<PAGE>   1

                        SETTLEMENT AND RELEASE AGREEMENT

      This Settlement and Release Agreement (the "Agreement") is entered into as
of this 2nd day of June 1997 (the "Effective Date") by and between Galoob Toys,
Inc., formerly known as Lewis Galoob Toys, Inc. ("Galoob"), by and on behalf of
itself and its wholly owned subsidiary Galco International Toys, N.V., and
Hedeen and Companies, FunMaker, Clemens V. Hedeen, Jr., Patti Jo Hedeen, Ned
Cain, Carol Cain, C.V. Hedeen's Fun Factory, Hedeen International, and CV
Hedeen's Fun City, USA (collectively the "Hedeen Group").

                                 A. DEFINITIONS

       1. The "Lawsuit" means the case of Lewis Galoob Toys, Inc. v. Clemens V.
Hedeen et al., and related cross-action, pending in the United States District
Court for the Northern District of California, No. C95-1852-DLJ.

       2. "Escrow Funds" means the money that Galoob has previously deposited in
an account at the Associated Kellogs Bank in Green Bay, Wisconsin (the "Escrow
Funds Bank"), pursuant to the Stipulation and Order Re Deposit of Funds, filed
July 24, 1996 in the Lawsuit, plus any interest that has accrued in said
account. The amount of money so deposited in the Escrow Funds Bank by Galoob is
Two Million Eighty-One Thousand Five Hundred and Fifty-Six Dollars
($2,081,556.00).

       3. "The Royalty Agreements" mean the following: (a) the Agreement between
FunMaker and Galoob dated June 16, 1986 (the "1986 Agreement"); (b) the
Supplemental Agreement between Hedeen and Companies (FunMaker) and Galoob
executed on June 29, 1989 by Hedeen and Companies (FunMaker) and on July 5, 1989
by Galoob; (c) the letter agreement regarding Z-BOTS between FunMaker and Galoob
dated December 14, 1992 and executed by
<PAGE>   2
FunMaker on December 29, 1992; and (d) any claimed or alleged express or implied
agreement or right based upon, relating to or arising out of any of the
agreements described in subparagraphs A3(a) through A3(c) and/or Micro Machines
(as defined below).

       4. "The Parties" mean Galoob, on the one hand, and the Hedeen Group, on
the other hand (with each member of the Hedeen Group being a "Party").

       5. "Micro Machines" means: (a) the words "Micro Machines"; (b) products
sold, manufactured, given away, distributed, sublicensed, licensed or otherwise
transferred under or using the Micro Machines name ("Micro Machines Products");
(c) the Micro Machines trademark, trade name, service mark, logo and goodwill
and intellectual property rights associated therewith; (d) all other trademarks,
trade names, service marks, markings, logos, patents, copyrights, trade dress,
designs and other identifying features, goodwill and intellectual property
rights owned or controlled by Galoob and used in conjunction with or associated
in any way with any Micro Machines Products; (e) all other trademarks, trade
names, service marks, markings, logos, patents, copyrights, trade dress, designs
and other identifying features, goodwill and intellectual property rights
licensed or otherwise authorized for use by Galoob from third parties to the
extent used in conjunction with or associated in any way with any Micro Machines
Products (the rights described in subparagraphs A5(a), A5(c), A5(d) and A5(e)
are collectively referred to as "Micro Machines Intellectual Property"); (f) all
molds, tooling, drawings, models, prototypes or other similar items sold,
manufactured, given away, distributed, licensed, sublicensed or otherwise
transferred or used in any way in connection with or relating to Micro Machines
Products and/or Micro Machines Intellectual Property; and (g) all rights to
sell, manufacture, give away, distribute, license, sublicense or otherwise enter
into any agreement in connection with or relating to Micro Machines Products
and/or Micro Machines Intellectual


                                      -2-
<PAGE>   3
Property.

       6. "Protective Order" means the Stipulation and Protective Order for
Confidential Information, filed September 6, 1995 in the Lawsuit.

                                  B. AGREEMENT

       Subject to the terms of this Agreement, the Parties desire to finally and
forever resolve all disputes of any kind or nature between them, including but
not limited to claims that have been or could be asserted in the Lawsuit or
elsewhere. Therefore, for good and valuable consideration, the Parties, and each
of them, agree as follows:

       1. Initial Cash Payment: On the date specified in paragraph B5, Galoob
shall pay to the Hedeen Group the sum of Twenty-Two Million Five Hundred
Thousand Dollars ($22,500,000.00).

       2. Additional Cash Payments:

              a. In accordance with the provisions of paragraph B2c below,
Galoob shall cause to be paid to the Hedeen Group an additional sum totalling
Seven Million Five Hundred Thousand Dollars ($7,500,000.00), payable as follows:
(a) Seven Hundred and Fifty Thousand Dollars ($750,000.00) on June 1, 1998; (b)
Five Hundred Thousand Dollars ($500,000.00) annually starting on June 1, 1999
through and including June 1, 2011; and (c) Two Hundred and Fifty Thousand
Dollars ($250,000.00) on June 1, 2012. (If June 1 falls on a holiday or weekend
in any year(s), the date for payment shall be the first business day following
June 1.)

              b. In the event that Galoob fails to make any payment pursuant to
paragraph B2a by the applicable due date ("Late Payment"), the Hedeen Group
shall promptly give written


                                      -3-
<PAGE>   4
notice of such Late Payment and Galoob shall have fourteen (14) days from the
date of receipt of such notice to cure by making the payment. Galoob shall pay
interest on any Late Payment at the rate of two percent (2%) over Bank of
America prime from the applicable due date through the date of payment.

              c. Within thirty (30) days of the Effective Date hereof, Galoob
will purchase one or more zero coupon government bonds that shall provide for
payments in the amounts specified in paragraph B2a above ("Bonds") to secure
payment of said amounts as set forth in the Security and Trust Agreement
attached hereto as Exhibit 1. The Bonds shall be payable to a trustee, which
shall be a bank or other institutional trustee designated by Galoob, and the
Bonds shall be administered pursuant to the attached Security and Trust
Agreement in favor of Clemens V. Hedeen and Patti Jo Hedeen, as secured parties.
The Security and Trust Agreement shall be executed by Clemens V. Hedeen, Patti
Jo Hedeen and Galoob prior to the time Galoob purchases the Bonds. Galoob may
satisfy the obligations set forth in paragraph B2a by paying the sums, or any of
them, directly in accordance with paragraphs B2a and B4 hereof or from the Bonds
through the procedures set forth in the Security and Trust Agreement, either of
which shall satisfy Galoob's obligations pursuant to paragraph B2a in full. The
Parties shall also execute any other documentation reasonably requested by the
trustee to implement the terms of the attached Security and Trust Agreement,
provided that such other documentation is consistent with and does not
contradict the terms and conditions of this Agreement or the Security and Trust
Agreement attached hereto as Exhibit 1.

       3. Escrow Funds: On the date and in the manner specified in paragraphs B4
and B5, Galoob shall cause the Escrow Funds to be paid to the Hedeen Group. The
Parties shall also promptly execute all paperwork necessary to close the bank
account that has been used to hold



                                      -4-
<PAGE>   5
the Escrow Funds.

       4. Manner of and Instructions re Payments: The payments described in
paragraphs B1, B2 and B3 shall be made by wire or other transfer of funds to a
single account with a single financial institution to be specified in writing by
Clemens V. Hedeen and Patti Jo Hedeen, who are hereby authorized by the Hedeen
Group, and each of them, to specify the recipient financial institution and
account. Such specification shall be provided to Galoob no later than the time
of execution of this Agreement. The Hedeen Group, and each of them, shall be
solely responsible for allocating the payments specified in paragraphs B1, B2
and B3 among themselves. Payment by Galoob pursuant to the specifications
provided by Clemens V. Hedeen and Patti Jo Hedeen will be deemed to have
satisfied Galoob's obligations under paragraphs B1, B2 and B3.

       5. Closing and Dismissal of Lawsuit: Within three (3) business days of
execution of this Agreement by all Parties, the Parties shall execute and file a
stipulation for dismissal of the Lawsuit with prejudice, including all
complaints and counterclaims, in the form attached hereto as Exhibit 2. All
Parties shall bear their own attorney's fees and costs in connection with the
Lawsuit and this Agreement. Simultaneously upon filing of the stipulation for
dismissal, Galoob shall: (a) cause the sum specified in paragraph B1 above to be
paid to the Hedeen Group pursuant to the instructions in paragraph B4; and (b)
provided Galoob has received the requisite forms from the Escrow Funds Bank
("Escrow Forms"), Galoob shall send the original Escrow Forms by Federal Express
or other express mail with a facsimile copy to the Escrow Funds Bank authorizing
it to pay the Escrow Funds to the Hedeen Group pursuant to paragraphs B3 and B4.
If for any reason beyond Galoob's control, Galoob has not received the Escrow
Forms from the Escrow Funds Bank by the time the dismissal is filed, Galoob will
execute and send said Escrow Forms to the Escrow Funds Bank immediately upon
their receipt.



                                      -5-
<PAGE>   6
       6. Galoob's Exclusive Rights to Micro Machines:

              a. The Hedeen Group, and each of them, acknowledge and agree that
as of the Effective Date hereof and at all times hereafter, Galoob has and shall
continue to have in the future the exclusive and entire right, title and
interest in and to Micro Machines for all purposes. The Hedeen Group, and each
of them, acknowledge and agree that as of the Effective Date hereof and at all
times hereafter, they have no right, title or interest in or to Micro Machines
and they shall not at any time assert any claim of any sort to or in connection
with Micro Machines. The Hedeen Group, and each of them, further acknowledge and
agree that Galoob has full and complete authority to make any and all decisions
of any nature or kind whatsoever and to take any action of any nature or kind
whatsoever concerning Micro Machines. Except only to the limited extent set
forth in paragraph B6b, the Hedeen Group, and each of them, shall not use Micro
Machines at any time now or in the future for any commercial or business purpose
or for personal gain.

              b. Galoob will not object to the Hedeen Group describing itself as
"inventors of the original Micro Machines toys"; provided, however, that Galoob
does not accept any responsibility and expressly disclaims any responsibility
for the accuracy of said statement. Galoob's agreement pursuant to this
subparagraph B6b shall be limited to the terms hereof, and shall not in any way
diminish or vary the terms of subparagraph B6a except to the extent specifically
set forth herein.

       7. The Royalty Agreements: The Hedeen Group, and each of them, hereby
convey all right, title and interest in and to the subject matter of and rights
under the Royalty Agreements in their entirety to Galoob for its exclusive use
and ownership. All of Galoob's obligations and


                                      -6-
<PAGE>   7
duties under the Royalty Agreements and all of the Hedeen Group's rights (and
each of their rights) under the Royalty Agreements are extinguished in their
entirety, including but not limited to any obligation to pay additional
royalties or other payments thereunder and any examination or audit rights
thereunder. The Hedeen Group, and each of them, acknowledge and agree that,
except as set forth in paragraphs B1, B2 and B3 hereof, Galoob has no obligation
of any kind to make any payments to the Hedeen Group, or any of them. The
Royalty Agreements are no longer of any force or effect and are hereby
terminated in their entirety and the Parties hereto expressly waive any and all
rights and obligations under the Royalty Agreements, including but not limited
to the provisions of paragraph 18 of the 1986 Agreement and any and all rights
to examine Galoob's books and records pursuant to paragraph 13 of the 1986
Agreement, or otherwise. The Hedeen Group, and each of them, acknowledge and
agree that all notices of default and/or notices of termination relating to the
Royalty Agreements, or any of them, are cancelled and are of no force or effect.

       8. Non-Competition and Non-Disparagement:

              a. The Hedeen Group, and each of them, hereby agrees that in
connection with the execution of the Agreement and the transfer of their
interest in the Royalty Agreements and the goodwill related thereto, the Hedeen
Group, and each of them, shall not, either directly or indirectly, engage in the
development, manufacture, license, distribution or sale of miniature vehicles in
substantially the same scale as Micro Machines vehicles marketed to date and/or
playsets for such miniature vehicles marketed to date. This restriction shall
terminate within five (5) years of the Effective Date of this Agreement.

              b. The Hedeen Group, and each of them, shall not use or authorize
the use of


                                      -7-
<PAGE>   8
any name, trademark, logo, service mark, trade dress, copyright,
patent, design or other marking which is confusingly similar to any Micro
Machines Intellectual Property, or otherwise engage in any act which causes, or
is reasonably likely to cause, any such confusion. In addition, except as
specifically set forth in paragraph B6b above, the Hedeen Group, and each of
them, shall not use or authorize the use of any name, trademark, logo, service
mark, trade dress, copyright, patent, design or other marking, or otherwise
engage in any act or business that does or is intended to dilute, tarnish,
degrade, diminish, impair or otherwise adversely affect, Micro Machines
Intellectual Property.

       9. Samples and Prototypes:

              a. Within three months of the Effective Date hereof, Galoob shall
use reasonable efforts to provide the Hedeen Group with samples of Micro
Machines toys to the extent they are in Galoob's possession as of the Effective
Date hereof, as follows: two samples of Micro Machines toys sold between 1994
and the Effective Date hereof, or one sample where two are not available,
provided Galoob has at least one sample of each toy to retain for its own use.

              b. Within thirty (30) days of the Effective Date hereof, Galoob
shall cause to be delivered to Legal Strategies Group all original Snappers
prototypes submitted by the Hedeen Group in 1986 which are in Galoob's
possession as of the Effective Date hereof.

       10. Releases:

              a. By Galoob: Subject to and conditioned upon dismissal of the
Lawsuit, Galoob, individually and for and on behalf of its successors,
predecessors, parent companies, subsidiaries (including but not limited to Galco
International Toys, N.V.), affiliated companies,


                                      -8-
<PAGE>   9
partnerships, partners, associates and joint venturers, hereby fully, completely
and finally waives, releases and forever discharges and covenants not to sue the
Hedeen Group, and each of them, and their successors, predecessors, heirs,
assigns, attorneys, executors, agents and representatives from any and all
claims, demands, suits, liabilities, debts and obligations of any kind or
nature, known or unknown, foreseen or unforeseen, suspected or unsuspected, that
it has had, now has or may have in the future as to any and all matters of any
kind through the Effective Date hereof, including but not limited to matters
based upon, relating to or arising from the following: (1) all claims asserted
or that could have been asserted in the Lawsuit; (2) the Royalty Agreements; (3)
Micro Machines; and (4) all other dealings, contracts and agreements between the
Parties, or any of them; provided, however, that this release does not release
or discharge any claim or obligation expressly created by this Agreement or the
Protective Order.

              b. By The Hedeen Group: Subject to and conditioned upon dismissal
of the Lawsuit, the Hedeen Group, and each of them, individually and for and on
behalf of their successors, predecessors, subsidiaries, parent companies,
affiliated companies, partnerships, partners, associates, heirs, executors and
joint venturers, hereby fully, completely and finally waive, release and forever
discharge and covenant not to sue Galoob, and its successors, predecessors,
parent companies, subsidiaries (including but not limited to Galco
Internationals Toys, N.V.), affiliated companies and former and current
employees, attorneys, officers, directors, agents, representatives, partners,
associates, assigns, distributors, licensors and licensees from any and all
claims, demands, suits, liabilities, debts and obligations of any kind or
nature, known or unknown, foreseen or unforeseen, suspected or unsuspected, that
they have had, now have or may have in the future as to any and all matters of
any kind through the Effective Date hereof, including but not limited to matters
based upon, relating to or arising from the following: (1) all


                                      -9-
<PAGE>   10
claims asserted or that could have been asserted in the Lawsuit; (2) the Royalty
Agreements; (3) Micro Machines; and (4) all other dealings, contracts and
agreements between the Parties, or any of them; provided, however, that this
release does not release or discharge any claim or obligation expressly created
by this Agreement or the Protective Order.

              c. Civil Code Section 1542: The Parties hereto certify that they
have read and understood, and hereby expressly waive the benefits of Section
1542 of the California Civil Code, and any and all similar provisions under
other state and federal laws. Civil Code Section 1542 provides as follows:

                   A general release does not extend to claims which the
            creditor does not know or suspect to exist in his favor at the time
            of executing the release, which if known by him must have materially
            affected his settlement with the debtor.


The Parties warrant that they have been represented by counsel and have had a
full and complete opportunity to consult with counsel about this Agreement and
to investigate the facts of the matters in dispute. The Parties recognize that
they may discover new facts in the future and voluntarily assume the risk that
they may discover such new facts in the future. The Parties further recognize
that they may suffer additional damages or injury arising out of the matters
released in this Agreement. The Parties acknowledge that they intend these
consequences even as to facts or claims for damages or injuries that may exist
which they do not know to exist and which, if known, would materially affect
their decision to execute this Agreement. The Parties have read and understood
the operation and legal effect of Section 1542 and hereby intend through this
release fully and forever to release all claims as set forth above regardless of
the discovery of any additional facts or information subsequent to the execution
of this Agreement.


                                      -10-
<PAGE>   11
       11. Denial of Liability: By entering into this Agreement, it is
understood that the Parties do not admit, and to the contrary expressly deny,
that they have breached any duty, obligation or agreement, or engaged in any
illegal, tortious or wrongful activity, or that any damages have been sustained
by any other Party hereto or any third party.

       12. Integration Clause: The Parties hereto warrant that no promise,
representation, inducement or agreement not expressed herein has been made to
them, either individually or collectively, in connection with this Agreement.
This Agreement is intended to be a full and complete statement of the terms of
the agreement between the Parties and expressly supersedes any and all prior
oral or written agreements (express or implied), including but not limited to
the Royalty Agreements.

       13. Modification or Amendment: This Agreement may not be altered,
amended, modified or otherwise changed in any respect whatsoever except by a
writing duly executed by Galoob, on the one hand, and Clemens V. Hedeen, Jr. and
Patti Jo Hedeen, on the other hand, who are hereby authorized by the Hedeen
Group, and each of them, to enter into such alterations, amendments,
modifications and changes.

       14. Affected Parties: This Agreement is and shall be binding upon and
inure to the benefit of the Parties and their respective agents, attorneys,
employees, officers, directors, parent companies, subsidiaries, predecessors,
affiliates, affiliated and related companies, successors, assigns, spouses,
associates, partners, principals, partnerships, joint venturers,
representatives, estates and heirs.

       15.Representations Re Signing Authority: Each of the persons executing
this Agreement represents and warrants that he or she has full and complete
authority to sign on


                                      -11-
<PAGE>   12
behalf of the designated entity.

       16. Representations Re Rights, Ownership, Etc.: The Hedeen Group, and
each of them, represent and warrant as follows:

              a. They, and each of them, have the exclusive right, title and
interest in (i) the Royalty Agreements and all rights, title and interest being
conveyed to Galoob in paragraph B7 above; (ii) the Lawsuit, and all matters that
were or could have been asserted in the Lawsuit; and (iii) the claims and/or
causes of action described or released herein;

              b. They, and each of them, have the exclusive right to convey the
interests and receive the benefits under this Agreement;

              c. This Agreement does not violate any agreement, obligation or
contract that the Hedeen Group, or any of them, have with any third party;

              d. No person or entity outside of the Hedeen Group has or claims
to have any right, title or interest in (i) the Royalty Agreements or any of the
rights, title and interest in said agreements; (ii) the Lawsuit, or any of the
matters that were or could have been asserted in the Lawsuit; and (iii) the
claims and/or causes of action described or released herein;

              e. Except for the Lawsuit, they, or any of them, are not involved
in any claims or lawsuits involving (i) the Royalty Agreements or any of the
rights, title and interest being conveyed to Galoob in paragraph B7 above; (ii)
the Lawsuit, or any of the matters that were or could have been asserted in the
Lawsuit; and (iii) the claims and/or causes of action described or released
herein;


                                      -12-
<PAGE>   13
              f. They, and each of them, have made no assignment, transfer,
conveyance or other disposition of any of the right, title or interest in (i)
the Royalty Agreements or any of the rights, title and interest being conveyed
to Galoob in paragraph B7 above; (ii) the Lawsuit, or any of the matters that
were or could have been asserted in the Lawsuit; and (iii) the claims and/or
causes of action described or released herein.

       17. Indemnity: In the event of any breach of any covenant, representation
or warranty in this Agreement, the breaching Party shall indemnify and hold the
other Party harmless from any loss, damage, cost or expense (including but not
limited to reasonable attorney's fees and costs) suffered as a result of or
arising from litigation, demands or other claims asserted by third parties as a
result of or arising from such breach of covenant, representation or warranty.

       18. Drafting: All Parties hereto have participated in the drafting of
this Agreement with the benefit of counsel. Any rule of construction to the
effect that any ambiguity is to be resolved against the drafting party shall not
be applied to the interpretation of this Agreement.

       19. Governing Law: This Agreement shall be governed by and construed
under the laws of the State of California, without regard to principles of
conflicts of law.

       20. Counterparts: This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall be deemed one and the same instrument.

       21. Remedies: In addition to all other remedies specifically provided
herein, in the event of a breach of any covenant, representation or warranty
herein, the Parties shall have all rights and remedies provided by law and
equity, including but not limited to the right to seek


                                      -13-
<PAGE>   14
injunctive relief, offset and all other remedies available in law or equity.

       22. Notice: All notices, requests, demands and other communications
required or permitted to be given pursuant to this Agreement shall be in writing
to the following persons at their respective addresses:

              a.     Notice to Galoob:

                     William G. Catron, Esq.
                     Galoob Toys, Inc.
                     500 Forbes Boulevard
                     South San Francisco, California 94080
                     Facsimile: (415) 583-5572

              b.     Notice to the Hedeen Group:

                     Clemens V. Hedeen, Jr.
                     Hedeen International
                     218 N. 14th Street
                     Sturgeon Bay, Wisconsin 54235
                     Facsimile:  (414) 743-8835

                           - and -

                     Patti Jo Hedeen
                     c/o Hedeen and Companies
                     1309 N. 14th Avenue
                     Sturgeon Bay, Wisconsin 54235
                     Facsimile:  (414) 743-5163


Such notice shall be delivered by certified mail, return receipt requested,
except where this Agreement otherwise specifies that notice shall be by
facsimile. In the event that either party wishes to change the designated person
and/or address for notice in the future, notice of such change of designated
person and/or address shall be provided in writing.

       23. Confidential Documents: The Protective Order shall remain in full
force and effect and the Parties hereto will continue to be bound thereby.
Within sixty (60) days of the Effective


                                      -14-
<PAGE>   15
Date hereof, the Parties and their attorneys, consultants, experts and agents
shall return all copies of documents and other materials containing information
designated by any other Party as "Confidential" or "Highly Confidential"
Information (with or without the "Attorney's Eyes Only" designation) pursuant to
the terms of the Protective Order by delivering such materials to the other
Party's counsel of record or, alternatively, such materials may be destroyed
provided that the Parties and their counsel of record certify under penalty of
perjury that all such materials have been destroyed, including copies given to
consultants, experts and agents; provided, however, that counsel of record in
the Lawsuit may retain pleadings, discovery, correspondence and work product
that contains Confidential Information provided that such counsel of record
agree to and shall continue to be bound by the terms of the Protective Order.

       24. Headings: The headings of this Agreement are included for convenience
only and shall not be deemed to constitute part of the Agreement or to affect
its construction.

       25. Confidentiality:

              a. For a period of ninety (90) days from the Effective Date
hereof, the terms of this Agreement shall remain confidential and shall not be
disclosed to any third party unless and until such sooner time as Galoob
determines that it should disclose the terms, or any of them, as a result of its
status as a publicly traded company or by virtue of judicial or legal process,
securities laws or accounting requirements. In the event there is such sooner
disclosure by Galoob, Galoob shall provide the Hedeen Group with twenty-four
hours advance written facsimile notice to the recipients specified in paragraph
24b that it intends to publicly disclose any terms of this Agreement. Upon such
public disclosure by Galoob, the terms of this Agreement shall no longer be
confidential.


                                      -15-
<PAGE>   16
              b. The confidential negotiations relating to this Agreement are
and shall remain confidential and shall not be disclosed to any third party
except: (a) as required by accounting requirements, legal or judicial process,
or for security law purposes; (b) to the extent that Galoob concludes that it is
reasonably necessary to disclose such information as a publicly traded company;
and (c) to the extent necessary to enforce the terms of this Agreement.

              c. In the event that any Party receives legal or judicial process
requiring disclosure of the terms and/or negotiations of this Agreement at a
time when such information remains confidential hereunder, said Party shall
provide all other affected Parties with reasonable notice of such legal or
judicial process to permit such Party to object to any disclosure.

              d. The Hedeen Group, and each of them, acknowledges and agrees
that the terms of this Agreement, and the negotiations relating to this
Agreement (collectively, the "Confidential Information"), may be deemed to be
non-public, material information under the United States securities laws.
Accordingly, the Hedeen Group, and each of them, agree they will not (i)
directly or indirectly purchase, sell or otherwise trade in any Galoob common
stock or other Galoob securities (including any options to purchase such common
stock or other securities) (collectively "Galoob securities") at any time prior
to the conclusion of the third business day following public disclosure by
Galoob of the terms of this Agreement or ninety days after the Effective Date
hereof, whichever is sooner, or (ii) recommend to or authorize any other party
that such party should purchase, sell or otherwise trade in any Galoob
securities at any time prior to the conclusion of the third business day
following public disclosure by Galoob of the terms of this Agreement or ninety
days after the Effective Date hereof, whichever is sooner.

       26. Severability: If any provision of this Agreement shall be deemed to
be void or


                                      -16-
<PAGE>   17
unenforceable for any reason, the same shall in no way affect (to the
maximum extent permissible by law) any other provision of this Agreement or the
validity or enforceability of this Agreement as a whole.

       27. Facsimile Signatures: This Agreement may be executed by facsimile,
which shall be deemed an original; provided, however, that original signatures
will also be provided by all signatories hereto.

                                       GALOOB TOYS, INC.


                                       By:_____________________________________
                                          PRESIDENT


                                       ________________________________________
                                          CLEMENS V. HEDEEN, JR.


                                       ________________________________________
                                          PATTI JO HEDEEN


                                       ________________________________________
                                          NED CAIN


                                       ________________________________________
                                          CAROL CAIN


                                       FUNMAKER; HEDEEN AND COMPANIES; C.V.
                                       HEDEEN; FUN CITY USA; C.V. HEDEEN'S
                                       FUN FACTORY


                                       By:_____________________________________
                                          CLEMENS V. HEDEEN, JR.



                                      -17-
<PAGE>   18
                                       By:_____________________________________
                                          PATTI JO HEDEEN


APPROVED AS TO FORM:

                                       LEGAL STRATEGIES GROUP


                                       By:_____________________________________

                                       Attorneys for the Hedeen Group


                                       JACKSON TUFTS COLE & BLACK, LLP


                                       By:_____________________________________

                                       Attorneys for Galoob Toys, Inc.


                                      -18-
<PAGE>   19
                                    EXHIBIT 1



                          SECURITY AND TRUST AGREEMENT

      This Security and Trust Agreement ("Agreement") is entered into as of
__________, 1997 between Galoob Toys, Inc., formerly known as Lewis Galoob
Toys, Inc. ("Galoob"), Clemens V. Hedeen, Jr. and Patti Jo Hedeen
(collectively the "Hedeens") and ______________, a California bank or other
California "securities intermediary" under the California U.C.C. ("Trustee").

                                    RECITALS

       A. Galoob and the Hedeens have entered into a Settlement and Release
Agreement ("Settlement Agreement") effective as of June 2, 1997, between Galoob,
on the one hand, and Hedeen and Companies, FunMaker, Clemens V. Hedeen, Jr.,
Patti Jo Hedeen, Ned Cain, Carol Cain, CV Hedeen's Fun Factory, Hedeen
International and CV Hedeen's Fun City, USA (collectively the "Hedeen Group"),
on the other hand, pursuant to which Galoob has agreed to make certain payments
to the Hedeen Group pursuant to paragraph B2a thereof.

       B. By no later than July 2, 1997, Galoob will obtain Zero Coupon bonds
issued by the United States Treasury in the name of Trustee ("Zero Coupon
Bonds"), as more particularly described in Exhibit A hereto.

       C. This Agreement is being made in accordance with and in full
satisfaction of the provisions of paragraphs B2a and B2c of the Settlement
Agreement.


                                    AGREEMENT

      NOW THEREFORE, in consideration of the above recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:

       1. CREATION OF TRUST; GRANT OF SECURITY INTEREST.

              1.1. APPOINTMENT OF TRUSTEE. Subject to the terms and conditions
of this Agreement, the parties hereto irrevocably appoint and engage
______________ to act as Trustee to hold, administer and dispose of the Trust
Property (defined below) in accordance with the terms of this Agreement. The
Trustee hereby accepts such appointment and agrees to perform the Trustee's
duties hereunder in a diligent and professional manner. This Agreement
irrevocably establishes the trust and may not be terminated by any of the
parties hereto except pursuant to the provisions of paragraph 8 below.

              1.2. DELIVERY OF TRUST PROPERTY.

                     1.2.1. Within three (3) business days of execution of this
Agreement by the Trustee, Galoob shall cause the Zero Coupon Bonds in the name
of the Trustee to be delivered to the Trustee and shall provide confirmation of
the purchase and delivery of said Zero Coupon Bonds to the Hedeens.
<PAGE>   20
              1.3. ACCEPTANCE BY TRUSTEE. Trustee hereby agrees to accept the
Zero Coupon Bonds and agrees to hold the Zero Coupon Bonds and all proceeds
thereof in trust pursuant to the terms of this Agreement. (All of these assets,
including all deposits to and interest accrued on the Trust Account, are
hereinafter referred to as the "Trust Property".)

       2. PURPOSE OF TRUST; SECURITY INTEREST. The Trustee shall hold exclusive
title to the Trust Property for the benefit of Galoob and the Hedeens to effect
and secure the payments called for under paragraph B2a of the Settlement
Agreement in accordance with the provisions of this Agreement and paragraphs B2a
and B2c of the Settlement Agreement. Galoob hereby grants to the Hedeens a
security interest in the Trust Property to secure payment by Galoob of the
amounts referred to in paragraph B2a and B2b of the Settlement Agreement
("Lien"). This Agreement is intended to and shall perfect such Lien under
applicable law. Galoob represents and warrants to the Hedeens that the Trust
Property is not presently subject to any other security interest or claim, and
that the execution, delivery and performance of this Agreement by Galoob does
not require the consent or approval of, or violate any agreement with, any third
party. Galoob also agrees that it shall not voluntarily encumber the Trust
Property for the benefit of any third party; and the Trustee agrees that it will
not enter into any agreement with any third party that could create or perfect
any additional interest in the Trust Property. The Trustee shall provide, or
cause to be provided, an executed UCC-1 Financing Statement against the Trust
Property, and only the Trust Property, for the Hedeens to file with the
applicable authorities. Galoob shall provide an executed UCC-1 Financing
Statement against the Trust Property, and only the Trust Property, for the
Hedeens to file with the applicable authorities, which UCC-1 Financing Statement
shall recite that it is being filed "at the Hedeens' request for protective
purposes." The Financing Statements shall not attach the Settlement Agreement or
this Agreement. The creation of the Lien in the Trust Property as provided
herein shall give the Hedeens a lien on said assets; but said security interest
shall not enable the Hedeens to direct the Trustee to make disbursements of the
Trust Property other than as provided herein. In the event Galoob and the
Trustee fail to make an annual payment as required under paragraph B2a of the
Settlement Agreement following an opportunity to cure pursuant to paragraph B2b
of the Settlement Agreement, and provided that the Trustee has not received a
Notice of Payment or Notice of Litigation (as defined below), the Hedeens shall
be entitled to foreclose or otherwise enforce their Lien against the Trust
Property to the extent that the Trust Account contains proceeds from matured
Bonds, plus interest thereon, if any. The Hedeens shall not be entitled to
foreclose or otherwise enforce their Lien against any unmatured Bonds that
secure future annual payments pursuant to paragraph B2a of the Settlement
Agreement.

       3. DUTIES OF TRUSTEE.

              3.1 DEPOSIT.

       Trustee shall deposit all proceeds of the Zero Coupon Bonds into a
market-rate interest-bearing account ("Trust Account") in Trustee's name at a
bank located in California to be held in trust pursuant and subject to the terms
of this Agreement.


                                      -2-
<PAGE>   21
              3.2. PRE-LITIGATION DISBURSEMENTS FROM TRUST ACCOUNT.

                     3.2.1. On June 1 of each year from 1998 through 2012, if
the Trustee has not received a Notice of Payment or a Notice of Litigation as
defined below, the Trustee shall disburse all funds in the Trust Account as
follows: (i) first, to the Hedeens for the amounts to which the Hedeen Group is
then entitled under paragraph B2a of the Settlement Agreement, which amounts are
fully set forth in Exhibit B hereto; (ii) second, any remaining amounts to
Galoob. An insufficiency of funds in the Trust Account for any reason shall not
condition or excuse Galoob's payment obligations under paragraph B2a of the
Settlement Agreement

                     3.2.2. Galoob may elect to make any or all of the annual
payments required pursuant to paragraph B2a of the Settlement Agreement directly
pursuant to paragraphs B2a and B4 of the Settlement Agreement, rather than from
the Trust Property. If Galoob makes such an election to pay directly, Galoob
shall provide written notice to the Trustee (with a copy to the Hedeens ) by no
later than June 1 in any year in which such direct payment is made, together
with bank confirmation that the requisite funds have been sent to the Hedeen
Group ("Notice of Payment"). If the Trustee receives such a Notice of Payment,
the Trustee shall hold the funds in the Trust Account until June 15 of the year
in which the Trustee has received the Notice of Payment, at which time the
Trustee shall disburse all funds in the Trust Account to Galoob; provided,
however, that, if prior to June 15 the Hedeens shall notify the Trustee in
writing that the Hedeen Group has not received good funds in the full amount of
the required payment, the Trustee shall not disburse such funds until it has
received joint disbursement instructions from both parties or a certified copy
of a court order directing disbursement.

              3.3 POST-LITIGATION DISBURSEMENTS FROM TRUST ACCOUNT.

       If the Trustee receives a written notice from Galoob stating that the
Hedeen Group or any member thereof is in material breach of the Settlement
Agreement and that Galoob has commenced litigation based upon such breach
("Notice of Litigation"), the Trustee shall thereafter not release or disburse
any funds from the Trust Account unless and until either: (i) Galoob thereafter
delivers to the Trustee a notice that the litigation has been dismissed; (ii)
Galoob and the Hedeens thereafter deliver to the Trustee joint instructions for
the disbursement of the funds in the Trust Account; or (iii) the Trustee
receives a certified copy of a court order directing the Trustee to disburse the
funds held. In agreeing that the funds may be held by the Trustee under the
circumstances specified in this paragraph 3.3, the Parties hereto intend only to
preserve the Trust Property until the events specified herein have occurred, and
the Parties do not waive and expressly preserve all arguments, claims, rights
and remedies they may have in such litigation, including any claim that the
lawsuit was improperly commenced.

              3.4 RELEASE OF TRUST PROPERTY. Trustee shall release the Trust
Property only as provided in this Agreement. All disbursements to the Hedeens
from the Trust Account shall include, if such disbursement is made after June 1
of any year, interest on the payment, if any, from June 1 to the date of payment
as provided in the Settlement Agreement to the extent of funds in the Trust
Account.


                                      -3-
<PAGE>   22
              3.5 BOOKS, RECORDS AND INFORMATION.

                     3.5.1 Trustee shall maintain complete and accurate books of
account and records of the Trustee's activities, collections and disbursements
pursuant to this Agreement. The Trustee shall make such books and records
available during normal business hours for inspection and audit by the parties
hereto and their respective representatives.

                     3.5.2. Not later than twenty (20) days from the end of each
calendar year, the Trustee shall deliver to the parties hereto a statement
accurately setting forth all deposits and disbursements made by the Trustee
during said year.

                     3.5.3. Trustee shall provide the parties hereto all
information reasonably requested regarding Trustee's actions in connection with
this Agreement.

       4. TRUSTEE'S RIGHTS.

              4.1. The Trustee shall not be responsible or liable in any manner
whatsoever for the sufficiency, correctness, genuineness or validity of any
assets deposited with or held by the Trustee.

              4.2. The Trustee shall be protected in acting upon any written
notices, certificate, instruction or request which the Trustee believes in good
faith to be genuine as to the due execution thereof, as to the validity and
effectiveness of the provisions thereof, and as to the truth of any information
contained therein.

              4.3. The Trustee shall not be liable for any error of judgment for
any act done or omitted except in the case of the Trustee's negligence, willful
misconduct, or bad faith.

              4.4. Trustee may execute or perform the Trustee's duties under
this Agreement either directly or through agents.

       5. NO OTHER DUTIES. The Trustee shall have no other duties except as
expressly provided in this Agreement.

       6. FEES. Trustee shall be entitled to receive reasonable fees for the
Trustee's services from Galoob as shall be reasonably agreed to between the
Trustee and Galoob.

       7. ADDITIONAL OBLIGATIONS.

              7.1 Galoob and the Hedeens hereby agree to take such action as
requested by the Trustee to implement or recognize the provisions of this
Agreement.

       8. TERM. The term of this Agreement shall commence on the date hereof and
shall end upon the first to occur of the following events:

              8.1 distribution of all of the Trust Property in accordance with
the provisions of this Agreement;


                                      -4-
<PAGE>   23
              8.2 joint written agreement of Galoob and the Hedeens, in which
case the Trustee shall distribute the Trust Property as provided in such joint
written agreement.

       9. INDEMNIFICATION.

              9.1. DISBURSEMENTS. If the Trustee shall incur any liability,
damages or expenses arising out of or resulting from a final determination that
the Trustee has improperly distributed funds hereunder, the party or parties
receiving such funds hereby agree to indemnify the Trustee and hold the Trustee
harmless therefrom.

              9.2. LIMITATION. Such indemnification shall not apply to
liabilities, damages, expenses or claims caused or incurred as a result of
Trustee's negligence, willful misconduct, bad faith or breach of this Agreement.

       10. RESIGNATION OR REMOVAL.

              10.1. RESIGNATION. Trustee may at any time resign by giving
written notice to Galoob and the Hedeens. Such resignation shall be effective
upon the joint appointment by the parties of a successor Trustee and such
successor Trustee's delivery to the parties of a written instrument accepting
such appointment.

              10.2. REMOVAL. Galoob and the Hedeens may by joint agreement
remove and replace the Trustee. Such removal and replacement shall be effective
upon the joint appointment by the parties of a successor Trustee and such
successor Trustee's delivery to the parties of a written instrument accepting
such appointment.

              10.3. DELIVERY. In connection with its removal or resignation, the
Trustee shall make arrangement for: (i) the delivery of the Trust Property, and
(ii) the transfer of the Trust Account, to the successor Trustee effective
concurrent with the effectiveness of the resignation or removal and appointment
of such successor.

       11. NOTICES. All notices required or permitted to be given under this
Agreement shall be in writing and shall be personally delivered or sent by
facsimile transmission with hard copy to follow, by overnight courier, receipt
acknowledged (such as Federal Express, Express Mail or DHL), or by registered or
certified mail, postage pre-paid, return receipt requested. Such notice shall be
deemed to be received: (i) if personally delivered upon the date of delivery to
the address of the person to receive such notice; (ii) if sent by overnight
courier one (1) business day after delivery to such courier; (iii) if mailed in
accordance with the provisions of this paragraph three (3) business days after
the date placed in the United States mail; or (iv) if transmitted by facsimile
as provided above on the business day following telephone confirmation of
receipt. Notices shall be given at the following addresses:



                                      -5-
<PAGE>   24
<TABLE>
<S>                   <C>                              <C>
GALOOB:               William G. Catron, Esq.          WITH A COPY TO:
                      Galoob Toys, Inc.                Debra S. Belaga, Esq.
                      500 Forbes Boulevard             Jackson Tufts Cole & Black,LLP
                      South San Francisco, CA 94080    650 California Street, 32nd Floor
                      Facsimile:  (415) 583-5572       San Francisco, California  94108
                                                       Facsimile:  (415) 392-3494


THE HEDEENS:          Clemens V. Hedeen, Jr.           WITH A COPY TO:
                      Hedeen International             Robert J. Vizas, Esq.
                      218 N. 14th Street               Legal Strategies Group
                      Sturgeon Bay, Wisconsin 54235    5905 Christie Avenue
                      Facsimile:  (414) 743-8835       Emeryville, CA  94608
                                                       Facsimile:  (510) 450-9601
                                 - and -

                      Patti Jo Hedeen
                      c/o Hedeen and Companies
                      1309 N. 14th Avenue
                      Sturgeon Bay, Wisconsin 54235
                      Facsimile:  (414) 743-5163

TRUSTEE:
</TABLE>


The address for delivery of notices may be changed by the relevant party by
giving notice of such change to all other parties to this Agreement in
accordance with this paragraph.

       12. PAYMENTS.

              12.1. Payments in accordance with this Agreement which are to be
made to the Hedeens shall be made to:

                      Hedeen & Companies
                      Account Number 10140715
                      Associated Bank
                      P. O. Box 19006
                      200 North Adams Street
                      Green Bay, WI 54307
                      ABA Routing #0759 00575


                                      -6-
<PAGE>   25
              12.2. Payments in accordance with this Agreement which are to be
made to Galoob shall be made to:

                      Sanwa Bank California
                      Account Name:  Galoob Toys, Inc.
                      Account Number 181102060
                      ABA Routing #122003516

              12.3. The bank account for receipt of funds hereunder may be
changed by the relevant party by giving notice of such change to all other
parties to this Agreement in accordance with paragraph 11 hereof.

       13. MISCELLANEOUS.

              13.1. HEIRS, SUCCESSORS AND ASSIGNS. The terms of this Agreement
shall be binding upon and inure to the benefit of the heirs, successors,
receivers, conservators and assigns of the parties hereto.

              13.2. HEADINGS. The headings of this Agreement are included for
convenience only and shall not be deemed to constitute part of this Agreement or
to affect its construction.

              13.3. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall be deemed to constitute one and the same instrument.

              13.4. SEVERABILITY. If any provision of this Agreement shall be
deemed to be void or unenforceable for any reason, the same shall in no way
affect (to the maximum extent permissible by law) any other provision of this
Agreement or the validity or enforceability of this Agreement as a whole.

              13.5. APPLICABLE LAW. This Agreement shall be governed by and
construed under the laws of the State of California, without regard to
principles of conflicts of law. By entering into this Agreement, Galoob and the
Trustee hereby amend any agreement between Galoob and the Trustee with respect
to the creation of the trust arrangement provided for in this Agreement to
provide for the choice of law referred to in the preceding sentence with respect
to all matters relevant to this Agreement.

              13.6. COMPLETE AGREEMENT. This Agreement embodies the entire
agreement and understanding between the parties and the Trustee. Except for the
Settlement Agreement, this Agreement supersedes all prior agreements relating to
the subject matter hereof.

              13.7. CUMULATIVE RIGHTS; NO WAIVER. No failure or delay of any
party hereto in exercising any power or right hereunder shall operate as a
waiver thereof. The rights and remedies of the parties hereto are cumulative and
not exclusive of any other rights or remedies such parties would otherwise have.
No waiver of any provision of this Agreement nor consent to any departure by a
party shall in any event be effective unless it is in writing; and such waiver
or


                                      -7-
<PAGE>   26
consent shall be effective only for the specific circumstance and will not
constitute a waiver as regards future occurrences.

              13.8 THE HEDEENS' REPRESENTATION. Clemens V. Hedeen and Patti Jo
Hedeen, and each of them, represent and warrant that they have full and complete
authority to execute this Agreement.

      IN WITNESS WHEREOF, the parties hereto have executed this Agreement.


      TRUSTEE:


      _________________________________


      GALOOB TOYS INC.:

      _________________________________

      By:______________________________



      _________________________________
         Clemens V. Hedeen, Jr.


      _________________________________
         Patti Jo Hedeen