<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION 

                            Washington, D.C. 20549
                          --------------------------
                                  FORM 10-K/A

   [X]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                                EXCHANGE ACT OF 1934
                     For the fiscal year ended January 31, 1997, 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 informa-tion
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 21, 1997 was $20,873,335 (based upon
the closing sale price of the Common Stock on the Nasdaq National Market on
April 21, 1997, and, for the purpose of this calculation only, assuming that all
of the Registrant's directors and officers are affiliates.) There were
13,614,667 shares of Registrant's Common Stock, $.01 par value, outstanding as
of April 21, 1997.

                      DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Stockholders for the fiscal
    year ended January 31, 1997 ("the 1997 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 3, 1997 (the "1997 Proxy Statement") (Part III).
<PAGE>

                             THE LEAP GROUP, INC.

                                  FORM 10-K/A
                           For The Fiscal Year Ended
                               January 31, 1997

                                     INDEX
    
<TABLE>
<CAPTION>

PART I

Item                                                                    Page
----                                                                    ----
<S><C>                                                                 <C>
1.  Business ...........................................................   3
2.  Properties .........................................................   8
3.  Legal Proceedings...................................................   9
4.  Submission of Matters to a Vote of Security Holders.................   9


PART II

5.  Market for Registrant's Common Equity and Related
     Stockholder Matters................................................   10
6.  Selected Financial and Operating Data...............................   11
7.  Management's Discussion and Analysis of Financial
     Condition and Results of Operations................................   11
8.  Financial Statements and Supplementary Data.........................   18
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 ...   37

Signatures .............................................................   39
</TABLE> 
     
                                       2


<PAGE>
 
PART I

Item 1. Business.

The Company

The Leap Group, Inc. ("Leap" or "the Company") is a strategic and creative
communication services company that develops and implements integrated brand
marketing campaigns using traditional and new media primarily for market leading
clients. The Company's marketing and communications services combine
comprehensive strategic brand marketing skills, award-winning creative talent,
and the production capabilities of world class full service advertising agencies
with the technological expertise to exploit new interactive and other digital
media. Leap's mission is to build brand equity for its clients. Leap focuses on
establishing long-term marketing partnerships with marquee clients of national
and international scope that position the Company as the steward for major
brands with correspondingly significant advertising budgets.

Leap is a Delaware corporation which was incorporated in March 1996 to act as
the parent company for three wholly-owned subsidiaries--The Leap Partnership,
Inc. ("Leap Partnership"), an Illinois corporation established in September,
1993; Lilypad Services, Inc. ("Lilypad"), an Illinois corporation established
in September, 1995; and Tadpole Productions, Inc. ("Tadpole"), an Illinois
corporation established in September, 1995.

In September 1996, the Company raised $40 million in its Initial Public Offering
(the "Offering") of common stock. A portion of the proceeds from the Offering,
approximately $1.3 million, was used to retire substantially all of the
Company's debt, and the balance of the proceeds will provide added capital to
the Company so that it may continue to pursue talent, products, technologies and
potential acquisitions that are complementary to the Company's business.

In December 1996, the Company formed a new wholly-owned subsidiary--Quantum Leap
Communications, Inc. ("QLC"), a Delaware corporation. QLC was created to help
advertisers 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 Communication, Inc. ("YAR"). Through a staff representing nearly 40
nationalities, YAR provides culturally relevant marketing and advertising for
global clients and for all major U.S. ethnic and global markets. YAR's clients
include AT&T, Western Union, Nike, American Airlines, Walt Disney, L.L. Bean,
MetLife, Citibank, EDS, Allstate, Medronic, Datascope, Calvin Klein, CNN,
General Electric, Eli Lilly, Alta Vista, Owens-Corning, Turner Broadcasting, USA
Poultry and Egg Council, FMC, and R.C. Cola.

The Company is headquartered in Chicago with offices in Los Angeles, New York,
San Francisco, and Moscow. 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 a part of this Report.

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

Leap's Core Strengths

Leap's central mission is to build brand equity for its clients by designing and
implementing strategic brand marketing plans and comprehensive advertising
campaigns that are driven by premier talent and creative content and employ both
traditional and new media. Management believes that certain core strengths have
been, and will continue to be, integral to Leap's success in achieving this
goal.

                                       3
<PAGE>
 
Roster of Marquee Clients.   Leap has successfully competed for and serviced
major accounts.  Leap's clients include Digital City, U.S. Robotics, Tommy
Armour, The Chicago Tribune Company, Ameritech Corporation, R.J. Reynolds, Pizza
Hut, Inc. and The University of Notre Dame. Leap attributes its success in
attracting such clients to the reputations of Leap and its senior management, as
well as its other core strengths, and believes that these factors, coupled with
the client roster itself, will enhance Leap's ability to attract additional
significant clients of national and international scope. Leap also believes in
providing pro-bono services to worthy organizations and has to date provided
services to the Brain Injury Association and the Partnership for a Drug Free
America.

Strategic Orientation.   Leap specializes in the strategic positioning of
brands. Beginning with a thorough appraisal of the needs, wants, impressions and
opinions of the client's customers and the position of the client's brand in its
marketplace in relationship to customers, competitors and retailers, Leap
develops a distinct identity for the brand. Fusing the brand strategy with
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.   Leap 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, Leap's management places heavy emphasis on creativity in
the selection and training of personnel. The Company believes that its success
in attracting such creatives is in part attributable to the reputations of
Frederick Smith, George Gier, Joseph A. Sciarrotta and Thomas R. Sharbaugh, who
in the aggregate have over 70 years of advertising experience. Among numerous
accolades received by these men for their work, Messrs. Gier and Sciarrotta were
each named a National Creative All-Star for 1994 by Adweek magazine. While
employed by DDB Needham, Messrs. Smith, Gier and Sciarrotta were best known for
their campaigns for Anheuser-Busch, Inc.'s Bud Light brand. The team created and
produced the memorable "Yes I am!" and "Ladies Night" commercials for Bud
Light.  Mr. Sharbaugh has a wealth of experience in brand stewardship acquired
during 18 years in marketing at Anheuser-Busch, Inc. ("Anheuser-Busch") and
Sears Roebuck and Co. ("Sears"). Mr. Sharbaugh oversaw the "Softer Side of
Sears" campaign, which was an important part of the fundamental repositioning
of Sears' retail operations. In addition, during his tenure at Anheuser-Busch,
Mr. Sharbaugh oversaw noteworthy campaigns, such as "This Bud's For You,"
"Gimme a Light," "Spuds McKenzie" and "the Bud Bowl," that contributed to
Budweiser's stronghold on the top position in the beer market and Bud Light's
emergence as the leading light beer.

Leap's employees include experienced writers, art directors, graphic designers,
Web designers, producers and strategic thinkers. Leap'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. The Company
believes that it has to date, despite intense competition for talent, been
successful in attracting and retaining superior creative and strategic thinkers
as well as highly skilled programmers and interactive media developers. All Leap
employees are called upon to contribute beyond their primary areas of expertise.

The depth of Leap's talent extends well beyond its senior management. Leap's
strategy is to recruit the very best talent available, and the work of Leap's
employees (all of whom share the title "Creative Partner") has received numerous
accolades and awards. Despite its short history, Leap has achieved international
recognition for creative advertising. The Company received a "Clio" award for
Special Effects for its 1995 Super Bowl Campaign for the Miller Brewing Company,
was a finalist in two categories at the 1995 London International Advertising
Awards and has received more than a dozen awards from the Chicago Show.

Organizational Model and Creative Process.   Leap operates with an
organizational structure that differs significantly from the traditional agency
model. Instead of functional departments organized in a vertical hierarchy, Leap
is a flat organization built around cross-functional work teams. Employees with
varied skill sets (such as writers, art directors, graphic designers, Web
designers, programmers, account planners, producers or media planners) are
brought together as needed to service each client's specific needs. Unlike the
traditional agency model, Leap's structure enables the client to deal directly
with the creative and other team members and also does not grant any one person
proprietary control over a creative concept. Management believes that this flat
open structure yields better communications, shorter cycle times, more
responsive services, more efficient use of resources, and a richer flow of
creative ideas. Management also believes that this unusual structure has enabled
Leap to create a culture and working environment that is attractive to creative
talent. Leap has used this to its advantage, bringing together top 

                                       4
<PAGE>
 
level marketing practitioners, creative minds and technical talent selected for
their balance of strategic understanding and creative capabilities. In addition,
Leap has used advanced technology to link its people, assets and ideas into a
flexible, fast-acting organization.

Integrated Services Approach.   Leap provides a full range of strategic,
creative, interactive and production services for both traditional and new media
projects. Leap'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 and radio advertisements, as well as promotions,
direct mail, package design and logo design. Leap will also develop and execute
digital 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 provides creative services for itself and its clients by
developing and maintaining sites on the Internet's World Wide Web. In addition,
Leap creates and implements interactive marketing solutions in a variety of
digital media including CD-ROMs. The Company's Creative Partners include skilled
programmers and interactive media developers. Management believes that Leap's
investment in technology serves as a competitive advantage in recruiting and
retaining talented employees.

With the creation of Quantum Leap, the Company has added a strategic focus on
developing proprietary content and new distribution systems that allow
advertisers to communicate more effectively in non-traditional ways.   An
example of Quantum Leap technologies and products includes Quantum Objects.
Quantum Objects, Version 1.0, is a new Internet publishing application that
allows real time customization and updating of on-line information.  The first
commercial application of this technology is an arts and entertainment guide for
The Chicago Tribune Company.

Leap is networked to the Internet through a 1.5 Mbps T1 line. The Company has
developed an intranet Web site to allow easy distribution of information
internally in a secured environment, and its clients can view and proof both
print and graphics remotely through password protected Web pages. Proofing and
annotation of audio and video work is accomplished with Emotion's Creative
Partner content distribution system. Leap's programmers are versed in Basic,
Pascal, C/C++, Java, Perl, Lingo and Hypertalk. Leap develops Internet projects
on a number of platforms including Macintosh and Windows NT servers. Leap also
utilizes two Sun Microsystems Sparc Servers, one in-house and one offsite. The
in-house Sparc Server is used for development of Web projects and beta testing
new technologies for companies, including Netscape and Macromedia, before they
are released to the public for general sale. Completed work is transferred to a
Sun Sparc 20, which is housed at a location that contains Chicago's Network
Access Point, one of the hubs at which the world's telecommunications providers
(such as Sprint and MCI) share information between networks. This Sparc 20 is
monitored 24 hours a day, 7 days a week to ensure optimal connectivity and
functionality.


Leap's Strategy

Leap's strategy embodies the following key elements to build its business and
succeed in its mission:

Focus on Brand Stewardship.   Leap's objective is to develop and nurture long-
term relationships with existing and new clients who have entrusted the Company
with the stewardship of their brands and the responsibility for designing,
creating and delivering key consumer messages over traditional and new media.
Leap has thus far been successful in winning additional assignments from several
clients who initially retained Leap to undertake a single project in Web design
or a specific brand advertising assignment. As such clients worked with Leap and
experienced its integrated, value-added approach, other assignments and
additional responsibilities followed. For example, Leap received an initial
assignment to do the strategic positioning and creative development for Tommy
Armour's 855s irons. Leap's scope of work for Tommy Armour grew to include
assignments for a World Wide Web site, new club design, logo design, package
design and material used at the point-of-purchase. Similarly, Leap was initially
engaged by U.S. Robotics to develop advertising for its modem division. Leap has
since received assignments to redesign and develop a number of U.S. Robotics'
Web sites. Leap is also working on adapting U.S. Robotics' installation software
CD-ROM to an advertising/marketing new media tool. In addition, the Company has

                                       5
<PAGE>
 
been engaged to do advertising for U.S. Robotics' telephony division. Management
believes that its focus on long-term partnerships should provide a recurring
revenue stream not associated with single project assignments.

Maintain Superiority in Talent, Technology, and Service.   Leap intends to
continue to attract, hire and retain top level strategic, creative and technical
talent and to be a leader in developing better ways of communicating with
consumers through leading-edge technology. With its flexible work team approach
and flat organizational structure, Leap is dedicated to providing faster and
more cost effective solutions to its clients' needs. Leap believes that it can
provide a competitive advantage to itself and its clients by creating leading
multimedia marketing programs that use interactive technologies and MIS tools
for optimizing the effectiveness of marketing initiatives.

Target Market Leaders as 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 for significant national or
international brands and are interested in using traditional and new media for
their marketing communications. Many of Leap's current clients are, and future
targets are expected to be, market leaders with aggressive plans for growth and
multi-faceted communications needs.

Consistent with such strategy, a large portion of the Company's revenues has
been and is expected to continue to be concentrated among a relatively limited
number of nationally recognized clients. For the year ended January 31, 1997,
three clients, Nike, U.S. Robotics, and Tommy Armour Golf, accounted for 25.1%,
23.4%, and 18.9%, respectively, of consolidated revenues.  In March 1997, Nike
gave the Company a notice of termination effective June 10, 1997.  See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", which is incorporated herein by reference to the 1997 Annual
Report.

Develop Proprietary Program Material.   Leap believes there is a significant
opportunity to create, develop and own proprietary program material for its
clients or itself. For example, Leap could create fictional characters, events
(a fictional sports league, for example) or locations (a fictional shopping
mall) that could be used in clients' marketing campaigns. This is similar in
concept to the early days of television when third parties, often advertising
agencies, developed entertainment programs sponsored by agency clients. Leap's
strategy, in contrast to the earlier concept, is to retain ownership of programs
it creates and to use such fictional creations primarily on the World Wide Web,
rather than television. If these fictional characters, events or locations are
developed and prove popular, the Company could license them to sponsors.
Moreover, the Company could create collateral merchandise, such as clothing,
games, and toys, based on these fictional creations. Leap's management believes
that this strategy, over time, could result in the creation of intellectual
property which, if properly utilized, could generate a recurring revenue stream
for the Company.

In March 1997, QLC announced the release of the Quantum Objects Software.
Quantum Objects, Version 1.0, was developed to become a powerful centralized
Internet database which allows editors to input new or revised text into a Web
site by posting the information to the database--and not to specific Web pages.
It will help publishers to maintain or freshen their Web sites more frequently,
easily and cost-effectively since there is no need to create a new Web page to
display the latest information.  Metromix, the first commercial application of
Quantum Objects, is an online arts and entertainment guide published by The
Chicago Tribune in an effort to take a leadership position in Web-based content
products.  Management believes that over time, the development of proprietary
program material, like Quantum Objects and Metromix, could result in recurring
revenue streams from licensing, advertising, and maintenance.

Pursue Acquisitions and Alliances.   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 Leap's core strengths and services.

Consistent with this strategy, in April 1997, the Company YAR.  With this
acquisition, Leap effectively doubles its revenue base, increases its creative
talent by approximately 200, and expands its presence nationally in New York
City and San Francisco, and internationally in Moscow.

                                       6
<PAGE>
 
Broaden Operations Geographically to Service Clients.   In keeping with the
Company's strategy of developing long-term relationships with national-to-global
clients, management intends to expand localized client account management and
support services through cost effective computerized local offices.  On January
31, 1997, The Leap Partnership established a new office in Los Angeles,
California, to service local and additional clients on the West Coast.  Creative
marketing, advertising and administrative support will be provided by personnel
at the Company's corporate headquarters as management believes that centralized
operations can best preserve Leap's culture, assist creativity and maximize the
operational efficiencies of Leap's structure.

Create the Marketing Multiplier.   In its work for clients, Leap applies a
concept it calls the "marketing multiplier." This concept involves the mixing
of advertising, entertainment and technology to increase the opportunities for
delivering brand messages in a fresh way. Ideally, this generates publicity and
public relations opportunities, creates product recognition and makes the
selling message more memorable. Leap seeks to create the "big idea," a
marketing theme which has greater impact as it is translated across multiple
communications channels into advertising, promotions, programming, entertainment
and Internet content. For example, in 1994 Leap created a series of humorous
spots for Miller that followed fictional quarterback Elmer Bruker, a member of
every winning Super Bowl team who never saw any playing time. Leap wrote a
Bruker biography, created Bruker trading cards and orchestrated promotions and
public relations efforts. The Bruker idea generated "free" publicity and
product recognition that went far beyond the spots themselves. At Super Bowl
1995, network sportscasters interviewed Bruker and fans displayed Bruker
banners. The Company believes that major national-to-global advertisers are
embracing the "marketing multiplier" or "big idea" marketing strategy as a
way to build brand equity on a cost effective basis and that Leap, with its
expertise in developing communications across all platforms and its
relationships with clients and members of the media and entertainment
industries, is well positioned to leverage the multiplier effectively for the
brands it promotes.


Leap's Services

Leap focuses on providing integrated marketing and communications services
designed to build brand equity through both traditional and new media. Creative
marketing solutions are generated with the goal of increasing the client's sales
while maximizing return on investment. The Company's solutions are formulated
through an ongoing process of building brand strategy and creating and producing
traditional and new media content.

Strategic Brand Management.   Leap focuses on developing a unique selling
proposition for a client or a client's product that builds brand equity and
differentiates the client or product from its competition. The Company creates
integrated marketing communications campaigns using a combination of traditional
and new media techniques designed to leverage marketing multiplier principles.
Leap has an account planning philosophy that places the consumer at the center
of the process, enhancing understanding of consumer needs, motives and
perceptions.

Creative Content Development.   Leap develops creative ideas and executions for
delivery through a variety of distribution channels. Leap creates television,
print, radio and outdoor ads; develops logos, packaging, product and collateral
designs; creates promotions; generates design, programming and content for World
Wide Web sites, interactive kiosks and laptop presentations; and develops
entertainment programming.

New Media Production and Services.   As part of Leap's integrated marketing
strategy, it generates and provides new media products and services including
designing and programming World Wide Web sites, interactive kiosks, CD-ROMs and
laptop presentations.

Innovative Production.   Once strategy and creative content are approved by
clients, Leap produces the work in a manner designed to maintain high standards
of quality and deliver an attractive return on investment. Leap seeks to deliver
innovative solutions that can lower production costs, or provide new media or
new distribution channels for Leap's clients.

                                       7
<PAGE>
 
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 themselves. 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. These
sources include national and regional full-service and specialty advertising
agencies as well as specialized and integrated marketing communications firms.
The Company could also be viewed as competing with large entertainment,
technology and/or marketing companies. While management believes that Leap has a
technological head start over most traditional agencies, many agencies have
begun to internally develop or acquire new media capabilities (e.g., corporate
identity and packaging, advertising services or World Wide Web site design),
have emerged technically proficient in the new media arena and are competing
with the Company in the interactive advertising market. 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 customer
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, due in large part to a structure that combines
the creative talent and other skills of a traditional advertising agency, as
well as access to significant client advertising budgets, with the technological
vision required to convert client budgets into effective digital, interactive
marketing communications. However, there can be no assurance that the Company
will continue 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, 1997, Leap employed a total of 82 Creative Partners, 74 of
whom were full-time and 7 part-time. Of these, 72 were engaged in servicing
clients and 10 were involved in finance and administration.  The acquisition of
YAR in April 1997, added approximately 200 additional employees to the Company.
The Company expects to hire a significant number of Creative Partners in fiscal
1998 to accommodate anticipated growth and expansion. None of the Company's
Creative Partners are represented by a labor union, and the Company believes
that its relations with its Creative Partners 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 Los Angeles, New
York, San Francisco, and Moscow.  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 March 1997, Leap Partnership entered into an agreement to purchase a 16,480
square foot, three-story commercial office building in Santa Monica, California.
The Company is currently leasing approximately 1,000 square feet of temporary
office space in Santa Monica until the building is available for occupancy.

                                       8
<PAGE>
     
With the acquisition of YAR in April 1997, the Company added the following
leased offices around the world:  New York City--approximately 26,300 square
feet, San Francisco--approximately 3,100 square feet, and Moscow--approximately
3,500 square feet.     


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
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 courts pursuant to the settlement
agreement.  The Company is not a party to any other litigation.     


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 1997.

                                       9
<PAGE>
  
PART II

Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters.
    
                             The Leap Group, Inc.

                           COMMON STOCK INFORMATION

The Company's common stock is traded on the Nasdaq National Market under the
symbol LEAP. On April 15, 1997, there were 58 holders of record of the Company's
stock. The Company's high and low common stock prices for the last two quarters
since the Company's Initial Public Offering are:

<TABLE>
<CAPTION>
 
      Fiscal 1997                         High       Low
      ---------------------------------------------------
      <S>                                <C>        <C>
      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 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.

                                      10

     
<PAGE>
Item 6.   Selected Financial and Operating Data.
    
Reference is made to "Financial Highlights" on page 1 and "Selected Financial
Data" on page 40 of the 1997 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.


OVERVIEW

The Leap Group, Inc. ("Leap") is a strategic and creative communication services
company that develops and implements integrated brand marketing campaigns
primarily for market leading clients using traditional and new media.
Traditional marketing services provided by Leap include television, print, radio
and outdoor advertising, promotions, direct mail and package and logo design;
its new media services include digital interactive applications such as World
Wide Web sites, CD-ROMs and interactive presentations. With a wide array of
innovative services and premier marketing, advertising and technical talent and
expertise, Leap is well prepared to continually pursue its central mission to
build brand equity for its clients.

During the fiscal year ended January 31, 1997, and in the few months since then,
The Leap Group, Inc. and its subsidiaries have achieved a number of strategic
milestones:

 .  Looking back over the three and one-half years of the Company's existence,
   the Company has grown to become profitable in its second full year of
   business with $8.2 million in revenues and $700,460 in net income during
   fiscal 1996. For fiscal 1997, the Company reported record revenues of $16.1
   million and record earnings of $1.3 million.

 .  The Company grew from four founding partners in September 1993, to 82
   employees as of January 31, 1997. Leap's strategy is to recruit the very best
   talent available. Despite intense competition for talent, the Company
   believes that it has been successful in attracting and retaining superior
   creative and strategic thinkers as well as highly skilled programmers and
   interactive media developers. Despite the short history of the Company, Leap
   and its Creative Partners have achieved international recognition for
   creative advertising and have received numerous other accolades and awards.

 .  In September 1996, Leap raised $40 million in its Initial Public Offering
   (the "Offering") of common stock. A portion of the proceeds from the Offering
   was used to retire certain obligations of the Company and the balance will
   provide added capital to the Company so that it may continue to pursue
   talent, products, technologies and potential acquisitions that are
   complementary to the Company's business.

 .  In December 1996, Leap formed a new subsidiary, Quantum Leap Communications,
   Inc. ("QLC"). QLC was created to help advertisers communicate more
   effectively with targeted consumers in non-traditional ways primarily using
   new media over the Internet.

 .  On January 31, 1997, The Leap Partnership, Inc. opened up a Los Angeles
   office. In keeping with the Company's strategy of developing long-term
   relationships with national-to-global clients, management broadened the
   Company's operations geographically. The office is under the guidance and
   direction of an exceptionally talented creative team headed by Creative
   Director, Steve Rabosky, and Managing Director, Carisa Bianchi.     

                                      11
<PAGE>
     
 . In March 1997, QLC announced the release of the Quantum Objects Software.
  Quantum Objects, Version 1.0, was developed to become a powerful centralized
  Internet database which allows editors to input new or revised text into a Web
  site by posting the information to the database - and not to specific Web
  pages. It will help publishers to maintain or freshen their Web sites more
  frequently, easily and cost-effectively since there is no need to create a new
  Web page to display the latest information. Management believes that over
  time, the development of proprietary program material, like Quantum Objects,
  could result in a recurring revenue stream for the Company.

 . In April 1997, Leap acquired YAR Communications, Inc. ("YAR"). YAR brings
  culturally relevant marketing and advertising expertise in over 40 different
  nationalities and for many U.S. ethnic and global markets. For the year ended
  December 31, 1996, YAR reported revenues of $18.5 million and pre-tax income
  of $2.75 million. In addition, YAR has added approximately 200 Creative
  Partners to Leap's pool of talent.


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; fixed fees for specific project
assignments; and licensing fees related to licensing of the Company's
proprietary software.

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 based upon 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 prior to the execution of
written agreements. Revenues, even if 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 propriety 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 generate additional
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. The Company has a limited operating history upon which an
     
                                      12
<PAGE>
     
evaluation of the Company and its prospects may be based, and the Company has
not identified any particular 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.
Leap's production projects are usually commenced and completed in a short time
period, often less than 60 days. 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. Revenues earned from fees based
upon third-party media placements are recognized 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.


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,
                                            ------------------------------------
                                             1997        1996         1995
--------------------------------------------------------------------------------
<S>                                         <C>          <C>          <C>
Revenues                                     100.0%      100.0%       100.0%
Operating expenses:
     Direct costs and related expenses        55.0        44.1         80.1
     Salaries and related expenses            26.4        27.4         34.2
     General and administrative expenses      10.0        12.0         15.4
--------------------------------------------------------------------------------
          Total operating expenses            91.4        83.5        129.7
--------------------------------------------------------------------------------
Operating income/(loss)                        8.6        16.5        (29.7)
     Other income and (expenses), net          2.8        (2.0)        (2.2)
--------------------------------------------------------------------------------
Income/(loss) before income taxes             11.4        14.5        (31.9)
     Income tax (expense)/benefit             (3.3)       (6.0)         9.1
--------------------------------------------------------------------------------
Net income/(loss)                              8.1%        8.5%       (22.8)%
================================================================================
</TABLE>

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 only 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 Creative Partners.     

                                      13
<PAGE>
     
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.

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 Creative Partners.

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.     
 
                                      14
<PAGE>
     
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.

Fiscal Year Ended January 31, 1995 Compared to Fiscal Year Ended January 31,
1994

The Company's inception was September 20, 1993, and operations commenced during
November 1993. Since less than three months of operations are included in fiscal
1994, comparisons to fiscal 1995 are not meaningful.

During fiscal 1994, the Company's revenues were $373,000 and operating expenses
were $496,000, resulting in a net loss of $123,000. The loss was primarily
attributable to start-up costs incurred in connection with commencing
operations.


LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has primarily financed its operations and
investments in property and equipment through cash generated from bank
borrowings, loans from a Company officer and equipment leases. As a result of
the Offering in late September 1996, the Company raised $35.7 million in cash,
net of underwriting commissions and other Offering costs, of which approximately
$1.3 million was used to repay company debt. The balance of the net proceeds
from the Offering were invested in short-term U.S. Treasury Notes and Bills,
certificates of deposit, and in a money market fund.

The Company's net working capital increased to $34.7 million at January 31, 1997
from a working capital deficit of $1 million at January 31, 1996. The Company's
cash and cash equivalents increased $32.3 million and $41,000 for the fiscal
years ended January 31, 1997 and 1996, respectively. The increase during fiscal
1997 is primarily due to the $34.4 million received from the net proceeds of the
Initial Public Offering after repayment of substantially all of the Company's
debt. This cash from financing activities is offset by cash used in operations
and in investing activities during fiscal 1997. The $825,000 decrease in cash
from operating activities is primarily attributable to a $4.4 million increase
in accounts receivable which is offset by current year net income of $1.3
million, increases in accounts payable and other liabilities totaling $1.7
million, and a decrease in costs in excess of billings of $400,000. The cash
used in investing activities includes capital expenditures totalling $524,000
and $825,000 in proprietary software development costs. The operating and
investing cash flows reflect the growth in the Company's business operations and
investment activities.

In October 1996, the Company obtained a line of credit facility, secured by
certain assets of the Company. The Company will be provided with credit up to
the lesser of (i) $24 million or (ii) 90-95% of the Company's available cash and
cash equivalent balances. The line of credit bears interest at the London
Interbank Offered Rate ("LIBOR") plus .5%. As of January 31, 1997, there was no
outstanding balance. In April 1997, the Company borrowed $20 million under this
facility for the purchase of YAR.     

                                      15
<PAGE>
     
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%.

In March 1997, Leap loaned $1.0 million to Vivid Publishing, Inc., an Internet
production house ("Vivid"), in exchange for a convertible debenture. The
debenture is convertible into 10% of the common stock of Vivid at Leap's option,
and is secured by a pledge of Vivid's common stock. Under the debenture, Leap
may at its option loan up to an additional $1.0 million on substantially the
same terms. As of April 15, 1997, Leap had advanced $474,000 pursuant to this
option. The loans to Vivid bear interest at the prime rate plus 2% per annum.

Also in March 1997, Leap Partnership entered into an agreement to purchase a
commercial office building to provide facilities for its new Los Angeles office.
The estimated purchase price is $2 million, of which $1.4 million will be seller
financed over a one-year term at 9% with an option to renew the note for one
additional year. The balance of the purchase price will be paid by the Company.

In April 1997, the Company acquired the assets and assumed certain liabilities
of YAR Communications, Inc. for $20 million plus additional contingent payments
should YAR meet certain revenue and earnings performance goals in the next three
years. The additional cash payments would be equal to 50% of the excess, if any,
of Annual Pre-Tax Income over the Annual Pre-Tax Income Targets, defined below,
for each of the calendar years 1997, 1998 and 1999, provided, however, that the
corresponding Annual Revenue Targets for those years are met or exceeded.
<TABLE>
<CAPTION>
        Year     Annual Pre-Tax Income Targets      Annual Revenue Targets
        ----     -----------------------------      ----------------------
<S>     <C>      <C>                                <C>             
        1997              $3,937,500                      $22,500,000    
        1998              $4,725,000                      $27,000,000  
        1999              $5,670,000                      $32,400,000
</TABLE>

The earnings and revenue targets are set at a minimum annual growth rate of 20%.
There is no limit to the amount of payments that could be paid under this plan
so as to further incent maximum performance. In the event such payments are
made, additional goodwill will be recorded and amortized over its remaining
estimated life.

The Company believes that the net proceeds of the Offering, together with
existing credit facilities and any funds from operations, will be sufficient to
meet the Company's cash requirements for at least the next twelve months. The
Company's long-term 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 the net
proceeds of the Offering, seller financing, institutional financing, 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      

                                      16
<PAGE>
     
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 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 strategy, a large portion of the Company's revenues has
been, and is expected to continue to be, concentrated among a relatively limited
number of nationally recognized clients. For the year ended January 31, 1997,
three clients accounted for 25.1%, 23.4%, and 18.9%, respectively, of
consolidated revenues. One client accounted for 66.4% of consolidated revenues
during fiscal 1996, and two clients accounted for 63.7% and 28.4% of
consolidated revenues during fiscal 1995.

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, engage another entity or take in-house all or part of the business
performed by the Company. In December 1995, the Company voluntarily resigned the
Miller Brewing Company account which accounted for 66.4% of the Company's
revenues for the year ended January 31, 1996. In the second half of fiscal 1996,
Miller 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 Miller's
advertising budget for such campaigns as unlikely and determined that Leap's
resources could be better utilized on other opportunities. The Company therefore
resigned the Miller 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 revenue by 96%. Excluding revenue attributable to
Miller, revenue from other existing clients and new business increased $13.3
million or 475% during fiscal 1997 as compared to fiscal 1996.

Even though the Company has taken steps to grow existing and new business,
diversify its client base, negotiate a greater percentage of retainer- and fee-
based 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 March 1997, a client representing 25.1% of the
Company's revenues for the year ended January 31, 1997, gave the Company a 90-
day notice of termination. Management believes that the loss of the client and
varying effects of seasonality, as described above, will have an impact on the
Company's operations, particularly in the short term. Given the Company's
existing plans to grow the business through the completion of the YAR
acquisition, new business development and its other strategic investments as
described above, Management believes that the loss in revenue will be replaced
and will therefore not have a materially adverse effect on the Company's
operating results beyond the short term. There can be, however, no assurance
that the Company will be able to manage the acquisition 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 statements. A
number of important factors could cause the      

                                      17
<PAGE>
     
Company's actual results, performance or achievements for fiscal 1998 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 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

                                      18
<PAGE>
 

    
                             The Leap Group, Inc.


              CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
                    AS OF JANUARY 31, 1997, 1996, AND 1995
                        TOGETHER WITH AUDITORS' REPORT

                                      19
                                                                  

<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, 1996 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended January 31, 1997.
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, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1997, in conformity with generally accepted accounting principles.



ARTHUR ANDERSEN LLP


Chicago, Illinois
April 15, 1997    

                                      20

<PAGE>
 
     
The Leap Group, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
 
 
                                                              January 31,
                                                      ---------------------------
ASSETS                                                    1997           1996
                                                      -------------  ------------
<S>                                                   <C>            <C>
 
CURRENT ASSETS
  Cash and cash equivalents                            $32,312,749    $   47,981
  Accounts receivable (net of allowance of $30,000
     and $0, respectively)                               4,793,937       362,388
  Costs in excess of billings (net of allowance of
     $40,000 and $0, respectively)                         218,721       619,660
  Deferred income tax asset                                 64,622             -
  Prepaid expenses                                         215,174        42,201
                                                       -----------    ----------
     Total current assets                               37,605,203     1,072,230
 
PROPERTY AND EQUIPMENT
  Land                                                     158,921       158,921
  Building and building improvements                       491,900       442,923
  Computer equipment                                       804,534       385,462
  Furniture and equipment                                  259,074       164,521
                                                       -----------    ----------
                                                         1,714,429     1,151,827
  Less accumulated depreciation                           (525,068)     (254,454)
                                                       -----------    ----------
     Net property and equipment                          1,189,361       897,373
 
OTHER ASSETS                                             1,065,048        83,190
                                                       -----------    ----------
 
TOTAL ASSETS                                           $39,859,612    $2,052,793
                                                       ===========    ==========
 </TABLE>

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

                                      21
<PAGE>
     
 
<TABLE>
<CAPTION>


                                                                January 31,
                                                         ------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY                        1997         1996
                                                        ------------   ----------
<S>                                                     <C>            <C>
CURRENT LIABILITIES
  Accounts payable                                       $ 1,834,331  $  898,133
  Accrued expenses                                           809,939     230,952
  Billings in excess of costs                                214,264        -
  Notes payable to bank                                         -        459,378
  Current portion of long-term liabilities                    52,066      56,295
  Notes payable to officer                                      -        400,000
                                                         -----------  ----------
     Total current liabilities                             2,910,600   2,044,758

LONG-TERM LIABILITIES
  Deferred income tax liability                              294,326        -
  Mortgage payable                                              -        381,097
  Capital lease obligations                                   71,999      66,526
                                                         -----------  ----------
     Total long-term liabilities                             366,325     447,623

TOTAL LIABILITIES                                        $ 3,276,925  $2,492,381
                                                         -----------  ----------

COMMITMENTS AND CONTINGENCIES (NOTE 9)

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, 13,600,000 and 9,600,000 shares
     issued and outstanding as of January 31, 1997
     and 1996, respectively                                  136,000      96,000
  Additional paid in capital                              35,581,344     (95,000)
  Retained earnings (accumulated deficit)                    865,343    (440,588)
                                                         -----------  ----------
     Total stockholders' equity (deficit)                 36,582,687    (439,588)

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY               $39,859,612  $2,052,793
                                                         ===========  ==========

</TABLE>


The accompanying notes to the consolidated financial statements are an integral
part of these statements.     
 
                                      22
<PAGE>
     
The Leap Group, Inc. and Subsidiaries
Consolidated Statements of Operations

<TABLE>
<CAPTION>
 
 
                                                 FISCAL YEAR ENDED JANUARY 31,
                                          -------------------------------------------
                                              1997           1996           1995
                                          -------------  ------------  --------------
<S>                                       <C>            <C>           <C>
 
Revenues                                   $16,087,986   $ 8,209,622   $   4,679,248
 
Operating expenses:
  Direct costs and related expenses          8,847,323     3,622,016       3,749,019
  Salaries and related expenses              4,252,019     2,246,963       1,598,047
  General and administrative expenses        1,602,644       984,966         722,092
                                           -----------   -----------   -------------
     Total operating expenses               14,701,986     6,853,945       6,069,158
 
Operating income/(loss)                      1,386,000     1,355,677      (1,389,910)
  Other income and (expense), net              456,293      (161,194)       (102,699)
                                           -----------   -----------   -------------
Income/(loss) before income taxes            1,842,293     1,194,483      (1,492,609)
  Income tax (expense)/benefit                (536,362)     (494,023)        427,300
                                           -----------   -----------   -------------
Net income/(loss)                          $ 1,305,931   $   700,460    ($ 1,065,309)
                                           ===========   ===========   =============
 
Per share data:
  Net income/(loss) per share                    $0.12         $0.07          $(0.11)
  Shares used in per share computation      11,126,162    10,108,680      10,108,680
 
</TABLE>


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

                                      23

<PAGE>
     
 
The Leap Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>
 
                                                                                Retained         
                                           Common Stock         Additional      Earnings/            Total     
                                     ------------------------    Paid In       (Accumulated       Stockholders'
                                        Shares      Amounts       Capital        Deficit)       (Deficit) Equity
----------------------------------------------------------------------------------------------------------------
<S>                                    <C>           <C>        <C>             <C>                <C>
 
Balance as of February 1, 1994          9,600,000    $ 96,000      ($95,000)       ($75,739)          ($74,739)
  Net loss                                      -           -             -      (1,065,309)        (1,065,309)
--------------------------------------------------------------------------------------------------------------
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
 
</TABLE>


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

                                      24 

<PAGE>
     
The Leap Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
 
                                                              FISCAL YEAR ENDED JANUARY 31,
                                                        ------------------------------------------
                                                            1997           1996          1995
                                                        -------------  ------------  -------------
<S>                                                     <C>            <C>           <C>
Cash Flows from Operating Activities:
Net income/(loss)                                        $ 1,305,931   $   700,460    ($1,065,309)
Adjustments to reconcile net income to net
cash provided by operating activities:
  Depreciation and amortization                              322,531       169,598        106,930
  Deferred income taxes                                      229,704       477,793       (427,300)
  Changes in operating assets and liabilities:
     Accounts receivable                                  (4,431,549)      286,369       (555,257)
     Costs in excess of billings                             400,939       (28,397)      (591,263)
     Prepaid expenses                                       (172,973)      (23,916)         4,103
     Other assets                                           (208,775)      (27,795)       (69,716)
     Accounts payable                                        936,198    (1,102,426)     1,809,400
     Accrued expenses                                        578,987       (34,958)       224,254
     Billings in excess of costs                             214,264             -              -
     Income tax payable                                            -       (16,230)             -
-------------------------------------------------------------------------------------------------
Net Cash (Used in)/Provided by Operating Activities         (824,743)      400,498       (564,158)
 
Cash Flows from Investing Activities:
  Capital expenditures                                      (488,566)     (241,947)      (281,571)
  Capitalized software development costs                    (825,000)            -              -
-------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities                     (1,313,566)     (241,947)      (281,571)
 
Cash Flows from Financing Activities:
  Net proceeds from issuance of common stock              35,716,344             -              -
  Net borrowings/(repayments) on:
     Capital lease obligations                               (35,675)            -              -
     Line of credit                                         (218,356)     (722,517)       760,653
     Term note                                              (241,022)      241,022              -
     Mortgage payable                                       (418,214)      (35,790)       (25,996)
     Note payable to officer                                (400,000)      400,000              -
-------------------------------------------------------------------------------------------------
Net Cash Provided by/(Used in) Financing Activities       34,403,077      (117,285)       734,657
 
Net Increase/(Decrease) in cash and cash equivalents      32,264,768        41,266       (111,072)
Cash and cash equivalents, at beginning of period             47,981         6,715        117,787
-------------------------------------------------------------------------------------------------
Cash and cash equivalents, at end of period              $32,312,749   $    47,981   $      6,715
 
</TABLE>
Supplementary disclosure of cash paid during the period:
<TABLE>
<S>                                                          <C>         <C>        <C>
  Interest paid                                          $   163,109   $   166,898   $     88,091
  Income taxes paid                                      $   400,056             -              -
Supplementary disclosure of noncash investing and financing activities:
  Property purchased under mortgage payable                        -             -   $    480,000
  Equipment purchased under capital lease obligations    $    74,035   $    85,704              -
 
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.     

                                      25
<PAGE>
     
The Leap Group, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements


NOTE 1 - DESCRIPTION OF BUSINESS

The Leap Group, Inc. and its subsidiaries ("the Company") are strategic and
creative communication services companies that develop and implement integrated
brand marketing campaigns primarily for market leading clients using traditional
and new media.

The Leap Group, Inc. is a Delaware corporation which was incorporated in March
1996 to act as the parent company for three wholly owned subsidiaries - The Leap
Partnership, Inc. ("Leap Partnership"), an Illinois corporation established in
September 1993; Lilypad Services, Inc. ("Lilypad"), an Illinois corporation
established in September 1995; and Tadpole Productions, Inc. ("Tadpole"), an
Illinois corporation established in September 1995.

The Company is primarily headquartered in Chicago, Illinois. On January 31,
1997, The Leap Partnership, Inc. established a second office in Los Angeles,
California.

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 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.


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
----------------------------
The accompanying Consolidated Financial Statements have been prepared on the
basis that the entities which now comprise the Company were combined at their
inception for financial reporting purposes. 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 a bank and mortgage payable: due to the floating interest rate
on these obligations, the carrying amounts approximate fair value.     

                                      26
<PAGE>
     
 
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 years
     Furniture and equipment                         5-7 years

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

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 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.
The Company's production projects are usually commenced and completed in a short
time period, often less than 60 days. 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.  Revenue earned from fees based
upon third-party media placements are recognized 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 billings received in advance of work performed.
This deferred revenue will be recognized in income as 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.     

                                      27
<PAGE>
     
For the year ended January 31, 1997, three clients accounted for 25.1%, 23.4%,
and 18.9%, respectively, of consolidated revenues (refer to Note 13). One client
accounted for approximately 66.4% of consolidated revenues during fiscal 1996,
and two clients accounted for approximately 63.7% and 28.4%, respectively of
consolidated revenues during fiscal 1995.

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
assests are reduced by a valuation allowance for the amount of any tax benefits
which are not expected to be realized.

Per Share Data
---------------
Net income (loss) per common share is computed using the weighted average number
of shares outstanding of common stock and dilutive common equivalent shares from
stock options using the treasury stock method.  In accordance with certain
Securities and Exchange Commission (SEC) Staff Accounting Bulletins, such
computations include all common and common equivalent shares issued within 12
months of the Company's  Offering date as if they were outstanding for all prior
periods presented using the treasury stock method and the Offering price.

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 October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 123 establishes financial
accounting and reporting standards for stock-based compensation.  The Statement
defines a fair value-based method of accounting for an employee stock option or
similar equity instrument. However, it also allows a company to continue to
measure compensation cost for those plans using the intrinsic-value based method
of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees. Companies electing to continue the accounting in Opinion No. 25 must
make pro forma disclosures of net income and earnings per share, as if the fair
value-based method of accounting defined in the Statement had been applied.
Management of the Company has elected to make the pro forma disclosure as
allowed by SFAS No. 123.  Note 7 to the consolidated financial statements
presents the pro forma net income and earnings per share disclosures.

In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, which the Company adopted in fiscal 1996. SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles to be held and used
by the Company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. To date, no such events or circumstances have occurred.  However,
the Company intends to continue to perform a periodic review of assets for
impairment.

In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share, which simplifies the standards for computing earnings per
share.  It replaces the presentation of primary EPS with the presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement and requires a reconciliation between the basic EPS
computation and the diluted EPS computation.  The SFAS No. 128 presentation is
reacquired for the year ended January 31,      

                                      28
<PAGE>
    
1998, and will be adopted by the Company at that time. Had the Company
calculated EPS using SFAS No. 128 for the year ended January 31, 1997, basic EPS
would have approximately $.12 per share.


NOTE 3 - OTHER ASSETS

During fiscal year 1997, the Company recorded approximately $825,000 of
capitalized software development costs as Other Assets in the accompanying
consolidated balance sheet. 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
$22,000 for fiscal 1997.

As of January 31, 1997 and 1996, the Company also recorded $214,000 and
$104,000, 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 $58,000 and $28,000
for fiscal years 1997 and 1996, respectively.


NOTE 4 - NOTES PAYABLE TO BANKS

Lines of Credit
----------------
On November 1, 1994, the Company entered into a revolving credit agreement with
a bank for a line of credit of up to $1 million. The interest rate on January
31, 1995 (1.5% above the bank's prime lending rate) was 10.5%. The line was
collateralized by all business assets, including a second mortgage on the
Company's commercial real estate, and was guaranteed by certain stockholders of
the Company. On October 26, 1995, all outstanding debt under the line was paid
in full, the agreement was terminated and the mortgage was discharged.

On October 4, 1995, the Company obtained a line of credit with a bank for up to
$1,500,000. 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. At January 31, 1996, $218,000 was outstanding under
such line and was classified as current with interest at 9.5% per annum. 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 (i) $24
million or (ii) 90-95% 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 is LIBOR plus .5%. As of
January 31, 1997, there was no outstanding balance on this line of credit.

Revolving Line and Term Note
-----------------------------
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. At January 31, 1996, the outstanding balance was approximately
$241,000 which was classified as current. In October 1996, the debt was retired
with proceeds from the Offering.

Mortgage
---------
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.     

                                      29
<PAGE>
     
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 in
June 2001. The loan was 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.


NOTE 5 - RELATED PARTY TRANSACTIONS

Guarantees of Notes Payable to Banks
-------------------------------------
As discussed in Note 4, prior to October 7, 1996, substantially all of the
Company's debt had been guaranteed by certain shareholders of the Company. The
Company's existing lines of credit are no longer guaranteed by shareholders, but
are collateralized by the assets of the Company.

Note Payable to Officer
------------------------
In February 1995, the Company secured financing from an officer of the Company
to fund additional working capital needs of the Company. The $450,000
installment note bore interest at prime plus 1.5% through October 31, 1996 and
was collateralized by a second mortgage on the Company's principal office
building. In October 1996, this note was repaid with proceeds from the Offering.


NOTE 6 - 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
shareholders 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.


NOTE 7 - STOCK COMPENSATION PLANS

1996 Stock Option Plan
-----------------------
On January 3, 1996, the Board of Directors and Shareholders 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 are available
for grant under this plan as of January 31, 1997.     

                                      30

<PAGE>
     
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. Directors, officers, employees and consultants of
the Company are eligible to receive grants under the Incentive 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).

Non-Employee Directors' 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 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.

Pro Forma Stock-Based Compensation Disclosures
----------------------------------------------
Under various plans, the Company may grant stock options and other awards to key
executives, management and creative personnel. Transactions under the various
stock option plans for the periods indicated were as follows:
<TABLE>
<CAPTION> 
                                                      STOCK OPTIONS
                                                -------------------------
                                                         Weighted Average
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
-------------------------------------------------------------------------
</TABLE>     

                                      31
<PAGE>
     
 
The following table summarizes information about stock options outstanding at
January 31, 1997:
<TABLE>
<CAPTION>

                                        OUTSTANDING OPTIONS                    EXERCISABLE OPTIONS
                             --------------------------------------      --------------------------
                                       Weighted Average   Remaining                        Average
Exercise Price               Shares    Exercise Price        Term         Shares            Price
---------------------------------------------------------------------------------------------------
<S>                         <C>            <C>               <C>         <C>                <C>
$3.00                         504,000      $3.00             8.92          181,333          $3.00
$7.00-$10.00                2,086,000      $7.40             9.06        1,507,000          $7.40
---------------------------------------------------------------------------------------------------
                            2,590,000      $5.96             8.55        1,688,333          $6.93
</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 1997   FISCAL 1996
---------------------------------------------------------------------------------------------
<S>                                                                <C>            <C>
Net income (loss)
     As reported                                                   $  1,305,931      $700,460
     Pro forma                                                      ($4,511,769)     $450,995
---------------------------------------------------------------------------------------------
Net income (loss) per share
     As reported                                                   $       0.12      $   0.07
     Pro forma                                                           ($0.41)     $   0.04
---------------------------------------------------------------------------------------------
</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 1997   FISCAL 1996
----------------------------------------------------------------------------------------------
<S>                                                                 <C>           <C>
Risk-free interest rate                                                     6.78%        6.78%
Expected life                                                         5-10 years     10 years
Expected volatility                                                           75%          75%
Expected dividend yield                                                        0%           0%
----------------------------------------------------------------------------------------------
</TABLE>

NOTE 8 - 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, 1997.  The Company has no other obligations for
post-retirement benefits.


NOTE 9 - 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>
1998                                               $132,516  $ 65,174   $184,582
1999                                                 28,596    59,733     81,686
2000                                                 26,596    20,086     45,505
2001                                                  3,796         -      3,796
--------------------------------------------------------------------------------
    Total future minimum lease payments            $191,504  $144,993   $315,569
         Less amount representing interest                    (20,928)
                                                             --------
    Obligations under capital leases                         $124,065
         Less current portion of capital lease obligation     (52,066)
                                                             --------
    Non-current portion of capital lease obligation          $ 71,999
                                                             ========
</TABLE>

Litigation
-----------
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, (collectively "the Plantiffs") filed a lawsuit against Leap, the
Miller Brewing Company and Trivers/Myers Music (collectively "the Defendants")
in the United States District Court, Central District of California. The
complaint alleges copyright and persona infringement, statutory and common law
unfair competition and unjust enrichment stemming from the airing of a
television commercial created by the Company for a client. The suit has been
referred to the Company's insurance carrier and legal counsel. The complaint
seeks substantial monetary damages. In an unsolicited demand, the Plaintiffs
offered to settle the case in the amount of $5,750,000. The Defendants rejected
such offer to settle because of their belief that the Plaintiffs' claims have no
merit. The Company continues to vigorously defend its position. Trial
proceedings are tentatively scheduled to commence on May 6, 1997. It is
difficult to ascertain the ultimate outcome of this litigation. An adverse
determination and award of damages not covered by insurance could have a
material adverse effect on the Company's results of operations, liquidity and
consolidated financial position.

Employment Agreements
----------------------
The Company has entered into employment agreements with certain executive
officers of the Company. The agreements expire in March 1999. Three of the
agreements provide for annual base salaries of $200,000 and the other two
agreements provide for annual base salaries of $300,000.


NOTE 10 - OTHER INCOME AND EXPENSE

Included in Other Income and Expense for the years ended January 31, 1997, 1996
and 1995, is interest income of $619,000, $0 and $0, and interest expense of
$163,000, $161,000, and $103,000, respectively.


NOTE 11 - 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 2.

The income tax provisions (benefits) charged to net income are summarized as
follows:
<TABLE>
<CAPTION>
 
                                   FISCAL YEAR ENDED JANUARY 31,
                                   ------------------------------
                                     1997      1996       1995
-----------------------------------------------------------------
<S>                                <C>       <C>       <C>
Federal:
 Current                           $292,229  $ 16,230          -
 Deferred                           188,475   406,125   (363,205)
----------------------------------------------------------------
                                   $480,704  $422,355  ($363,205)
</TABLE>      
 
                                      33 
<PAGE>
 
     
<TABLE> 
<CAPTION> 
                                   FISCAL YEAR ENDED JANUARY 31,
                                   -----------------------------
                                       1997      1996       1995
----------------------------------------------------------------
<S>                                <C>         <C>      <C> 
State:
 Current                           $ 14,429         -          -
 Deferred                            41,229    71,668    (64,095)
----------------------------------------------------------------
                                   $ 55,658  $ 71,668   ($64,095)
----------------------------------------------------------------
Total Tax Provision (Benefit)      $536,362  $494,023  ($427,300)
</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,
                                                   --------------------------------
                                                     1997       1996        1995
-----------------------------------------------------------------------------------
<S>                                                <C>        <C>        <C>
Statutory rate                                         34.0%      34.0%      (34.0)%
State, net of Federal tax benefit                       4.8        4.9        (4.9)
Interest income, exempt from State income taxes        (2.2)         -           -
Change in valuation allowance                          (9.7)       1.3        11.4
Other                                                   2.2        1.2        (1.1)
----------------------------------------------------------------------------------
Effective rate                                         29.1%      41.4%     (28.6)%
</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>
                                                     JANUARY 31,
                                         ----------------------------------
                                            1997         1996        1995
---------------------------------------------------------------------------
<S>                                      <C>         <C>           <C>
Net operating loss carryforward          $   8,698     $ 103,600   $582,296
Alternative minimum tax credit                   -        16,230          -
Compensation accruals                       16,536        55,598     57,868
Bad debt reserves                           27,300             -          -
Other reserves                              12,088         3,173          -
    Less-Valuation allowance                     -      (178,601)  (162,371)
---------------------------------------------------------------------------
Net current deferred income tax asset    $  64,622     $       -   $477,793
</TABLE>

Management recorded a valuation allowance to fully reserve for its net deferred
tax asset at January 31, 1996. This valuation allowance was reversed in fiscal
1997 as a result of expected utilization of the tax asset in future years.

At January 31, 1997 and 1996, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $112,000, to be utilized
ratably over the next five years, and $260,000, respectively.

The components of the net long-term deferred income tax liability are as
follows:
<TABLE>
<CAPTION>
                                                            JANUARY 31,
                                               ------------------------------
                                                  1997         1996      1995
-----------------------------------------------------------------------------
<S>                                            <C>          <C>          <C>
Net operating loss carryforward                $   34,792        -        -
Depreciation and amortization                    (329,118)       -        -
-----------------------------------------------------------------------------
Net long-term deferred income tax liability     ($294,326)       -        -
</TABLE>
Depreciation and amortization includes $363,000 of deferred tax liabilities
related to capitalized software costs.      

                                      34
<PAGE>
     
NOTE 12 - RESIGNATION FROM SIGNIFICANT CLIENT

In prior years, revenues from one major client represented approximately 66.4%
and 63.7% of the Company's total revenues in fiscal 1996 and 1995, respectively.
In December 1995, the Company resigned the account of this client in order to
pursue other assignments.


NOTE 13 - SUBSEQUENT EVENTS

Line of Credit
--------------
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
rate on the line is equal to the London Interbank Offered Rate ("LIBOR") plus
2%.

Loan to a Strategic Partner
---------------------------
In March 1997, Leap loaned $1.0 million to Vivid Publishing, Inc., an Internet
production house ("Vivid"),  in exchange for a convertible debenture.  The
debenture is convertible into 10% of the common stock of Vivid at Leap's option,
and is secured by a pledge of Vivid's common stock.  Under the debenture, Leap
may at its option loan up to an additional $1.0 million on substantially the
same terms.  As of April 15, 1997, Leap had advanced $474,000 pursuant to this
option.  The loans to Vivid bear interest at the prime rate plus 2% per annum.

Loss of Significant Client
--------------------------
In March 1997, a client representing approximately 25% and 6% of revenues during
the years ended January 31, 1997 and 1996, respectively, gave the Company a
notice of termination effective June 10, 1997.

Purchase of Real Estate
-----------------------
In March 1997, Leap Partnership entered into an agreement to purchase a
commercial office building to provide facilities for its new office in Los
Angeles. $1.4 million of the $2 million purchase price will be seller financed
over a one-year term at 9% with an option to renew the note for one additional
year. The balance of the purchase price will be paid by the Company.

Acquisition
-----------
In April 1997, the Company acquired the assets and assumed certain liabilities
of YAR Communications, Inc.  for $20 million. The sellers may also receive
contingent payments if certain revenue and performance goals are achieved for
each of the next three years. In addition, to provide performance incentives,
options to purchase one million shares of Leap's common stock were granted to
YAR's management and employees. YAR provides culturally relevant marketing and
advertising for global clients in over 40 different nationalities and for all
major U.S. ethnic and global markets.

The acquisition will be accounted for using the purchase method of accounting
and, accordingly, the purchase price will be allocated to the assets acquired
and the liabilities assumed based upon the fair values at the date of
acquisition. The excess of the purchase price over the fair values of the net
assets acquired and net liabilities assumed will be recorded as goodwill, which
will be amortized on a straight-line basis over 20 years.


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 1997 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 1997 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 1997 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 1997 Proxy Statement under the heading "Executive
Compensation and Certain Transactions" (hereby incorporated by reference) for
this information.

                                      36
<PAGE>
 
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 1997 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, 1997 and 1996
 
     Consolidated Statements of Operations for the Fiscal Years Ended January
     31, 1997, 1996 and 1995
 
     Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended
     January 31, 1997, 1996 and 1995
 
     Consolidated Statements of Cash Flows for the Fiscal Years Ended January
     31, 1997, 1996 and 1995
 
     Notes to Consolidated Financial Statements

     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.
 
    *10.3             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.
 
   **10.8             The Leap Group, Inc. Employee Incentive Compensation Plan.
 
   **10.9             The Leap Group, Inc. Non-employee Directors' Stock Option
                      Plan.
</TABLE>     

                                      37
<PAGE>
     
<TABLE>
<CAPTION>
 
 
<C>                   <S>
   **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.
 
    *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 1997 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.     

(b)  Reports on Form 8-K

     No reports on Form 8-K were filed during the last quarter of fiscal 1997.

                                      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/ R. STEVEN LUTTERBACH
                                           ------------------------
                                               R. Steven Lutterbach
                                       Chairman and Chief Executive Officer
                                           (principal executive officer)

                                       Date: June 23, 1997


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 23rd day of June, 1997:      

/s/ R. Steven Lutterbach                   /s/ Peter Vezmar
------------------------------------       -------------------------------------
R. Steven Lutterbach                       Peter Vezmar
Chairman and Chief Executive Officer       Chief Financial Officer
(principal executive officer)              (principal financial and accounting
                                           officer)
                                                    
/s/ Frederick R. Smith                     /s/ John G. Keane
------------------------------------       -------------------------------------
Frederick R. Smith                         John G. Keane
Vice Chairman and Chief Operating          Director
Officer
                                           /s/ Thomas McElligott
/s/ Thomas R. Sharbaugh                    -------------------------------------
------------------------------------       Thomas McElligott
Thomas R. Sharbaugh                        Director                        
Director and President

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

                                      39