank of Switzerland for a
                  line of credit up to $24,000,000, and related documentation.
 
       ***10.4    Revolving Credit Agreement, dated February 18, 1997, by and
                  between the Company and Manufacturers Bank, for a line of
                  credit up to $8,000,000, and related documentation.
 
         10.4a    Second Loan Modification Agreement, dated January 30, 1998,
                  between The Leap Group, Inc. and Manufacturer's Bank
 
        **10.8    The Leap Group, Inc. Employee Incentive Compensation Plan.
 
        **10.9    The Leap Group, Inc. Non-employee Directors' Stock Option
                  Plan.
 
       **10.10    The Leap Group, Inc. Employee Stock Purchase Plan.
 
       **10.11    The Leap Group, Inc. Amended and Restated 1996 Stock Option
                  Plan.
 
        *10.13    Employment Agreement dated March 12, 1996 by and between the
                  Company and R. Steven Lutterbach.
 
        *10.14    Employment Agreement dated March 12, 1996 by and between the
                  Company and Thomas Sharbaugh.
 
        *10.15    Employment Agreement dated March 12, 1996 by and between the
                  Company and Frederick Smith.
</TABLE> 
 
                                      37

<PAGE>
 
<TABLE> 
<CAPTION> 
<C>               <S> 
        *10.16    Employment Agreement dated March 12, 1996 by and between the
                  Company and George Gier.

        *10.17    Employment Agreement dated March 12, 1996 by and between the
                  Company and Joseph A. Sciarrotta.
 
        *10.18    Form of Indemnification Agreement.
 
         11.      Statement Regarding Computation of Per Share Earnings.
 
         13.2     Selected Financial Data from the 1998 Annual Report.
 
         21.      Subsidiaries of the Registrant.
 
         23.      Consent of Arthur Andersen LLP.
 
         27.      Financial Data Schedule.
</TABLE>

*   Previously filed with the Securities and Exchange Commission (the "SEC") as
    an Exhibit to the Registrant's Registration Statement on Form S-1 (File No.
    333-050501) as amended, and incorporated herein by reference.

**  Previously filed with the SEC as an Exhibit to the Registrant's
    Registration Statement on Form S-8 (File No. 333-24389), and incorporated
    herein by reference.

*** Previously filed with the SEC as an Exhibit to the Annual Report on Form
    10-K which was filed on May 1, 1997.

****Previously filed with the SEC as an Exhibit to the Quarterly Report on Form
    10-Q filed for the Quarter Ended October 31, 1997 on December 15, 1997.

(b) Reports on Form 8-K

    Form 8-K dated November 11, 1997 and filed with the Commission on November
    26, 1997, describing the acquisition of Kang & Lee Advertising, Inc. and K&L
    West Advertising, Inc.

                                      38

<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.

                                      THE LEAP GROUP, INC.


                                      By:   /s/ FREDERICK A. SMITH
                                         --------------------------------
                                                Frederick A. Smith
                                                 Vice Chairman and
                                              Chief Executive Officer
                                          (principal executive, financial
                                              and accounting officer)

                                      Date:  May 1, 1998


Pursuant to the requirements of the Securities Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities indicated on the 1st day of May, 1998:



/s/ FREDERICK A. SMITH                         /s/ JOHN G. KEANE
--------------------------------               --------------------------------
Frederick A. Smith                             John G. Keane 
Chief Executive Officer                        Director
                              

/s/ THOMAS R. SHARBAUGH                        /s/ CHARLES J. RUDER
--------------------------------               --------------------------------
Thomas R. Sharbaugh                            Charles J. Ruder    
Director and President                         Director            
                                                                    

/s/ GEORGE GIER
--------------------------------
George Gier
Director, Chief Marketing
and Information Officer
and Executive Vice President

                                      39